I-T-Interest income received on FDRs for obtaining LC is business income of undertaking which is to be taken into consideration while calculating deduction u/s 10AA: ITAT
By TIOL News Service
AHMEDABAD, DEC 28, 2018: THE ISSUE IS - Whether interest income received by the assessee on FDRs for obtaining LC is the business income of the undertaking which is to be taken into consideration while calculating deduction u/s 10AA of the Act - YES IS THE VERDICT.
Facts of the case
The assessee engaged in the business of trading/speculation in bullion, commodities, shares and securities, had filed its return for relevant AY. It had established a new SEZ unit. During the relevant year, the assessee had claimed deduction u/s 10AA of the Act. The AO noticed that the assessee had included interest income in the profits of business of the undertaking. The AO noticed that interest income could not be construed as profit derived from the undertaking, and if interest income was being excluded in all the three years, then the assessee would not be entitled for any deduction u/s 10AA, because resultant profit would be loss.
While taking into consideration modus operandi of the assessee, he observed that the assessee used to obtain letter of credit (LC) for a period of 360 days, whereas payment for export was received within a week or 15 days. Thus, instead of making payment, it kept on accumulating over the years on which interest was earned. For obtaining LC, assessee was required to offer fixed deposits receipts to the bank as security. On expiry of LC credit, bank liquidates FDR and makes payment to the importers. Exports were made for an immediate payment basis, therefore, as the purchases made on credit basis, the purchase value was higher than the prevailing rate on the date of payment. The assessee used to earn interest income on the FDRs as well as on the export receipts received on immediate sales and deposited in the banks. The AO took a view that this interest income could not be considered as derived from export of articles or things or services. Hence, he excluded interest income from the profits of undertaking, and thereafter held that the assessee would not entitle for deduction. On appeal, CIT(A) passed order in favour of assessee. Aggrieved Revenue filed appeal before Tribunal.
Tribunal held that,
++ if it is to be assessed as business income, then it is to be considered as profit of the undertaking as eligible for deduction under section 10AA of the Act. It was found that the CIT(A) has made reference to order of the ITAT in the case of Zaveri & Co. P.Ltd. The facts in that case are identical. In this case it was held that no provision was found in the statute on the basis of which it can be held that the interest income which forms part of the profits of the business is to be excluded for arriving at profits derived from "export of articles or things or services" as prescribed under sub-section (7) of section 10AA of the Act;
++ Gujarat High Court in the case of Hari Orgochem P.Ltd., in tax Appeal No.256 & 205 of 2000 held that interest from bank FDR kept as margin has to be assessed as business income, and eligible for deduction under section 32AB, though in that case the issue relates to admissibility of deduction under section 32AB, 80HHA and 80I of the Income Tax Act, but the question was, whether interest income earned on margin money kept with the bank for availing letter of credit is to be assessed as a business income or not;
++ it was noted that Interest income received by the assessee on fixed deposit receipts made by it for the purpose of obtaining letter of credit is to be treated as business income, because it has nexus with the export activities of the assessee. Identical issue considered by the Karnataka High Court in the case of Motorola India Electronics P.Ltd. In that case the assessee had interest income from deposits lying in EEFC account and interest income earned on inter-corporate loans out of the funds of the undertaking. Such interest income was considered as business income of the assessee's undertaking. Thus, it was held that CIT(A) has rightly considered the judgment relied upon by the assessee, and has rightly held that interest income earned by the assessee on FDRs. for obtaining LC is the business income of the undertaking which is to be taken into consideration while calculating deduction under section 10AA of the Act.Thus, this ground of appeal is rejected in all three years.
(See 2018-TIOL-2504-ITAT-AHM)
