ORDER
S.C. Tiwari, Accountant Member
1. This appeal has been filed by the assessee on 21-2-2005 against the order of the learned Commissioner (Appeals)-X, Mumbai dated 13-1-2005 in the case of the assessee in relation to assessment order under Section 143(3) for assessment year 2001-02.
2. The only ground of appeal taken by the assessee in this appeal is follows:
The learned Commissioner (Appeals) erred in holding that the interest earned on funds retained in Exchange Earners Foreign Currency Account does not represent income derived from the business of exports and thereby earned in directing that the interest amounting to Rs. 1,01,894 be taxed under the head “Income from other sources”.
3. Facts of the case leading to this dispute briefly are that the assessee company was engaged in the business of manufacturing of plain and studded jewellery and export thereof. The assessee claimed that during the year it had earned total income of Rs. 2,15,28,067 and the entire income was exempt from tax under Section 10B because the assessee was 100 per cent Export Oriented Unit. The learned assessing officer did not dispute that the assessee was 100 per cent Export oriented unit. He held the view that the entire income earned by the assessee could not be said to be profits and gains derived by a 100 per cent Export oriented undertaking from the export of articles or things. Insofar as interest income of Rs. 1,78,086 was concerned the learned assessing officer asked the assessee as to why this interest income should not be assessed under the head “Income from other sources”. The assessee in its reply dated 12-2-2003 stated that the assessee had issued bank guarantees for Customs, Central Excise, Sales-tax and MMTC. Against the bank guarantees the assessee had to place fixed deposit receipts with the bank on which interest was earned by the assessee during the ordinary course of assessees business of export. The assessee earned Rs. 76,191 as interest on such fixed deposits receipts. Besides being the 100 per cent export oriented unit, the assessee was required to maintain EEFC Account with Bank of India from which the assessee earned an income of Rs. 1,01,894. The assessee therefore, argued that entire interest income of Rs. 1,78,086 was earned during the ordinary course of export business of the assessee. The learned assessing officer considered these arguments of the assessee and he held the view that interest income was not directly generated/ derived from the business activities of the assessee-company. Interest income had been received by the assessee on funds lying idle or unused in the form of deposits with banks. Such interest income was assessable under the head “Income from other sources”. In support of these contentions the learned assessing officer placed reliance on the judgments in Sterling Foods v. CIT ; CIT v. Madras Motors Ltd./ M.M. Forgings Ltd. ; CIT v. Pandian Chemicals Ltd. and CIT v. N.S.C. Shoes . The learned assessing officer, therefore, assessed this sum of Rs. 1,78,086 as assessees income from other sources and accordingly, did not hold the same as exempt under the provisions of Section 10B of the Act.
4. During the course of hearing before the learned Commissioner (Appeals) the assessee stated that it was a 100 per cent Export Oriented Unit (EOU). The assessee was manufacturing gold, silver and platinum studded jewellery at its premises situated in Navi Mumbai which was outside Special Economic Zone (SEZ). As the assessees manufacturing activity was outside SEZ the assessee was required to furnish bonds and guarantees to Customs and Central Excise departments. It therefore became necessary to give bank guarantees and for that purpose the banks required the assessee to take fixed deposits with them. Interest income of Rs. 76,191 arose to the assessee in these special circumstances. Likewise interest income earned on the Export Realisations Deposit in EEFC Account was also generated out of business activities relating to manufacture and export of goods by the assessee. The assessee argued that as against the interest income of Rs. 1,78,085 the assessee had paid interest of Rs. 2,50,028 to Navi Mumbai Municipal Corporation by way of Cess on import of raw material. The assessee paid interest of Rs. 20,728 to ABN Amro bank for availing vehicle loan. The assessee argued that the interest paid was in connection with the business and therefore interest paid was required to be adjusted against the interest earned. If the interest earned was netted against interest paid there was only negative amount of interest expenditure. In other words there was no income that could be assessed under the head “Income from other sources”. In support of these contentions of the assessee placed reliance on the decisions in Assit. CIT v. Sharda Gums & Chemicals Industrial Area (2001) 76 ITD 282 (Jodh.); Dy. CIT v. Diamond Creak (2002) 82 iTD 291 (Mum.); Leatherage v. Income Tax Officer (2003) 86 ITD 482 (Luck.); Pink Star v. Dy. CIT(2000) 72 ITD 137 (Mum.) and Alfa Leval India Ltd. v. CIT (2003) 133 Taxman 740 (Bom.). The assessee argued that the case law relied upon by the assessing officer was not concerned with the question of netting out of income against credits and debits. In the case of the assessee there was no net interest income and there was only net interest expenditure. The learned Commissioner (Appeals) considered these arguments of the assessee. He held that here was no dispute that there was interest income of Rs. 1,78,085. This interest income had nexus with the assessees business inasmuch as the interest of Rs. 76,191 was earned on margin money deposited with the bank for export. The learned Commissioner (Appeals) therefore held that interest income of Rs. 76,191 was assessable under the head “Profits and gains of business or profession” and the learned assessing officer erred in assessing it as “Income from other sources”. However, in relation to the interest income of Rs. 1,01,894 earned by the assessee from EEFC account the learned Commissioner (Appeals) held that this income had been earned because the surplus funds had been kept in the EEFC Account. He therefore held that income of Rs. 1,01,894 was required to be taxed under the head “Income from other sources”. Based on this reasoning the learned Commissioner (Appeals) held that only the interest receipt of Rs. 76,191 was required to be netted against interest paid of Rs. 2,70,756. The amount of Rs. 1,01,894 was not required to be netted against interest expenditure incurred by the assessee and the entire amount was chargeable to tax as “Income from other sources” not qualified for deduction under Section 10B. Still aggrieved the assessee is in appeal before us.
5. During the course of hearing before us the learned Counsel for the assessee argued that both interest income of Rs. 76,191 and Rs. 1,01,894 had been earned by the assessee during the ordinary course of its business. Such interest income could not be separated from the export income of the assessee that was fully exempt under the provisions of Section 10B of the Act. The learned Counsel emphasised that expression used under the provisions of Section 10B was “derived by” and not “derived from”. The learned Counsel also strongly emphasised the provisions of Explanation to Section 10B(3). He pointed out that the assessees account was maintained abroad because Explanation 2 deemed deposit of EEFC Account to be convertible foreign exchange received in India. For that reason also interest earned on that account had to be treated as an integral part of the sale proceeds received by the assessee.
6. In the alternative the learned Counsel argued that the learned Commissioner (Appeals) erred in not netting interest earned by the assessee from EEFC Account against interest expenditure. There was no justification to assess it under the head “Income from other sources”. Both income had been earned by the assessee in the ordinary course of business and represented business income of the assessee. He argued that in that view of the matter the assessee’s interest income of Rs. 1,01,894 was also to be netted against interest expenditure of Rs. 2,70,756. The learned departmental representative strongly relied upon the reasoning of the assessing officer as well as the learned Commissioner (Appeals) that we have enumerated in the foregoing paragraph.
7. We have carefully considered the rival submissions. The controlling expression in Section 10B in this respect is “Profits and gains as are derived by a hundred per cent export-oriented undertaking from export of articles or things or computer software”. The expression employed is, therefore, unmistakably “derived from” as distinguished from the expression “attributable to”. In the instant case the income earned by the assessee is interest income. The income derived by the assessee from its hundred per cent export oriented undertaking is income from export of gold, silver and platinum studded jewellery manufactured by the assessee. It cannot be said that interest income earned by the assessee on its deposits with EEFC Account abroad was an income derived from the export of articles or things or computer software. It may be that the assessee deposited its export earnings only in EEFC Account but the fact remains that interest income is earned because the assessee retained its funds deposited in EEFC Account rather than because the assessee operated a manufacturing unit of gold, silver or platinum studded jewellery and exported its products. Interest income earned by the assessee cannot be said to be export income of the assessees 100 per cent EOU. We are therefore, of the view that even if such interest income is required to be assessed under the head “Profits and gains of business or profession” the assessee would in that case be not entitled to exemption under Section 10B of the Act. We derived support for this view held by us from the judgment of Hon’ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT. In the result we do not see any infirmity in the order of the learned Commissioner (Appeals). The same is upheld and this appeal is dismissed.