ORDER
K.K. Boliya, Accountant Member
1. This appeal has been filed by the assessee against the order dated 8-10-2004 of CIT(A)-XXIX, Mumbai.
2. The grounds of appeal filed in Form No. 36 were not in consonance with Rule 8 of the I.T.A.T. Rules and, therefore, revised grounds of appeal have been filed by the assessee, which are as under:
1.1 The ld. CIT(A)-XX1X erred in confirming the disallowance of exemption under Section 10A in respect of interest at Rs. 2,67,212 earned on FDs kept with Bank/Nominated Agencies by way of margin for the purpose of the appellant’s business.
1.2 Your appellant prays to hold that interest received at Rs. 2,67,212 in course of carrying on of its business cannot be considered as income from other source and has to be set off against interest paid.
1.3 Your appellant prays to hold that interest earned by your appellant’s undertaking is derived from the business of the undertaking and is entitled to deduction/exemption under Section 10A(1) as read with Section 10A(4).
2.1 The ld. CIT(A) erred in directing enhancement of your appellant’s income by ordering the exclusion of the gain that accrued to your appellant during the year on account of higher realization of export proceeds outstanding on 31-3-2000 during the year at a rate higher than the rate at which they were accounted for as on 31-3-2000 as per Rule 115 from the profits of the undertaking eligible for deduction under Section 10A(1) as read with Section 10A(4).
2.2 Your appellant submits that the said gain realized during the year on account of Exchange Fluctuation forms part of both the export turnover and total turnover and is derived from the business of undertaking and is deductible under Section 10A(1) as read with Section 10A(4).
2.3 Your appellant, therefore, prays to direct the cancellation of the order of enhancement.
2.4 Your appellant prays to hold that ld. CIT(A) ought to have followed the order of ITAT, Mumbai in case of S.S. Industries and ought not to have ordered enhancement of your appellant’s total income.
3. From the above, it may be seen that the grounds of appeal pertain to two issues. The first issue is as to whether interest income of Rs. 2,67,212 is eligible for deduction under Section 10A of the Income-tax Act. The second issue pertains to the enhancement made by the ld. CIT(A) to the assessed income by holding that the net income of Rs. 98,38,801 earned by the assessee on account of fluctuation in the rate of foreign exchange, is not income eligible for deduction under Section 10A.
4. With regard to the first ground of appeal, the facts may be stated briefly. The assessee is a Pvt. Ltd. Company engaged in the business of manufacturing of gold jewellery studded with diamonds. The industrial undertaking of the assessce-company is located in the Free Trade Zone area known as SEEPZ at Andheri, Mumbai and on that basis, the assessee is entitled to exemption under Section 10A. The Assessing Officer admitted the assessee’s claim for exemption under Section 10A in respect of the export profits, but he held that interest income of Rs. 2,67,702 earned by the assessee on bank fixed deposits, was not eligible for exemption under Section 10A. The Assessing Officer brought to charge of tax the aforesaid interest income as income from other sources. The ld. CIT(A) confirmed the finding of the Assessing Officer.
5. It may be mentioned here that the Assessing Officer relied on the following judgments:
1. Hon’ble Supreme Court in the case of Cambay Electricals Supply Industrial Co. Ltd. v. CIT ,
2. Hon’ble Delhi High Court in the case of CIT v. Cement Distribution Ltd. ,
3. Hon’ble Supreme Court in the case of CIT v. Sterling Foods ,
4. Hon’ble Madras High Court in the case of CIT v. Menon Impex (P.) Ltd. .
6. The ld. CIT(A) substantiated his finding by relying on the following judicial pronouncements:
1. Asstt. CIT v. South India Produce Co.
2. K. Ravindernathan Nair v. Dy. CIT
3. K.S. Subbaih Pillai and Co. (India) (P.) Ltd. v. CIT
4. Urban Stanislaw and Co. v. CIT [2003] 263 ITR 10 : 130 Taxman 244 (Ker.)
5. CIT v. Monarch Tools (P.) Ltd.
6. CIT v. Satheesh Nair [2004] 264 ITR 377 (Ker.)
7. CIT v. Rane (Madras) Ltd. .
7. The ld. counsel appearing on behalf of the assessee Shri D.R. Raiyani forcefully contended before us that the bank fixed deposits were not made by the assessee out of its surplus income with a view to earn any interest. It is submitted that the interest income was earned by the assessee on margin deposits, which were compulsorily required to be kept deposited in bank for the purchase of gold, which is the assessee’s main raw material and also in connection with Bank Guarantee required for business purposes. It is, therefore, contended that the interest income earned by the assessee is in the nature of business income and it cannot be considered as income from other sources. The ld. counsel invited our attention to the provisions of Section 10A(1), which may be reproduced below:
10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as arc derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.
8. The ld. counsel thereafter referred to the provisions of Sub-section (4) of Section 10A, which reads as under:
(4) For the purposes of [Sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.
It is argued before us that under Section 10A deduction of profits and gains derived by an undertaking from the export of articles or things or computer software is admissible. It is then pointed out by the ld. counsel for the assessee that as per Sub-section (4), the profits derived from export shall be the amount which bears to the
profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the undertaking. The ld. counsel contended that the provisions of Sub-section (4) are akin to the provisions of Sub-section (3) of Section 80HHC of the Income-tax Act. The ld. counsel submitted that the
assessee-company is a 100 percent exporter and that the interest income is in the nature of business income and, therefore, the assessee is entitled to full deduction under Section 10A without excluding the interest income. For this proposition, the ld. counsel for the assessee has relied on various judicial pronouncements.
9. During the course of hearing, the ld. counsel for the assessee was informed by the Bench about the Supreme Court decision in the case of Pandian Chemicals Ltd. v. CIT . The ratio of this judgment may be reproduced below from the head note:
The words ‘derived from’ in Section 80HH of the Income-tax Act, 1961, must be understood as something which has a direct or immediate nexus with the assessee’s industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking.
Held accordingly, that interest derived by the industrial undertaking of the asscssee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the special deduction under Section 80HH.
10. The ld. counsel submitted that the aforesaid decision of Hon’ble Supreme Court was rendered in the context of Section 80HH of the Income-tax Act, which requires that deduction will be allowable in respect of profits and gains derived from an industrial undertaking. It is claimed that the aforesaid Supreme Court decision cannot be applied to Section 10A. Alternatively, the ld. counsel argued that for making the bank deposits for the purposes of business, the assessee has utilized borrowed funds on which interest has been paid and, therefore, such interest should be deducted from the gross interest income and only the net can be excluded for the purpose of exemption under Section 10A.
11. The ld. DR Shri Bharat Bhushan strongly supported the orders of revenue authorities and has relied on the various judgments, which are referred to in the orders of the Assessing Officer and CIT(A). He also relied on the Supreme Court decision in the case of Pandian Chemicals Ltd. (supra).
12. We have given a careful consideration of the rival submissions made before us vis-a-vis the facts of the case and in the light of the legal position emerging from the relevant provisions of the I.T. Act and the various precedents cited before us. First of all it must be mentioned here that in none of the cases which has been relied upon by the Id. Counsel for the assessee, the Supreme Court decision in the case of Pandian Chemicals Ltd. (supra), has been considered. We are, therefore, of the view that the effect of all these cases is considerably diluted by the binding Supreme Court decision in the case of Pandian Chemicals Ltd. (supra), the ratio of which has been reproduced above. From the phraseology of Section 10A, which is clear and without any ambiguity, it may be seen that under this provision deduction is available in respect of “Profits and Gains as are derived by an undertaking from the export of articles or things or computer software”. Since the Supreme Court decision in the case of Pandian Chemical Ltd. (supra) was rendered in relation to Section 80HH, it is necessary to make a reference to the provisions contained under Sub-section (1) of Section 80HH, which is reproduced below:
80HH. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty percent thereof.
13. If the provisions of Section 10A and Section 80HH are read in juxtaposition, it would be seen that Section 10A entitles an assessee to deduction of such profits and gains as are derived from the export of articles or things. On the other hand, under Section 80HH deduction is available to an assessee in respect of profits and gains derived from an industrial undertaking. The crucial words in both the sections are “derived from”. In our view, there is hardly any material difference between the legal requirements of Section 80HH and Section 10A. In the case of Pandian Chemicals Ltd. (supra), it was observed by the Supreme Court that the words “derived from” must be understood as something, which has a direct or immediate nexus with the industrial undertaking. In that case, the assessee derived interest on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking. Thus, the deposits made by the assessee were essential requirement for carrying on the functioning of the industrial undertaking. The electricity was required for the purpose of running the industrial undertaking. Nevertheless, the Hon’ble Supreme Court held that the interest earned by the assessee on such deposit was not profit derived from the industrial undertaking and, therefore, the assessee is not entitled to deduction under Section 80HH.
14. Here a reference may also be made to the Kerala High Court judgment in the case of K. Ravindernathan Nair (supra) which has also been strongly relied upon by the ld. CIT(A). The aforesaid case arose in the context of Section 80HHC and the ratio of this case is reproduced below from the head note:
The provisions of Section 80HHC of the Income-tax Act, 1961, clearly provide that the deduction permissible under the said section is of the profits derived by the assessee from the export of such goods or merchandise. The meaning of the expression ‘derived from’ has got only a limited import and, therefore, the expression ‘derived from’ as used in Section 80HHC must be understood as profit directly arising from the export of the goods and not incidental to the export.
Held, that, in the instant case, the interest from short-term deposits received by the appellant was not the direct result of any export of any goods or merchandise. The fixed deposit was made only for the purpose of opening letters of credit and for getting other benefits which were necesstiry requirements to enable the appellant to make the export. The interest income received on the short-term deposits though it could be attributed to the export business could not be treated as income which was derived from the export business. Even assuming that the bank, had insisted for making short-term deposits for opening letters of credit and for other facilities, it could not be said that the income was derived from the export business. The assessee was not entitled to special deduction under Section 80HHC in respect of such interest.
The Kerala High Court in the above case considered the provisions of Section 80HHC(1) wherein it is laid down that deduction would be admissible in respect of profits derived by the assessee from the export of goods or merchandise. Apparently, the phraseology of Section 10A(1) and Section 80HHC(1) is identical. It was also observed by the Kerala High Court that the fixed deposits were made for the purpose of opening letters of credit and for getting other benefits, which were necessary requirements to enable the assessee to make the export. It was observed by the High Court that the interest income received could be attributed to the export business, but could not be treated as income derived from export.
15. Similar view has been taken in various other cases, which have been referred to by the Assessing Officer and ld. CIT(A) in their orders. It would be fruitful to refer to the Madras High Court decision in the case of Menon Impex (P.)Ltd. (supra), which has been relied upon by the Assessing Officer to support his conclusion. This case directly arose under Section 10A and the assessee had set up a new industrial undertaking in Kandla Free Trade Zone for the manufacture of light engineering goods. During the course of business of the undertaking, the assessee was required to open letters of credit with banks. The banks required the assessee to make deposits as a condition for issuing such letters of credit. On these deposits, the assessee earned interest and the question was whether the assessee was entitled to deduction under Section 10A in respect of the interest income. On these facts, the Madras High Court held as under:
In this case, the interest received by the assessee was on deposits made by it in the banks. It is that deposit which is the source of income. The mere fact that the deposit made was for the purpose of obtaining letters of credit which letters of credit were in turn used for the purpose of the business of the industrial undertaking docs not establish a direct nexus between the interest and the industrial undertaking.
16. The Madras High Court drew support from the Supreme Court decisions in the cases of Cambay Electric Supply Industrial Co. Ltd. (supra) and Sterling Foods (supra).
17. In view of the categorical legal position which emerges from the above-mentioned cases including the Supreme Court decision in the case of Pandian Chemicals Ltd. (supra), we do not consider it necessary to discuss the various cases, which have been relied upon by the ld. counsel for the assessee. As mentioned above, the Supreme Court decision in the case of Pandian Chemicals Ltd. (supra), was not considered in any of these cases. We, therefore, hold that the interest income is not eligible for deduction under Section 10A as such income cannot be said to be in the nature of profits and gains derived from the export of articles or things. Therefore, on this issue, we confirm the order of ld. CIT(A).
18. Coming to the alternative claim that only net interest income can be excluded from the profits, in our view this claim has merit. In the context of Section 80HHC, the ITAT, Delhi Special Bench held in the case Lalsons Enterprises v. Dy. CIT [2004] 89 ITD 25 that for the purposes of Clause (baa) under the Explanation, 90 per cent of only net interest should be taken and not gross interest. It was further observed by the Special Bench that interest expenditure, which has direct nexus for earning interest income must be deducted from the gross interest. The Special Bench decision would be equally applicable for the purposes of Section 10A. We, therefore, direct the Assessing Officer to exclude from the profits only the net interest. The assessee may be allowed an opportunity to establish direct nexus between the interest payment and interest receipt and the interest expenditure, which is directly referable to earning of interest income may be deducted therefrom and only the net interest income, if any, may be excluded from the profits for the purpose of Section 10 A.
19. With regard to the second issue, the facts are that during the year the assessec earned foreign exchange gain amounting to Rs. 2,51,70,300, which was included in the gross sales credited to Profit and Loss Account. On the aforesaid income, the asscssee claimed deduction under Section 10A. The Assessing Officer allowed such deduction. When the matter came up before the ld. CIT(A), he issued a notice of enhancement on the ground that with regard to the profits derived by the assessee on account of fluctuation in foreign exchange rate, the assessee is not entitled to deduction under Section 10A. After elaborately discussing this issue and after considering the replies filed before him, the ld. CIT(A) came to the conclusion that the assessee was not entitled to deduction under Section 10A in respect of foreign exchange gain of Rs. 98,38,801 which pertained to the sales made by the assessee in the previous year relevant to the assessment year 2000-01.
20. The ld. counsel appearing on behalf of the assessee vehemently contended before us that the foreign exchange gain is of the same nature as the sale proceeds of the goods exported by the assessee. It is also submitted that the sale consideration has been remitted in convertible foreign exchange within the stipulated period of six months. On account of fluctuation in the rate of foreign exchange, the assessee sometimes suffers a loss and sometimes earns profit in respect of sale consideration, which remains due on the last day of the accounting year and is actually received in the subsequent accounting year. The ld. Counsel contended that this issue is covered in assessee’s favour by various judicial pronouncements. He referred to ITAT, Delhi Bench decision in the case of Smt. Sujatha Grover v. Dy CIT [2002] 74 TTJ 347. In this case, for the purpose of Section 80HHC, it was held that income from foreign currency fluctuation was part of export turnover and was in the nature of only additional sales price. Similar view was taken in the following cases:
1. Sree Hanuman Trading Co. v. CIT
2. Fab India v. CIT
3. V.D. Swami and Co. (P.) Ltd. v. CIT
4. Hindustan Trading Corpn. v. CIT .
The ld. counsel also relied on the ITAT, Mumbai Bench decision in the case of Mandhana Bornemann Industries Ltd. v. Asstt. CIT [IT Appeal Nos. 4577 and 4578 (Mum.) of 1999, dated 15-4-2004] (copy at page 31 of the Paper Book). In this case, the question arose as to whether deduction under Section 80HHC is available on the profit earned by the assessee on account of exchange fluctuation. The ld. counsel invited our attention to the finding of the ITAT contained at para 8 of the order as under:
We have considered the rival submissions in the light of material placed before us and precedents relied upon. We find that this issue is covered by the decision of the Tribunal rendered in the case of K. Uttamlal Exports Ltd. v. DCIT in ITA Nos. 38 & 39/Mum./1996, dated 9-7-2003. In this case it was held that exchange gain arising on account of change in exchange rate after the end of accounting year constitute part of export turnover eligible for deduction. No contrary decision was brought before us. We, therefore, respectfully following the precedent, decide this issue in favour of the assessee and against the revenue.
21. The ld. counsel has also relied on the following ITAT decisions where similar view was taken in the context of deduction under Section 80HHC:
1. B. Vijaykumar & Co. ITA No. 2510/Mum./2000, Mumbai Bench decision dated 28-2-2005 (copy at page 64 of Paper book).
2. Priyanka Gems v. ACIT [2005] 94 TTJ (Ahd.) 557.
The ld. counsel for the assessee therefore contended that the ld. CIT(A) was not justified in enhancing the income by withdrawing deduction under Section 10A in respect of profit earned by the assessee on account of exchange rate fluctuation. The ld. DR strongly supported the order of ld. CIT(A).
22. We have carefully considered the submissions made before us by both the sides and have gone through the provisions of law and the precedents relied upon by the ld. counsel for the assessee. In our view, this issue is covered in assessee’s favour by several cases relied upon by the ld. counsel for the assessee and discussed above. There is no material difference between the requirement of Section 80HHC and Section 10A. The profit on account of foreign exchange gain is directly referable to the articles and things exported by the assessee. Such profits are, therefore, in the same nature as the sale proceeds and there is no reason while deduction under Section 10A should not be allowed in respect of such exchange gain. Therefore, we vacate the order of the ld. CIT(A) on this issue.
23. In the result, the appeal stands partly allowed.
