By TIOL News Service

NEW DELHI, DEC 08, 2015: THE issue is - Whether the interest earned on FDRs qualifies for deduction u/s 10B, in case such FDRs including accrued interest are under lien with a commercial bank for facilitating the letter of credit and bank guarantee facilities. YES is the answer.

The assessee is engaged in the business of manufacture and sale of home furnishings such as rugs, bath mats, blankets etc, and had commenced operations on 1st October 2002. The Assessee had filed its return for AY 2008-09 declaring an income of Rs. 10,34,24,340/-, after claiming deduction in respect of income earned from the deemed export drawback at Rs. 1,22,25,214/-, customer claims at Rs. 28,27,224/-, freight subsidy Rs. 29,24,405/- and interest on FDRs made for business purposes of Rs.43,287/-. The return of the Assessee was picked up for scrutiny and notice u/s 143(2) was issued. The AO excluded the above receipts from the computation of eligible income u/s 10B(4), as he was of the view that the above receipts did not fall within the expression 'profit derived' from the export of articles.

Having heard the parties, the High court held that,

++ it is seen that the submissions made on behalf of the Revenue proceed on the basic misconception regarding the true purport of the provisions of Chapter VIA of the Act and on an incorrect understanding of Section 80A (4). It appears that the object of Section 80A (4) was to ensure that a unit which has availed of the benefit u/s 10B will not be allowed to further claim relief u/s 80IA or 80IB r/w/s 80A(4). The intention does not appear to be to deny relief u/s 10B (1) r/w/s 10B(4) or to whittle down the ambit of those provisions as is sought to be suggested by Revenue's counsel. In Hritnik Exports case, the Court quoted with approval the observations of the Special Bench of the ITAT in Maral Overseas Ltd. that "Section 10A/10B of the Act is a complete code providing the mechanism for computing the 'profits of the business' eligible for deduction u/s 10B. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act." This then brings us to the questions framed for consideration in the present case and the decision of the ITAT in not accepting the Assessee's plea in regard to 'customer claims' 'freight subsidy' and 'interest on fixed deposit receipts' even while it accepted the Assessee's case as regards 'deemed export drawback';

++ the contention of the Assessee as regards customer claims was that it had received the claim of Rs. 28,27,224/- from a customer for cancelling the export order. Later on the cancelled order was completed and goods were exported to another customer. The sum received as claim from the customer was non-severable from the income of the business of the undertaking. The Court fails to appreciate as to how the ITAT could have held that this transaction did not arise from the business of the export of goods. Even as regards freight subsidy, the Assessee's contention was that it had received the subsidy in respect of the business carried on and the said subsidy was part of the profit of the business of the undertaking. If the ITAT was prepared to consider the deemed export draw back as eligible for deduction then there was no justification for excluding the freight subsidy. Even as regards the interest on FDR, the Court has been shown a note of the balance sheet of the Assessee which clearly states that "fixed deposit receipts (including accrued interest) valuing Rs.15,05,875/- are under lien with Bank of India for facilitating the letter of credit and bank guarantee facilities." In terms of the ratio of the decisions of this Court both in Hritnik Exports and Universal Precision Screws, the interest earned on such FDR ought to qualify for deduction u/s 10B. Accordingly, the questions are answered in favour of the Assessee and against the Revenue.

(See 2015-TIOL-2729-HC-DEL-IT)