Derived from industrial undertaking test excludes interest on deposits used to secure letters of credit

Interest earned on bank deposits made to secure letters of credit was held not to be income derived from the industrial undertaking because the phrase "derived from" requires a direct source nexus, not a merely incidental connection. As the immediate source of the interest was the deposit itself, the income did not qualify as profits derived from the undertaking and was not eligible for exemption under section 10A.

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Issues: Whether interest earned on deposits made for obtaining letters of credit, and used in connection with the industrial undertaking, was income derived from the industrial undertaking so as to qualify for exemption under section 10A of the Income-tax Act, 1961.

Analysis: The expression "derived from" is narrower than "attributable to" and requires a direct source nexus with the industrial undertaking. The immediate source of the interest income was the bank deposit itself, not the industrial undertaking. The fact that the deposit was made to secure letters of credit for business purposes did not create the necessary direct nexus, because the connection with the undertaking was only incidental.

Conclusion: The interest income was not profits derived from the industrial undertaking and was not eligible for exemption under section 10A; the answer was against the assessee and in favour of the Revenue.

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