Direct nexus test governs deduction of deposit interest, but export-profit computation can include it under section 80HHC.

Interest on bank deposits kept for opening letters of credit and furnishing guarantee fund was held not to be income derived from the industrial undertaking for sections 80HH and 80-I, because it arose from the deposits themselves and lacked the direct and proximate nexus required by the narrower expression "derived from". The claim therefore failed under those provisions. For section 80HHC, however, export profits were computed by reference to business profits, and the interest already included in business income was treated as part of export profits. Deduction was thus unavailable under sections 80HH and 80-I, but available under section 80HHC.

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Issues: Whether interest earned on bank deposits made for opening letters of credit and furnishing guarantee fund formed part of profits derived from the export business for deduction under sections 80HH, 80HHC and 80-I of the Income-tax Act, 1961.

Analysis: The interest on deposits made with the bank had no direct nexus with the industrial undertaking itself and was derived from the deposits, not from the undertaking, so the wider expression "attributable to" could not be applied where the statute used the narrower expression "derived from". On that footing, the interest was not eligible for deduction as business profit for the purposes of sections 80HH and 80-I. For section 80HHC, however, the relevant sub-section equated profits derived from export with the profits of business as computed under the head "Profits and gains of business or profession"; since the interest had already entered that computation, it was to be treated as part of export profits for that provision.

Conclusion: The claim for deduction was rejected under sections 80HH and 80-I, but accepted under section 80HHC.

Final Conclusion: The reference was answered partly for the assessee and partly for the Revenue, with the interest income excluded for sections 80HH and 80-I but included for section 80HHC.

Ratio Decidendi: Income is said to be derived from an undertaking only when there is a direct and proximate nexus with the undertaking, whereas interest on bank deposits arises from the deposits themselves; but where the statute equates export profits with business profits, amounts included in business income may be treated as derived from export business for that provision.

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