Section 10A foreign currency deposit interest: direct nexus test clarified, matter remitted to ITAT for fresh determination

SC addressed whether interest on foreign currency deposit was eligible for deduction under Section 10A as business income or taxable as income from other sources. Relying on precedent distinguishing between direct and indirect nexus with the eligible industrial undertaking, SC held that mere use of deposits for obtaining letters of credit does not automatically establish the requisite direct nexus. As the factual matrix concerning the nature and purpose of the deposits was not adequately examined, SC did not conclusively decide the allowability of Section 10A benefit. The matter was remitted to ITAT to reappraise the transactions in detail and determine afresh the character of interest income and consequent eligibility for deduction.

---

---

Issues:
Assessment of interest income under the Income Tax Act, 1961 - Interpretation of Section 10A - Application of the judgment of the Madras High Court in Menon Impex Private Limited case.

The Supreme Court heard arguments from both sides and granted leave in a batch of three cases. In a civil appeal, the assessee, a 100% Export Oriented Unit earning foreign exchange through software development and exports, received interest income on a Foreign Currency Deposit Account permitted by FERA. The assessee claimed exemption under Section 10A of the Income Tax Act, but the sum was questioned to be assessed under 'Other Sources' in Section 56 of the Act. The High Court's judgment was based on the Madras High Court's decision in Menon Impex Private Limited case, where the Tribunal had to determine if interest income from funds related to a Letter of Credit was derived from the profits of the business of the industrial undertaking to qualify for Section 10A benefits. The Madras High Court concluded that the interest was earned on a deposit made by the assessee in banks, and the direct nexus between the interest and the industrial undertaking was not established. The Supreme Court set aside the impugned judgment and remitted the cases to the Income Tax Appellate Tribunal for a fresh decision after examining the transaction in question, similar to the detailed analysis done by the Madras High Court in the Menon Impex Private Limited case. The ITAT was directed to allow the assessee to produce relevant documents before making a decision on the legal question. Consequently, the civil appeals filed by the assessee were allowed with no order as to costs.

---

---