Business income treatment for fixed deposit interest and EEFC exchange gains, with section 10A excluded from book profit computation.

Interest on fixed deposits kept for business purposes was treated as business income because the deposits had a direct nexus with the business and were maintained against bank guarantees; it was therefore included in the section 10A deduction base. Foreign exchange gain credited in the EEFC account was also treated as business income, since it arose from business operations and was included in the section 10A computation. For book profit under section 115JB, the section 10A deduction/exemption was excluded from the computation, following the assessee's earlier year position. The assessee obtained relief on the substantive income-characterisation issues, while the Revenue's challenge to book profit treatment failed.

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Issues: (i) Whether interest earned on fixed deposits kept for business purposes was to be treated as business income and included while computing deduction under section 10A; (ii) Whether exchange gain credited in respect of EEFC account was to be treated as business income and included while computing deduction under section 10A; (iii) Whether deduction under section 10A was allowable while computing book profit under section 115JB.

Issue (i): Whether interest earned on fixed deposits kept for business purposes was to be treated as business income and included while computing deduction under section 10A.

Analysis: The fixed deposits were found to have a direct nexus with the business, being kept apart for business purposes and against bank guarantees. Interest arising from such deposits was treated as income arising from the business activity and not as income from other sources. The issue was followed on the basis of the assessee's own earlier year decision.

Conclusion: The interest on fixed deposits was held to be business income and was directed to be included while computing deduction under section 10A, in favour of the assessee.

Issue (ii): Whether exchange gain credited in respect of EEFC account was to be treated as business income and included while computing deduction under section 10A.

Analysis: The amount was found to represent foreign exchange fluctuation gain and not interest income. Exchange gains were treated as arising from business operations and were directed to be assessed under the head business income, following the assessee's own earlier year ruling.

Conclusion: The EEFC exchange gain was held to be business income and was directed to be included while computing deduction under section 10A, in favour of the assessee.

Issue (iii): Whether deduction under section 10A was allowable while computing book profit under section 115JB.

Analysis: The Tribunal followed the earlier decision in the assessee's own case and held that the deduction/exemption under section 10A was to be excluded from book profit computation under section 115JB. The Revenue's objection was rejected on this basis.

Conclusion: Deduction under section 10A was directed to be excluded from book profit computation under section 115JB, in favour of the assessee and against the Revenue.

Final Conclusion: The assessee succeeded on the substantive tax treatment issues and the Revenue's challenge to the book profit computation also failed; the cross appeals were thus disposed of with relief granted to the assessee on the disputed issues.

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