2019 (3) TMI 1861 - AT - Income Tax

Tribunal Rules Interest Income from Deposits Eligible for Section 10A Deduction, Overturning Previous Decision.

Lily Jewellery Private Limited Versus DCIT - 10 (2) (1), Mumbai.

The Tribunal allowed the assessee's appeal, directing the AO to include interest income from fixed deposits and security deposits for electricity ... Deduction u/s 10A - AO excluding the interest income earned while determining the profits eligible for the purpose of computation of deduction under Section 10A - HELD THAT:- The Tribunal in Assessment Year 2009-10 [2018 (5) TMI 130 - ITAT MUMBAI] by following the judgment of the Hon'ble Karnataka High Court in the case of M/s. Hewlett Packard Global Soft Ltd. [2017 (11) TMI 205 - KARNATAKA HIGH COURT] held that the interest income earned on funds placed in the bank was entitled to benefits of Sec. 10A. The Tribunal further noticed that the interest income earned had a nexus with the borrowing raised from the bank which was, in turn, utilised for carrying on the eligible business. Similarly, on the issue of interest earned on the security deposit placed for obtaining electricity connection is concerned, the same was also held eligible for the benefits of Sec. 10A of the Act following the decision of the Tribunal in the case of M/s. Dania Oro Jewellery Pvt. Ltd. [2018 (1) TMI 240 - ITAT MUMBAI] Thus claim of assessee for inclusion of interest income for the purposes of Sec. 10A of the Act is accepted. Assessing Officer is directed to compute deduction under Section 10A of the Act by considering the aforesaid interest income. Appeal of the assessee is allowed, Issues:1. Exclusion of interest income from profits eligible for deduction under Section 10A of the Income Tax Act.Analysis:The appeal involved a dispute regarding the exclusion of interest income earned by the assessee while determining the profits eligible for the computation of deduction under Section 10A of the Income Tax Act. The interest income in question comprised amounts earned on fixed deposits for working capital facilities and security deposits for obtaining electricity connection. Both the Assessing Officer and the CIT(A) had excluded these incomes from the 'profits of the business' for computing the deduction under Section 10A, citing a lack of a direct nexus with the business of manufacturing studded jewelry, even though the assessee was engaged in the business of manufacturing and exporting studded jewelry in a Special Economic Zone, making it eligible for the deduction under Section 10A.In a similar case for the Assessment Year 2009-10, the Tribunal had considered a comparable dispute and held that interest income earned on funds placed in a bank was eligible for benefits under Section 10A of the Act. The Tribunal noted that the interest income had a connection with borrowings utilized for the eligible business. Similarly, interest earned on a security deposit for electricity connection was also deemed eligible for benefits under Section 10A of the Act. The Tribunal, based on the precedent set in the earlier case for the Assessment Year 2009-10, accepted the claim of the assessee for the inclusion of interest income for the purposes of Section 10A of the Act.The Tribunal's decision was influenced by the fact that the interest income had a direct connection with the borrowings utilized for the business and that the interest earned on the security deposit was also considered incidental to the eligible business. By following the precedent and the reasoning provided in the earlier case, the Tribunal set aside the orders of the CIT(A) and directed the Assessing Officer to compute the deduction under Section 10A by considering the interest income in question. Ultimately, the appeal of the assessee was allowed based on the Tribunal's decision and the applicable legal principles.This detailed analysis of the judgment highlights the key issues, legal arguments, and the Tribunal's decision, providing a comprehensive understanding of the case and its implications regarding the computation of deductions under Section 10A of the Income Tax Act.