Tribunal allows deduction for trading activities under section 10AA, treats interest income as business income

M/s. Ossian Exports Versus Income Tax Officer-14 (2) (4), Mumbai and DCIT, Central Circle-8 (3) (Erstwhile DCIT, CC-46), Mumbai Versus M/s. Ossian Exports

M/s. Ossian Exports Versus Income Tax Officer-14 (2) (4), Mumbai and DCIT, Central Circle-8 (3) (Erstwhile DCIT, CC-46), Mumbai Versus M/s. Ossian Exports ... Issues Involved:
1. Disallowance of deduction under section 10AA.
2. Treatment of interest on FDs as 'income from other sources'.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 10AA:

The assessee, engaged in trading and import/export of polished diamonds, gold, and gold jewellery, claimed a deduction of Rs. 3,61,19,032 under section 10AA of the Income Tax Act, 1961 for the A.Y. 2011-12. The Assessing Officer (AO) disallowed this deduction, arguing that the assessee had neither manufactured nor produced any goods or articles nor provided any services, as the imported diamonds were merely re-exported without any value addition. The AO rejected the assessee's claim that the term 'services' as used in section 10AA(9) of the Act should be read as defined in the SEZ Act, 2005, which would override the provisions of section 10AA of the Act.

The CIT(A) allowed the assessee's claim for deduction under section 10AA, interpreting that the term 'services' includes trading activities, as defined under the SEZ Act and SEZ Rules. The CIT(A) relied on judicial pronouncements, including the ITAT decisions in Geetanjali Exports Corporation Ltd. and Goenka Diamonds and Jewellers Ltd., which supported the view that trading for re-export qualifies as 'services' under the SEZ Act, thereby entitling the assessee to the deduction under section 10AA.

The Tribunal upheld the CIT(A)'s decision, agreeing that the provisions of the SEZ Act, which include trading as 'services', have an overriding effect due to the non-obstante clause in section 51(1) of the SEZ Act. This interpretation was consistent with previous Tribunal decisions, confirming that the assessee's trading activities qualified for the deduction under section 10AA.

2. Treatment of Interest on FDs as 'Income from Other Sources':

The assessee contested the treatment of interest income of Rs. 1,23,10,695 earned from Fixed Deposits (FDs) as 'income from other sources' instead of 'business income'. The FDs were made as margin money for opening a Letter of Credit (L/C) with Corporation Bank for the assessee's import/export business. The assessee argued that the interest income had a direct nexus with the business and should be considered business income, eligible for deduction under section 10AA.

The CIT(A) upheld the AO's decision, treating the interest income as 'income from other sources'. However, the Tribunal reversed this decision, citing the case of Jewel Arts, where it was held that interest earned on FDs kept as margin money for business purposes should be treated as business income. The Tribunal noted that the FDs were not made from excess funds but were a business requirement, thereby constituting business receipts eligible for deduction under section 10AA.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the deduction under section 10AA for the assessee's trading activities. Additionally, the Tribunal allowed the assessee's appeal, treating the interest income from FDs as business income eligible for deduction under section 10AA. Consequently, the Revenue's appeal was dismissed, and the assessee's cross-appeal was partly allowed.