Section 10AA deduction for incidental interest on surplus business deposits retained business character and escaped tax as other sources.

Interest earned by a SEZ export unit on short-term fixed deposits of temporarily parked surplus business funds was treated as incidental to the export business, so it retained its business character for section 10AA. The Tribunal applied a liberal, purposive construction of the incentive provision and relied on Full Bench authority to hold that such incidental interest is not excluded merely because it does not arise directly from export invoices. The interest was therefore eligible for deduction under section 10AA and was not assessable separately as income from other sources.

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Issues: Whether interest earned on short-term fixed deposits out of temporarily parked surplus funds by a Special Economic Zone unit is eligible for deduction under section 10AA of the Income-tax Act, 1961, or is assessable as income from other sources.

Analysis: The assessee was a 100% export-oriented SEZ unit engaged in software development and related services. The interest arose from temporary parking of surplus business funds in fixed deposits, and the Tribunal treated this activity as integral to the export business rather than as an independent source of income. Relying on the Full Bench decision applying the same principle to export units, the Tribunal held that incidental interest earned from such deposits retains its business character for the purposes of the incentive provision and is not to be excluded merely because it is not derived directly from export invoices. The Tribunal distinguished the line of authorities dealing with deductions under Chapter VI-A and accepted a liberal, purposive construction of the incentive provision.

Conclusion: The interest income on temporary fixed deposits qualified for deduction under section 10AA and was not taxable separately as income from other sources.

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