Direct nexus test limits section 10AA deduction on fixed-deposit interest; double taxation claim requires verification.

Interest earned by an eligible SEZ unit on short-term fixed deposits placed from surplus funds is not deductible under section 10AA unless it has a direct nexus with the export undertaking's operations and is derived from the business itself. Applying strict construction of exemption provisions, the interest was treated as incidental investment income rather than export profits, so deduction was denied on that issue. The separate contention that the same interest income had been taxed twice required factual verification; relief was to follow if the claim was substantiated.

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Issues: (i) Whether interest earned on short-term fixed deposits kept out of surplus funds of an eligible SEZ unit qualifies for deduction under section 10AA of the Income-tax Act, 1961; (ii) Whether the alleged double taxation of the same interest income required verification and consequential relief.

Issue (i): Whether interest earned on short-term fixed deposits kept out of surplus funds of an eligible SEZ unit qualifies for deduction under section 10AA of the Income-tax Act, 1961

Analysis: The deduction under section 10AA is available only in respect of profits and gains derived from the export activity of the eligible unit. Applying the direct nexus test, income must arise from the business undertaking itself and not merely be incidental to it. The interest in question arose from fixed deposits kept with a bank in India, and the deposit source was distinct from the export operations of the SEZ unit. The cited authorities on interest from deposits were distinguished on facts, and the principle of strict construction of exemption provisions was applied.

Conclusion: The interest income from fixed deposits was held not eligible for deduction under section 10AA and the assessee failed on this issue.

Issue (ii): Whether the alleged double taxation of the same interest income required verification and consequential relief

Analysis: The computation controversy required factual verification to determine whether the same interest amount had already been included in business income while also being assessed under the head income from other sources.

Conclusion: The matter was sent back for verification and relief was directed if the claim was found correct.

Final Conclusion: The appeal succeeded only on the limited verification issue, while the substantive challenge to denial of deduction on fixed-deposit interest failed.

Ratio Decidendi: Interest earned from bank fixed deposits by an eligible unit is not deductible under section 10AA unless it has a direct nexus with the export business of that unit and is derived from the undertaking's operations.

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