Fixed-deposit interest lacks section 10AA nexus unless directly linked to export business; MAT and disallowance issues remanded.

Interest earned on fixed deposits created from surplus export proceeds was treated as income from other sources and not as profit derived from export activity, so it was not eligible for deduction under section 10AA absent a direct and inextricable nexus with business exigency. The computation of book profit under section 115JB was sent back for verification and recomputation because the accounts and MAT adjustments had not been meaningfully examined. The claim for leave encashment under section 43B was also remanded for factual verification of payment and any prior disallowance. A possible double addition of the same interest income was required to be checked before final computation of taxable income.

---

---

Issues: (i) Whether interest earned on fixed deposits made out of surplus export proceeds was eligible for deduction under section 10AA; (ii) whether the computation of book profit under section 115JB required verification and recomputation; (iii) whether the claim under section 43B for leave encashment paid during the year required fresh examination; and (iv) whether the addition of interest income resulted in double addition requiring verification.

Issue (i): Whether interest earned on fixed deposits made out of surplus export proceeds was eligible for deduction under section 10AA.

Analysis: Deduction under section 10AA is confined to profits and gains derived from export activity. Interest on bank deposits is ordinarily taxable under the head "income from other sources" unless the deposits are made in the ordinary course of business or are inextricably linked with business exigencies such as bank guarantees, letters of credit, margin money, or similar commercial requirements. The deposits in question were found to be long-term fixed deposits made from surplus funds and not shown to have a direct nexus with export operations or commercial expediency. The earlier treatment of the same interest income in prior years also supported consistency in assessment.

Conclusion: The interest income on fixed deposits was not eligible for deduction under section 10AA and the issue was decided against the assessee.

Issue (ii): Whether the computation of book profit under section 115JB required verification and recomputation.

Analysis: The computation of book profit was not examined by the first appellate authority in a meaningful manner. The record suggested a possible mismatch between the profit shown in the accounts and the book profit adopted for MAT purposes. Since proper verification of the profit and loss account and the applicable adjustments under section 115JB was , the matter required fresh examination by the Assessing Officer.

Conclusion: The issue was remanded for verification and recomputation in favour of the assessee.

Issue (iii): Whether the claim under section 43B for leave encashment paid during the year required fresh examination.

Analysis: The assessee's claim depended on whether the amount had been disallowed in the earlier year and whether payment was made during the relevant previous year. These foundational facts were not verified before the claim was denied. As the entitlement under section 43B turned on factual verification of payment and prior disallowance, the matter required reconsideration.

Conclusion: The issue was remanded for fresh adjudication in favour of the assessee.

Issue (iv): Whether the addition of interest income resulted in double addition requiring verification.

Analysis: The assessment record indicated that the same interest income had been credited in the profit and loss account and then added again under the head "income from other sources" while simultaneously disallowing deduction under section 10AA. This raised a prima facie question of double inclusion of the same amount, which required verification of the correct taxable income.

Conclusion: The issue was remanded for verification in favour of the assessee.

Final Conclusion: The appeal succeeded only in part, with the substantive claim for deduction on fixed-deposit interest rejected, while the remaining disputed computations and disallowances were sent back for fresh verification and adjudication.

Ratio Decidendi: Interest on fixed deposits earns deduction-linked character under section 10AA only when it has a direct and inextricable nexus with export business or is generated by commercial expediency; surplus-fund deposits made as an investment decision do not qualify as business-derived profits.

---