Exports—Exemption u/s. 10A—Matter remanded to the Tribunal to consider the transaction of earning of interest on foreign currency deposit in detail to determine whether there existed any nexus between interest and industrial undertaking.

The assessee, a private limited company established under the Madras Export Processing Zone, a 100% export oriented unit, engaged in the business of development and export of software filed its return of income for the assessment year 2002- 03 on 31st October, 2002, admitting “nil” income after claiming exemption u/s. 10A amounting to Rs. 8,34,84,900. The assessment was completed u/s. 143(3) of the Act by adding to income, the interest on deposits amounting to Rs. 92,06,602. The Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer, namely that the interest income of Rs. 92,06,602 did not qualify for exemption u/s. 10A of the Act and the same had to be assessed to tax under the head “Income from other sources”. The Tribunal following the order of the jurisdictional High Court in the case of CIT vs. Menon Impex P. Ltd. (2003) 259 ITR 403 (Mad) dismissed the appeal filed by the assessee. The High Court confirmed the order of the Tribunal holding that the interest income was earned out of the export realisation and kept in the foreign currency deposit account, as permitted by the FERA under the banking regulations and that there was no direct nexus between the interest earned and the industrial undertaking since the interest was received on deposit made in banks and it was that deposit which was the source of income.

On further appeal, the Supreme Court held that the impugned judgment of the High Court was based on the judgment of the Madras High Court in the case of CIT vs. Menon Impex P. Ltd. (supra). The Supreme Court observed that in that case, the Madras High Court examined in detail the transaction in question and found that the assessee had set up a new industrial undertaking in Kandla Free Trade Zone for manufacturing light engineering goods. The goods therein were exported during the assessment year 1985-86. In the course of business, the assessee was required to open a letter of credit. On such deposit, the assessee earned interest. Under the said circumstances, the High Court held, following the judgment in the case of CIT vs. Sterling Foods reported in [1999] 237 ITR 579 (SC), that the interest received by the assessee was on deposit made by it in the banks; that such deposit was the source of income; and that, the mere fact that the deposit was made for obtaining letter of credit which letter was, in turn, used for the purpose of business undertaking did not establish a direct nexus between the interest and industrial undertaking. According to the Supreme Court, the judgment of the Madras High Court in Menon Import P. Ltd. ( supra) was based on the examination of the transaction in detail which exercise had not been undertaken in the present case.

For the above reasons, the Supreme Court set aside the impugned judgment and remitted the case to the Income-tax Appellant Tribunal for deciding the matter afresh after examining the transaction in question, as done by the Madras High Court in the case of Menon Import P. Ltd. (supra).