The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the denial of deduction under Section 10AA to a Special Economic Zone (SEZ) unit, ruling that interest income earned from fixed deposits does not constitute business income eligible for exemption.
Excelra Knowledge Solutions (P) Ltd (assessee) claimed deduction under Section 10AA for Assessment Year 2018-2019, including interest income earned from fixed deposits maintained with banks.
The Assessing Officer (AO) denied the claim on the grounds that the interest income was not derived from the export of services and hence did not qualify as profits derived from the business under Section 10AA of the Income Tax Act.
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Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], who dismissed the appeal and affirmed the AO’s findings. The CIT(A) held that the interest income had no direct nexus with the business of the SEZ unit and it could not be treated as eligible business income for the purposes of Section 10AA deduction.
Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT. The assessee argued that the fixed deposits were linked to business operations and were often required for bank guarantees, performance assurances, or regulatory compliance, thereby constituting an integral part of the business activity.
The Revenue relied on judicial precedents including the Supreme Court’s decision in Pandian Chemicals Ltd. v. CIT and Liberty India v. CIT, contending that such income is incidental and not derived from business operations, and therefore not eligible for exemption under Section 10AA of the Income Tax Act.
The two-member Bench comprising Vijay Pal Rao (Vice-President) and Madhusudan Sawdia, (Accountant member) observed that the expression derived from used in Section 10AA must be narrowly interpreted.
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The tribunal held that the interest income from fixed deposits, being independent of export activity, cannot be treated as business income for the purpose of deduction.
The tribunal held that the AO and CIT(A) rightly disallowed the claim of deduction in respect of such income. The tribunal upheld the orders of the AO and CIT(A).
The appeal filed by the assessee was dismissed.
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