D.T. Garasia, J.M.:— The present appeal has been preferred by the Revenue against the order dated 10.10.2016 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2012-13.
2. The short facts of the case are as under:
The assessee is a partnership firm having income from business during the year under consideration. The firm is engaged in manufacture and export of Diamond and Jewellery from a unit situated in, SEEPZ, Andheri, Mumbai. The assessee firm had a turnover of Rs. 224.40 crores during the year and earned a net profit of Rs. 48.12 crores. The entire turnover of the assessee was n the form of export from the unit located in the SEZ. The firm did not have any local turnover. The assessee filed its return of income on 29/09/2012 for AY 2012-13 declaring nil income after claiming deduction u/s. 10AA of the Income Tax Act, 1961 of Rs. 48.12 crores. During the course of assessment proceedings, the Assessing Officer (hereinafter referred to as the AO) observed that the assessee has received interest of Rs. 36,80,659/- from the fixed deposits in the bank. The AO further observed that this interest income has been netted against the interest paid of Rs. 2,28,47,528/-. The AO held that the interest received has to be taxed under the head, Income from Other Sources and not as Business Income. He placed his reliance on the judgements of the Apex court in the case of Pandian Chemicals, 262 ITR 278 wherein the apex court held that interest on deposit with Electricity Board is not income derived from business and has to be assessed as income from Other Sources. The AO also relied upon the judgement of the Delhi High Court in the case of Shriram Honda Power Equipment, 289 ITR 475 (Del). However, in this case the issue was interest earned from surplus funds which we parked with the bank where the court held that such interest should be categorized as income from other sources and not business income and has no bearing to the facts of the present case.
3. Matter carried to the Ld. CIT(A) and the Ld. CIT(A) has allowed the appeal by observing as under:
“3.3. The submissions of the learned counsel have been carefully considered and I find sufficient force in the same. The Hon'ble High Court of Karnataka in the case of CIT v. Motorola India Electronics Private Ltd, 225 taxman 11 held, after considering the decisions of the apex court in Pandian chemicals Ltd. v. CIT, 262 ITR 278 and Liberty India v. CIT, 317 ITR 218 “it is clear that what is exempted is not merely the profits and gains from the export of articles but also the Income from the Business of the undertaking”. Specific to the question of interest earned by the EOU on the FDRs placed by it and interest earned from the loans given to sister concerns, it was held that “although it did not partake the character of profits and gains from the sale of an article it is income which is derived from the consideration realised by export of articles”. In this case, the Hon'ble High Court held that interest earned on loans given to sister concerns is also to be treated as business income. In the instant case, the interest earned is on fixed deposits kept with the bank as collateral security to enable the appellant to have credit facilities for exports. Therefore, it has direct nexus with the export activities of the appellant. According to the appellant, it was mandatory and absolutely necessary for the appellant to keep fixed deposits of Rs. 4 crores with the bank to avail the credit facilities for smooth conduct and running of its export business. The learned counsel pleaded that the deposit made by the appellant should be deemed to be a deposit made for the purpose of business and the interest earned from such deposit should be treated as business income. The appellant has also given the correspondence with Bank of India wherein the bank has enhanced the limit of credit facilities provided to the appellant on certain terms and conditions. One of the conditions is providing collateral security of equipments etc. of the firm and TDRs of Rs. 4 crores under bank's lien. Therefore, the appellant had no choice but to keep an FD of Rs. 4 crores with the bank in order to avail the credit facilities of the bank. This act was purely in the interest of business and the interest arising therefrom has to be treated as business income following the ratio of the judgment of the Karnataka High Court in the case of CIT v. Motorola India Electronics Private Ltd. cited supra. These grounds of appeal are allowed.”
4. Having heard the Ld. D.R., I find that Ld. CIT(A) has relied upon the decision of Hon'ble Karnataka High Court which is in reference to section 10AA but Ld. CIT(A) has not considered whether the interest income is arrived from export of article of things. Therefore, after considering the judgment of Hon'ble Supreme Court in the case of Pandian Chemicals, 262 ITR 278 and judgment of Hon'ble Kerla High Court in the case of Ravindran Nair, 263 ITR 3, I restore this issue back to the file of the Ld. CIT(A) to decide the issue and decide the matter afresh.
5. In the result, appeal of the Department is allowed for statistical purposes.