11. The learned counsel for the assessee has vehemently argued that in this case interest from deposit was offered as business income and was also assessed as business income and therefore, automatically once it is assessed as business income then the same becomes eligible for deduction u/s.10B.
On careful consideration we find that though these arguments look attractive but not correct. For this we have to refer to the famous decision of the Hon’ble Supreme Court in the case of CIT vs. Sterling Foods (supra). In that case the question arose whether receipt from sale of import entitlements was eligible for deduction u/s.80HH.
The Hon’ble Supreme Court noted that identical question came before the Hon’ble High Court for an earlier year and the High Court had answered the question against the assessee in Sterling Foods vs. CIT (150 ITR 292). It was further noted that in this year, the Hon’ble High Court has taken a different view. If we go through the decision of Hon’ble Karnataka High Court in the case carefully, which is reported at 190 ITR 275, then we find that a different view has taken by the Hon’ble Karnataka High Court because section 28 had itself been amended by the Finance Act, 1990 with effect from April 1, 1962 by insertion of clause (iiia) and clause (iiib) with effect from 1.4.1967. After noting this amendment the Hon’ble High Court reproduced the provisions of clause (iiia) and (iiib) and then observed as under:
“Section 28 provides for what income shall be chargeable to income tax under the head “Profits and gains of business or profession”. Therefore, by the amendment effected to section 28, what was held by this court not to be an income arising out of profits and gains of business or profession, by operation of law, has become such income. Therefore, once it becomes income, automatically, the benefits conferred by section 80HH will be attracted to the case of the assessee.”
From the above, it is clear that Hon’ble High Court was of the view that once the income from sale of import license was to be treated as business income under the Act in view of clause (iiia) of section 28, then automatically benefits conferred by section 80HH would be available.
12. The Hon’ble Supreme Court did not agree with this logic (reported at 237 ITR 579) and the decision of Hon’ble Karnataka High Court was reversed. It was observed that it is not the criteria how the income is assessed but because of the expression “derived from” what was required is that such business profit for being eligible to a deduction should have direct nexus to the profits and gains of such industrial undertakings. In fact it was held as under:
“Held, reversing the decision of the High Court, that the provisions of section 28 as amended made no difference. The word “derive” is usually followed by the word “from” and it means: “get, to trace from a source: arise from, originate in, show the origin or formation of”. The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements became available. There must be, for the application of the words “derived from”, a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applied. There under, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee’s industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income-tax Act, 1961.”
13. We further find that similar view has been taken by the Hon’ble Supreme Court again in the case of Liberty India vs. CIT(supra). In this case the question was whether profit from Duty Entitlement Pass Book Scheme (DEPB) and Duty Draw Back Scheme could be said to be profit derived from business of industrial undertaking eligible for deduction under section 80-IB of the Income-tax Act, 1961. It can be seen that DEPB and Duty Drawback etc., are covered by clause (iiid) to section 28 which means necessarily they have to be treated as business income under the provisions of the Act, still the deduction was denied u/s. 80I/80IA/80IB because these items were held to be not derived from the business of industrial undertaking/ export activity.
14. Therefore, it is clear that merely because the income has been assessed as business income will not automatically confer the benefits of a particular deduction once there is a rider provision that such income should be derived from a particular source. In the case before us admittedly the interest income was generated from interest on FDRs etc., from the surplus funds and, therefore, the same cannot be held to have been derived from the export of I.T. Services.
19. We are unable to agree with the submission of the learned counsel for the assessee that after insertion of section 10B(4) by the Finance Act 2000 with effect from 2001, the decision in the case of Menon Impex (supra) would not be applicable. This is so, because section 10B(4) merely gives the formula to make the deduction proportionate. Say if there is export turnover of Rs. 50 and total turnover is also Rs.100/- then the total business profit has to be divided by 50/100, because the total turnover (i.e. export turnover + domestic turnover). But the expression `derived from’ cannot be ignored in Section 10B(1) because the expression involves only these items of profit eligible for deduction which are derived from such undertaking.
20. We have also gone through the decisions of the Co-ordinate Bench of the Tribunal in the case of J.P. Morgan India Pvt. Ltd. v. DCIT (supra) and Living Stones Jewellery Pvt. Ltd., v. DCIT (supra) and find that both the decisions are distinguishable because both the decisions have not considered mandatory decision available from the Hon’ble Madras High Court in the case of CIT v. Menon Impex v. CIT(supra). In addition the benefit of Third Member decision in the case of Ito v. Banyan Chemicals Ltd. (supra) was also not available in this case.
21. In any case the decision in the case of Menon Imp ex v. CIT(supra) was followed by the Hon’ble Madras High Court in the case of India Com net International v. ITO (304 ITR 322). This decision was rendered for the assessment year 2002-03 when sub-section (4) had already been inserted on the Statute. Further in this case it was also argued that since the interest income was derived from funds retained by the bank to meet the exigencies of the business and that the entire transaction would constitute an integrated whole and the same could not be bifurcated into different areas. Reliance was also placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Baby Marine Exports (290 ITR 323) for the proposition that section 10A was beneficial provisions and, therefore, should be construed liberally. But these submissions were not accepted by the Court. From the above, it is clears that at present only one decision is available and whereby interest income was held to be not eligible for deduction u/s. 10A/10B. Therefore, we are bound to follow this decision as the learned counsel simply tried to distinguish this and could not point out to a different decision from the apex court or other courts. In these circumstances, we find nothing wrong with the order of the learned CIT(A) and confirm the same.