Interest Income Received On Temporary FDs Is Eligible For Exemption: ITAT

The Banglore Bench of the Income Tax Appellate Tribunal (ITAT) has held that interest income received on temporarily fixed deposits is eligible for exemption.

The bench of George George K. (Judicial Member) and Laxmi Prasad Sahu (Accountant Member) has relied on the decision of the Karnataka High Court in the case of CIT Vs. Hewllett Packard Soft Ltd. in which it was held that the assessee was entitled to 100% exemption or deduction under Section 10-A in respect of the interest income earned by it on the deposits made by it with the banks in the ordinary course of its business and also interest earned by it from the staff loans.

The appellant/assessee is in the business of providing software development services, including testing, infrastructure support, and other related services. The assessee company also provides information technology-enabled services to Allstate Group companies.

The assessee has earned an interest income of Rs. 5,85,16,568. The assessee was issued a show cause notice as to why interest income should not be taken out while computing the income under Section 10AA.

The AO observed that the assessee is eligible for a claim of exemption under Section 10AA only on the profits derived from the export of IT and IT-enabled services. The interest received on short-term fixed deposits parked in the bank is to be treated as income from other sources, and the income must be directly connected with the export of IT and ITeS.

The assessee contended that the assessee is a 100% export unit and eligible for exemption as per Section 10AA of the Act on the profits derived from the export business activities as defined in Section 10AA of the Act. The fund was temporarily parked in the bank as a fixed deposit for a shorter period. The assessee has no business in India; therefore, the interest received on a fixed deposit should be treated as business income as defined in Section 10AA of the Act.

The department contended that the assessee was unable to prove that there was a direct nexus between the fixed deposit made and the business activity carried on by the assessee.

The tribunal allowed the appeal of the assessee and held that the interest income received on temporarily fixed deposits is eligible for exemption under Section 10AA of the Income Tax Act.

Case Title: Allstate India Private Limited Versus Deputy Commissioner of Income-tax

Case No.: ITA No.257/Bang/2023

Date: 31.05.2023

Counsel For Appellant: Prakash Shridhar Hegde

Counsel For Respondent: Gudimella VP Pavan Kumar

Click Here To Read The Order