ITAT: Tax Exemption Eligible If Interest Received from Short-Term FDs

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has issued a ruling stating that interest income received from short-term fixed deposits is eligible for exemption.

The ITAT bench, comprised of George George K. (Judicial Member) and Laxmi Prasad Sahu (Accountant Member), cited the decision of the Karnataka High Court as their basis. This decision was made in reference to a case of CIT Vs. Hewlett Packard Soft Ltd. presented by the appellant/assessee, wherein the Karnataka High Court affirmed the entitlement of the assessee to a 100% exemption or deduction under Section 10-A.

The exemption applies to the interest income earned on deposits made by the assessee with banks as part of its ordinary business operations, as well as the interest earned from staff loans.

The appellant/assessee primarily engages in providing software development services, which include testing, infrastructure support, and related services. Additionally, the company offers information technology-enabled services to entities within the Allstate Group companies.

The total interest income received by the assessee amounted to Rs. 5,85,16,568. Subsequently, a show-cause notice was issued, requiring the assessee to justify why the interest income should not be excluded when calculating their overall income under Section 10AA.

The Assessing Officer (AO) contended that only earnings received from the export of IT and IT-enabled services qualify for exemption claims under Section 10AA for the appellant/assessee.

Therefore, the interest earned on short-term fixed deposits parked in banks should be regarded as revenue from sources other than IT and IT-enabled services exports.

In response, the assessee argued that as a 100% export unit, it is exempted from paying taxes on earnings from export business activities, as specified by the provisions of Section 10AA of the Income Tax Act.

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They asserted that the fund was parked in the bank temporarily. Interest earned on fixed deposits should be considered as business income under Section 10AA of the Act.

The government authorities contended that the assessee failed to establish a direct connection between the fixed deposit made and the commercial activities of the assessee.

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Upon review, the tribunal upheld the appeal made by the assessee, ruling that Section 10AA of the Income Tax Act indeed permits an exemption for interest income earned from short-term fixed deposits.