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2006 (11) TMI 541 - AT - Income TaxDeduction u/s 10A and 10B - interest income - deposits lying in the EEFC account - advancing of intercorporate loans out of the funds of the undertaking - head Income from business or Income from other sources - HELD THAT - Keeping this distinction in mind we have to necessarily hold that the entire profits deriving from the business of undertaking should be taken into consideration while computing the eligible deduction u/s 10A/10B of the Act by applying the mandatory formula. As the Legislature wanted to specifically exclude receipts by way of brokerage commission rent charges or any other receipt of similar nature from the profits of the business in section 80HHC the hon ble High Court it has specifically inserted Explanation (baa). If the Legislature intended to exclude interest from the term Profit of business of undertakings under section 10A/10B a similar provision as in the case of section (baa) would have been inserted. No such Explanation has been introduced in section 10A/10B. Thus we agree with the submissions of learned counsel for the assessee and direct the Assessing Officer to recompute the deduction u/s 10A and 10B of the Act on the lines indicated above for the assessment year 2001-02. In the result this ground of the assessee is allowed in the assessment year 2001-02. We have already held interest income in this case has to be assessed under the head Income from business. While doing so the Assessing Officer has to compute separately income earned by way of interest. To compute the interest income all connected and related expenditure has to be allowed. In this case the assessee had to necessarily hold the funds in deposits and advances due to embargo placed by the Government restricting prepayment of the external commercial borrowing. The assessee has to necessarily hold on to the funds which would otherwise have been utilised to repay the liability which would have reduced its liability to pay interest. Thus there is a clear nexus between the external commercial borrowings and the funds placed for short-term deposits and other deposits. Thus in our considered opinion the relatable expenditure has to be deducted. In the result this ground of the assessee is allowed for the assessment years 1997-98 and 1998-99. For the assessment year 2001-02 though the principle do not change the ground of netting of interest is an alternative ground. As we have directed that due to change in law deduction u/s 10A/10B has to be granted on this business receipts the ground becomes infructuous. In the result ITAs are allowed in part as indicated above and COs are dismissed.
Issues Involved:
1. Inclusion of interest income while computing deduction under sections 10A and 10B of the Income-tax Act, 1961. 2. Allowability of interest expenditure on the interest income. 3. Allowing deduction in respect of proportionate management expenses of earning interest income. 4. Levy of interest under section 234B. 5. Inclusion of income from the sale of import licenses for computing deduction under section 10A/10B. Issue-wise Detailed Analysis: 1. Inclusion of Interest Income for Deduction under Sections 10A and 10B: The primary issue was whether interest income should be included while computing deduction under sections 10A and 10B of the Income-tax Act, 1961. The assessee earned interest income from deposits in the EEFC account and intercorporate loans. The assessee argued that this interest income should be considered as "Income from business" and be eligible for exemption under section 10A. The Department contended that only profits derived from the export of articles or software are eligible for deduction, and interest income should be assessed under "Income from other sources." The Tribunal held that the interest income had a close nexus with the business activity of the assessee and should be assessed under "Income from business." For assessment years 1997-98 and 1998-99, the Tribunal upheld the earlier decision against the assessee. However, for the assessment year 2001-02, the law had changed, and the Tribunal directed that the entire profits from the business of the undertaking should be considered for deduction under section 10A/10B. 2. Allowability of Interest Expenditure on Interest Income: The assessee claimed that interest expenditure should be allowed against the interest income. The Tribunal agreed, noting that the funds had to be held in deposits due to government regulations, creating a nexus between the external commercial borrowings and the deposits. Therefore, the related expenditure should be deducted. This ground was allowed for the assessment years 1997-98 and 1998-99. For the assessment year 2001-02, the principle remained the same, but the ground became infructuous as the deduction under section 10A/10B was granted on business receipts. 3. Deduction for Proportionate Management Expenses: The assessee sought to deduct proportionate management expenses related to earning interest income. The Tribunal referred to an earlier decision where 5% of expenses were treated as expenditure for earning income. The Assessing Officer had restricted this to 4%, but the assessee did not provide further evidence to support a higher claim. The Tribunal directed that the expenses claimed should be allowed, subject to a maximum of 5%. 4. Levy of Interest under Section 234B: The assessee disputed the levy of interest under section 234B for the assessment year 1997-98. The Tribunal held this to be consequential in nature and, following the Supreme Court's decision in CIT v. Anjum M. H. Ghaswala, rejected the assessee's ground. 5. Inclusion of Income from Sale of Import Licenses: The Department appealed against the inclusion of income from the sale of import licenses for computing deduction under section 10A/10B. The first appellate authority had relied on a previous Tribunal decision in the case of Wipro Information Technologies. The Tribunal found no infirmity in this finding and dismissed the Department's appeals. Cross-Objections: The assessee's cross-objections were not pressed during the hearing and were therefore dismissed as not pressed. Conclusion: The ITAs were allowed in part, and the cross-objections were dismissed. The Tribunal provided detailed reasoning for each issue, ensuring that the legal principles and relevant case law were thoroughly considered.
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