2011 (11) TMI 119 - HC - Income Tax

Inculsion and Exclusions in Numerator and Denominator while calculating Exemptions under 10A - Held That - If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. - If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated do. Thus decision of Tribunal in directing assessing officer to exclude communication expenses out of Total Turnover for computing eligible deduction under Section 10A is justified and consequently appeals of revenue is dismissed.

Issues Involved:
1. Whether the ITAT erred in directing the assessing officer to exclude communication expenses from Total Turnover for computing eligible deduction under Section 10A of the Income Tax Act, 1961.

Detailed Analysis:

1. Background and Appeals:

The appeals under Section 260A of the Income Tax Act, 1961 were preferred by the Revenue against the Income Tax Appellate Tribunal's (ITAT) orders dated 13.10.2009 and 04.03.2011. The common question in these appeals was whether ITAT erred in directing that assessing officer to exclude communication expenses out of Total Turnover for computing eligible deduction under Section 10A of the Income Tax Act, 1961.

2. Original Assessment and Commissioner of Income Tax's Intervention:

In the original assessment, the assessing officer did not include communication expenses in the figure of total turnover for computing the eligible deduction under Section 10A. The Commissioner of Income Tax, exercising powers under Section 263, directed the assessing officer to reassess the income by including communication expenses in the total turnover. The assessee appealed against this order to the ITAT.

3. ITAT's Decision:

The ITAT upheld the Commissioner of Income Tax's exercise of power under Section 263 but decided that communication expenses had to be excluded from the total turnover for computing the deduction under Section 10A. Consequently, the Commissioner of Income Tax (Appeals) followed this decision and allowed the assessee's appeal.

4. Revenue's Contention:

The Revenue contended that Section 10A, which provides for a deduction of profits from export, should be computed as per Section 10A(4). The definition of 'export turnover' excludes telecommunication charges, but 'total turnover' is not defined, thus no exclusion should be made from 'total turnover'. They argued that the legislative intent was clear in excluding telecommunication charges from 'export turnover' but not from 'total turnover'.

5. Assessee's Argument:

The assessee cited the Bombay High Court's decision in CIT v. Gem Plus Jewellery India Ltd., which was followed by the Karnataka High Court in CIT v. Tata Elxsi Ltd. They argued that since 'export turnover' excludes telecommunication charges and is a component of 'total turnover', logically, telecommunication charges should also be excluded from 'total turnover'. They emphasized that excluding an item from the numerator but including it in the denominator would lead to absurd results.

6. Legal Provisions and Interpretations:

Section 10A provides for a deduction of profits derived from export. Sub-section (4) states that profits derived from export should be proportionate to the export turnover relative to the total turnover. Explanation 2(iv) defines 'export turnover' to exclude telecommunication charges.

7. Court's Analysis and Agreement with Precedents:

The court agreed with the Bombay High Court's reasoning in Gem Plus Jewellery India Ltd., stating that the numerator (export turnover) and denominator (total turnover) must have the same meaning to avoid absurdity. The Karnataka High Court also supported this view, emphasizing uniformity in the formula's components. The court concluded that excluding telecommunication charges from 'export turnover' but including them in 'total turnover' would be illogical and contrary to legislative intent.

8. Conclusion:

The court concluded that the ITAT was correct in directing the exclusion of communication expenses from total turnover for computing the deduction under Section 10A. The appeals were dismissed, and the question was answered in favor of the assessee and against the Revenue.

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