2014 (1) TMI 1235 - HC - Income Tax

Benefit of Section 10A and 10B - Interest on fixed profit - Whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking? - Held that - There is a direct nexus between this income and the income of the business of the undertaking - Though it does not par take the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles - In view of the definition of Income from Profits and Gains incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Profits and gains derived from export of articles is different from the income derived from the profits of the business of the undertaking - The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking - what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking - thus, the Tribunal was justified in extending the benefit to the amounts also there was no merit in these appeals Decided against Revenue.

Issues Involved:
1. Classification of interest income from surplus funds.
2. Computation of deduction under Sections 10A and 10B of the Income Tax Act.
3. Attribution of management expenses to interest income.

Issue-wise Detailed Analysis:

1. Classification of Interest Income from Surplus Funds:
The primary issue was whether the interest received by the assessee from surplus funds deposited in banks and sister concerns should be classified under "Income from Business" or "Income from other sources." The Tribunal had ruled that such interest income should be treated as part of the business income, thus qualifying for deductions under Sections 10A and 10B of the Income Tax Act. The revenue challenged this, arguing that interest income does not have a direct nexus with the business of exporting software and should be classified as "Income from other sources." The court examined precedents, including the cases of Pandian Chemicals Ltd. vs. Commissioner of Income Tax and Liberty India vs. Commissioner of Income Tax, which emphasized that the term "derived from" requires a direct nexus with the industrial undertaking. However, the court noted that the law had changed post-2001, and under the new Section 10B(4), the profits of the business of the undertaking, including incidental incomes, should be considered for deductions.

2. Computation of Deduction under Sections 10A and 10B:
The court delved into the methodology for computing deductions under Sections 10A and 10B, particularly post the 2001 amendment. The revenue contended that only profits directly derived from the export of articles or software should be considered for deductions. The court, however, highlighted the distinction introduced by the amendment, where profits of the business of the undertaking, including incidental incomes like interest from EEFC accounts and inter-corporate deposits, should be considered. The court referenced the specific language of Section 10B(4), which uses "profits of the business of the undertaking" rather than "profits and gains derived by the assessee from a 100% export-oriented undertaking." This broader terminology justified including interest income in the computation of eligible deductions.

3. Attribution of Management Expenses to Interest Income:
The second substantial question in ITA No.447/2007 concerned the rate at which management expenses attributable to the interest income should be allowed. The Tribunal had allowed these expenses at a rate of 5%, while the Assessing Officer had computed them at 4%. The court did not find it necessary to delve deeply into this issue, given the resolution of the primary question about the classification of interest income. The court's primary focus remained on whether the interest income should be part of the business income eligible for deductions under Sections 10A and 10B.

Conclusion:
The court concluded that the interest income from EEFC accounts and inter-corporate deposits should be considered part of the business income of the undertaking. This income, therefore, qualifies for deductions under Sections 10A and 10B of the Income Tax Act, post the 2001 amendment. The court answered the first substantial question of law in ITA No.428/2007 in favor of the revenue and against the assessee, and the first substantial question of law in ITA No.447/2007 in favor of the assessee and against the revenue. The second substantial question of law in both appeals was deemed unnecessary for further consideration. Each party was ordered to bear its own costs.

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