2013 (12) TMI 1702 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of interest received from surplus funds.
2. Computation of deduction u/s 10A and 10B of the Income Tax Act.
3. Allowance of management expenses attributable to interest income.

Summary:

Issue 1: Taxability of Interest Received from Surplus Funds
The revenue challenged the Tribunal's order that interest payable on fixed deposits constitutes profits of the business of the undertaking, thus entitling the assessee to benefits u/s 10A and 10B of the Income Tax Act, 1961. The assessee earned interest from deposits in the EEFC account and inter-corporate loans. The Tribunal held that interest income from these sources should be assessed under the head "Income from Business" and extended the benefit under Section 10B for the assessment year 1998-99. However, for the assessment year 2001-02, the Tribunal noted the change in law and applied the formula in sub-section 4 of Section 10B, concluding that the term "profits of the business" is broader than "profits and gains derived by the assessee from a 100% export-oriented undertaking."

Issue 2: Computation of Deduction u/s 10A and 10B
The revenue contended that only profits and gains derived from the export of articles or computer software should be considered, not the profits of the business of the undertaking. They argued that interest from fixed deposits, loans to sister concerns, or EEFC accounts cannot be construed as profits and gains from export. The Tribunal, however, held that the entire profits deriving from the business of the undertaking should be considered while computing the eligible deduction u/s 10B/10A by applying the mandatory formula. The Court agreed with the Tribunal, noting that the amended Section 10B(4) includes all incidental incomes derived from the business of the undertaking.

Issue 3: Allowance of Management Expenses Attributable to Interest Income
The Tribunal allowed management expenses attributable to interest income at the rate of 5%, while the Assessing Officer had computed it at 4%. The Court did not find any cogent reasons provided by the Assessing Officer for applying the lower rate and upheld the Tribunal's decision.

Conclusion:
The Court upheld the Tribunal's decision that interest income from surplus funds should be treated as part of the total income for computing deductions u/s 10A and 10B. The first substantial question of law in ITA No.428/2007 was answered in favor of the revenue, and the first substantial question of law in ITA No.447/2007 was answered in favor of the assessee. The second substantial question of law in both appeals did not arise for consideration. The parties were ordered to bear their own costs.