2019 (3) TMI 73 - HC - Income Tax

Deduction u/s 10B - basis of computation of the deductions - assessee is a 100% export-oriented unit - income on sale of export quota and interest on margin money deposits for opening letter of credit - HELD THAT - Basis of computation of the deductions enumerated under Chapter VI A is different from that set out for special deductions like section 10A and 10B. Relief under section 10A is granted in respect of profits derived from the eligible activity of export, computed as a proportion of the profits of the business of the undertaking. Export reliefs such as Duty Drawback, REP Licences and DEPB have been brought within the ambit of business income in terms of sub-sections (iiia) to (iiie) of section 28 of the Act, vide Finance Act, 1990 with retrospective effect from 01.04.1962. Income from sale of export quota thus falls under the head business income to be included in the computation of Profit and Gains of business or profession entitled to relief under section 10B. As regards interest income, the assessee states that the assessee imports raw materials under a letter of credit. The sanctioning bank mandates that a percentage of the amount be maintained as margin money and retained as a Time deposit. The deposit is created out of the working capital limits sanctioned by the bank. Interest is paid on the working capital assistance and processing charges and earned on the lien marked deposits. Both the componants of interest have a direct nexus to the business activity carried on by the assessee. There the sole activity engaged in by the assessee is export, all incomes generated by the conduct of the business of the unit would be eligible to the benefits under section 10A/10B. The orders of the authorities below are reversed and the issue answered in favour of the assessee

Issues Involved:
1. Entitlement to deduction under section 10B of the Income Tax Act, 1961 for income on sale of export quota.
2. Entitlement to deduction under section 10B for interest on margin money deposits for opening letters of credit.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 10B for Income on Sale of Export Quota:

The assessee, a 100% export-oriented unit engaged in the manufacture and export of garments, challenged the Income Tax Appellate Tribunal's orders denying deduction under section 10B for income earned from the sale of export quota. The assessee argued that the export quota, allotted by the Apparel Export Promotion Council (APEC), is mandatory for exporting garments and has a direct nexus with the eligible business activity. The quota, if in excess, can be transferred to other exporters, and the income from such transfers should be considered part of the business profits eligible for deduction under section 10B. The assessee relied on a CBDT Circular which equated export quota sales to business income.

The court noted that export reliefs like Duty Drawback, REP Licences, and DEPB are included in business income under section 28(iiia) to (iiie) of the Act. It emphasized that section 10B does not restrict what constitutes business profits, unlike section 80HHC, which excludes 90% of certain receipts from business profits. Therefore, income from the sale of export quota falls under business income and is eligible for deduction under section 10B. This issue was held in favor of the assessee.

2. Entitlement to Deduction under Section 10B for Interest on Margin Money Deposits:

The assessee also contended that interest earned on margin money deposits, required for opening letters of credit for importing raw materials, should qualify for deduction under section 10B. The deposits were made out of working capital limits sanctioned by the bank, and the interest earned had a direct nexus with the business activity.

The Revenue relied on concurrent orders of lower authorities and several decisions, arguing that income from incidental sources, even if connected to the export activity, does not qualify for deduction under section 10A. However, the court distinguished the basis of computation for deductions under Chapter VI A (like section 80IA) from special deductions under sections 10A and 10B. It noted that section 10B encompasses all incomes generated by the business activities of the eligible undertaking, unlike section 80IA, which limits deductions to income derived directly from eligible undertakings.

The court referenced decisions from the Karnataka High Court and the Delhi High Court, which supported the broader interpretation of business income under section 10B. It concluded that all incomes generated by the conduct of the business of the unit, including interest on margin money deposits, are eligible for deduction under section 10A/10B.

Conclusion:

The court reversed the lower authorities' orders and ruled in favor of the assessee, holding that both the income from the sale of export quota and the interest on margin money deposits qualify for deduction under section 10B. The substantial question of law was answered in favor of the assessee, and the tax appeals were allowed with no costs.

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