2010 (6) TMI 65 - HC - Income Tax

Exemption u/s 10A manner of computation treatment of interest income for the purpose of section 80HHC exclusion of interest and not gross interest for the purpose of section 80HHC Impact of disallowance of expenses in computation of deductions / exemptions Held that a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover - Freight and insurance do not have an element of turnover - these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary - The plain consequence of the disallowance and the add back that has been made by the Assessing Officer is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under Section 10A the addition made on account of the disallowance of the Provident Fund / ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made the plain consequence of the disallowance made by the Assessing Officer must follow. - exemption u/s. 10A to be granted on foreign exchange gain earned (due to fluctuation of foreign exchange) on realization of export receipts in the year of export

Summary

Issues Involved:
a. Computation of exemption under Section 10A after excluding freight and insurance from total turnover.
b. Granting exemption under Section 10A on assessed income enhanced due to disallowance of PF/ESIC contributions.
c. Treatment of interest income as business income for deduction under Section 80HHC.
d. Considering net interest and not gross interest for exclusion under clause (baa) of Explanation to Section 80HHC.
e. Granting exemption under Section 10A on foreign exchange gain realized on export receipts.

Detailed Analysis:

Re Question a:
The issue revolves around whether the exemption under Section 10A should be computed after excluding freight and insurance from the total turnover. The Tribunal held that:
1. The expression "total turnover" is not defined in Section 10A.
2. Profits derived from export must consider both export turnover and total turnover of the business.
3. Both export turnover and total turnover should be comparable.
4. Freight and insurance, having no element of profit, cannot be included in the total turnover.

The Tribunal directed that the deduction under Section 10A should be computed after excluding freight and insurance from the total turnover. The High Court upheld this view, stating that the definition of "export turnover" excludes freight and insurance, and this exclusion must also apply when it forms part of the total turnover in the denominator of the formula. The Court emphasized that any other interpretation would lead to an absurdity and inconsistent application of the term "export turnover."

Re Question b:
The issue concerns whether the Tribunal was justified in directing the Assessing Officer to grant the exemption under Section 10A on the assessed income, which was enhanced due to the disallowance of employer's and employee's contributions towards PF/ESIC. The High Court noted that the disallowance led to an increase in business profits. Since there was no statutory provision to exclude this addition from the computation of profits eligible for deduction under Section 10A, the Court held that the plain consequence of the disallowance must follow. Thus, the Tribunal's direction was justified.

Re Questions c and d:
Both parties agreed that these questions are covered by the judgment in Commissioner of Income Tax v. Asian Star Company Limited. The High Court answered these questions in the negative, in favor of the Revenue and against the assessee.

Re Question e:
The issue is whether the foreign exchange gain realized on export receipts should be considered in the year of export for the purpose of exemption under Section 10A. The Tribunal followed its Special Bench decision, concluding that foreign exchange gains realized within the stipulated period should be considered in the year of export. The High Court upheld this view, distinguishing it from the case of Commissioner of Income Tax v. Shah Originals, where the foreign exchange fluctuation arose after the export transaction was complete. In the present case, the fluctuation occurred in the course of the export transaction, thus forming part of the sale proceeds.

Conclusion:
The High Court disposed of the appeal, answering the questions of law as follows:
- Question a: Against the Revenue and in favor of the assessee.
- Question b: Against the Revenue and in favor of the assessee.
- Questions c and d: In favor of the Revenue and against the assessee.
- Question e: Against the Revenue and in favor of the assessee.

No order as to costs was made.