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2017 (11) TMI 205 - HC - Income TaxDeduction under Section 10-A - eligibility to interest income earned - income not as a direct result of export - nature of investment of surplus - interest on staff loans - Held that - Assessee was entitled to 100% exemption or deduction under Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as Income from other Sources under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act. We therefore affirm and agree with the view expressed by the first Division Bench of this Court in the case of M/s. Motorola India Electronics (P) Ltd.(2014 (1) TMI 1235 - KARNATAKA HIGH COURT ) - Decided in favour of assessee.
Issues Involved:
1. Whether interest income from various sources should be treated as business income for a software development company not engaged in banking/financial activities. 2. Whether such interest income qualifies for deduction under Section 10A of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Classification of Interest Income The Full Bench analyzed whether the interest income earned by the assessee from Fixed Deposits, Citibank Hong Kong, and staff loans should be classified as business income. The earlier Division Bench in the case of M/s. Motorola India Electronics (P) Ltd. held that such interest income should be construed as "Business Income of the assessee derived from the Undertaking" under Section 10-A of the Income Tax Act, 1961. This interpretation included all incidental incomes derived from the business of the Undertaking as part of the profits and gains from export activities. However, the subsequent Division Bench in the present case took a different stance, relying on Supreme Court decisions, and held that the interest income did not have a direct nexus with the export business of the Undertaking. They concluded that the interest income should not be treated as profits derived from the export of articles or software and should be taxed under Section 56 as "Income from Other Sources." Issue 2: Eligibility for Deduction under Section 10A The Full Bench examined whether the Assessing Officer was correct in denying the deduction under Section 10A for the interest income. The Bench noted that the scheme of the Income Tax Act, particularly the provisions under Chapter III (Sections 10A and 10B), provides for 100% deduction of profits and gains derived from the export business of eligible Undertakings. The Bench emphasized that these sections are special provisions and form a complete code in themselves, distinct from the deductions under Chapter VI-A (Sections 80-HH, 80-IB, etc.), which deal with deductions from Gross Total Income. The Bench referred to various High Court decisions, including those of the Delhi High Court in Riviera Home Furnishing vs. Additional Commissioner of Income Tax and the Calcutta High Court in Commissioner of Income Tax, Kolkata-IV Vs. Hindustan Gum & Chemicals Ltd., which supported the view that interest income from temporary parking of surplus funds should be included in the profits of the business for the purposes of Section 10B. The Full Bench concluded that the interest income earned by the assessee from the temporary parking of surplus funds and staff loans should be treated as part of the profits and gains of the business of the Undertaking. This interpretation aligns with the purposive approach to tax incentives provided under Sections 10A and 10B, aimed at promoting export-oriented units. Conclusion: The Full Bench affirmed the view of the first Division Bench in the case of M/s. Motorola India Electronics (P) Ltd., holding that the interest income earned by the assessee qualifies as business income and is eligible for 100% deduction under Section 10A of the Income Tax Act, 1961. The Bench disagreed with the subsequent Division Bench's view that such interest income should be taxed under Section 56 as "Income from Other Sources." Both questions were answered in favor of the Respondent Assessee and against the Revenue, and the matter was sent back to the Division Bench for further proceedings in accordance with this opinion.
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