2018 (1) TMI 1146 - AT - Income Tax

Eligible for deduction u/s. 10A - nature of income/ additions u/s 41(1) - inclusion of interest income and other income earned by assessee - whether these incomes are incidental to the business and are to be treated as business profits ? - Held that - For excess provisions reversed pertain to provisions created in immediately previous financial year 2007-08 which are considered excess, including audit fee excess. These amounts are incomes u/s. 41(1), if they are allowed as deduction in earlier year. Since the amounts are directly connected to the business, the excess provision reversed is certainly having a nexus with the business. As far as the bad debts recovered are concerned, as seen from the ledger copy placed on record, these bad debts are previously written-off so to that extent profit in those years has come down. Therefore, the recovery of the bad debts certainly has a business connection. Miscellaneous receipts as seen from the ledger copy, these are incentives received from airlines, recovery of subscription from the employees, notice period payments recovered from the employees who retired or resigned, recovery of salary advances etc., and also includes sale of scrap. These amounts are part of business income and has a direct nexus with the activity of assessee. Therefore, since these amounts have a direct nexus (under the Company Law, these are to be reported as other incomes), We are of the opinion that these amounts are to be considered as part of business income and cannot be excluded for the purpose of deduction u/s. 10A of the Act. For interest income it is not known in the present facts of the case whether the interest income is earned on short term deposits out of surplus funds or long term deposits which has no connection with the business activity of assessee. Even though the AO has treated the income as business income , there is no finding whether the interest income has a nexus with the business of the undertaking . Just because the assessee has earned interest income out of the business it may not be eligible for deduction unless it has nexus with the business of undertaking. Thus in the interest of justice, we restore the issue to the file of AO to give proper findings on the nature of interest income earned and accordingly, consider the claims of assessee

Summary

Issues:
Whether interest income and other income earned by the assessee are eligible for deduction u/s. 10A of the Income Tax Act.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) concerning the eligibility of interest income and other income for deduction u/s. 10A. The Assessing Officer excluded interest income and other income from the deduction under u/s. 10A based on precedents like CIT Vs. Sterling Foods and CIT Vs. Pandian Chemicals Ltd. The assessee argued that these incomes are directly related to the business activity. However, the CIT(A) upheld the AO's decision based on the principles in Liberty India Vs. CIT. The assessee raised the issue of excluding these incomes from total turnover, but it was deemed irrelevant as the AO had already included them in the export turnover.

The core issue revolved around whether the interest income and other income had a nexus with the export business of the assessee. The assessee cited various case laws to support their claim that these incomes should be considered as business profits eligible for deduction u/s. 10A. The Tribunal noted that while the AO treated these incomes as part of business income, there was no explicit finding on the nexus between interest income and the business undertaking. The Tribunal analyzed the nature of other incomes, such as excess provisions reversed, bad debts recovered, and miscellaneous receipts, concluding that they were directly connected to the business and should not be excluded from the deduction.

Regarding interest income, the Tribunal highlighted the lack of information on whether it was earned from short-term deposits related to the business. Citing precedents like CIT Vs. Hewlett Packard Global Soft Ltd., the Tribunal emphasized the importance of establishing a nexus between interest income and the business activity. The Tribunal directed the AO to examine the nature of interest income, the source of funds, and its connection to the export business before making a decision. As a result, the Tribunal remanded the issue to the AO for further investigation, allowing the appeals related to other income but considering the appeal on interest income allowed for statistical purposes.

In conclusion, the Tribunal allowed the appeal for statistical purposes and instructed the AO to provide detailed findings on the nature of interest income to determine its eligibility for deduction u/s. 10A, aligning with the principles established in relevant case laws.