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TMI Blog2019 (10) TMI 1195X X X X Extracts X X X X X X X X Extracts X X X X ..... rticular receipts offered under the head prior period income? [B] Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance made u/s. 40(a)(i) of the Act amounting to Rs. 1,12,01,869/ without appreciating that assessee had not filed any application u/s. 195 for nondeduction of TDS? [C] Whether the Appellate Tribunal has erred in law and on facts in directing the assessing officer to exclude unrealised export from the total turnover, without appreciating that the formula adopted by the Appellate Tribunal would render the entire scheme of things nonworkable in as much as the assessee would become entitled to Section 10B deduction even in respect of turnover for which sales proceeds was not realised? [D] Whether the Appellate Tribunal has erred in law and on facts in directing the assessing officer to consider other income as being eligible for deduction under Section 10B of the Act?" 3 It appears from the materials on record that the return of income for the AY 200607 was filed by the assessee on 31st December 2006 declaring a total income of Rs. 9,55,84,979/. A report under Section 92(E) of the Act relating to the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for furnishing inaccurate particulars of income. 6 Thus, the Assessing Officer found that the assessee credited Rs. 3,39,534. being net period income i.e. prior period income of Rs. 46,50,648/ minus the period expenses of Rs. 43,11,114/. The Assessing Officer took the view that during the year under consideration the "prior period income" was taxable, but the "prior period expenses" were not allowable. In such circumstances, the Assessing Officer made addition of Rs. 46,50,648/ in respect of the "prior period income" and denied the set off of the prior period expenses against such prior period income. The Assessing Officer denied the set off on the basis that a different set of rules applied to such income and expenses. 7 The CIT(A), in the appeal preferred by the assessee, confirmed the addition on the basis that the prior period expenses cannot be adjusted against the prior period income in the absence of any corelation or nexus. The observations of the CIT(A) are as follows: "3.5 I have considered the facts of the case, assessment order and appellant's submission. Appellant did not account for complete prior period income on the ground that these are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned senior standing counsel appearing for the Revenue vehemently submitted that the decision of the Appellate Tribunal as regards the prior period expenditure is erroneous. Mr. Bhatt pointed out that it was noticed by the Assessing Officer, in the course of the assessment proceedings, that the assessee had credited an amount of Rs. 3,39,534/ below the PBT net figure. The assessee accepted that the same pertained to the earlier years and having regard to the volume of the business, it had likely to have debit and credit pertaining to the earlier years. Mr. Bhatt submitted that there is no proof or evidence relating to the crystallization of the expenditure in the current year. According to Mr. Bhatt, once the Assessing Officer came to the conclusion that prior period expenditure cannot be allowed, then the same could not have been given set off against the prior period income. While the expenditure was disallowable as not pertaining to the year in question, the income should have been included in the total income of taxability on accrual or receipt. 11 On the other hand, Mr. Tushar Hemani, the learned counsel appearing for the assessee submitted that the only reason ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the standard, restricts itself to those items of income or expenses which arise in the current period as a result of the errors or omissions in the preparation of the financial statements of one or more prior periods. Some of the examples of prior period items are as under : * Error in calculation in providing expenditure or income. * Omission to account for income or expenditure. * Nonprovision of travelling expenses for travel already undertaken. * Nonprovision for salary already due in earlier year. * Applying incorrect rate of depreciation. * Treating operating lease as finance lease. * Capitalisation of borrowing cost on working capital. 13 Section 37(1) of the Act is as follows: "37. General (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 a [x x] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Hence, the only requirement under Section 37 of the Act is that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 per cent deduction from such incomes is provided to account for these expenses."" 17 Mr. Hemani, the learned counsel placed reliance on the decision of this Court in the case of Principal Commissioner of Income Tax1 vs. Adani Gas Ltd [Tax Appeal No.900 of 2016 decided on 11th January 2017] wherein two questions fell for consideration of this Court. Those are as under; "A. Whether the Appellate Tribunal has erred in law and in facts in deleting the disallowance of Rs. 10,28,028/ being the preliminary expenditure under Section 35 D of the Act ? B. Whether the Appellate Tribunal has erred in facts and circumstances in directing the AO to set off prior period expenditure of Rs. 15,25,746/ without considering the merit of the issue?" This Court held as under: "3.0. So far as proposed question no.A is concerned, it is with respect to deletion of disallowance of Rs. 10,28,028/ being preliminary expenditure under Section 35 D of the Act. The learned Tribunal has dealt with the same in para 4 and considering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in the present appeal. Hence, present appeal deserves to be dismissed and is accordingly dismissed." 18 Mr. Hemani also placed reliance on the decision of this Court in the case of Principal Commissioner of Income TaxI vs. Adani Enterprises Ltd [Tax Appeal No.566 of 2016 decided on 20th July 2016] wherein one of the questions was as under: "(A) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in deleting the disallowance of Prior Period expenditure of Rs. 67,88,591/?" The Court, ultimately, held as under: "2. Main question is sum of Rs. 67.88 lacs(rounded off) which the Assessing Officer and CIT(Appeals) disallowed treating the expenditure as a prior period expenditure. The Tribunal reversed the findings of the Revenue authorities primarily on two grounds. Firstly, that the assessee being a company was charged uniformly for all years and would therefore, have no revenue implication of whether the expenditure was recognised in this assessment year or earlier year. The second ground was that in any case, the Revenue had recognised the prior period income. If that be so, according to the Tribunal, it would be unfair not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prior period income while working out the current year taxable income, there was no reason to disallow only a part of the prior period adjustment. 22 This Court in PCIT vs. Adani Enterprises [Tax Appeal NO.566 of 2016 decided on 20th July 2016] noted that the prior period income was declared by the assessee in the current year and accepted by the Revenue. Hence, this Court declined to interfere with the order of the ITAT holding that it would be unfair not to recognise the prior period income. It further took into account the fact that the company would be taxed at the same rate in the present assessment year or during the earlier year. 23 This Court in PCIT vs. Adani Enterprises Ltd [Tax Appeal no.573 of 2016 decided on 20th July 2016] followed its order in the Tax Appeal no.566 of 2016 dated 20th July 2016 to dismiss the Tax Appeal. 24 Thus, in view of the aforesaid discussion, we are of the view that the ITAT committed no error in holding that once the prior period income is held to be taxable, the prior period expenditure also should be allowed to be set off and the assessee is not obliged in law to indicate any direct or indirect nexus between the prior period income and pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payee under the Act. Section 195 would not apply. The fundamental principle of deducting tax at source in connection with the payment only where the sum is chargeable to tax under the Act continues to hold the field even after the retrospective insertion of Explanation 2 to subsection (1) of Section 195 of the Act. 28 Thus, where the payment is in the nature of reimbursement, there is no element of income involved, and therefore, no tax is required to be deducted at source. Having regard to the settled position, the assessee was not liable to deduct the tax at source on such payments and hence, the ITAT committed no error in answering the second question as proposed by the Revenue in favour of the assessee. ➢ THIRD QUESTION OF LAW: 29 The Assessing Officer, while working the eligible profit for deduction under Section 10B of the Act, held that the "unrealized export turnover" is to be excluded from the "export turnover", but refrained from excluding the same from the "total turnover". The said action was confirmed by the CIT(A) on the basis that there is no provision to reduce the same from the total turnover the profit on the unrealised turnover would get uninten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the incentives under S. 80IA/80IB is the generation of profits (operations profits). Thus, the profits eligible for deduction u/s. 10B should be derived by the undertaking from 'exports' of articles or things and should not be incidental to it. All the incomes viz. Dividend income, other income, profit on sale of fixed assets, excess provision written back, profit on sale of investments, duty draw back income, interest income cannot be said to be 'derived' from 'export of articles or things'. The source of income of each of these items is a step away from export of articles or things. Hence, these incomes cannot be considered to be eligible for deduction u/s. 10B." 32 The CIT(A), in the appeal preferred by the assessee, affirmed the decision of the Assessing Officer holding as under: "Assessing Officer excluded other income for computing deduction under Section 10B on the ground that these incomes are not derived from the EOU. In other income are in the nature of dividend, duty drawback, etc which are not derived from EOU and therefore should not be eligible for deduction. I agree with the assessing officer that these items are not derived fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beginning on the 1st day of April, 2012 and subsequent years : Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under subsection (1) of section 139. (2) This section applies to any undertaking which fulfils all the following conditions, namely : (i) it manufactures or produces any articles or things or computer software; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence : Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the reestablishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section: (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation. The provisions of Explanation ] and Explanation 2 to subsection (2) of section 80I shall apply for the purposes of clause (iii) of this subsection as they apply for the purposes of clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich eligible activity commences. The methodology for computation as envisaged in subsection (1) of Section 10B is by way of a mathematical formula set out in subsection (4) whereby the profits derived from the exports of articles or things or computer software is stated to be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles /things /computer software bears to the total turnover of the business carried on by the undertaking. 37 Export reliefs such as Duty Drawback, REP Licences and DEPB have been brought within the ambit of business income in terms of subsections (iiia) to (iiie) of Section 28 of the Act, vide Finance Act, 1990 with retrospective effect from 1st April 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. It is relevant to note that there is no restriction whatsoever placed on what constitutes profits of the business of the eligible undertaking. 38 One may contrast in this context, the provisions of clause (baa) under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48 ITR 110(SC). 42 The Supreme Court in CIT vs. Dr. V. Gopinathan [2001] 248 ITR 449 (SC) took the view that the interest on the fixed deposits would not qualify for setting off against the interest on the loans borrowed. The other two decisions on the same line in the context of Section 80HHC are CIT vs. Sterling [1999] 237 ITR 579 and CIT vs. Pandian Chemicals Ltd [2003] 262 ITR 278 (SC). In these two decisions, the Supreme Court reiterated the nexus theory and declined to treat such interest earned as business income. The Revenue seeks to draw an analogy even for the purpose of Section 10B of the Act that an assessee who is engaged in the business of exports and invests the surplus funds in fixed deposits or earns dividend income or income from sale of its assets will not be able to treat the interest earned thereon as business income since it does not bear any direct nexus with the export business of the assessee. 43 The Supreme Court in Cambay Electrical Supply Industrial Co. Ltd vs. CIT [1978] 113 ITR 84 drew a fine distinction between the words "attributable to" and "derived from". It was held: "In our view, since the expression of wider import, namely 'attributable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of the assessed. 46 In Urban Stanislaus Co. vs. CIT [2003] 263 ITR 10 the assessee had contended that as a condition for obtaining a loan from the bank, 20% of the sale receipts had to be deposited by way of security. It was claimed that the interest earned on such deposit was business income for the purpose of Section 80HHC. This was negatived by the Kerala High Court by observing (ITR Page 12) that "the assessed can claim deduction in respect of the profits derived from the export of goods only when it is established that the income is solely related to the export. The obvious intention behind the provision in Section 80HHC is to promote exports. However, the income earned by way of interest from fixed deposit is not an income from exports. Thus, it was rightly taken into account as income from other sources." This decision has been affirmed by the Supreme Court by the dismissal of the Special Leave Petition [order reported in 265 ITR (Statutes) 38]. 47 In K. Ravindranathan Nair v. CIT [2003] 262 ITR 669, in dealing with a similar issue, the Kerala High Court held: "...The interest from short term deposits received by the appellant is not the direct result of any expor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt business. The Tribunal, therefore, did not commit any error in deleting the addition made on account of fluctuation in foreign exchange rates from the deduction under section 10B of the Act." 51 We are of the view that the basis of computation of the deductions enumerated under Chapter VIA is different from that set out for the special deductions like Section 10A and 10B. Section 80IA provides for a deduction of profits and gains derived by an undertaking or an enterprise from an eligible business. The provisions of Section 80IA(1) state that where the gross total income of an assessee includes profits and gains derived by an undertaking or an enterprise from any eligible business, there shall, in accordance with and subject to the provisions be allowed, in computing the total income of the assessee, a deduction of an amount equal to 100% of the profits and gains derived from such business for a demarcated period. The relief under Section 10B, on the other hand, is granted in respect of the profits derived from the eligible activity of export, computed as a proportion of the profits of the business of the undertaking. 52 The aforesaid distinction has been noted by the Full Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I of the Act provide for exemptions or 100% deduction in Chapter III which deals with "Incomes which do not form part of the Total Income" and Section 10A deals with "Special provisions in respect of the newly established Undertakings in Free Trade Zone, etc. (FTZ)" and Section 10AA deals with "Special provisions in respect of newly established Units in Special Economic Zones (SEZs)" and Section 10B deals with "Special provisions in respect of newly established 100% Export Oriented Units (100% E.O.Us)". 12. Before coming to the crux of the controversy, let us have a look at the brief factual background of the Respondent assessee for the Assessment Year 200102 in question. 13. The Respondent assessee during the relevant year operated four Units set up under the Scheme formulated by the Government in the name of Software Technology Parks of India (STPI) for 100% Export of the Computer Software Units. The Government of India to promote the fast growing Industry of Software and Software Technology in our country, made a special provision for providing incentive in the form of Tax Exemption by inserting Section 10A in Chapter III of the Act which provision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that is the bone of contention between the assessee and the Revenue before us. 17. The learned counsel for the Revenue, Mr. Aravind relying upon the following judgments under Sections 80HH, 80HHC and 80I of the Act which scheme of Deductions under Chapter VIA of the Act is different from the scheme of Exemptions from tax under Sections 10A and 10B in Chapter III of the Act, submitted that the interest income derived by the Respondent assessee cannot be said to be "Profits and Gains" as derived by an Undertaking from the export of articles and therefore such interest income earned from Banks and staff loans has to be taxed under Section 56 of the Act as "Income from other Sources" and 100% deduction treating them as "profits and gains of business" is not allowable under 80A of the Act. 18. The relevant extracts of the judgments mainly relied upon by the learned counsel for the Revenue are quoted below for ready reference. 19. In Pandian Chemicals Ltd. Vs. Commissioner of Income Tax [(2003, 262 ITR. 278 (SC)], the Hon'ble Supreme Court dealing with a controversy with regard to interest on deposits with Electricity Board held that the same could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself." 20. In Liberty India Vs. Commissioner of Income Tax [(2009) 317 ITR 218], the Hon'ble Supreme Court dealing with the controversy of profit from Duty Exemption Payback Scheme (DEPB), Duty drawback incentives dealing with deduction under 80IB of the Act held that the profit derived on sale of such DEPB and Duty draw back Entitlements by the assessee could not be said to be Profits and Gains "derived from" which are "ancillary" as compared with the words "attributable to" and therefore such profits on sale of DEPB/Duty drawback Entitlements was not deductible under Section 80IB of the Act. The relevant discussion as found in paragraph 16 of the judgment is quoted below for ready reference. "16. DEPB is an incentive. It is given under Duty Exemption/Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deciding I.T.A. No.100066/2016 (Principal CIT Vs. The Totagar's Cooperative Societies Sales Ltd. Sirsi, Karnataka) on 16/06/2017, the Hon'ble Supreme Court held that the profits and gains of business attributable to one of the activities specified in Section 80P(2)(a) of the Act which gave 100% deduction from tax to the Cooperative Societies engaged in specified types of activities did not include the interest earned by it by investing Surplus Funds in Short Term Deposits and Government Securities which would be taxable under Section 56 of the Act as "Income from other Sources". The relevant extract of the Supreme Court judgment is quoted below for ready reference. "To say that the source of income is not relevant for deciding the applicability of s.80P would not be correct because weightage has to be given to the words "the whole of the amount of profits and gains of business" attributable to one of the activities specified in s.80P(2)(a). An important point needs to be mentioned. The words "the whole of the amount of profits and gains of business" emphasise that the income in respect of which deduction is sought must constitute the operational income and not th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs or computer software, as the case may be, shall be allowed from the total income of the assessee: .... .... 10A(2) This section applies to any undertaking which fulfils all the following conditions, namely: (I) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year- (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park; (c) commencing on or after the 1st day of April, 2001 in any special economic zone; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the reestablishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Home Furnishing vs. Additional Commissioner of Income Tax, Range 15 [(2016) 65 Taxmann.com 287(Delhi)], the Division Bench of Delhi High Court dealing with a case of Export Oriented Undertaking, for the Assessment Year 200809, in respect of interest received by an assessee on Fixed Deposit Receipts (FDRs.) which were under lien with Bank for facilitating Letter of Credit and Bank Guarantee facilities held that such interest received on FDRs would qualify for deduction under Section 10B of the Act. The relevant paragraphs 9 and 15 of the said decision are quoted below. "9. The question as to what can constitute as profits and gains derived by a 100% EOU from the export of articles and computer software came for consideration before the Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (2014) 46 Taxmann.com 167 (Kar). The said appeal before the Karnataka High Court was by the Revenue challenging an order passed by the ITAT which held that the interest payable on FDRs was part of the profits of the business of the undertaking and therefore includible in the income eligible for deduction Sections 10A and 10B of the Act. There the Assessee had earned inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noticed the decision of the Supreme Court in Liberty India. The Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (supra) makes a reference to the said decision. That decision of the Karnataka High Court has been cited with approval by this Court in Hritnik Exports (supra) and Universal Precision Screws (supra). In Hritnik Exports (supra) the Court quoted with approval the observations of the Special Bench of the ITAT in Maral Overseas Ltd. (supra) that "Section 10A/10B of the Act is a complete code providing the mechanism for computing the 'profits of the business' eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act." 30. The said judgment, in our opinion, rightly distinguishes the judgments on the interpretation of Section 80HH, 80IA etc. under Chapter VIA of the Act in view of Section 80A (4) of the Act which, with a nonobstante clause which starts with "Notwithstanding anything to the contrary contained in Section 10A or Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e does not appear to have provided for excluding the amount of interest from the total turnover as has been done in the case of 80HHC by explanation (baa) of subsection (4C) thereof. In that case, 90% of the income arising out of interest has to be excluded from the profits of the business for the purpose of arriving at deduction available under Section 80HHC. But an identical provision is not there. Therefore, that provision cannot be imported by implication. The submission that the amount earned from interest was not intended to be taken into account for the purpose of giving benefit under subsection (1) of Section 10B may be correct. But the amount of deduction available to a 100% export oriented undertaking is necessarily dependent upon the formula provided in subsection (4). There is, as such, no scope for any controversy that part of the money was earned from interest and not from export. This question came up before the Karnataka High Court and was answered in the case of CIT v. Motorola India Electronics (P.) Ltd. [2014] 46 taxmann.com 167/225 Taxman 11 (Kar.)(Mag.) as follows: "In the instant case, the assessee is a 100% EOU, which has exported software and earned t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed from the total income of the Assessee in the manner set out by section 10A and the computation is also provided in that provision itself namely subsection (4), then there is a complete Code which is evolved and formulated by the Legislature. 20. In relation to this, we also find support in the judgment of this Court in the case of Black and Veatch Consulting Pvt. Ltd. This Court has observed and held as under: "Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasized in a judgment of a Division Bench of this Court, while construing the provisions of Section 10B, in Hindustan Unilever Ltd. Vs. Deputy Commissioner of Income Tax MANU/MH/0417/2010: [2010] 325 ITR 102 (Bom) at paragraph 24. The submission of the Revenue placed its reliance on the literal reading of Section 10A under which a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years is to be allowed from the total income of the assessee. The deduction under Section 10A, in our view, has to be given effect to at the stage of computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such export business and therefore incidental income of such undertaking by way of interest on the temporarily parked funds in Banks or even interest on staff loans would constitute part of profits and gains of such special Undertakings and these cases cannot be compared with deductions under Sections 80HH or 80IB in Chapter VIA of the Act where an assessee dealing with several activities or commodities may inter alia earn profits and gains from the specified activity and therefore in those cases, the Hon'ble Supreme Court has held that the interest income would not be the income "derived from" such Undertakings doing such special business activity. 35. The Scheme of Deductions under Chapter VIA in Sections 80HH, 80HHC, 80IB, etc from the 'Gross Total Income of the Undertaking', which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10A and 10B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not to frustrate it. But that turned out to be the, unintended, consequence of construing the clause literally, as was done by the High Court for which it cannot be blamed, as the provision is susceptible of such construction if the purpose behind its enactment, the objective it sought to achieve and the mischief it intended to control is lost sight of. One way of reading it is that the clause excludes any undertaking formed by transfer to it of any building, plant or machinery used previously in any other business. No objection could have been taken to such reading but when the result of reading in such plain and simple manner is analysed then it appears that literal construction would not be proper. ..." II] In R.K. Garg v. Union of India, [(1981) 4 SCC 675] = [1982 SCC (Tax) 30 p.690], the Hon'ble Apex Court has held as under: "8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints, because it has to deal with complex probl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posits 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 10A or 10B 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 delinked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10A or Section 10B of the Act and cannot be taxed separately under Section 56 of the Act." 54 The Delhi High Court in the case of Riviera Home Furnishing vs. Addl. Commissioner of Income Tax Range - 15 reported in 2016 (237) Taxman 520, following its earlier decision in Commissioner of Income Tax IV vs. Hritnik Exports Pvt Ltd [2014 TIOL 2507 HC DEL IT], has taken the identical view as follows: "In the considered view of the Court, the submissions made on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hy; ITR 0190 Madras wherein the following view was taken : "In the light of the above said decision, we are of the firm view that the interest earned from deposits with Corporation Bank, Electricity Board and on staff advances does not have direct or immediate nexus with the business of the assessee's undertaking and, consequently, they are not eligible for grant of deduction under Section 10B of the Act, which is akin to Section 80HH of the Act dealt with in the decision referred supra." 5. Mr. R.N. Bajoria, Learned senior advocate rightly pointed out that the judgment of the Madras High Court is of no relevance for the simple reason that subsection (4) of Section 10B was not taken into account by the Hon'ble Madras High Court. Therefore, this judgment is of no assistance in deciding the issue. The learned Tribunal has passed the following order : "There is no requirement for the purposes of Section 10B to establish direct nexus between the income and the undertaking. The entire business income of the 100% EOU will be the "profits of the business of the undertaking". It has been held above that the interest earned on temporarily surplus business funds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction only in respect of the income 'derived from/by the eligible undertakings'. The use of the word 'business' in the context of the grant of the relief widens the scope of such benefit encompassing all incomes generated by such business activities. 20. Such special deduction is intended as a benefit to a special class of undertakings and as stated by the Supreme Court in the case of Bajaj Tempo LTD. vs. Commissioner of Income Tax, Bombay [(1992) 3 SCC 78], 'Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it, too, has to be construed so as to advance the objective of the section and not to frustrate it'." 57 Mr. Bhatt, the learned senior counsel appearing for the Revenue has placed strong reliance on the decision of the Supreme Court in the case of Liberty India vs. Commissioner of Income Tax [2019] 317 ITR 218(SC). In Liberty India, the issue before the Supreme Court for consideration was : "whether profit from Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme could be said to be profit derived from the business of the Industrial Undertaking eligible for deduction under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60 Thus, subsection (4) of Section 10B stipulates that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, notwithstanding the fact that subsection (1) of Section 10B refers the profits and gains as are derived by a 100% EOU, yet the manner of determining such eligible profits has been statutorily defined in subsection (4) of Section 10B of the Act. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Subsection (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of Section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction U/S 10B is similar to the provisions of Section 80HHC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture intended to exclude interest from the term "profits of business of undertakings" under Sections 10A and 10B of the Act a similar provision as in the case of Section (baa) would have been inserted. * No such explanation has been introduced in Sections10A and 1OB and therefore, it held that the interest income is exempted from payment of tax and also their claim for allowance of 5% on scientific basis should be allowed.) The High Court took the view as follows: * Subsection (4) says that the profits derived from export of articles or things or computer software shall be the account which bares to the profits of the business of the undertaking and not the profits and gains from the export of articles. * Therefore, profits and gains derived from the export of articles is different from the income derived from the profits of the business of the undertaking. * The profits of the business of the undertaking includes the profits and gains from the export of the articles as well as all other incidental incomes derived from the business of the undertaking. * It is interesting to note that similar provisions are not there while dealing with computation of income under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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