2009 (12) TMI 678 - AT - Income Tax

Tribunal affirms CIT(A)'s decision on Section 10B deduction requirements

The Tribunal upheld the CIT(A)'s decision, confirming the disallowance of the deduction under Section 10B for interest and miscellaneous income. The ... Disallowance u/s 10B - Interest expenses incurred in export business - business of providing I.T. enabled services and BPO transactions processing - Interest income was generated from interest on FDRs etc., from the surplus funds - AO was of the opinion that u/s 10B(1), deduction was allowable only on profits derived from export of articles or things or computer software. Therefore, no deduction was possible on interest income. It was submitted that the company was treating interest income etc. as business profit and therefore, deduction u/s 10B should be allowed. AO did not find any force in this submission and held that Hon’ble Supreme Court has clearly held that in the case of CIT v. Sterling Foods [1999 (4) TMI 1 - SUPREME COURT] that whenever the expression ‘derived from’ was used then only profits derived from such undertakings could be made eligible for the purpose of various deductions. Ultimately he held that taxable income as per return at ‘Nil’ but added to the business income on account of denial of deduction u/s 10B. CIT(A) confirm the disallowance made by the AO on account of appellant’s claim u/s 10B. HELD THAT:- The ld counsel for the assessee has vehemently argued that in this case interest from deposit was offered as business income and was also assessed as business income and therefore, automatically once it is assessed as business income then the same becomes eligible for deduction u/s 10B. On careful consideration we find that though these arguments look attractive but not correct. For this we have to refer to the famous decision of the Hon’ble Supreme Court in the case of Sterling Foods (supra). In that case the question arose whether receipt from sale of import entitlements was eligible for deduction u/s 80HH. The Hon’ble Supreme Court noted that identical question came before the Hon’ble High Court for an earlier year and the High Court had answered the question against the assessee in Sterling Foods v. CIT [1984 (6) TMI 41 - KARNATAKA HIGH COURT] held that once the income from sale of import license was to be treated as business income under the Act in view of clause (iiia) of section 28, then automatically benefits conferred by section 80HH would be available. The Hon’ble Supreme Court did not agree with this logic—CIT v. Sterling Foods (supra) and the decision of Hon’ble Karnataka High Court was reversed. It was observed that it is not the criteria how the income is assessed but because of the expression 'derived from' what was required is that such business profit for being eligible to a deduction should have direct nexus to the profits and gains of such industrial undertakings. We further find that similar view has been taken by the Hon’ble Supreme Court again in the case of Liberty India [2009 (8) TMI 63 - SUPREME COURT]. In this case the question was whether profit from Duty Entitlement Pass Book Scheme (DEPB) and Duty Draw Back Scheme could be said to be profit derived from business of industrial undertaking eligible for deduction u/s 80-IB. It can be seen that DEPB and Duty Drawback etc., are covered by clause (iiid) to section 28 which means necessarily they have to be treated as business income under the provisions of the Act, still the deduction was denied u/s 80-I/80-IA/80-IB because these items were held to be not derived from the business of industrial undertaking/export activity. Therefore, it is clear that merely because the income has been assessed as business income will not automatically confer the benefits of a particular deduction once there is a rider provision that such income should be derived from a particular source. In the case before us admittedly the interest income was generated from interest on FDRs etc., from the surplus funds and, therefore, the same cannot be held to have been derived from the export of I.T. Services. In any case the decision in the case of Menon Impex (P.) Ltd. (supra) was followed by the Hon’ble Madras High Court in the case of India Comnet International v. ITO.[2007 (7) TMI 233 - MADRAS HIGH COURT] This decision was rendered for the assessment year 2002-03 when sub-section (4) had already been inserted on the Statute. Further in this case it was also argued that since the interest income was derived from funds retained by the bank to meet the exigencies of the business and that the entire transaction would constitute an integrated whole and the same could not be bifurcated into different areas. Reliance was also placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Baby Marine Exports [2007 (3) TMI 206 - SUPREME COURT] for the proposition that section 10A was beneficial provisions and, therefore, should be construed liberally. But these submissions were not accepted by the Court. From the above, it is clear that at present only one decision is available and whereby interest income was held to be not eligible for deduction u/s10A/10B. Therefore, we are bound to follow this decision as the ld counsel simply tried to distinguish this and could not point out to a different decision from the Apex Court or other Courts. In these circumstances, we find nothing wrong with the order of the ld CIT(A) and confirm the same. In the result, the appeal is dismissed. Issues Involved:1. Deduction under Section 10B of the Income-tax Act, 1961.2. Treatment of interest income and miscellaneous income.3. Interpretation of 'derived from' in the context of Section 10B.4. Application of judicial precedents and statutory provisions.Detailed Analysis:1. Deduction under Section 10B of the Income-tax Act, 1961:The primary issue in this appeal was whether the assessee's claim for deduction under Section 10B of the Income-tax Act, 1961, amounting to Rs. 61,45,377, was valid. The assessee, engaged in IT-enabled services and BPO transactions, claimed a deduction under Section 10B. The Assessing Officer (AO) disallowed this claim, stating that the deduction was only allowable on profits derived from the export of articles, things, or computer software.2. Treatment of Interest Income and Miscellaneous Income:The AO found that the assessee's declared profit included interest income (Rs. 57,36,314), interest on fixed deposits (Rs. 1,10,874), and miscellaneous income (Rs. 2,98,189). The AO held that these items did not qualify for deduction under Section 10B as they were not derived directly from the export activities. The assessee argued that these incomes should be considered business profits and thus eligible for deduction under Section 10B, citing various judicial precedents.3. Interpretation of 'Derived From' in the Context of Section 10B:The CIT(A) upheld the AO's decision, emphasizing that the term 'derived from' necessitates a direct and proximate connection between the income and the eligible activity. The CIT(A) noted that the interest income from surplus funds and fixed deposits, as well as the miscellaneous income from the sale of scrap, did not have a direct nexus with the export activities. Therefore, these incomes were not eligible for deduction under Section 10B.4. Application of Judicial Precedents and Statutory Provisions:The assessee cited several judicial decisions to support their claim, including CIT v. Indo Swiss Jewels Ltd. and CIT v. Lok Holdings. They argued that once the income was assessed as business income, it should automatically qualify for deduction under Section 10B. The Tribunal, however, referred to the Supreme Court's decisions in CIT v. Sterling Foods and Liberty India v. CIT, which emphasized the need for a direct nexus between the income and the eligible activity for the deduction to apply. The Tribunal also considered the decision of the Special Bench in Topman Exports v. ITO, which discussed the concept of 'derived from' in the context of Section 80HHC.The Tribunal concluded that merely assessing the income as business income did not automatically qualify it for deduction under Section 10B. The interest income from surplus funds and fixed deposits, as well as the miscellaneous income, did not have a direct and proximate connection with the export activities. Therefore, these incomes were not eligible for deduction under Section 10B.Conclusion:The Tribunal upheld the CIT(A)'s decision, confirming the disallowance of the deduction under Section 10B for the interest and miscellaneous income. The appeal was dismissed, affirming that the term 'derived from' requires a direct nexus between the income and the eligible activity for the deduction to apply.