2014 (1) TMI 1235 - HC - Income Tax

Benefit of Section 10B for interest and sale of import entitlement income found to qualify as business export income and exempted

Interest and consideration received from sale of import entitlements were held to have a direct nexus with the business of the undertaking and therefore ... Benefit of Section 10A and 10B - Interest on fixed profit - Whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking? - Held that:- There is a direct nexus between this income and the income of the business of the undertaking - Though it does not par take the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles - In view of the definition of ‘Income from Profits and Gains’ incorporated in Sub-section (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Profits and gains derived from 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 export of the articles as well as all other incidental incomes derived from the business of the undertaking - what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking - thus, the Tribunal was justified in extending the benefit to the amounts also – there was no merit in these appeals – Decided against Revenue. Issues: (i) Whether interest income from surplus funds deposited in banks, EEFC accounts and advanced as inter-corporate loans constitutes 'profits of the business' and is thus eligible for deduction/exemption under Sections 10A/10B of the Income-tax Act, 1961; (ii) Whether management expenses attributable to interest income are allowable at 5% instead of 4% as computed by the Assessing Officer.Issue (i): Whether interest income from EEFC, bank deposits and inter-corporate loans is to be treated as profits of the business of a 100% export-oriented undertaking for computing deduction under Sections 10A/10B of the Income-tax Act, 1961.Analysis: The Court examined the substituted proviso in Section 10B(4) (Finance Act, 2001) which prescribes that 'profits derived from export' shall be the amount which bears to the profits of the business of the undertaking the same proportion as export turnover bears to total turnover. The substituted sub-section expands the computation by linking 'profits derived from export' to the broader concept of 'profits of the business of the undertaking', encompassing incidental incomes connected with the undertaking. Earlier authorities interpreting 'derived from' in other sections emphasise a direct or immediate nexus; however, the amended statutory text specifies a formulaic apportionment based on business profits and turnover, indicating legislative intent to include business-derived incidental incomes for calculation of export-related profits under Section 10B.Conclusion: The interest income from EEFC, bank deposits and inter-corporate loans is covered within the 'profits of the business of the undertaking' for the purposes of Section 10B(4) and is eligible to be taken into account when computing deduction under Section 10B. This conclusion is answered in favour of the assessee in ITA No.447/2007 and against the revenue in respect of the relevant substantial question; conversely, in ITA No.428/2007 the corresponding substantial question was answered in favour of the revenue.Issue (ii): Whether management expenses attributable to interest income are allowable at 5% rather than 4% as applied by the Assessing Officer.Analysis: The Tribunal applied and allowed a 5% managerial/attribution allowance on scientific basis for expenses connected with earning the interest income. The Court noted the Tribunal's reasoning and the absence of cogent reasons by the Assessing Officer to restrict the allowance to 4%.Conclusion: The finding that management expenses attributable to interest income are allowable at 5% is upheld in favour of the assessee; the second substantial question therefore does not require further consideration in light of the primary findings.Final Conclusion: The appeals result in split outcomes on the substantial questions considered: the Court affirms that, under the amended Section 10B(4), profits of the business for computation of export-derived profits include incidental incomes such as interest and related managerial allowances, leading to a mixed result across the connected appeals.Ratio Decidendi: For purposes of Section 10B the phrase 'profits derived from export' is to be computed by applying the statutory formula in sub-section (4), which treats the export-derived profits as the proportion of the undertaking's overall business profits corresponding to export turnover, thereby including incidental business incomes that form part of the profits of the business of the undertaking.