2016 (7) TMI 920 - HC - Income Tax

High Court upholds inclusion of interest income in EOU profits for tax deduction eligibility

Commissioner of Income Tax, Kolkata Versus Hindustan Gum And Chemicals Ltd

The High Court dismissed the appeal, ruling in favor of the assessee regarding the treatment of interest income in the profits of a 100% Export Oriented ... Interest income treated as part of the profits of business of the 100% E.O.U. eligible for deduction under Section 10B - Held that:- Total turnover shall naturally include receipt on account of interest. The legislature does not appear to have provided for excluding the amount of interest from the total turn over as has been done in the case of 80HHC by explanation (baa) of sub-section (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. 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 the 100% EOU deposited with banks for short periods is business income and has in fact been so assessed. It is not in dispute that the surplus funds were of the 100% EOU. As such, the interest earned thereon has to be regarded as part of the “profit of the business of the undertaking. Tribunal was correct in directing the Assessing Officer to treat the interest income as part of the profits of business of the 100% E.O.U. eligible for deduction under Section 10B and compute deduction accordingly - Decided in favour of assessee Issues:1. Interpretation of Section 10B of the Income Tax Act, 1961 regarding the treatment of interest income in the profits of a 100% Export Oriented Undertaking (EOU).2. Application of Section 80HHC in determining deduction eligibility under the Income Tax Act, 1961.3. Consideration of fresh evidence under Rule 46A of the Income Tax Rules, 1962.Analysis:1. Interpretation of Section 10B:The High Court analyzed the provisions of Section 10B of the Income Tax Act, 1961, focusing on subsections (1) and (4). Subsection (1) allows a deduction for profits derived by a 100% EOU from exports, subject to the provisions of the section. Subsection (4) specifies the method for calculating the deduction based on export turnover and total turnover. The Court emphasized that the deduction is dependent on the formula provided in subsection (4) and does not exclude interest income from the total turnover. The Court cited a Karnataka High Court judgment supporting the inclusion of interest income in the profits of the business of the undertaking for deduction under Section 10B.2. Application of Section 80HHC:The Court addressed the application of Section 80HHC in determining deduction eligibility. It highlighted that Section 80HHC excludes 90% of interest income for calculating deductions, but such provision is not present in Section 10B. The Court differentiated between the provisions of Section 10B and Section 80HHC, emphasizing that interest income must be considered in the profits of the business for a 100% EOU. It rejected the relevance of a Madras High Court judgment that did not consider Section 10B(4) in a similar context.3. Consideration of Fresh Evidence:The Court noted that one of the questions regarding the consideration of fresh evidence under Rule 46A of the Income Tax Rules, 1962 was not pressed by the revenue. Therefore, the Court focused solely on the interpretation of Section 10B and did not delve into the issue of fresh evidence. The Court relied on precedents and the Tribunal's decision to uphold the treatment of interest income as part of the profits of the business of a 100% EOU eligible for deduction under Section 10B.In conclusion, the High Court dismissed the appeal, answering the primary question against the revenue and in favor of the assessee regarding the treatment of interest income in the profits of a 100% EOU under Section 10B of the Income Tax Act, 1961. The judgment provided a detailed analysis of the statutory provisions and relevant case law to support its decision.