2020 (2) TMI 1234 - HC - Income Tax

High Court grants tax exemption to Assessee under Income Tax Act, promoting economic growth.

M/s. California Software Co., Ltd. Versus The Commissioner of Income Tax-I Chennai.

The High Court of Madras ruled in favor of the Assessee, allowing the appeals and granting exemption/deduction under Section 10-A / 10-B of the Income Tax ... Deduction u/s 10-A / 10-B - income of the Assessee u/s 41 could be treated as 'export income' of the Assessee and was therefore entitled to deduction under Section 10-A/10-B - Assessee Company had offered stock option scheme to its employees and Assessee Company had offered stock option scheme to its employees in the preceding assessment years and following the SEBI guidelines and standard accounting practices, the said amount was debited to the Profit and Loss Account of the Assessee Company - HELD THAT:- As relying on HEWLETT PACKARD GLOBAL SOFT LTD. [2017 (11) TMI 205 - KARNATAKA HIGH COURT] and M/S. CAMICERIA APPARELS INDIA P. [2019 (3) TMI 73 - MADRAS HIGH COURT] we are inclined to take a view that the income brought to tax under Section 41 of the Act by reversal of the entry with regard to the stock option given to the employees is also in the nature of 'export income' and therefore, the Assessee is entitled to exemption / deduction under Section 10-A / 10-B of the Act and the view taken by the learned Tribunal is not sustainable. - Decided in favour of assessee. Issues:1. Applicability of deduction under Section 10-A / 10-B of the Income Tax Act.2. Treatment of income under Section 41 of the Income Tax Act.3. Eligibility for relief in various scenarios under the Income Tax Act.Issue 1: Applicability of deduction under Section 10-A / 10-B:The appeals were filed questioning the correctness of the Income Tax Appellate Tribunal's order denying the Assessee deduction under Section 10-A / 10-B of the Act. The Tribunal held that the Assessee was not entitled to the deduction. The substantial questions of law raised included issues related to the addition of deemed income, eligibility for relief under Section 10B, treatment of reversal credit entries, and the nature of interest earned on loans advanced to a subsidiary.Issue 2: Treatment of income under Section 41:The Assessee Company had offered a stock option scheme to its employees in previous years, resulting in entries in the Profit and Loss Account. When employees did not exercise the options due to declining stock prices, the company reversed the entries, treating the differential amount as income under Section 41 of the Income Tax Act. The question arose whether this income could be considered 'export income' and qualify for deduction under Section 10-A / 10-B, a matter decided against the Assessee by the Tribunal.Issue 3: Eligibility for relief under the Income Tax Act:The Assessee argued that the controversy was covered by a Division Bench judgment and a Full Bench judgment of the Karnataka High Court, emphasizing that all incomes generated by the export business activities should be eligible for benefits under Section 10-A / 10-B. Citing precedents, the Court concluded that the income taxed under Section 41 was akin to 'export income,' entitling the Assessee to exemption/deduction under Section 10-A / 10-B. The appeals were allowed, questions of law answered in favor of the Assessee, and no costs were awarded.In conclusion, the High Court of Madras ruled in favor of the Assessee, allowing the appeals and granting exemption/deduction under Section 10-A / 10-B of the Income Tax Act. The judgment highlighted the importance of interpreting provisions liberally to promote economic growth and clarified that all incomes generated by export business activities should be eligible for benefits under the specified sections. The decision was based on legal precedents and a detailed analysis of the nature of income and the applicable tax provisions.