Section 10A computation and interest diversion claim: foreign exchange expenses excluded from total turnover, disallowance remanded.

Expenditure incurred in foreign exchange must be excluded from total turnover where it is excluded from export turnover for section 10A computation, so the deduction formula remains consistent and does not produce distortion; the assessee succeeded on this point. An interest addition said to arise from diversion of interest-bearing funds to subsidiaries was not finally sustained because the factual basis and business nexus were not examined in sufficient depth; the matter was remitted to the Assessing Officer for fresh consideration after giving the assessee an opportunity to place materials.

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Issues: (i) Whether expenditure incurred in foreign exchange is to be excluded from total turnover while computing deduction under section 10A. (ii) Whether the addition of interest of Rs. 8.73 crores, said to arise from diversion of interest-bearing funds to subsidiaries, was liable to be sustained or the issue required fresh examination.

Issue (i): Whether expenditure incurred in foreign exchange is to be excluded from total turnover while computing deduction under section 10A.

Analysis: The issue was governed by the settled rule that the formula for computing export-linked deduction must operate consistently, and any amount excluded from export turnover must also be excluded from total turnover to avoid distortion of the computation. The Court followed the earlier binding view, in line with the principle laid down by the Supreme Court, that the computation formula must remain workable and not produce an absurd result.

Conclusion: The issue was answered in favour of the assessee.

Issue (ii): Whether the addition of interest of Rs. 8.73 crores, said to arise from diversion of interest-bearing funds to subsidiaries, was liable to be sustained or the issue required fresh examination.

Analysis: The disallowance had been deleted by the appellate authorities on the footing that the transactions were reflected through book entries and that no actual cash transfer to the subsidiaries had taken place. However, the business nexus of the investment and the exact character of the transaction had not been examined in sufficient depth. The Court held that this aspect required reconsideration by the Assessing Officer after giving the assessee an opportunity to place the necessary materials.

Conclusion: The issue was remitted to the Assessing Officer for fresh consideration.

Final Conclusion: The appeal succeeded on the deduction-computation issue, while the interest-disallowance question was sent back for reconsideration, leaving the assessment open only to that limited extent.

Ratio Decidendi: For export-linked deductions, expenditure excluded from export turnover must also be excluded from total turnover in the same proportion; where the factual basis for an interest disallowance is inadequately examined, the matter may be remitted for fresh assessment.

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