TaxTMI 
TaxTMI 
2017 (11) TMI 205
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....ved from eligible business of the assessee (software development) for the purpose of claiming deduction under Section 10A of the Income Tax Act, 1961?" 2. The conflict of opinion of the Two Division Benches has resulted in the aforesaid Reference to the Full Bench. The earlier view was taken in favour of the assessee by the first Division Bench in I.T.A.No.428/2007 (The Commissioner of Income Tax and Another Vs. M/s. Motorola India Electronics (P) Ltd.) on 11/12/2013. The subsequent Division Bench taking a different view on 10/04/2014 in the present I.T.A.No.812/2007 referred the aforesaid Questions of Law for consideration by the Full Bench. 3. The first Division Bench in its decision dated 11/12/2013 held that the Respondent - assessee, a 100% Export Oriented Unit (EOU) which is exporting Software like the Respondent - assessee in the present case was entitled to 100% deduction under Section 10-A of the Income Tax Act, 1961 ('Act' for short) in respect of the interest income earned by it during the relevant Assessment Year from Exchange Earner's Foreign Currency (EEFC) Account and the same would be construed as "Business Income of the assessee derived from the Undertaking" ....
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....ng which earns profit, which could be a part of total income of the assessee. The Division Bench, therefore, proceeded to take a view that the Respondent assessee/Undertaking, M/s. Hewlett Packard Globalsoft P.Ltd. which invested its surplus funds in Banks and received interest thereon and also interest on the staff loans, such interest earned by the Undertaking/assessee had no direct nexus with the business of the Undertaking and in other words the business of the Undertaking as contemplated under Section 10-A of the Act is only the export of articles or things or Computer Software and interest on surplus amount in Bank deposit or loans to staff could not have any nexus with the business of the Undertaking as contemplated under Section 10-A(4) of the Act. 7. The Division Bench, therefore, held that they were unable to agree with the view taken by the earlier Division Bench in the case of Respondent Assessee - M/s. Motorola India Electronics (P) Ltd.(supra) and thus the matter was required to be referred to the Full Bench for its opinion. 8. We have heard the learned counsels, Mr. K.V. Aravind for the Revenue and Mr. T. Suryanarayana for the Respondent - Assessee. 9. The S....
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....inserting Section 10-A in Chapter III of the Act which provision is quoted herein below and the same provided for a 100% deduction of Profits and Gains derived by an Undertaking from the export of articles or things or Computer Software for a period of ten consecutive Assessment Years from the beginning of its setting up, if such Undertaking begins to manufacture or produce such Articles or things or Computer Software in its Export Undertaking. The said provision was substituted by Finance Act, 2000, with effect from 01/04/2001 in place of the earlier Section 10-A, which was inserted by Finance Act, 1981. 14. Section 10-B of the Act was also substituted by the Finance Act, 2000, with effect from 01/04/2001 in place of earlier provisions of Section 10-B of the Act inserted by Finance Act, 1988 with effect from 01/04/1989 and it provided for such 100% deduction of profits and gains derived by a 100% Export Oriented Undertaking set up in specified Zones like STPI etc. from the export of articles or things or Computer Software for a period of Ten consecutive Assessment Years, beginning with the Assessment Year relevant to the previous year in which the Undertaking begins to manufact....
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....ame could not be treated as 'Profits and Gains derived from Industrial Undertaking" for the purposes of Section 80-HH of the Act. The relevant paragraphs 4 and 6 of the judgment are quoted below for ready reference. "4. Section 80HH of Income Tax Act grants deduction in respect of profits and gains "derived from" an industrial undertaking. The contention of the appellant before us is that interest earned on the deposit made with the Electricity Board (assessee) for the supply of electricity to the appellants industrial undertaking should be treated as income derived from the industrial undertaking within the meaning of section 80HH. It is submitted that without the supply of electricity the industrial undertaking could not run and since electricity was an essential requirement of the industrial undertaking, the industrial undertaking could not survive without it. It is further pointed out that for the purpose of getting this essential input, the statutory requirement was that the deposit must be made as a precondition for the supply of electricity. Consequently, according to the appellant, the interest on the deposit should be treated as income derived from the industrial ....
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....against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/duty drawback are incentives which flow from the Schemes framed by Central Government or from s. 75 of the Customs Act, 1962, hence, incentive profits are not profits derived from the eligible business under S.80-IB. They belong to the category of ancillary profits of such undertakings." 21. Likewise, in Commissioner of Income Tax Vs. Sterling Foods [(1999) 237 ITR 579] again the Hon'ble Supreme Court in a case arising under Section 80-HH of the Act held that the nexus between the sale consideration of Import Entitlements and the Industrial Undertakings was not direct but only incidental and therefore the same would not constitute "profits and gains" derived from assessee's Indust....
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....ome and not the other income which accrues to the society. In this particular case, the evidence shows that the assessee-society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, such interest income falls in the category of "other income" which has been rightly taxed by the Department under s.56.-The Totgars Co-operative Sale Society Ltd. vs. ITO (2010) 228 CTR (Kar) 526 affirmed. Assessee, a co-operative society, being engaged in providing credit facilities to its members and marketing the agricultural produce of the members, interest earned by it by investing surplus funds in short-term deposits and Government securities fell under the head "Income from other sources" taxable under s.56 and it cannot be said to be attributable to the activities of the society and, therefore, the interest income did not qualify for deduction under s.80P(2)(a)(i)." 23. The Division Bench following the aforesaid judgment later again held that the said judgment of the Hon'ble Supreme Court will apply to the same Assessee even for subsequent assessment years despite the amendment in law ....
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....t is not formed by the transfer to a new business of machinery or plant previously used for any purpose. ....... 10-A(4) For the purposes of [sub-section (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking." 25. The learned counsel for the Respondent assessee, Mr.T. Suryanarayana submitted that the entire profits and gains of the Undertaking of the Respondent assessee who was exclusively engaged in the business of manufacture and export of Software Programmes and projects was entitled to exemption or 100% deduction under Section 10-A of the Act as the entire income earned by such Undertaking including the interest earned from Banks and staff loans which was just incidental to the normal business activity of export of software and such interest would also therefore constitute part of the profits and gains of the Undertaking and would be entitled to such exemption. 26.....
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....A and 10B of the Act. There the Assessee had earned interest on the deposits lying in the EEFC account as well as interest earned on inter-corporate loans given to sister concerns out of the funds of the undertaking. There was a restriction on the Assessee in that case from making pre-payment of its external commercial borrowings ('ECB'). It could repay only to the extent of 10% of the outstanding loan in a year. This made the Assessee temporarily park the balance funds as deposits or with various sister concerns as inter corporate deposits until the date of repayment. The Assessee contended that the interest derived from the business of the industrial undertaking was eligible for exemption within the meaning of Section 10B and applied the formula under Section 10B(4) of the Act for determining the profits from exports. The Assessee's contention that the expression "profits of the business of the undertaking" in Section 10B(4) was wider than the expression "profits and gains derived by" the Assessee from a 100% EOU occurring in Section 10B(1) was accepted by the ITAT. The ITAT noticed that unlike Section 80 HHC, where there was an express exclusion of the interest earned from t....
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....tained in Section 10-A or Section 10-AA or Section 10-B or Section 10-BA or in any provisions of this Chapter" proceeds to enumerate the various deductions under Chapter VI-A of the Act. 31. Similarly the Division Bench of the Calcutta High Court in Commissioner of Income Tax, Kolkata-IV Vs. Hindustan Gum & Chemicals Ltd. [(2016) 72 Taxmann.com.90(Calcutta)] again held that interest earned on Surplus Business Funds deposited with Banks for short periods will be part of profits of business for the purposes of Section 10-B of the Act. The relevant portion of the judgment in para.3 relied upon in the decision of the Division Bench of this Court in the case of M/s. Motorola India Electronics (P) Ltd.(supra) is quoted below for ready reference. "3. A bare reading of sub-section (1) suggests that 100 % export oriented undertakings are entitled to a deduction of profits and gains derived from the export of articles for a period of 10 years. The aforesaid entitlement is, however, subject to the provisions of Section 10B. In other words, subject to the provisions contained in the other parts of the Section 10B, the benefit is available to an assessee. It was not disputed that th....
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....ortion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received by sale of import entitlements is to be construed as income of the business of the undertaking. There is a direct nexus between this income and the income of the business of the undertaking. Though it does not partake the character of a profits 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. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals. Therefore, the first substantial question of law raised in ....
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.... and gains of business. This is anterior to the application of the provisions of Section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in Sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VIA "gross total income" to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable under Section 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under Section 10A has to be given at the stage ....
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....nks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI-A under Section 80-HH, etc. The computation of income entitled to exemption under Section 10-A or 10-B of the Act is done at the prior stage of computation of Income from Profits and Gains of Business as per Sections 28 to 44 under Part-D of Chapter IV before 'Gross Total Income' as defined under Section 80-B(5) is computed and after which the consideration of various Deductions under Chapter VI-A in Section 80HH etc. comes into picture. Therefore analogy of Chapter VI Deductions cannot be telescoped or imported in Section 10-A or 10-B of the Act. The words 'derived by an Undertaking' in Section 10-A or 10-B are different from 'derived from' employed in Section 80-HH etc. Therefore all Profits and Gains of the Undertaking including the incidental income by way of interest on Bank Deposits or Staff loans would be enti....
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....ue in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J., said in his inimitable style: "In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events - self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability." The Court must always r....