TaxTMI 
TaxTMI 
2017 (11) TMI 205
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....n 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" within the meaning of Section 10-A of the Act. The Division Bench held that the Profits of the business of....
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....ceeded 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 Scheme of the Income Tax Act, 1961 is that the said Act is divided into XXIII Chapters, comprising of Section 1 to Sect....
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....tion 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 manufacture or produce such Articles. 15. There is no dispute of facts before us as found by the Income Tax Tribunal with the Responden....
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....vant 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 undertaking within the meaning of section 80HH. 5...... 6. The word "derived" has been construed as far back in 1948 by the Privy Council in C....
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....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 Industrial Undertaking for the purpose of computing deduction under Section 80-HH of the Act. The observations made in paragraph 9 of the judgment are quoted below: "9. We do not thin....
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....es 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 and even if the interest income was earned by the assessee Co-operative Society from the deposits made with the Co operative Banks and not with the other Scheduled or Nationalized Banks as was done in the....
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....ofits 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. The learned counsel for the Respondent assessee also urged that in fact, the question of applying the formula under Section 10-A(4) for giving proportionate deduction would not arise in such circumstances where the assessee was engaged wholly in 100% export of its Software Programmes and would not apply t....
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.... 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 the 'profits of business of undertaking', there was no similar provision as far as Sections 10A and 10B were concerned. 15. In the considered view of the Court, the submissions made on behalf of the Revenue proceed on the basic misconception regarding the true purport of the provisions of Chapter VIA of the Act and on....
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....16) 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 the only relevant provision to be taken into account is sub-section (4) which we already have quoted. Sub-section (4) provides the quantum of deduction which can be availed by an assessee. The quantum of deduction is dependent upon the total turnover of the business of the undertaking and the export turnover of the undertaking. Once these....
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....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 ITA No.428/2007 is answered in favour of the revenue and against the assessee and the first substantial question of law in ITA No.447/2007 is answered in favour of the assessee and against the revenue. In the light of the aforesaid findings, the second question of law in both the appeals do not arise for consideration." 32. The Division Be....
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....tal 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 when the profits and gains of business are computed in the first instance." 21. Therefore, when this Court has held that Chapter VIA provides for deduction to be made in computing the total income and section 80HH deals with deduction in respect of profit and gains from the newly established undertaking or Hotel business in backward areas, then the attempt of the Revenue....
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....n 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 entitled to 100% exemption or deduction under Section 10-A and 10-B of the Act. Such interest income arises in the ordinary course of export business of the Undertaking even though not as a direct result of export but from the Bank Deposits etc., and is therefore eligible for 100% deduction. 36. We have to take a purposive interpretation of the Scheme of the Act for the exemption under ....
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....dmonition 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 remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry"; "that exact wisdom and nice adaption of remedy are not always possible" and that "judgment is largely a prophecy based on me....