TaxTMI 
TaxTMI 
2019 (10) TMI 1195
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....o prove expenditure was incurred for earning the particular receipts offered under the head prior period income? [B] Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance made u/s. 40(a)(i) of the Act amounting to Rs. 1,12,01,869/­ without appreciating that assessee had not filed any application u/s. 195 for non­deduction of TDS? [C] Whether the Appellate Tribunal has erred in law and on facts in directing the assessing officer to exclude unrealised export from the total turnover, without appreciating that the formula adopted by the Appellate Tribunal would render the entire scheme of things non­workable in as much as the assessee would become entitled to Section 10B deduction even in respect of turnover for which sales proceeds was not realised? [D] Whether the Appellate Tribunal has erred in law and on facts in directing the assessing officer to consider other income as being eligible for deduction under Section 10B of the Act?" 3 It appears from the materials on record that the return of income for the AY 2006­07 was filed by the assessee on 31st December 2006 declaring a total income of Rs. 9,55,8....
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....penses in the profits offered for tax, no deduction is done to the income now computed. Penalty u/s. 271(1)(c) is separately initiated for furnishing inaccurate particulars of income. 6 Thus, the Assessing Officer found that the assessee credited Rs. 3,39,534.­ being net period income i.e. prior period income of Rs. 46,50,648/­ minus the period expenses of Rs. 43,11,114/­. The Assessing Officer took the view that during the year under consideration the "prior period income" was taxable, but the "prior period expenses" were not allowable. In such circumstances, the Assessing Officer made addition of Rs. 46,50,648/­ in respect of the "prior period income" and denied the set off of the prior period expenses against such prior period income. The Assessing Officer denied the set off on the basis that a different set of rules applied to such income and expenses. 7 The CIT(A), in the appeal preferred by the assessee, confirmed the addition on the basis that the prior period expenses cannot be adjusted against the prior period income in the absence of any corelation or nexus. The observations of the CIT(A) are as follows: "3.5 I have considered the facts of t....
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....AO to allow set off prior period expenditure against prior period income and only net income is to be added to the total income of the assessee." 10 Mr. Manish Bhatt, the learned senior standing counsel appearing for the Revenue vehemently submitted that the decision of the Appellate Tribunal as regards the prior period expenditure is erroneous. Mr. Bhatt pointed out that it was noticed by the Assessing Officer, in the course of the assessment proceedings, that the assessee had credited an amount of Rs. 3,39,534/­ below the PBT net figure. The assessee accepted that the same pertained to the earlier years and having regard to the volume of the business, it had likely to have debit and credit pertaining to the earlier years. Mr. Bhatt submitted that there is no proof or evidence relating to the crystallization of the expenditure in the current year. According to Mr. Bhatt, once the Assessing Officer came to the conclusion that prior period expenditure cannot be allowed, then the same could not have been given set off against the prior period income. While the expenditure was disallowable as not pertaining to the year in question, the income should have been included in the....
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.... and amount of prior period items, should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived. Para 16 of the standard, restricts itself to those items of income or expenses which arise in the current period as a result of the errors or omissions in the preparation of the financial statements of one or more prior periods. Some of the examples of prior period items are as under : • Error in calculation in providing expenditure or income. • Omission to account for income or expenditure. • Non­provision of travelling expenses for travel already undertaken. • Non­provision for salary already due in earlier year. • Applying incorrect rate of depreciation. • Treating operating lease as finance lease. • Capitalisation of borrowing cost on working capital. 13 Section 37(1) of the Act is as follows: "37. General ­ (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 a [x x] and not being in the nature of capital expenditure or personal expenses of the assessee....
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....s like interest, commission, etc., which do not have element of turnover are included in the profit and loss account. 32.11 It has, therefore, been clarified that "profits of the business" for the purpose of Section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 per cent deduction from such incomes is provided to account for these expenses."" 17 Mr. Hemani, the learned counsel placed reliance on the decision of this Court in the case of Principal Commissioner of Income Tax­1 vs. Adani Gas Ltd [Tax Appeal No.900 of 2016 decided on 11th January 2017] wherein two questions fell for consideration of this Court. Those are as under; "A. Whether the Appellate Tribunal has erred in law and in facts in deleting the disallowance of Rs. 10,28,028/­ being the preliminary expenditure under Section 35 D of the Act ? B. Whether the Appellate Tribunal has erred in facts and circumstances in directing the AO to set off prior period expenditure of Rs. 15,2....
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....ing Officer to set off assessees prior period of expenditure and income as per the law. Therefore, necessary consequence shall follow. Under the circumstances, we see no reason to interfere with the impugned judgment and order passed by the learned Tribunal. Question B is also held against the revenue and in favour of assessee. No substantial question of law arise in the present appeal. Hence, present appeal deserves to be dismissed and is accordingly dismissed." 18 Mr. Hemani also placed reliance on the decision of this Court in the case of Principal Commissioner of Income Tax­I vs. Adani Enterprises Ltd [Tax Appeal No.566 of 2016 decided on 20th July 2016] wherein one of the questions was as under: "(A) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in deleting the disallowance of Prior Period expenditure of Rs. 67,88,591/­?" The Court, ultimately, held as under: "2. Main question is sum of Rs. 67.88 lacs(rounded off) which the Assessing Officer and CIT(Appeals) disallowed treating the expenditure as a prior period expenditure. The Tribunal reversed the findings of the Revenue authorities....
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....0th July 2016] has taken such a stance while allowing the set off of the prior period expenses against the prior period income. 21 This Court in PCIT vs. Adani Gas Ltd [Tax Appeal No.900 of 2016 decided on 11th January 2017] allowed the set off by following the decision of the Delhi High Court in CIT vs. Exxon Mobile Lubricant Pvt Ltd [(2010) 8 Taxmann.com 249 (Delhi). It was held that if the AO had not excluded the prior period income while working out the current year taxable income, there was no reason to disallow only a part of the prior period adjustment. 22 This Court in PCIT vs. Adani Enterprises [Tax Appeal NO.566 of 2016 decided on 20th July 2016] noted that the prior period income was declared by the assessee in the current year and accepted by the Revenue. Hence, this Court declined to interfere with the order of the ITAT holding that it would be unfair not to recognise the prior period income. It further took into account the fact that the company would be taxed at the same rate in the present assessment year or during the earlier year. 23 This Court in PCIT vs. Adani Enterprises Ltd [Tax Appeal no.573 of 2016 decided on 20th July 2016] followed its order in th....
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....held that an assessee paying any sum to a non­resident is not liable to deduct tax if the sum is not chargeable to tax under the Act, as the expression in Section 195(1) of the Act is "chargeable under the provisions of the Act." 27 The decision in GE India (supra) has been followed by this Court in PCIT vs. Nova Technology Pvt Ltd [Tax Appeal NO.290 of 2018 decided on 9th April 2018]. It was held therein that the payment does not enter the tax liability of the payee under the Act. Section 195 would not apply. The fundamental principle of deducting tax at source in connection with the payment only where the sum is chargeable to tax under the Act continues to hold the field even after the retrospective insertion of Explanation 2 to sub­section (1) of Section 195 of the Act. 28 Thus, where the payment is in the nature of reimbursement, there is no element of income involved, and therefore, no tax is required to be deducted at source. Having regard to the settled position, the assessee was not liable to deduct the tax at source on such payments and hence, the ITAT committed no error in answering the second question as proposed by the Revenue in favour of the assessee. ....
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.... FOURTH QUESTION OF LAW: 31 The Assessing Officer, by placing reliance on the decision of the Supreme Court in the case of liberty India Ltd vs. CIT 317 ITR 218(SC) held as follows: "16.9 Thus, as per the provision of the section the profits should be derived by the hundred per cent export­oriented undertaking from the export of articles or things. As has been held by the Hon'ble Supreme Court above, it is not the ownership of that business which attracts the incentives. What attracts the incentives under S. 80­IA/80­IB is the generation of profits (operations profits). Thus, the profits eligible for deduction u/s. 10B should be derived by the undertaking from 'exports' of articles or things and should not be incidental to it. All the incomes viz. Dividend income, other income, profit on sale of fixed assets, excess provision written back, profit on sale of investments, duty draw back income, interest income cannot be said to be 'derived' from 'export of articles or things'. The source of income of each of these items is a step away from export of articles or things. Hence, these incomes cannot be considered to be eligible for ded....
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.... substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub­section only for the unexpired period of aforesaid ten consecutive assessment year: Provided further that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub­section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software. Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2012 and subsequent years : Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub­section (1) of section 139. (2) This section applies to any undertaking which fulfils all the following conditions, namely : (i) it manufactures or produces any articles or things or computer software; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence : Provided that this....
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....ovided for under Chapter VI A, except that the exemption or deduction is in its entirety. However, the basic principle, namely, that the profit and gain must be derived from the concerned activity, is common to both the provisions. It is not in dispute that the assessee herein is a 100% export - oriented unit. The provisions of Section 10B of the Act, in terms of which relief is sought, provides for a deduction of such profits and gains as are derived by a 100% export­ oriented unit from the export of articles, things or computer software for a period of 10(ten) consecutive assessment years commencing with the assessment year relevant to the previous year in which eligible activity commences. The methodology for computation as envisaged in subsection (1) of Section 10B is by way of a mathematical formula set out in sub­section (4) whereby the profits derived from the exports of articles or things or computer software is stated to 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 /things /computer software bears to the total turnover of the business carried on by the undertaking....
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....to refer to hereinafter is that where the statutory provision talks about the "income derived from the business activity in question", the nexus theory should be applied in order to determine whether a particular item of income is business income or not. 41 The Supreme Court in Tuticorin Alkali Chemicals and Fertilisers Ltd vs. CIT [1997] 227 ITR 172 took the view that the interest earned on the deposits placed for the purposes of obtaining loans for business cannot be treated as business income, but only as the income from other sources. The decision in Tuticorin (supra) was rendered in the context of Sections 56 and 57 of the Act and came to be followed in the CIT vs. Autokast Ltd [2001] 248 ITR 110(SC). 42 The Supreme Court in CIT vs. Dr. V. Gopinathan [2001] 248 ITR 449 (SC) took the view that the interest on the fixed deposits would not qualify for setting off against the interest on the loans borrowed. The other two decisions on the same line in the context of Section 80HHC are CIT vs. Sterling [1999] 237 ITR 579 and CIT vs. Pandian Chemicals Ltd [2003] 262 ITR 278 (SC). In these two decisions, the Supreme Court reiterated the nexus theory and declined to treat such int....
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.... relevant assessment year when the assessee had not commenced business. It was held therein that the interest income was income from other sources and therefore the interest paid on the borrowed capital could not be said to have been laid out or expended for the purposes of earning such income and therefore would not come within the purview of Section 57(iii). 45 In the context of Section 80HHC itself, the Madras High Court in K.S. Subbiah Pillai v. CIT [2003] 260 ITR 304 has held that if an assessee engaged in the business of exports, invests surplus funds in the fixed deposits and earns interest thereon, such income cannot be treated as business income since it does not bear any direct nexus with the export business of the assessed. 46 In Urban Stanislaus Co. vs. CIT [2003] 263 ITR 10 the assessee had contended that as a condition for obtaining a loan from the bank, 20% of the sale receipts had to be deposited by way of security. It was claimed that the interest earned on such deposit was business income for the purpose of Section 80HHC. This was negatived by the Kerala High Court by observing (ITR Page 12) that "the assessed can claim deduction in respect of the profits de....
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....ed by a hundred per cent export ­ oriented undertaking from the export of articles or things or computer software for the period and subject to the conditions stipulated there under. Therefore, the deduction is permissible if such profits and gains as are derived from the export of articles and things. As held in the above decision, the exact remittance in connection with such export would depend on the precise exchange rate at the time when the amount is remitted. The receipt would be on account of the export made and therefore, the fluctuation thereof must also be said to arise out of the export business. Merely because of fluctuation in the international currencies, the income does not get divested of the character of income from export business. The Tribunal, therefore, did not commit any error in deleting the addition made on account of fluctuation in foreign exchange rates from the deduction under section 10B of the Act." 51 We are of the view that the basis of computation of the deductions enumerated under Chapter VIA is different from that set out for the special deductions like Section 10A and 10B. Section 80IA provides for a deduction of profits and gains derived b....
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.... to be made in computing Total Income, Part A - General, comprising of Section 80­A to 80­B and Part B - Deductions in respect of certain payments, comprising of Section 80C to 80GGC and Part C - Deductions in respect of certain incomes - comprising of Section 80H to Section 80TT. 10. Out of this broad scheme of the Act, since the cited cases before us mostly pertain to Part C of Chapter VI­A which deals with the deductions to be made in computing Total Income under Section 80­H, 80HH, 80HHC etc, we would deal with these provisions when relevant case laws are discussed by us. 11. As against the Chapter VI­A relating to Deductions from Gross Total Income as provided in Chapter VI­A of the Act, Section 10­A and 10B contained in Chapter III of the Act provide for exemptions or 100% deduction in Chapter III which deals with "Incomes which do not form part of the Total Income" and Section 10­A deals with "Special provisions in respect of the newly established Undertakings in Free Trade Zone, etc. (FTZ)" and Section 10­AA deals with "Special provisions in respect of newly established Units in Special Economic Zones (SEZs)" and Section....
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.... 16. The assessee earned during the said Assessment Year 2001­02, interest income of Rs. 4,68,037/­ on the Short Term Deposits made by it to the tune of Rs. 6,46,88,606/­ out of its Surplus Funds temporarily parked in the Current Account held in Citi Bank, Hong Kong and also earned interest of Rs. 6,02,309/­ from the Advances of loans to its staff members. The deduction in respect of both the said interest income was claimed as a 100% deduction under Section 10­A of the Act during the said relevant year as income from "Profits and Gains" of export business. But, the Assessing Authority under the Act held that such interest income was not entitled to 100% deduction under Section 10­A of the Act, but such interest income was taxable under Section 56 of the Act, as 'Income from Other Sources' and that is the bone of contention between the assessee and the Revenue before us. 17. The learned counsel for the Revenue, Mr. Aravind relying upon the following judgments under Sections 80­HH, 80­HHC and 80­I of the Act which scheme of Deductions under Chapter VI­A of the Act is different from the scheme of Exemptions from tax under Sections 10....
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....he genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non­payment. And rent is not land within the meaning of the definition." This definition was approved and reiterated in 1955 by a Constitution Bench of this Court in the decision of Mrs. Bacha F. Guzdar Vs. CIT (1955) 27 ITR 1 (SC). It is clear, therefore, that the words 'derived from' is s.80HH of the IT Act, 1961 must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself." 20. In Liberty India Vs. Commissioner of Income Tax [(2009) 317 ITR 218], the Hon'ble Supreme Court dealing with the controversy of profit from Duty....
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....e of the import entitlements can in the circumstances, only be said to be the export promotion scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the export promotion scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee's industrial undertaking." 22. In Totgars Co­operative Sale Society Ltd. Vs. Income Tax Officer [(2010) 322 ITR 283], which judgment was relied upon by the Division Bench of this Court for the later years also while deciding I.T.A. No.100066/2016 (Principal CIT Vs. The Totagar's Co­operative Societies Sales Ltd. Sirsi, Karnataka) on 16/06/2017, the Hon'ble Supreme Court held that the profits and gains of business attributable to one of the activities specified in Section 80....
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....on'ble Supreme Court and such 100% deduction would not be available to the assessee Society even with reference to Section 80­P(2)(a) or (d) of the Act for those subsequent assessment years as well. 24. Before adverting to the judgments cited by the learned counsel for the Respondent assessee and his contentions in brief, let us extract the relevant portion of the Section 10­A applicable in the facts and circumstances of the present case to its relevant extent herein below. 10A [Special provision in respect of newly established undertakings in free trade zone, etc. 10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking 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 or things or computer software, as the case may be, shall be allowed from the total income of the assessee: .... .... 10­A(2) This section applies to any undertaking which fulfils all the follow....
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.... circumstances where the assessee was engaged wholly in 100% export of its Software Programmes and would not apply to exclude such exemption in respect of the interest income because the interest income of the Undertaking does not form part of 'Total Turnover of the assessee' in contra­distinction with 'export turnover of the assessee' because the assessee is engaged in 100% export of articles and the assessee admittedly satisfies all other relevant conditions for applicability of Section 10­A of the Act to the respondent assessee. 27. He submitted that the judgment of the Division Bench in the case of M/s. Motorola India Electronics (P) Ltd.(supra) of this Court which has been differed with by the subsequent Division Bench giving rise to the present Reference to the Full Bench gives the correct interpretation of Section 10­A/10­B of the Act and the same has been consistently followed at later stages by the other High Courts. 28. The learned counsel for the Respondent assessee relied upon the following decisions in this regard. 29. In Riviera Home Furnishing vs. Additional Commissioner of Income Tax, Range 15 [(2016) 65 Taxmann.com 287(Del....
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.... 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 an incorrect understanding of Section 80A(4) of the Act. The opening words of Section 80A(4) read "Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter.....". What is sought to be underscored, therefore, is that Section 80A, and the other provisions in Chapter VIA, are independent of Sections 10A and 10B of the Act. It appears that the object of Section 80A(4) was to ensure that a unit which has availed of the benefit under Section 10B will not be allowed to further claim relief under Section 80IA or 80IB read with Section 80A(4). The intention does not appear to be to deny relief under Section 10B(1) read with Section 10B(4) or to whittle down the ambit of those provisions as is sought to be suggested by Mr. Manchanda. Also, he is not right in contending that the decisions of the High Courts referred to above have not noticed the decision of the Supreme Court in Liberty India. The Karnata....
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....sub­section (4) which we already have quoted. Sub­section (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 two figures are available, one has to divide the total turnover by the export turnover in order to work out the percentage of the export turn over, vis­à­vis the total turn over. Suppose total turn over is Rs. 100/­ and total export turn over is for Rs. 10/­, then the export turn over is 10 % of the total turnover. Then one has to find out the total profit of the business of the undertaking. Suppose the total profit of the business of the undertaking is Rs. 100, in that case, deduction available to the assessee under Section 10 subsection (1) of Section 10B shall be 10% of Rs. 100, I.e. to say Rs. 10/­. This is the formula which has been provided by subsection (4) for the purpose of working out the benefit or deduction under subsection (1). Total turnover shall naturally include receipt on account of interest. The legislature does not appear to have provided for exclu....
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....red 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 Bench of Bombay High Court in Commissioner of Income Tax­IV Vs. Symantee Software India (P) Ltd. [MANU/MH/2575/2014] rightly held, in our opinion, that the provisions of Chapter VI­A in the context of 'Deductions' cannot be allowed to be telescoped in Section 10­A and the deduction under Section 10­A has to be given effect to at the prior stage of computing the profits and gains of the business, whereas Chapter VI­A comes in for application after the Gross Total Income is determined by adding the income under various independent Heads of Income in Chapter IV comprising of Sections 14 to 59 of the Act. 33. The relevant extract from paragraphs 19 to 21 of Bombay High Court decision is also quoted below for ready reference. "19. There is some substance in the contention of Mr. Kaka that if the deduction shall be allowed ....
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....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 to telescope Chapter VIA in the context of the deduction, which is permissible under section 10A falling in Chapter III, cannot be countenanced." 34. We are of the considered opinion that the above referred decisions relied upon by the learned counsel for the Revenue, Mr. Aravind do not cover the cases under Sections 10­A and 10­B of the Act which are special provisions and complete code in themselves and deal with profits and gains derived by the assessee of a special nature and character like 100% Export Oriented Units (EOUs.) situated in Special Economic Zones (SEZs), STPI, etc., where the entire profits and gains of the entire Undertaking making 100% exports of articles including software as is the fact in the present case, the assessee is given 100% deduct....
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....ll 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 10­A and 10­B 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 Section 10­A/10­B of the Act and for the object of granting such incentive to the special class of assessees selected by the Parliament, the play­in­the­joints is allowed to the Legislature and the liberal interpretation of the exemption provisions to make a purposive interpretation, was also propounded by Hon'ble Supreme Court in the following cases: I] In Bajaj Tempo Ltd., Bombay Vs. Commissioner of Income Tax, Bombay, [(1992) 3 SCC 78], the Hon'ble Supreme Court held that: "5. ... ..Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it, too, has to be const....
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.... times the judges have been overruled by events - self­limitation 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 meagre and uninterpreted experience". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid." 37. On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction u....
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....in Liberty India. The Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (supra) makes a reference to the said decision. That decision of the Karnataka High Court has been cited with approval by this Court in Hritnik Exports (supra) and Universal Precision Screws (supra). In Hritnik Exports (supra) the Court quoted with approval the observations of the Special Bench of the ITAT in Maral Overseas Ltd. (supra) that "Section 10A/10B of the Act is a complete code providing the mechanism for computing the 'profits of the business' eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act." 55 A similar view has also been taken by the Calcutta High Court in the case of Commissioner of Income Tax, Kolkata­IV vs. Hindustan Gum and Chemicals Ltd [(2016) 72 Taxmann.com 90 (Calcutta)]. We quote the following observations made in paras 4 and 5 as under: "4. Mr. Dudhoria, learned Advocate appearing for the revenue drew our attention to a judgment of the Madras....
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....to succeed. The Assessing Officer is directed to treat the interest of Rs. 28,74,473/­ as part of the profits of the business of the 100% EOU eligible for deduction under Section 10B and compute the deduction accordingly. The Assessing Officer should deduct the sum of Rs. 8,01,30,294/­ (Rs. 7,72,54,821/­ + Rs. 28,74,473/­) and not only Rs. 7,72,54,821/­ from the profit as per profit and loss account for the purpose of separate consideration under section 10B Ground Nos. 3, 4 and 5 of the assessee's appeal are thus allowed." 56 The Madras High Court in the case of M/s. Camiceria Apparels India P. Ltd. vs. The Assistant Commissioner of Income Tax reported in [2019] 103 taxmann.com 238 (Madras), after referring to the Full Bench decision of the Karnataka High Court in the case of Hewlett Packard (supra), held as under: "19. The relief provided for in terms of Sections 10A, 10B and other special provisions addresses relief to be granted to specified categories of undertakings, specified either by the activities carried on by them or their location (in STPI/FTZ/EOU). The provision is attracted to the entire income derived from the 'business of the....
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....f determining such eligible profits has been statutorily defined in, sub­ section (4) of that section. Both sub­sections (1) and (4) should be read together while computing the eligible deduction u/s 10B of the Act. We should not ignore sub­section (4) of Section 10B which provides the specific formula for computing the profits derived by the undertaking from export. As per the formula so laid down, the entire profits of the business are to be determined which are further multiplied by the ratio of export turnover to the total turnover of the business. In case of Liberty India (supra), the Supreme Court dealt with the provisions of Section 80IA of the Act wherein no formula was laid down for computing the profits derived by the undertaking which has specifically been provided under sub­section (4) of Section 10B while computing the profits derived by the undertaking from the export. Thus, the decision of the Supreme Court in Liberty India (supra) is of no help to the revenue in determining the claim of deduction u/s 10B in respect of the export incentives. 59 Section 10B(4) lays down the special formula for computing the profits derived by the undertaking from ex....
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.... to look into Motorola India (supra) in details. In Motorola India (supra), the assessee had the outstanding borrowings by way of External Commercial Borrowings. The borrowings were for the business of STP undertaking. The Government had formulated a policy on pre­payment and the policy stated that the approval of pre­payment would be granted only to the extent of 10% of the outstanding loan. In such circumstances, it was required to temporarily park the funds, until the date of repayment, and also keep paying the interest on the loans. The assessee took a business decision to place these funds with its various sister concerns as intercorporate deposits. The assessee claimed that the interest income as derived from the business of export of articles or things or computer software was eligible for exemption under Section 10A of the Act. The AO disallowed the exemption claimed with respect to the respect income. The ITAT's ruling: • ITAT held that the terminology used in sub­section 4 is 'profits of the business' of the undertaking in contradiction to the word profits and gains derived by the asssessee "from a 100% export oriented undertaking. ....