Section 10B, read with section 10A and section 28(i),

IN THE ITAT BANGALORE BENCH ‘A’ Assistant Commissioner of Income-tax, Circle 12(1), Bangalore v. Motorola India Electronics (P) Ltd. P. Mohanarajan, Judicial Member And J. Sudhakar Reddy, Accountant Member IT Appeal Nos. 1152(Bang.) of 2001-02, 1134, 1139 and 1153 (Bang.) of 2003 and 3134 (Bang.) of 2004 C. O. Nos. 77 and 78 (Bang.) of 2003 [Assessment years: 1997-98, 1998-99 and 2001-02] November 28, 2006 Section 10B, read with section 10A and section 28(i), of the Income-tax Act, 1961 - Export oriented undertaking - Assessment years 1997-98, 1998-99 and 2001-02 - Assessee had certain outstanding borrowings by way of External Commercial Borrowings (ECBs) - RBI had placed restrictions on prepayment of instalments in respect of said borrowings - Thus, assessee had to repay a small portion of its outstanding loans, though it had liquidity to pay more and was required to temporarily park funds, until date of repayment and also keep paying interest thereon - As a result, assessee took a business decision to place these funds with various sister concerns as inter-corporate deposits and earned interest income on said deposits - Assessee claimed that said interest income was assessable as income from business and same was eligible for exemption under section 10A for assessment years 1997-98 and 1998-99 - For assessment year 2001-02, it was submitted that Act had undergone a change and entire concept and basis of section 10A have changed and thus as per provisions of law as applicable to assessment year 2001-02, interest income formed part of profits from business of industrial undertaking and once formula as specified in sub-section 4 of section 10A was applied, assessee would be entitled for deduction - Assessing Officer, however, rejected claim of assessee and assessed interest income as assessee’s income from other sources - Whether in view of fact that assessee had advanced amounts to sister concerns from out of monies available with it, for reason that it was prevented from Government regulations from prepaying ECBs, said interest income could definitely be considered to have close nexus with business activity of assessee and, thus, assessable under head ‘income from business - Held, yes - Whether in view of decision of Tribunal in case of Synopsys (India) (P.) Ltd. v. ITO in (IT Appeal No. 1100 (Bang.) of 2003, order dated 23-12-2005, for assessment years 1997-98 and 1998-99, assessee was not eligible for grant of relief on interest income while computing deduction under sections 10A and 10B - Held, yes - Whether for assessment year 2001-02, since after amendment in section 10B, entire profits derived from business of an undertaking were to be taken into consideration while computing eligible deduction under section 10B/10A, assessee was entitled to deduction claimed - Held, yes - Whether further, since interest income was assessable as business income of assessee, all related and connected expenditure incurred by assessee in earning that income was allowable - Held, yes FACTS The assessee-company earned interest income from deposits lying in the EEFC Account and from advancing of inter-corporate loans out of the funds of the undertaking. As per the assessee, it had to deposit in EEFC account certain amount with the bank, subject to the RBI’s restriction as to the maximum amount that could be held therein. The assessee further submitted that it had outstanding borrowings by way of External Commercial Borrowings (ECBs) obtained in earlier years, which could be repaid only in accordance with the repayment schedule and, thus, the assessee could repay a small portion of its outstanding loans, though it had the liquidity to pay more and was required to temporarily park the funds, until the date of repayment, and also keep paying the interest on the loans. Still further, the assessee submitted that as it had to hold these funds, it took a business decision to place these funds with various sister concerns as inter-corporate deposits. The assessee claimed that both the interest incomes derived from deposits in the EEFC Account and the interest income earned on inter-corporate deposits, had to be assessed under the head ‘income from business’, and further 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 for the assessment years 1997-98 and 1998-99. For the assessment year 2001-02, it was submitted that the Act had undergone a change and the entire concept and basis of section 10A had changed and thus as per the provisions of law as applicable to the assessment year 2001-02, the interest income formed part of profits from the business of industrial undertaking and once the formula was applied as specified in sub-section 4 of section 10A, the assessee would be entitled for deduction. On the other hand, the revenue’s case was that only those profits and gains that are derived by an eligible undertaking from the export of article or thing of computer software were eligible for deduction for the assessment year 2001-02. According to the Assessing Officer, the interest income received by the assessee on bank deposit could not be considered as derived from industrial undertaking, and, thus, it was to be assessed under the head ‘income from other sources’. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. On second appeal: HELD As the interest in question arose on deposits which were held in EEFC account from export profits and as the Government by regulation had stipulated the maximum amount that could be held in EEFC account and as the assessee had advanced amount to sister concerns from out of monies available with him, for the reason that he was prevented by Government regulations from prepaying external commercial borrowings, the income in question could definitely be considered to have close nexus with the business activity of the assessee and, thus, assessable under the head ‘income from business’. [Para 7.2] The next issue was whether the assessee was eligible for grant of relief on interest income while computing deduction under sections 10A and 10B. For the assessment years 1997-98 and 1998-99, the issue had been decided against the assessee by the order of the Tribunal in IT Appeal No. 1100(Bang.) of 2003, the case of Synopsis India (P.) Ltd. v. ITO order dated 20-8-2005. In view of the said decision, the assessee was not eligible for grant of relief on interest income, while computing deduction under sections 10A and 10B. [Para 8.1] As regards the assessment year 2001-02, section 10B has undergone a change. Earlier it was an exemption section and income from the undertakings which were covered by this section did not form part of total income. From this particular year, though the section appeared in Chapter 3, which classified income which did not form part of total income, a deduction from business income from the undertaking was granted by including the special provision. Another important feature in sub-section (4) that not the methodology of arriving at the export profits of the business of the undertaking was given in a formula, as in the case of 80HHC and it shall be the same proportion as the export turnover bears to total turnover in respect of such articles or things or computer software. The word ‘shall’ has been used to make it mandatory. Another important feature is that the terminology used in sub-section (4) is ‘profits of the business’ of the undertaking in contradiction to the word ‘profits and gains derived by the assessee’ from a 100 per cent export oriented undertaking. [Para 8.3] In section 80-IA, the term ‘profits and gains from the business’ has been used. Similar terminology has been used in many other sections such as 80JJ or 80JJA etc. Whereas under section 80-I and other sections the terminology used is ‘profits and gains derived from industrial undertaking’. The term ‘from the business of’ is much wider than the term ‘derived from industrial undertaking’. Keeping this distinction in mind, necessarily, it was to be held that the entire profits deriving from the business of undertaking should be taken into consideration, while computing the eligible deduction under section 10B/10A by applying the mandatory formula. Hence, for the assessment year 2001-02, the Assessing Officer was to be directed to recompute the deduction under sections 10A and 10B on the above lines. [Para 8.4] Regarding the allowability of interest expenditure on the interest income, it had already been held that interest income had to be assessed under the head ‘income from business’. While doing so, the Assessing Officer had to compute separately income earned by way of interest. To compute the interest income, all connected and related expenditure had to be allowed. The assessee had to necessarily hold the funds in deposits and advances due to embargo placed by the Government, restricting pre-payment of the external commercial borrowing. The assessee had to necessarily hold on to the funds, which would otherwise have been utilized to repay the liability which would have reduced his liability to pay interest. Thus, there was a clear nexus between the external commercial borrowings and the funds placed for short-term deposits, and other deposits. Thus, for the assessment years 1997-98 and 1998-99, the relatable expenditure had to be deducted. [Para 8.8] For assessment year 2001-02, though the principles did not change, the ground of netting of interest was an alternative ground. As it had been held that due to change in law, deduction under section 10A/10B had to be granted on the business receipts, this ground became infructuous. [Para 8.9] EDITOR’S NOTE: 1. In view of the decision of the Tribunal in the case of Synopsys (India) (P.) Ltd. v. ITO [IT Appeal No. 1100 (Bang.) of 2003, order dated 23-12-2005], the assessee was entitled to claim deduction in respect of proportionate management expenses of earning of interest income, subject to a maximum limit of 5 per cent. 2. In view of the decision of the Tribunal in Wipro Information Technologies v. Dy. CIT [IT Appeal Nos. 651 (Bang.) of 1994 dated 31-7-2002], the Commissioner (Appeals) rightly included income of the assessee from sale of import licences, for the purpose of computing deduction under section 10A/10B. CASE REVIEW: CIT v. Tirupati Woollen Mills Ltd. [1992] 193 ITR 252 (Cal.); CIT v. Tamil Nadu Dairy Development Corpn. Ltd. [1995] 216 ITR 535/[1996] 87 Taxman 1 (Mad.); Snam Progetti S.P.A. v. Addl. CIT [1981] 132 ITR 70/[1982] 10 Taxman 86 (Delhi); CIT v. Paramount Premises (P.) Ltd. [1991] 190 ITR 259 (Bom.); Synopsys (India) (P.) Ltd. v. ITO [IT Appeal No. 1100 (Bang.) of 2003 dated 23-12-2005]; Wipro Information Technologies v. Dy. CIT (Assessment) in IT Appeal No. 651 (Bang.) of 1994 dated 31-7-2002; CIT v. Anjum M. H. Ghaswala [2001] 252 ITR 1/119 Taxman 352 (SC) - followed. K. S. Subbiah Pillai & Co. (India) (P.) Ltd. v. CIT [2003] 260 ITR 304 (Mad.) - distinguished.