TMI Blog2007 (6) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... e against income from business of exports of software from software technology park : ( Rs. ) 1.Interest on EEFC 71,47,091 2.Interest on rupee deposits 30,76,465 3.Corporate charges 20,00,000 4.Exim Bank ISO reimbursement 11,76,000 5. Interest on ICDs. 1,64,455 6.Domestic software services 14,51,506 7.Recovery of charges for use of work stations 9,00,215 The Assessing Officer disallowed the claim of the assessee-company. The CIT (A) affirmed the order of the Assessing Officer. The assessee is in further appeal before us. The issues in this regard are raised in Ground Nos. 1 to 10. 2.1 Learned counsel for assessee Shri Mukesh Butani made elaborate arguments. He also filed paper book containing 135 pages. Shri Butani submitted that learned CIT(A) has not interpreted the wider scope of exemption under section 10A prevailing in the year under appeal. Section 10A, as it stood prior to amendment by Finance Act, 2000 with effect from 1-4-2001, reads as follows : "10A. (1) Subject to the provisions of this section, any profits and gains derived by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss the Legislature had intended that both classes of tenants can be asked to vacate by the Rent Controller for providing the landlord additional accommodation, be it for residential or non-residential purposes, it would not have used the word "any" instead of using the letter "a" to denote a tenant. From the plain reading of the un-amended section 10A as applicable to the facts of this case all profits of the undertaking including incidental and ancillary income such as interest from banks etc. would qualify for the benefit of exemption and the section does not place any restriction as in the case of section 10( 29 ) and the amended section 10A. 2.2 The Supreme Court in Orissa State Warehousing Corpn. v. CIT [1999] 237 ITR 589 while interpreting the scope of section 10(29) observed thus: "That on a plain reading of section 10(29) of the Act the prerequisite element for the entitlement as regards the claim for exemption is the income which is derived from letting out of godowns or warehouses for storage, processing or facilitating marketing of commodities and not otherwise. The Legislature has been careful enough to introduce in the section itself, a clarification by using ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. The courts therefore have started resorting to purposive interpretation. The law has to be found in the words in which the Parliament has enacted and it is for the court to interpret those words so as to give effect to that purpose. The primary rule of statutory interpretation is that the intention of the Legislation must be found in the words used by the Legislature itself. If a statute using an expression gives restricted meaning to the expression, there is no alternative but to adopt that meaning. If however, the expression used in a statute is of general character, it should be understood in the sense in which every person understands that expression. It is not necessary to import artificial considerations into the matter. Thus, where the definition of the word is not given, it must be construed in its popular sense, if it is a word of every day use. Popular sense means that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it CIT v. Taj Mahal Hotel [1971] 82 ITR 44 (SC). When the context makes the meanin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stop as soon as the effective source is discovered, and be not extended to another matter, however, closely connected with effective source in question is. The word derived connotes drawing or receiving from a source. When something is stated to be derived from something else, the latter is a source, while the former is that which flows from that source. Profits and gains can be said to have been derived from an activity carried on by a person only if the said activity is the immediate and effective source of the said profit or gain CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 (PC). In the present case the source is industrial undertaking. The industrial undertaking may carry out several business activities and earn profits and gains out of those business activities. Unless the Legislature specifies that under which business activity, the income is exempt or not exempt, it should be presumed that the entire profits and gains of the industrial undertaking is exempt from tax. In this case the Legislature by way of amendment in 2001 specified that the assessee is entitled to a deduction of such profits and gains as are derived by an undertaking from the export o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Products Ltd. v. Dy. CIT [2001] 77 ITD 123 (Delhi) 5. Ambika Cotton Mills Ltd. v. Jt. CIT [2003] 86 ITD 240 (Mad.) 6. Dy. CIT v. Jagdish Electronics [1998] 66 ITD 542 (Pune) 7. Dy. CIT v. Transpower (P.) Ltd. [2002] 80 ITD 11 (Gau.) 8. Asstt. CIT v. Gallium Equipment (P.) Ltd. [2001] 79 ITD 41 (Delhi) (TM). 2.12 Learned DR, on the other hand, strongly supported the appellate order. He submitted that there is no dispute that all such incomes are assessable as income from other sources. Even under the un-amended provisions of section 10A as applicable to the year under appeal, any profits and gains which are derived by an assessee from an industrial undertaking to which this section applies is not to be included in the total income of assessee. Thus, the pre-requisite is the profits and gains derived from an industrial undertaking and not income which has no nexus with the industrial undertaking or which cannot be considered as derived from the industrial undertaking cannot be allowed exemption as provided in section 10A of the Act. He also relied upon following case laws to support his argument that such income cannot be considered as income derived fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by an undertaking from export of article or computer software is to be allowed as deduction while computing the total income of the assessee. Thus, what was earlier exempt and was not forming part of the total income but will be allowed as deduction. However, the fact remains that whether exemption has to be granted or deduction has to be allowed, in both the cases only such income which is by way of profits and gains derived by an assessee from an industrial undertaking to it this section applies i.e., an undertaking which manufactures or produces articles or things in a free trade zone or electronic hardware technology park or software technology park. Thus, in both the cases what is required to be satisfied is that the exemption/deduction is allowable only in respect of such profit and gain as are derived by an assessee from an industrial undertaking. Hence, even to claim exemption under section 10A, the same can be granted provided such profits and gains are derived by an assessee from an industrial undertaking. 3.1 Hon ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. ( supra ) held thus : "As regards the aspect emerging from the express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain, derived from the assessee s industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relied under section 80HH of the Income-tax Act, 1961." 3.3 Hon ble Madras High Court in the case of CIT v. Menon Impex (P.) Ltd. [2003] 259 ITR 403 was considering the question whether interest from funds in connection with letters of credit is income derived from profit of the business of industrial undertaking so as to be entitled to get the benefit of section 10A of the Income-tax Act. Allowing the appeal of revenue, Hon ble Madras High Court held thus : " Held , that the interest received by the assessee was on deposits made by it in the banks. It was the deposit which was the source of the interest income. The mere fact that the deposit was made for the purpose of obtaining letters of credit which were in tur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strial undertaking itself. All the decisions cited by the appellant have been considered by the Madras High Court in the assessee of Pandian Chemicals Ltd. [1998] 233 ITR 497 . We see no reason to disagree with the reasoning given by the High Court in Pandian Chemicals Ltd. s case [1998] 233 ITR 497 with respect to those decisions to hold that they do not in any way allow the word derived in section 80HH to be construed in the manner contended by the appellant". In the present case, it is seen that the assessee has received interest on deposit in EEFC account and other interest on surplus funds parked. The interest has been received pursuant to deposit made and not as part of activity of industrial undertaking. Thus, the source of interest is deposit and not the industrial undertaking. For the application of words "derived from" there should be a direct nexus between income and the industrial undertaking. In the present case, there is no direct nexus but only an incidental connection that the fund of industrial undertaking are firstly placed in the deposit and thereafter on such deposit the interest is earned. The activity of industrial undertaking is to export and the mome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the issue therein was claim of deduction under section 80HHC prior to its amendment with effect from 1992-93. Prior to such amendment, deduction under section 80 Hon ble High Court was available in respect of profit as computed under the head "Profits and gains of business or profession" and not in respect of income derived from industrial undertaking. It is to be noted that various judgments relied by learned counsel for assessee are prior to the decision rendered by Hon ble Supreme Court in the case of Pandian Chemicals Ltd. ( supra ). After the authoritative pronouncement of the Hon ble Supreme Court in the case of Pandian Chemicals Ltd. ( supra ), the interest income which has no nexus with the activity of the industrial undertaking cannot be allowed as deduction. The Head Note in the case of Hindustan Lever Ltd. ( supra ) is extracted herein : "Under the provisions of section 2(5)( i ) of the Finance (No. 2) Act, 1962, an assessee whose "total income includes any profits and gains derived from the export of any goods or merchandise out of India, shall be entitled to a deduction, from the amount of Income-tax and super tax with which he is chargeable for the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low exemption under section 10A of the Act : ( Rs. ) 1.Interest on EEFC 71,47,091 2.Interest on rupee deposits 30,76,465 3.Interest on ICDs 1,64,455 4. As regards amount by way of reimbursement by Exim Bank, Shri Butani submitted that during the year under consideration, the appellant had received a grant from EXIM Bank, to the extent of 50 per cent of the expenses incurred in obtaining ISO quality certification for its business, per the bank s "Programme for Product and Process Certification". The said income has been shown as "other income" in the P L A/c. With a view to promoting exports from India, EXIM Bank provides various incentives to Indian companies to become globally competitive. In this context, it part finances expenses incurred on quality certification of products and processes to add credibility to the appellant in the international market. Shri Butani further submitted that the expense for obtaining quality certification has a direct link with the business of the appellant, therefore, income in relation to revenue expenditure would bear the character of a business receipt. Reliance in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, the fact is not in dispute that the assessee has received grant from Exim Bank, being 50 per cent of the expenses incurred in obtaining ISO quality certification. This implies that the assessee has incurred much more expenses. It is also mentioned that the total expenses in this regard were Rs. 23,52,000 which was reduced while computing profits of business. Accordingly, applying the principles laid down by Special Bench of the Tribunal in the case of Lalsons Enterprises v. Dy. CIT [2004] 89 ITD 25 (Delhi) (SB) as now approved by Hon ble Delhi High Court in the case of CIT v. Shri Ram Honda Power Equipment [2007] 289 ITR 475 only net of the receipt can be excluded. Since in the present case, the expenses are more than the receipt and since there is direct nexus between the expenses incurred and earning the income, nothing has to be excluded while computing profit derived from industrial undertaking so as to compute deduction under section 10A of the Act. Accordingly, Ground No. 4 is allowed. 6. Ground No. 6 is against denial of exemption under section 10A on income from corporate charges of Rs. 20 lakhs earned from HCL Technologies Ltd. Similarly, Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot to reduce the profits of business by the amount of Rs. 20 lakhs received by way of corporate charges and Rs. 9,00,250 received by way of reimbursement recovered for use of work stations. Accordingly, Ground Nos. 6, 9 and 10 ruled in favour of assessee. 8. Ground Nos. 7 and 8 are against denial of exemption under section 10A of income of Rs. 14,51,506 earned from domestic software services. During the year under consideration, the appellant had received an income of Rs. 11,93,172 from software services rendered in the domestic sector. The Assessing Officer held that professional services are in addition to software services as declared in P L A/c. Income from these services is not even remotely connected with the business of software export from a STPI, hence, the income is treated as "income from other sources" which has not been disclosed. The CIT(A) affirmed the action of the Assessing Officer on the ground that these professional receipts are in addition to the software services declared in the P L A/c and not connected with the business of software export. Hence, the same should be treated as "income from other sources". Mr. Butani submitted that the Assessing Officer wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order. 9. We have considered rival submissions and the relevant facts. While computing exemption under section 10A, any profit derived by the eligible undertaking is not to be included in total income. Accordingly, even the income from domestic software services will be eligible for exemption so long as the assessee fulfils the conditions laid down under section 10A of the Act. It is also observed that the value of such domestic service is not even 1 per cent of the total services rendered by eligible undertaking. Even the domestic services were rendered from the very same eligible undertaking. Accordingly, whole of the profit of such undertaking is to be exempted under section 10A of the Act. Ground Nos. 7 and 8 are accordingly decided in favour of the assessee. 10. Ground No. 11 is against disallowance of lease rent payment of Rs. 2,04,400 to Noida Authorities. In the year under consideration, the appellant had debited a sum of Rs. 2,04,400 as lease rent and late registration fee paid to Noida Authority, in respect of leasehold properties, of which possession was taken in February, 1998. 10.1 The Assessing Officer held that the assessee is able to get a capital asset ..... X X X X Extracts X X X X X X X X Extracts X X X X
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