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TMI Blog2007 (6) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome 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 assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, 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 the words "any income derived from", meaning thereby obviously for marketing of commodities by letting out of godowns or warehouses for storage, processing or facil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. 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 meaning of a word clear it becomes unnecessary to search for and select a particular meaning out of the diverse meanings a word is capable of according to lexicographers 1958 SCR 418. 2.6 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of articles or things or computer software. 2.10 The Delhi Bench of the ITAT in Picric Ltd. v. Joint CIT [2004] 90 ITD 301 negatived this contention. Very similar line of argument was advanced by the assessee in this case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um 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 from an industrial undertaking : 1.CIT v. Sterling Foods [1999] 237 ITR 579 (SC). 2.Hindustan Lever Ltd. v. CIT [1999] 239 ITR 297 (SC) 3.Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC) 4.CIT v. Ritesh Industries Ltd. [2005] 274 ITR 324 (Delhi) 5.Arvindbhai H. Shah v. Asstt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction 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 expression "attributable to" occurring in the phrase "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the Legislature has deliberately used the expression 'attributable to' and not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 turn used for the purpose of the business of the industrial undertaking did not establish a direct nexus between the interest and the industrial undertaking and, therefore, the assessee was not entitled to get the benefit of section 10A in relation to the interest." In coming to the conclusion, the Madras High Court referred to the decision of Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rived' 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 moment the export proceeds are received, the activity of industrial undertaking comes to a half. Thereafter any amount realized out of such export proceeds do not partake the character of income of the industrial undertaking but the genesis or the source lies in the deposit and not the industrial undertaking. Thus, it cannot be said that the interest on deposit is profit "derived from" the ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment year commencing on 1-4-1962, of an amount equal to the income-tax and super tax calculated respectively at one-tenth of the average rate of income-tax and of the average rate of super tax on the amount of such profits and gains included in the total income". The word "derived" is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regard is placed on Sree Ayyanar Spg. & Wvg. Mills Ltd. v. CIT [1999] 240 ITR 106 (Mad.). Without prejudice to the aforesaid, treating such receipt as reimbursement would not make a difference, as the same would go to reduce the total expense of Rs. 23,52,000 already allowed in the P&L A/c against the business income. This position has not been disputed by the Assessing Officer. It is submitted that when the expenses incurred in obtaining ISO certification is allowed as business deduction while computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (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, Ground Nos. 9 and 10 relate to denial of exemption of Rs. 9,00,215 beings charges for use of work stations recovered from HCL Technologies Ltd. During the year under consideration, the appellant had received certain sums from HCL Technologies Ltd. as management and corporate charges. A sum of Rs. 1,00,000 was deducted at source. The said income has been shown as "other income" in the P&L A/c. During the year under consideration, the appellant had raised debit notes on HCL Technologies Ltd. for use of work stations including rent an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wrongly took the income as Rs. 14,51,506 on basis of amounts shown in the certificate of tax deduction issued to the appellant. The difference is on account of payments of Rs. 33,334 and Rs. 2,25,000 received from Apollo Hospital and Maharashtra State Electricity Board ('MSEB') respectively, which pertain to preceding and succeeding assessment years respectively. The appellant has accounted for such sums in the respective assessment years, hence, said amounts should not be consid- ered. Further, it is to be noted that the Assessing Officer an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered 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 by the lease rent payment. Accordingly, the payment is treated as capital expenditure and not as revenue expenditure. Learned CIT(A) upheld the disallowance on the ground that the expenditure was incurred in connection with acquiring plot of land on long-term lease for 99 years. Thus, the assessee receives enduring benefit and hence, to be treated as capital expenditure not allowable under section 37(1) of the Act. 10.2 Mr. Butani submitted that the business of the appellant was in existence and therefore, expenditure on account of lease rent should be allow ..... 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