TMI Blog2017 (11) TMI 205X X X X Extracts X X X X X X X X Extracts X X X X ..... or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act. We therefore affirm and agree with the view expressed by the first Division Bench of this Court in the case of M/s. Motorola India Electronics (P) Ltd.(2014 (1) TMI 1235 - KARNATAKA HIGH COURT ) - Decided in favour of assessee. - ITA No. 812/2007 - - - Dated:- 30-10-2017 - JUSTICE DR. VINEET KOTHARI , JUSTICE A. S. BOPANNA And JUSTICE B. VEERAPPA Mr. K.V. Aravind, Adv. for Appellants-Revenue Mr.T. Suryanarayana, Adv. for Respondent-Assessee ORDER By The Court ( Per Dr. Vineet Kothari, J. ) 1. The following Questions have been referred on 10/04/2017 by the Division Bench of this Court for answer by Full Bench. (i) Whether in the facts and in the circumstances of the case, Tribunal was justified in holding that interest from Fixed Deposits, accrued interest on Fixed Deposits, interest received from Citibank, Hong kong and interest on staff loans should be treated as business income of the assessee even though the assessee is not carrying any banking/financial activity? (ii) Whether the Assessing Officer was correct in holding that the interest income can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that 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 Profit and Gains from the sale of articles but it is the income which is derived from the consideration realized from export of articles. The assessee was thus held entitled to 100% deduction for the Assessment Year 2001-02 under Section 10-A/10-B of the Act. 5. However, the subsequent Division Bench took a different view on 10/04/2014 in the present I.T.A.No.812/2007 and relying upon certain Supreme Court decisions referred therein, held that the Undertaking/Assessee could have more sources of income other than the profits and gains as are derived by them from the export of articles or things or Computer Software and such Undertakings contemplated under Section 10-A(1) of the Act are entitled to seek benefit of deduction only in respect of the profit derived from export of articles or things or Computer Software. 6. The subsequent Division Bench further held that the expression Total Turnover of the business carried on by the Undertaking would mean only the turnover of the export business of the Undertaking and not any other acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom Gross Total Income as provided in Chapter VI-A of the Act, Section 10-A and 10-B 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 10-A deals with Special provisions in respect of the newly established Undertakings in Free Trade Zone, etc.(FTZ) and Section 10-AA deals with Special provisions in respect of newly established Units in Special Economic Zones (SEZs) and Section 10-B deals with Special provisions in respect of newly established 100% Export Oriented Units (100% E.O.Us) . 12. Before coming to the crux of the controversy, let us have a look at the brief factual background of the Respondent assessee for the Assessment Year 2001-02 in question. 13. The Respondent assessee during the relevant year operated four Units set up under the Scheme formulated by the Government in the name of Software Technology Parks of India (STPI) for 100% Export of the Computer Software Units. The Government of India to promote the fast growing Industry of Software and Software Technology in our country, made a special provision for providing incentive in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble 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 80-HH, 80-HHC and 80-I of the Act which scheme of Deductions under Chapter VI-A of the Act is different from the scheme of Exemptions from tax under Sections 10-A and 10-B in Chapter III of the Act, submitted that the interest income derived by the Respondent assessee cannot be said to be Profits and Gains as derived by an Undertaking from the export of articles and therefore such interest income earned from Banks and staff loans has to be taxed under Section 56 of the Act as Income from other Sources and 100% deduction treating them as profits and gains of business is not allowable under 80-A of the Act. 18. The relevant extracts of the judgments mainly relied upon by the learned counsel for the Revenue are quoted below for ready reference. 19. In Pandian Chemicals Ltd. Vs. Commissioner of Income Tax [(2003, 262 ITR. 278 (SC)], the Hon ble Supreme Court dealing with a controversy with regard to interest on deposits wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved 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 Exemption Payback Scheme (DEPB), Duty drawback incentives dealing with deduction under 80-IB of the Act held that the profit derived on sale of such DEPB and Duty draw back Entitlements by the assessee could not be said to be Profits and Gains derived from which are ancillary as compared with the words attributable to and therefore such profits on sale of DEPB/Duty drawback Entitlements was not deductible under Section 80-IB of the Act. The relevant discussion as found in paragraph 16 of the judgment is quoted below for ready reference. 16. DEPB is an incentive. It is given under Duty Exemption/Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the later years also while deciding I.T.A. No.100066/2016 (Principal CIT Vs. The Totagar s Co-operative 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-P(2)(a) of the Act which gave 100% deduction from tax to the Co-operative Societies engaged in specified types of activities did not include the interest earned by it by investing Surplus Funds in Short Term Deposits and Government Securities which would be taxable under Section 56 of the Act as Income from other Sources . The relevant extract of the Supreme Court judgment is quoted below for ready reference. To say that the source of income is not relevant for deciding the applicability of s.80P would not be correct because weightage has to be given to the words the whole of the amount of profits and gains of business attributable to one of the activities specified in s.80P(2)(a). An important point needs to be mentioned. The words the whole of the amount of profits and gains of business emphasise that the income in respect of which deduction is sought must constitute the operational i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or computer software, as the case may be, shall be allowed from the total income of the assessee: . . 10-A(2) This section applies to any undertaking which fulfils all the following conditions, namely:- (i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year- (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park; (c) commencing on or after the 1st day of April, 2001 in any special economic zone; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Furnishing vs. Additional Commissioner of Income Tax, Range 15 [(2016) 65 Taxmann.com 287(Delhi)], the Division Bench of Delhi High Court dealing with a case of Export Oriented Undertaking, for the Assessment Year 2008-09, in respect of interest received by an assessee on Fixed Deposit Receipts (FDRs.) which were under lien with Bank for facilitating Letter of Credit and Bank Guarantee facilities held that such interest received on FDRs would qualify for deduction under Section 10-B of the Act. The relevant paragraphs 9 and 15 of the said decision are quoted below. 9. The question as to what can constitute as profits and gains derived by a 100% EOU from the export of articles and computer software came for consideration before the Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (2014) 46 Taxmann.com 167 (Kar). The said appeal before the Karnataka High Court was by the Revenue challenging an order passed by the ITAT which held that the interest payable on FDRs was part of the profits of the business of the undertaking and therefore includible in the income eligible for deduction Sections 10A and 10B of the Act. There the Assessee had earned interest on the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Supreme Court 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. 30. The said judgment, in our opinion, rightly distinguishes the judgments on the interpretation of Section 80-HH, 80-IA etc. under Chapter VI-A of the Act in view of Section 80-A (4) of the Act which, with a non-obstante clause which starts with Notwithstanding anything to the contrary contained in Section 10-A or Section 10-AA or Section 10-B or Section 10-BA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total turnover as has been done in the case of 80HHC by explanation (baa) of sub-section (4C) thereof. In that case, 90% of the income arising out of interest has to be excluded from the profits of the business for the purpose of arriving at deduction available under Section 80HHC. But an identical provision is not there. Therefore, that provision cannot be imported by implication. The submission that the amount earned from interest was not intended to be taken into account for the purpose of giving benefit under subsection (1) of Section 10B may be correct. But the amount of deduction available to a 100% export oriented undertaking is necessarily dependent upon the formula provided in subsection (4). There is, as such, no scope for any controversy that part of the money was earned from interest and not from export. This question came up before the Karnataka High Court and was answered in the case of CIT v. Motorola India Electronics (P.) Ltd. [2014] 46 taxmann.com 167/225 Taxman 11 (Kar.)(Mag.) as follows: In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another port ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation is also provided in that provision itself namely sub-section (4), then there is a complete Code which is evolved and formulated by the Legislature. 20. In relation to this, we also find support in the judgment of this Court in the case of Black and Veatch Consulting Pvt. Ltd. This Court has observed and held as under: Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasized in a judgment of a Division Bench of this Court, while construing the provisions of Section 10B, in Hindustan Unilever Ltd. Vs. Deputy Commissioner of Income Tax MANU/MH/0417/2010: [2010] 325 ITR 102 (Bom) at paragraph 24. The submission of the Revenue placed its reliance on the literal reading of Section 10A under which 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 is to be allowed from the total income of the assessee. The deduction under Section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mporarily parked funds in Banks or even interest on staff loans would constitute part of profits and gains of such special Undertakings and these cases cannot be compared with deductions under Sections 80-HH or 80-IB in Chapter VI-A of the Act where an assessee dealing with several activities or commodities may inter alia earn profits and gains from the specified activity and therefore in those cases, the Hon ble Supreme Court has held that the interest income would not be the income derived from such Undertakings doing such special business activity. 35. The Scheme of Deductions under Chapter VI-A in Sections 80-HH, 80-HHC, 80-IB, etc from the Gross Total Income of the Undertaking , which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10-B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch construction if the purpose behind its enactment, the objective it sought to achieve and the mischief it intended to control is lost sight of. One way of reading it is that the clause excludes any undertaking formed by transfer to it of any building, plant or machinery used previously in any other business. No objection could have been taken to such reading but when the result of reading in such plain and simple manner is analysed then it appears that literal construction would not be proper. II] In R.K. Garg v. Union of India, [(1981) 4 SCC 675] = [1982 SCC (Tax) 30 p.690], the Hon ble Apex Court has held as under:- 8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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