TMI Blog2019 (10) TMI 1195X X X X Extracts X X X X X X X X Extracts X X X X ..... proposed by the Revenue in favour of the assessee. Eligible profit for deduction u/s 10B - unrealized export turnover is to be excluded from the export turnover but refrained from excluding the same from the total turnover - HELD THAT:- The aforesaid issue is now settled by the decisions of CIT vs. HCL Technologies Ltd [ 2018 (5) TMI 357 - SUPREME COURT] while computing deduction under Section 10A if the export turnover in numerator is arrived at after excluding certain expenses, the said expenses should also be excluded from the total turnover in denominator. Benefit of exemption as contemplated u/s 10B - HELD THAT:- Dividend income, profit on sale of fixed assets, profit on sale of investments, excess provision return back, duty drawback and interest income could be said to have direct nexus with the income of the business of the undertaking. Although it may not partake the character of profit and gain from the sale of article, yet it could be termed as an income derived from the consideration realized by the export articles. In view of the definition of income from profits and gains incorporated in sub section (4), the Tribunal committed no error in granting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating to the international transaction in form No.3CB was also filed. The return was processed under Section 143(1) of the Act, 1961. Notice under Section 143(2) of the Act was issued on 18th December 2007 and was duly served on the assessee. 4 Essentially, the following four issues came up before the Assessing Officer: (i) Prior period expenditure and prior period income. (ii) Disallowance made under Section 40(a)(i) of the Act. (iii) Section 10(B) deduction in respect of the turn over for which the sales proceeds were not realized. (iv) The other income as being eligible for deduction under Section 10(B) of the Act. ➢ FIRST QUESTION OF LAW: 5 The Assessing Officer as regards prior period expenditures held as under: 5.3 While making the alternate plea, the assessee has itself conceded the requirement of taxing at least the prior period Income in excess of the expenditure. No dispute remains about this. Further, no proof was submitted regarding the crystallization of the expenditure in the current year. No bills, no vouchers, no reasoning f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he observations of the CIT(A) are as follows: 3.5 I have considered the facts of the case, assessment order and appellant's submission. Appellant did not account for complete prior period income on the ground that these are adjusted against prior period expenses. The details and nature of prior period income is not given therefore it cannot be said that prior period income is related to prior period expenses. In absence of any correlation, prior period expenses cannot be adjusted against prior period income. In any case any income accrued or received by the appellant is taxable unless the same is already taxed in earlier year. It is not in dispute that prior period income is not taxed in earlier year therefore the same has to be offered for tax during the year. Since there is no correlation of this income with prior period expenses, the same cannot be set off against this. Accordingly, I agree with the assessing officer that no adjustment of prior period expenses is permissible against prior period incomes which are taxable in this year. This ground is therefore rejected. 8 In further appeal before the Tribunal, the ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 total income of taxability on accrual or receipt. 11 On the other hand, Mr. Tushar Hemani, the learned counsel appearing for the assessee submitted that the only reason assigned by the assessee and the CIT(A) to confirm the addition is that the prior period income and the expenditure do not have any nexus, or in other words, any correlation, and therefore, the set off was declined. According to Mr. Hemani, there is no legal obligation to demonstrate any nexus to claim the business expenditure. Mr. Hemani placed reliance on Sections 37(1) and 57 of the Act, 1961. According to Mr. Hemani, the ITAT committed no error much less an error of law in taking the view that once the prior period was taken into account, the expenses should also be accepted. ➢ CONCEPT OF PRIOR PERIOD AND ITS ACCOUNTING TREATMENTS: 12 As per Section 209 of the Companies Act, 1956, every company is required to prepare and maintain its books of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . Hence, the only requirement under Section 37 of the Act is that the expenses (not capital or personal) should be incurred for the purposes of the business or profession. There is no need to demonstrate that a certain expense relates to a particular income in order to claim such expense. Moreover, if the Legislature intended to have such a condition, it would have worded the section accordingly as was done in Section 57(iii) of the Act. 14 Section 57 of the Act is as follows: 57. Deductions The income chargeable under the head Income from other sources shall be computed after making the following deductions, namely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 15,25,746/ without considering the merit of the issue? This Court held as under: 3.0. So far as proposed question no.A is concerned, it is with respect to deletion of disallowance of ₹ 10,28,028/ being preliminary expenditure under Section 35 D of the Act. The learned Tribunal has dealt with the same in para 4 and considering the fact that the very expenditure stand accepted in the preceding assessment year and therefore, thereafter it will not be open for the department in the subsequent year to disallow the preliminary expenditure under Section 35 D of the Act, the learned Tribunal has deleted the disallowance of ₹ 10.,28,028/ being preliminary expenditure under Section 35 D of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 67,88,591/ ? The Court, ultimately, held as under: 2. Main question is sum of ₹ 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 primarily on two grounds. Firstly, that the assessee being a company was charged uniformly for all years and would therefore, have no revenue implication of whether the expenditure was recognised in this assessment year or earlier year. The second ground was that in any case, the Revenue had recognised the prior period income. If that be so, according to the Tribunal, it would be unfair not to recognise the expenditure also of the prior period. 3. Having heard learned counsel for the parties and having perused the documents on record, we see no reason to interfere. Firstly, the expenditure of ₹ 67.88 lacs is a fraction of the total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Tax Appeal no.566 of 2016 dated 20th July 2016 to dismiss the Tax Appeal. 24 Thus, in view of the aforesaid discussion, we are of the view that the ITAT committed no error in holding that once the prior period income is held to be taxable, the prior period expenditure also should be allowed to be set off and the assessee is not obliged in law to indicate any direct or indirect nexus between the prior period income and prior period expenditure. ➢ SECOND QUESTION OF LAW: 25 The Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sub section (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. ➢ THIRD QUESTION OF LAW: 29 The Assessing Officer, while working the eligible profit for deduction under Section 10B of the Act, held that the unrealized export turnover is to be excluded from the export turnover , but refrained from excluding the same from the total turnover . The said action was confirmed by the CIT(A) on the basis that there is no provision to reduce the same from the total turnover the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 Thus, as per the provision of the section the profits should be derived by the hundred per cent export oriented 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. 80 IA/80 IB 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 deduction u/s. 10B. 32 The CIT(A), in the appeal preferred by the assessee, affirmed the decision of the Assessing Officer holding as under: Assessing Officer excluded other i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the deduction referred to in this sub section 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 sub section 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 sub section (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 condition shall not apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deduction provided 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 sub section (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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the ratio of turnover (export/total). It does not define profits of business unlike 80HHC(4C)(baa). 40 We looked into few decisions of the various High Courts and the Honourable Supreme Court in context with Section 80HH and Section 80HHC of the Act. The approach in all the decisions which we would like 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orated is incidental to the carrying on of the business of generation and distribution of electricity by the assessed. 44 The Calcutta High Court in Consolidated Fibers and Chemicals Ltd vs. CIT [2005] 273 ITR 353 was called upon to consider the question in context of Sections 56 read with 57 (iii), whether the interest paid on the borrowed capital could go to reduce the income from the short term deposits the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49 Our High Court in CIT vs. Priyanka Gems [2014] 367 ITR 575 (Guj) examined the treatment of foreign exchange fluctuation gains and held that the same are not similar to interest etc. as prescribed in 80HHC (4C) (bba) and therefore will form part of the export profit and not be excluded from it. 50 In Principal Commissioner of Income Tax vs. Asahi Songwon Colors Ltd [2018] 400 ITR 138, this Court observed : 8. Section 10B of the Act provides for deduction of such profits and gains as are derived 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 intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra), ultimately, held as under: 9. The Scheme of the Income Tax Act, 1961 is that the said Act is divided into XXIII Chapters, comprising of Section 1 to Section 298 and Fourteen Schedules to the Act. We are mainly concerned with Chapter II (Basis of Charge Section 4 to Section 9 A); Chapter III (Incomes which do not form part of Total Income Section 10 to Section 13 B) Chapter IV (Computation of Total Income, providing for different Heads of Income Part D Profits and Gains of Business or Profession (Section 28 to Section 44DB) and Chapter VI A (Deductions to be made in computing Total Income, Part A General, comprising of Section 80 A to 80 B 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 VI A which deals with the deductions to be made in computing Total Income under Section 80 H, 80HH, 80HHC etc, we would deal with these provisions when relevant case laws are discussed by us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 15. There is no dispute of facts before us as found by the Income Tax Tribunal with the Respondent assessee, as a 100% Export Oriented Unit had four Units set up in the Software Technology Park of India (STPI) Scheme and it had no other Units from which it carried on any other activity other than the 100% export of Software projects during the Assessment Year 2001 02 under consideration. 16. The assessee earned during the said Assessment Year 2001 02, interest income of ₹ 4,68,037/ on the Short Term Deposits made by it to the tune of ₹ 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 ₹ 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 10 A of the Act during the said relevant year as income from Profits and Gains of export business. But, the Assessing Aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... input, the statutory requirement was that the deposit must be made as a precondition for the supply of electricity. Consequently, according to the appellant, the interest on the deposit should be treated as income derived from the industrial undertaking within the meaning of section 80HH. 5 6. The word derived has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC) when it said : 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 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 non payment. 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Vs. Sterling Foods [(1999) 237 ITR 579] again the Hon ble Supreme Court in a case arising under Section 80 HH of the Act held that the nexus between the sale consideration of Import Entitlements and the Industrial Undertakings was not direct but only incidental and therefore the same would not constitute profits and gains derived from assessee s Industrial Undertaking for the purpose of computing deduction under Section 80 HH of the Act. The observations made in paragraph 9 of the judgment are quoted below: 9. We do not think the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from other sources taxable under s.56 and it cannot be said to be attributable to the activities of the society and, therefore, the interest income did not qualify for deduction under s.80P(2)(a) (I). 23. The Division Bench following the aforesaid judgment later again held that the said judgment of the Hon ble Supreme Court will apply to the same Assessee even for subsequent assessment years despite the amendment in law and even if the interest income was earned by the assessee Co operative Society from the deposits made with the Co operative Banks and not with the other Scheduled or Nationalized Banks as was done in the earlier years involved before the Hon ble Supreme Court and such 100% deduction would not be available to the assessee Society even with reference to Section 80 P(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 10 A applicable in the facts and circumstances of the present case to its relevant extent herein below. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arayana submitted that the entire profits and gains of the Undertaking of the Respondent assessee who was exclusively engaged in the business of manufacture and export of Software Programmes and projects was entitled to exemption or 100% deduction under Section 10 A of the Act as the entire income earned by such Undertaking including the interest earned from Banks and staff loans which was just incidental to the normal business activity of export of software and such interest would also therefore constitute part of the profits and gains of the Undertaking and would be entitled to such exemption. 26. The learned counsel for the Respondent assessee also urged that in fact, the question of applying the formula under Section 10 A(4) for giving proportionate deduction would not arise in such 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 contra distinction with export turnover of the assessee because the assessee is engaged in 100% export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eposits or with various sister concerns as inter corporate deposits until the date of repayment. The Assessee contended that the interest derived from the business of the industrial undertaking was eligible for exemption within the meaning of Section 10B and applied the formula under Section 10B(4) of the Act for determining the profits from exports. The Assessee s contention that the expression profits of the business of the undertaking in Section 10B(4) was wider than the expression profits and gains derived by the Assessee from a 100% EOU occurring in Section 10B(1) was accepted by the ITAT. The ITAT noticed that unlike Section 80 HHC, where there was an express exclusion of the interest earned from the profits of business of undertaking , there was no similar provision as far as Sections 10A and 10B were concerned. 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 conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for short periods will be part of profits of business for the purposes of Section 10 B of the Act. The relevant portion of the judgment in para.3 relied upon in the decision of the Division Bench of this Court in the case of M/s. Motorola India Electronics (P) Ltd.(supra) is quoted below for ready reference. 3. A bare reading of sub section (1) suggests that 100 % export oriented undertakings are entitled to a deduction of profits and gains derived from the export of articles for a period of 10 years. The aforesaid entitlement is, however, subject to the provisions of Section 10B. In other words, subject to the provisions contained in the other parts of the Section 10B, the benefit is available to an assessee. It was not disputed that the only relevant provision to be taken into account is sub section (4) which we already have quoted. Sub section (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 expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the consideration received by sale of import entitlements is to be construed as income of the business of the undertaking. 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 profits and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of income from Profits and Gains incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals. Therefore, the first substantial question of law raised in ITA No.428/2007 is answered 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in Sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VIA gross total income to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI A in the context of the deduction which is allowable under Section 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under Section 10A 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI A under Section 80 HH, etc. The computation of income entitled to exemption under Section 10 A or 10 B of the Act is done at the prior stage of computation of Income from Profits and Gains of Business as per Sections 28 to 44 under Part D of Chapter IV before Gross Total Income as defined under Section 80 B(5) is computed and after which the consideration of various Deductions under Chapter VI A in Section 80HH etc. comes into picture. Therefore analogy of Chapter VI Deductions cannot be telescoped or imported in Section 10 A or 10 B of the Act. The words derived by an Undertaking in Section 10 A or 10 B are different from derived from employed in Section 80 HH etc. Therefore all 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 10 A and 10 B 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 theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J., said in his inimitable style: In the utilities, tax and economic regulation cases, there are good reasons for judicial self restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events - self limitation 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 law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrary 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 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 observa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereon has to be regarded as part of the profit of the business of the undertaking . We further find that the Tribunal in the case of Cheviot Co. Ltd. for assessment years 2003 04 and 2004 05, relied upon by the assessee, has dealt with similar issue. In those cases, the difference between the provisions of Section 10B and 80HH was noted and after considering the judgments of the Hon'ble Supreme Court in Sterling Foods (supra) and in P.R. Prabhakar vs CIT (284 ITR 548 (SC)) approving the Special Bench decision of the Tribunal in International Research Park Laboratories Limited vs. Assistant C.I.T. (212 ITR (AT) 1 (SB)), it was held that the profits of the business of the undertaking would include its entire business income. Keeping in view the above decision and the decision of the Tribunal, we are of the considered opinion that the assessee has to succeed. The Assessing Officer is directed to treat the interest of ₹ 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 ₹ 8,01,30,294/ (₹ 7,72,54,821/ + ₹ 28,74,473 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80 IA /80IB of the Act, ultimately, took the view that the duty drawback receipts / DEPB benefits would not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I / 80 IA / 80 IB of the Act. 58 It is clear from the plain reading of Section 10B(1) of the Act that the said section allows deduction in respect of the profits and gains as are derived by a 100% EOU. Further, Section 10B(4) of the Act stipulates specific formula for computing the profit derived by the undertaking from export. Thus, the provisions of sub section (4) of Section 10B of the Act mandate that the deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover by the total turnover. Thus, even though sub section (1) of Section 10B refers to the profits and gains as are derived by a 100% EOU, the manner of determining such eligible profits has been statutorily defined in, sub section (4) of that section. Both sub sections (1) and (4) should be read together while computing the eligible deduction u/s 10B of the Act. We should not ignore sub section (4) of Section 10B which prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the formula contained therein. The only difference is that Section 80HHC contains a further mandate in terms of Explanation (baa) for exclusion of certain income from the ''profits of the business which is, however, conspicuous by its absence in Section 10B. On the basis of the aforesaid distinction, sub section (4) of 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 assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. 61 We take notice that the Karnataka High Court in CIT vs. Motorola India Electronics (P) Ltd. [ITA No.447 of 2007 (Kar HC) dated 11th December 2013] makes a reference to the decision of the Supreme Court of Liberty India (supra). We would like 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are not there while dealing with computation of income under Section 80HHC. On the contrary, there is a specific provision like Section 80HHB which expressly excludes this type of incomes. In the instant case, the assessee is a 100% EOU, which had exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. 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 an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of 'income from Profits and Gains' incorporated in Sub section (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. In takin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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