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2013 (12) TMI 1702

..... t. JUDGMENT Kumar N., These appeals are filed by the revenue challenging the order passed by the Tribunal holding that the interest payable on the fixed deposits constitutes profits of the business of the undertaking. As such, the assessee is entitled to the benefit under Sections IOA and 10B of Income Tax Act, 1961 (hereinafter referred to as 'the Act' for brevity). 2. The assessee had earned interest from the following sources: 1. Deposits lying in the EEFC account and 2. Advancing of inter-corporate loans out of the funds of the undertaking. The assessee had outstanding borrowings by way of External Commercial Borrowings (ECBs in short) obtained in earlier years. The assessee has to repay this borrowing only in accordance with the repayment schedule. It was stated that RBI has imposed restriction on prepayment of instalments. The undisputed fact is that the borrowings were for the business of STP undertaking. Under the Exchange Control Regulation, the assessee is prohibited from any pre-payment of ECBs. For any pre-payment of the loan, the assessee had to seek prior permission of the Central Government. In the year 1999, the Government had formulated a policy on pre-paym .....

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..... nce, they extended the benefit under Section 10 B of the Act, for the assessment year 1998-99. 3. However, while dealing with the very same question for the assessment year 2001 -02, they took note of the change in the law. They extracted Section 10B(1) and (4) of the Act and held that it was an exemption section and income from these undertakings, which are covered by the section did not form part of the total income. However, by virtue of the amendment, in particular, introduction of Sub-section (4) to Section 10B of the Act, the methodology of arriving at the export profits of the business of the undertaking is given in a formula. 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% export oriented undertaking'. Finally, they held that the term "from the business of' is much wider than the term "derived from industrial undertaking". Keeping the said distinction in mind, they held that the entire profits deriving from the business of undertaking should be taken into consideration, while computing the eligible deduction .....

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..... ax under the head lncome from Business" and not under the head "Income from other sources , is perverse, arbitrary and contrary to law? 2. Whether the finding of the appellate authorities having regarding to the facts and circumstances of the case and the law that the interest income deposited out of surplus funds in Banks and sister concerns and EEFC account should be treated as part of the total income for the purpose of computing deduction under Sections 10A and 10B of the Income Tax Act, is perverse and arbitrary? In ITA No. 447 2007: 1. Whether the Appellate Authorities committed an error m holding that the interest income deposited out of surplus funds in Banks and sister concerns and EEFC account should be treated as part of the total income for the purpose of computing deduction under - Sections 10A and 20B of the Income Tax Act? 2. Whether the Appellate Authorities were correct in holding that the management expenses attributable to the income earned by way of interest is allowable at the rate of 5% and not at the rate of 4% as computed by the Assessing Officer without assessing any cogent reasons for applying such charges?" 6. Learned Counsel for the revenu .....

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..... and the industrial undertaking. In the case of COMMISSIONER OF INCOME TAK VS. MENON IMPEX (P) LTD. REPORTED IN (2003) 259 ITR 403 (MAD), dealing with exemption under Section 10A of the Act, has held as under: "It was pointed out that unless the source of the income is from an industrial undertaking, such income cannot be regarded as "derived from" industrial undertaking. It was held that the income derived from sale of import entitlement could only be said to be the export promotion scheme and not the industrial undertaking. " Following the aforesaid judgments, the Madras High Court in the case of COMMISSIONER OF INCOME TAX VS. THE MADRAS MOTORS LIMITED REPORTED IN (2002) 257 ITR 60 (MAD) has held that the interest which is earned by the assessee from the bank deposits would not have a direct nexus with the industrial undertaking of the assessee and would only be incidental income thereto and, therefore, such interest has to be ignored from the allowable profits under Section 80 HH. Following the aforesaid judgments, the Division Bench of this Court in the Case of ANIL DANG VS. INCOME TAX OFFICER REPORTED IN (2012) a44 ITR 143 (Karn) has held that the primary co .....

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..... nd gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years . 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 fo .....

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..... 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. Now the question is whether the interest received and the consideration received by sale of import entitlement 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 par take tile 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 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 .....

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