Interest income is “profit derived from business of undertaking” eligible for 10A/10B benefit – Karnataka HC


CIT v Motorola India Electronics (P) Ltd. (ITA NO.447 OF 2007) (Kar HC) (dated 11.12.2013)

Background:

The assessee had outstanding borrowings by way of External Commercial Borrowings. The borrowings were for the business of STP undertaking. The Government had formulated a policy on pre-payment and the policy stated that approval of pre-payment would be granted only to the extent of 10% of the outstanding loan. Hence, it is required to temporarily park the funds, until the date of repayment, and also keep paying the interest on the loans. The assessee took a business decision to place these funds with various sister concerns as inter-corporate deposits.

The assessee claimed that the interest income as derived from the business of export of articles or things or computer software and the same is eligible for exemption under section 10A of the Act. The AO disallowed the exemption claimed with respect to the interest income. 

ITAT’s ruling

  • ITAT held that 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’. 
  • It was held that the term “from the business of” is much wider than the term “derived from industrial undertaking”
  • After introducing Section 80 HHC, it was observed, that the legislature intended to exclude interest from the term “profits of business of undertakings” under Sections 10A and 10B of the Act and similar provision as in case of Section (baa) would have been inserted. 
  • No such explanation has been introduced in Sections 10A and 10B and therefore, it held that the interest income is exempted from payment of tax and also their claim for allowance of 5% on scientific basis should be allowed.

HELD:

  • Subsection (4) says that profits derived from export of articles or things or computer software shall be the account which bares to the profits of the business of the undertaking and not the profits and gains from export of articles
  • Therefore, profits and gains derived from export of articles is different from the income derived from the profits of the business of the undertaking.
  • The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. 
  • It is interesting to note that similar provisions are not there while dealing with computation of income under Section 80HHC. On the contrary, there is specific provisions like Section 80HHB which expressly excludes this type of incomes.
  • 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 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 par take 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 Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. 
Note:
The High Court has distinguished the following rulings relied upon by the Revenue Authorities:
  • PANDIAN CHEMICALS LTD. VS.. CIT  (2003) 262 ITR 278 (SC)
  • LIBERTY INDIA VS. CIT (2009) 317 ITR 218 (SC)
  • CIT VS. STERLING FOODS (1999) 237 ITR 579 (SC)
  • CIT VS. MENON IMPEX (P) LTD. (2003) 259 ITR 403 (MAD)
  • ANIL DANG VS. ITO (2012) 344 ITR 143 (Kar)
  • CIT v SHAH ORIGINALS (2010) 327 ITR 19 (BOM)

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