Addl. CIT vs M/s. Sapient Corporation Pvt.Ltd.

ITA No. 7022/Del/2018 [AY 2008-09]

Findings

5.2.

“I have gone through the facts of the case, appellant's submission and the assessment order of the AO. The issue involved in this case is that whether the appellant is entitled to claim deduction u/s 10A of the I.T. Act where the separate books of accounts unit wise have not been maintained?

5.3

The appellant has claimed deduction u/s 10A in respect of four units i.e. Bangalore Unit, Noida Unit 1, Noida Unit 2 & Gurgaon Unit. The AO has disallowed the deduction u/s 10A on account of two reasons:-

c)

The appellant has not furnished the proof/evidence of realization of export proceeds as the Form 56F filed by the Appellant was not accepted;

d)

The appellant has not maintained separate accounts for each unit, which is a mandatory requirement for the claim of deduction under section 10A of the Act.

5.4

The AO also disputed that the interest income amounting to 2,11,40,005/-(erroneously stated as Rs. 12,31,04,147 in the assessment order) is not eligible for deduction under section 10A of the Act. No separate addition was made by the AO since the claim of deduction under section 10A of the Act was disallowed in totality.

5.5

DRP confirmed disallowance of deduction claimed u/s 10A with a finding that the appellant did not file evidence in support of export proceeds having been realized in the prescribed time limit and therefore, the basic condition u/s 10A(3) of the Act was not fulfilled by the appellant. Accordingly, the claim of deduction u/s 10A was not allowed.

5.6

The matter went up to the Hon'ble ITAT wherein it was decided vide order dated 15.03.2013 to refer the matter back to the AO to examine the additional evidence submitted by the assessee before the Hon'ble Tribunal. The relevant extract of the decision of Hon'ble ITAT are reproduced as under:-

8.

“We have carefully considered the submissions and perused the records. We find that the additional evidence submitted in this case need to be admitted for proper adjudication of the matter. Hence we admit the additional evidence and we remit the additional evidences to the file of the Assessing officer to consider the same and pass the orders accordingly."

5.7

During the set aside proceedings, the AO examined the additional evidence regarding realization of export proceeds as per the condition u/s 10A(3) of the Act. However, the AO disallowed deduction u/s 10A on account of non maintenance of separate books of accounts of each unit. The relevant extract of the AO order are reproduced as under:-

"4.19.

It can be seen that the assessee has not maintained separate accounts for each Units in past year as well which is a mandatory requirement for the claim of section 10A. The auditor has allocated all the expenses amongst various units in the ratio of turnover for arriving at profits of undertaking. Any unit can only be said as an independent unit when it establishes that such units are functionally independent in all terms and the business of that unit should have been carried independently without the help of other units. In all terms units should be independently working as centers of profit. In the case of the assessee the assessee was filed to establish such test that books of accounts are not maintained as centers of profit. Based on the above analysis and submission made by the assessee I am of the view that both the units are not separate and identical unit. The assessee could not establish independent nature of each unit. The assessee is not maintaining separate books of account, hence it can be safely concluded that the assessee is not eligible to claim deduction u/s 10A of the Act."

5.8

The appellant is in appeal against the aforesaid order of the AO. The appellant has taken various grounds to defend its position and counter the position taken by the AO which as discussed below.

5.8.1.

The Appellant relied on CBDT Circular No. 1/2013 which provides that "there is no requirement in law to maintain separate books of account the same cannot be insisted upon. However, since the deductions under these sections are available only to the eligible units, the Assessing Officer may call for such details or information pertaining to different units to verify the claim and quantum of exemption, if required."

5.8.2

The appellant pointed out that all four units operating during the subject year are registered under the STP scheme and are eligible for deduction u/s 10A of the Act. The appellant highlighted that separate books of accounts may have reliance only in the case where the business entity is having non-STP and STP units.

5.8.3

The appellant averred that the 'Gurgaon unit' was operational for 9 year and 'Bangalore unit' was operational for 4th year and deduction was not challenged by the department in any earlier assessments. The appellant submitted historical chart to show case that deduction u/s 10A of the Act has been allowed to the appellant right from commencement of the operations. Further, the appellant relied on case laws wherein it is held that the satisfaction of conditions as prescribed for STP units u/s 10A of the Act has to be examined in the year in which an undertaking begins manufacture or produced article, thing or computer software.

5.8.4

The appellant submitted that turnover has been taken as an allocation key for preparing the P&L account unit wise. Further, the appellant relied on various case laws wherein it is held that turnover is a reasonable method to allocate method unit wise.

5.9

I find that the AO has not allowed deduction u/s 10A mainly on the ground that separate books of accounts were not maintained by the assessee for the respective units. The AO observed that the computation of depreciation was not evident in the absence of separate books of accounts. Further, the AO observed that auditor allocated all the expenses among various units in the ratio of turnover for arriving at profits of respective undertaking. I find that the objective behind maintaining of separate books of accounts for eligible units is that there can be a situation when business entity is having non-STP as well as STP units and in such a condition, separate books of accounts to arrive at profits of eligible units is must. However, in the present case, all four units operating during the subject year are eligible for deduction u/s 10A and the profits of each undertaking work out based on turnover as a allocation key is not material because the profits allocation to all such units are exempt u/s 10A. The difference, if any, between the actual and allocated one would even out once all four units are to be allowed the exemption. Further, the appellant invited my attention to the fact that the business model of the assessee of providing IT and ITES services across the units is cost plus where services are charged after factoring in the total cost incurred to provide such services and therefore the appellant argued that the allocation based on the turnover key is appropriate. The appellant also relied on the decision of Hon'ble ITAT Bangalore, in the case of IBM where it is held that the allocation expenditure in the ratio of turnover is a reasonable method on arriving of the expenses. 5.10 Further, Hon'ble Delhi High Court in the case of EHPT India Pvt. Ltd. (16) Taxman.com 305) held that the consistently adopted and accepted apportionment for purpose of deduction u/s 10A should not be disturbed. In this case the assessee highlighted that the department has accepted the claim of deduction u/s 10A from Α.Υ. 2001-02 to 2007-08 on the basis of allocation key of "turnover". Accordingly, in a case, where the department has accepted the allocation of expenses on turnover key for 7 years at a stretch (A.Y. 2001-02 to 2007-08) and all units are eligible for deduction, I do not find merit in the disallowance made by the AO on the ground that separate books of accounts was not maintained for each unit. Hence, the ground of appeal is allowed.”

“On the issue of deduction under section 10A of the Income tax Act (here in after referred to as 'the Act') in respect of the interest income, it is submitted that the said interest income has accrued from fixed deposits made by the assessee. The assessee has not substantiated as to how such interest earned on FDR will fall under the head 'Business Income' and not under the head 'Income from Other Sources'. Facts of the case as discussed in the assessment order make it amply evident that the Ld. Assessing officer has categorically held that said interest income was of the nature of 'Income from other sources' and cannot be considered as 'business income'. On the other hand, the Learned CIT(A) has not controverted such finding of the Ld.AO. In fact, in his order, the Ld. CIT(A) has not dealt with above finding of the Ld. Assessing Officer with regard to nature of interest income at all and therefore, the order of Ld.CIT(A) is not sustainable on this count itself.

1.1

Further, whether an interest income will be taxable under the head 'Income from other sources' or 'profit and gain from business', it is essentially a question of fact. As per the provisions of the Income tax act, interest from deposits in a bank will normally qualify as 'Income from other sources'. However, if an assessee make contrary claim and states that in its case such interest income will qualify as 'Profit and Gain from Business', then onus will be on such an assessee to prove the same. The assessee failed to discharge such onus.

1.2

In this regard, reliance is place upon decision dated 09.03.2021 of Hon'ble ITAT, Pune in the case of Barclays Shared Services Private Limited v. ACIT, Company Circle 1(2), Chennai (ITA No.267/CHNY/2018) (Copy Enclosed). In the said case, on a similar issue, Hon'ble Tribunal held as under:

6.

The assessee submitted before the AO that it 'placed its unutilized funds in short term fixed deposits with banks in order to effectively manage the working capital requirements of its business'. On a specific query, the Id. AR stated, as is also borne out from the reply submitted before the authorities below, that the fixed deposits were not meant to be furnished as primary or collateral securities for obtaining credit facilities from the bank. The contention of the assessee raised before the AO that the surplus funds were invested in fixed deposits, in order to effectively manage the working capital requirements of its business, would have merited acceptance, if such fixed deposits had been utilized in any manner in assisting the working capital requirements. However, the position is clearly converse before us. If the assessee, instead of making fixed deposits with banks had deposited the amount in the cash credit or overdraft or any other such account maintained with the banks, that would have been a case of effectively managing working capital requirements of the business. Here, we are confronted with a situation in which the assessee has rather chosen to earn interest income on the amount of fixed deposits, even for a short duration during which the funds were unutilized. Under such circumstances, we fail to appreciate as to how such interest income can be classified as 'profits of the business of the undertaking'. The same, being alien to the business of the undertaking do not partake the character of 'profits of the business of the undertaking'. In that view of the matter, such interest income cannot be included in the qualifying amount for the purposes of deduction u/ss. 10A/10AA of the Act.

7.

The AO has relied on the judgment in Menon Impex (P) Ltd.(supra) which is a jurisdictional high Court judgment of the assessee in which claim u/s.10A has been denied in respect of the interest income earned from banks. The counter judgment relied on by the Id. AR is that of the Hon'ble Karnataka High Court in CIT Vs. Hewlett Packard Global Soft Ltd. (2017) 87 taxmann.com 182 (Kar) (FB) in which interest from bank deposits has been made eligible for exemption u/s.10A or 10B. We need to go with and follow the Menon judgment for two reasons. First is that the same is of the Hon'ble jurisdictional High Court, which is binding on the assessee and secondly, we are concerned with section 10A/10AA which are in the nature of deduction provisions, whereas the Hewlett Packard dealt with sections 10A/10B, the then exemption provisions. The Id. DR has also relied on the judgment of Hon'ble Uttarakhand High Court in Conventional Fastener & Ors. Vs. CIT (2018) 301 CTR 625 (Uttarakhand) in which it has been held that no deduction u/s.80IC can be allowed in respect of interest income earned from fixed deposits. In view of the foregoing discussion, we are fully satisfied that the authorities below were justified in not including the interest on fixed deposits amounting to Rs.99.02 lakh in the qualifying amount for the purposes of granting deduction u/ss.10A/10A of the Act. The assessee fails on this score..." (Emphasis supplied)

1.3

Thus, considering the fact that the concerned interest income falls under the head 'Income from other source', the same would not be eligible for deduction under section 10A of the Income tax Act. This is the main basis on which such interest income has not been considered as eligible for deduction under section 10A of the I.T. Act by the Ld. A.O.

2.

Without prejudice to the above, second basis for making disallowance under section 10A of the Act in respect of interest income is that the said interest income can not be considered as having been derived from business of export as there is no direct nexus between such income and export activity. Immediate source of such interest income is fixed deposit made out of surplus funds with the assessee and not the export activity. The assessee has not substantiated that such fixed deposits had to be created or made due to some compulsion on account of business requirements without fulfilling of which it would not have been possible to carry out business operations. The assessee had discretion to invest its surplus funds in any of the financial instruments available in the market such as mutual funds, bank deposits, other debt instruments etc. Now, it is well settled by way of series of judgments of Hon'ble Supreme Court and various High Courts that the phrase 'derived from' used in section 10A of the Act is to be construed narrowly and it is different from the phrase 'attributable to'. From ration of all such judgments, it emerges that if an income is not having immediate nexus with the export business, then it will not qualify for deduction under section 10A of the Act at all.

2.1

In this regard, reliance is placed upon following judgment of Hon'ble Madras High court, which squarely covers the issue in favour of the Revenue. High Court of Madras in the case of International Components India Ltd. Vs. ACIT (2015), 59 Taxmann.com 32 (Copy Enclosed)

"...5. The above said plea of the assessee ex facie cannot be countenanced in view of the decision of the Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539, wherein it is held as under (page 280):

"It is clear, therefore, that the word 'derived from 'in section 80HH of the Income-tax Act, 1961, must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed 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.

The learned counsel appearing on behalf of the appellant has referred to several decisions of the Madras High Court in order to contend that the word 'derived from' could be construed to include situations, where the income arose from something having a close connection with the industrial undertaking itself. All the decisions cited by the appellant have been considered by the Madras High Court in the case of Pandian Chemicals Ltd. [1998] 233 ITR 497 (Mad). We see no reason to disagree with the reasoning given by the High Court in Pandian Chemicals Ltd. [1998] 233 ITR 497 (Mad) with respect to those decisions to hold that they do not in any way allow the word 'derived' in section 80HH to be construed in the manner contended by the appellant.

The learned counsel for the appellant then contended that having regard to the object with which section 80HH was introduced in the statute book, this court should give a liberal interpretation to the words in a manner so as to allow such object to be fulfilled. The rules of interpretation would come into play only if there is any doubt with regard to the express language used. Where the words are unequivocal, there is no scope for importing any rule of interpretation as submitted by the appellant."

(Emphasis supplied)

6.

In the light of the above said decision, we are of the firm view that the interest earned from deposits with Corporation Bank, Electricity Board and on staff advances does not have direct or immediate nexus with the business of the assessee's undertaking and, consequently, they are not eligible for grant of deduction under section 10B of the Act, which is akin to section 80HH of the Act dealt with in the decision referred supra..."

(Emphasis Supplied)

2.2

Reliance is also placed upon following decision of Hon'ble Supreme Court, which elaborately explains the restrictive meaning of the phrase 'derived from' which has been used in section 10A of the Act also.

Hon'ble Supreme Court of India in case of Saraf Exports v. Commissioner of Income-tax [2023] 149 taxmann.com 145 (SC) (Copy Enclosed)

7.2

Section 80-IB provides for deductions in respect of profits and gains from certain industrial undertakings. Therefore, as such for claiming deductions under section 80-IB, it must be on the "profits and gains derived from industrial undertakings" mentioned in section 80-IB. An identical question came to be considered by this Court and, more particularly, with respect to the profit from DEPB and Duty Drawback Schemes, in the case of Liberty India (supra).

7.3

After taking into consideration the DEPB and Duty Drawback Schemes, ultimately, it is observed and held in the case of Liberty India (supra) that DEPB/Duty Drawback Schemes are incentives which flow from the schemes framed by the Central Government or from section 75 of the Customs Act, 1962 and, hence, incentive profits are not profits derived from the eligible business under section 80-IB. It is observed that they belong to the category of ancillary profits of such undertakings.

7.4

Similar view was also expressed with respect to the Duty Drawback. Thereafter, in paragraph 43 of the above decision, it is observed and held that duty drawback, DEPB benefits, rebates, etc. cannot be credited against the cost of manufacture of goods debited in the profit and loss account for purposes of sections 801A/80-IB as such remissions (credits) would constitute an independent source of income beyond the first degree nexus between profits and the industrial undertaking. Thus, it is observed and held that duty drawback receipts/DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purpose of section 80-IB of the Act, 1961.

7.6

Therefore, following the law laid down by this Court in the case of Sterling Foods (supra) and Liberty India (supra) as such, no error has been committed by the High Court in holding that on the profit from DEPB and Duty Drawback claims, the assessee shall not be entitled to the deductions under section 80-IB as such income cannot be said to be an income "derived from" industrial undertaking and even otherwise as per Section 28(iiid) and (iiie), such an income is chargeable to tax....."

(Emphasis supplied)

2.3

In view of the above, concerned interest income can not be considered to have been derived from the export business and therefore, the assessee will not be eligible for deduction under section 10A of the Act in respect of such income in light of ratio of above mentioned decisions.”

“Re: Ground of Appeal No. 3: Admissibility of deduction under section 10A of the Act on the interest income earned from fixed deposits during the year

Separately, the learned AO has also contended that interest income of Rs.2,11,40,005 (erroneously stated as Rs. 12,31,04,147 in the assessment order) earned from Fixed Deposits made out of surplus funds from export realization are not eligible for deduction under section 10A of the Act.

During financial year 2007-08, the Assessee earned interest income from its unutilized temporarily available funds which were placed in short-term fixed deposits with banks in order to effectively manage the working capital requirements of its business. Such interest income was classified as business income since the source of such term deposits was inextricably linked to the business of the Assessee. Hence, such interest income was considered as profits of the business eligible for deduction under section 10A of the Act.

The Learned Assessing Officer (Ld. AO) while adjudicating on this issue completely ignored the legislative provisions contained in section 10A of the Act. Section 10A of the Act provides for deduction in respect of the profits and gains derived by an undertaking, from export of computer software. The relevant provision of section 10A of the Act is reproduced below:

"10A. Special provision in respect of newly established undertakings in free trade zone, etc.

(1)

Subject to the provisions of this section, 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 beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee...

...(4) For the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall 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 or things or computer software bears to the total turnover of the business carried on by the undertaking..."

In terms of sub-section (1) of section 10A of the Act, deduction is allowed under that section in respect of such profit and gains as are derived by an undertaking from export of articles, things or computer software. For the purpose of sub-section (1) of section 10A of the Act, sub-section (4) thereto explains the profits derived from export of computer software to be amount which bears to the profits of the business of the undertaking. The same proportion as export turnover bears to the total turnover of the business. From the combined reading of sub-sections (1) and (4) of section 10A of the Act, it would kindly be appreciated that for the purpose of computation of deduction under that section, profits of the business of the undertaking is to be considered.

In view of the aforesaid, it would be appreciated that provisions of section 10A of the Act are widely worded and takes into account not only 'profits and gains' derived by the undertaken from export, but also all income that arise during the course of business of the undertaking.

There is no dispute with regard to the proposition that the words 'derived from industrial undertaking' had been used by statute to restrict the deductions of only those income which has directly derived from the industrial undertaking and not to other income which is incidental to the carrying of industrial undertaking.

It is also respectfully submitted by the assessee that the provisions of section 10A are much wider in scope and the restricted meaning assigned to the language of other sections cannot be applied in section 10A of the Act. The intention of the Legislature in providing for the deduction under section 10A of the Act is with respect to profit of the business of the undertaking and hence, the intention is to give benefit of deduction not only to the profits and gains derived from the undertaking but also to give benefit of deduction in respect of the income having a close and direct nexus with the profit and gains of the business of the eligible undertaking. All incomes that arise essentially during the course of running of the eligible business would be eligible for deduction under section 10A of the Act. Hence, the addition made by the AO is not in accordance with section 10A(4) of the Act.

The Learned Assessing Officer (Ld. AO) while adjudicating on this issue also failed to take cognizance of the decisions given by various courts including those pronounced by the jurisdictional High Court wherein it has been held that interest income arising from funds placed in short-term fixed deposits in order to optimally utilize the surplus funds of the company would form part of “profits of business of undertaking" and therefore, eligible for deduction under the Act.

Reliance in this regard is placed on the following decisions:

The question as 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 vs Motorola India Electronics Pvt Ltd: [2014] 265 CTR 94 (Kar). In that case, the Revenue challenged the decision of the Tribunal which had 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 under sections 10A and 10B of the Act. There, the assessee claimed that interest earned on the deposits lying in the EEFC account as well as interest earned on inter-corporate loans given to sister concerns out of the funds of the undertaking, constituted "profits of the business of the undertaking" for purposes of section 10B(4) of the Act. The Karnataka High Court held that

"it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking". Specific to the question of interest earned by the EOU on the FDRs placed by it and interest earned from the loans given to sister concerns, it was held that although it did not partake the character of profit and gains from the sale of an article, "it is income which is derived from the consideration realized by export of articles."

The Special bench of the Tribunal in the case of Maral Overseas Ltd vs ACIT: [2012] 136 ITD 177 (Indore Trib.) (SB) on the interpretation of section 10B(4) of the Act [pari materia to sub-section (7) of section 10AA] held that sub-section (4) of section 10B does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the of the business of the undertaking, the same would be included in the profit of the business of the undertaking. Thus, once an income forms part of the business of the undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits.

The aforesaid decisions in the case of Motorola India Electronics (supra) and Maral Overseas (supra) have been affirmed by the Full bench of the Karnataka High Court in the case of CIT vs Hewlett Packard Global Soft Ltd: 403 ITR 453 (Kar) (FB). The Full bench, dismissing the appeal of the Revenue, recorded the following pertinent observations:

"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 geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, 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 therefore eligible for 100% deduction. "In the said case, the Full Bench of the Court affirmed the decision in the case of Motorola India (supra), holding as under: ………………..

37.

On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction under Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as 'Income from other Sources' under Section 56 of the Act. The incidental activity of parking of surplus funds with the Banks or advancing of staff loans by such special category of assessees covered under section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the undertaking engaged in the export of articles as envisaged under section 10-A or section 10-B of the Act and cannot be taxed separately under section 56 of the Act. (emphasis supplied)

In one of the first judgments, the Delhi High Court in the case of Snam Progetti S.P.A. vs ACIT: 132 ITR 70 (Del) observed that: "The main question for decision is whether the "interest income" could be treated as "business income". The answer to this question has to depend on how we are to consider the interest income derived by the petitioner. No doubt, normally, on the placing of funds in banks on short-term or long-term deposits the interest income derived from those sources would be "income from other sources", but there have been cases in which such income has been treated as income from business, notwithstanding the fact that it is interest income.

………….The question to be seen in such a case is whether the interest income is derived also from what may be described as "business activity". If it is so derived then the mere fact that it is taxed under a different section will make no difference. The approach to the problem has, therefore, to be disassociated from the section under which the tax is imposed on the form of income.

……………….In the present case, the assessee claimed that it has funds which it derived from business and which are used only in business and for no other purpose. If they are spare funds, then they are deposited in banks and, hence, it is clear that this income is also business income. To repeat what was said earlier, the company has not come from Italy to make bank deposits in India but has come to carry on business. If at any time it has spare funds it prefers not to keep the same idle but makes deposits in banks which give some income. This also is, therefore, business income, and for the purpose of set-off has not to be treated as separate from business income." (emphasis supplied)

The decision of the Karnataka High Court in Motorola India (supra) was followed by the Delhi High Court in the case of CIT vs Hritnik Exports Pvt Ltd: ITA 219/2014 and PCIT vs Universal precision Screws: ITA 392 of 2015 (Del).

In Riviera Home Furnishing vs ACIT: 237 Taxman 520 (Delhi), the Delhi High Court again considered the scope of section 10B of the Act. Allowing the appeal of the assessee and repelling the arguments raised by the Revenue, the Delhi High Court made the following pertinent observations:

"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 contained in section 10A or section 10A/10AA/ 10B or section 10B or ". What is sought section 10BA or in any provisions of this Chapter. to be underscored, therefore, is that Section 80A, and the other provisions in Chapter VIA, are independent of Sections 104 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 801A or 801B read with Section 804(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 part of the business of the eligible undertaking, there is no further mandate in the provisions of Section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction U/S 10B is similar to the provisions of Section 80HHC inasmuch as both the sections mandates determination of eligible profits 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 104/10B 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.

62.

In view of the aforesaid discussion, we hold that the 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 the benefit of exemption, as contemplated under Section 10B of the Act." (emphasis supplied)

The Madras High Court in their judgement in the case of California Software Co Ltd vs CIT: Tax Case (Appeal) Nos. 206 & 207 of 2009, relied on the decision of Hewlett Packard (supra) and held that income taxable under section 41(1) of the Act, in the form of reversal of ESOP expenses entries in the books of account, shall also be in the nature of "export income" and therefore, the assessee would be eligible for deduction under section 10A/10B of the Act.

Support may also be drawn from the decision of the Delhi bench of the Tribunal in the case of MMTC Limited vs DCIT in ITA Nos. 1415/Del/2011, 217/Del/2005 & 4504/Del/2005 holding income earned from the investment of surplus funds to be in the nature of business income having regard to the fact that the assessee had earning such income consistently from its business activity.

Similar view has been taken in the following decisions:

 PCIT vs JP Morgan Services India Pvt Ltd: [2019] ITA 662/2017 (Bom), Revenue's SLP dismissed in [2020] SLP(C) No. 3726/2020 (SC)

 CIT vs Hindustan Gum & Chemicals Ltd: 241 Taxman 401 (Cal)  CIT vs Sankhya Technologies (P) Ltd: [2020] 427 ITR 318 (Mad)  Camiceria Apparels India (P) Ltd vs ACIT: [2019] 103 taxmann.com 238 (Mad)

 R Sytems International Ltd vs ACIT: [2019] ITA No.6506/Del/2016 (Del Trib.)

 Affiliated Computer Services of India (P) Ltd vs DCIT: [2020] 114 taxmann.com 178 (Bang Trib.)

 Tata Consultancy Services Limited vs DCIT: ITA No.5199/Mum/2019 (Mum Trib.)

In view of the aforesaid, notwithstanding that the provisions of section 10A of the Act are widely worded to take into account for computation of deduction, incomes which are derived from carrying on of the business of the undertaking, the receipt on account of interest on fixed deposits, are to be taken into account as part of the profits of the business of undertaking as such income has direct nexus with the business of such undertaking. Therefore, in the instant case, the interest on fixed deposit of Rs. 2,11,40,005 was included in 'profits of the business of the undertaking' while computing deduction under section 10A.”

ITA No.1753/Del/2018 & C.O.No.74/Del/2026

[Assessment Year : 2012-13]

4.2.

“I have considered the facts of the case, basis of disallowance made by the AO and submissions of appellant. As it is clear from assessment order that the AO has analyzed the facts and figures of the exempt income earned by appellant, expenses (not) claimed against it and investments made to earn such exempt income. The AO has also discussed the nature of administrative and other expenses which are bound to incur by appellant for earning such exempt income. He has recorded specific reasons rejecting the claim of the assessee in regards to expenditure computed by it for earning such exempt income. Taking Into account all these facts and legal position, AO has computed the disallowance u/s 14A and Rule 8D at Rs. 18,27,057/-, rather, has substantiated the computation made by appellant in its audit report. The objection raised by appellant that AO has not recorded any objective satisfaction in regard to the correctness of claim of the assessee has no force as in the case Indiabulls Financial Services Ltd. Vs. DCIT 395 ITR 242, Hon'ble Jurisdictional Court has already held that if the AG has carried elaborate analysis out of facts and the issue but did not expressly record his dissatisfaction, would not per say justify that he was not satisfied or did not record cogent reasons for his dissatisfaction. It has been further held by Hon'ble Court that to insist that the AO should pay such lip service regardless of substantial compliance with a provision would, in fact, destroy the mandate Section 14A of the Act. So far as the computation of disallowance under BD rule of the Act is concerned, Hon'ble Court has further held that 'Undoubtedly, the language of Section 14A presupposes that the AO has to adduce some reasons if he is not satisfied with the amount offered by way of disallowance by the assessee. At the same time, Section 14A (2) as read with Rule SD (2)(1) leaves the AO equally with no choice in the matter Inasmuch as the statute in both these provisions mandates that the particular methodology enacted should be followed. In other words, the AO Is under a mandate to apply the formulae as it were under Rule 8D because of Section 14A(2). If in a given case, therefore, the AO is confronted with a figure which, prima facie, is not in accord with what should approximately be the figure on a fair working out of the provisions, he is but bound to reject it. In such circumstances the AO ordinarily would express his opinion by rejecting the disallowance offered and then proceed to work out the methodology enacted. Thus, the Hon'ble Court also holds that if the AO is not satisfied with the amount offered by way of disallowance by the assessee, he has no choice except to follow the particular methodology enacted as per provisions of 14A(2) r.w. Rule 8D (2) (1) of IT Rules. Hon'ble Court clearly says that the AO Is under mandate to apply the formula as per aforesaid provisions in such cases. In the case of appellant, AO was not satisfied with the fact that appellant had made no disallowance against the exempt income earned by it. The non satisfaction of AO was based on the audit report and return of income of appellant whereas, disallowance was worked out as per the provisions of law while preparing the audit report, but, It was not taken into consideration while computing the taxable income. In such situation, the AO was not needed to bring on record any independent material to form the satisfaction for the purpose of computing the disallowance in the case of the appellant. He was justified in computing the disallowance as per Rule 8D of the Act after analyzing the amounts of Investments made by appellant, exempt income shown and expenses (not) claimed against it by appellant. By this working, AO has just supported and validated the working/computation given by appellant itself in its return of income/audit report for the purpose of making disallowance u/s 14A of the Act. The AO has also applied the legal provisions to the situation and made disallowance. In view of this, I uphold the disallowance made by AO at Rs. 18,27,057/- u/s 14A r.w. Rule 8D of IT Rules and dismiss the grounds taken by appellant.”