34 Export – Profits and gains from export oriented undertakings in special economic zones – Scope of section 10A – Meaning of “Profits and gains derived by an undertaking” – Interest on bank deposits and staff loans arise in the ordinary course of business – Entitled to exemption u/s. 10A

CIT
vs. Hewlett Packard Global Soft Ltd.; 403 ITR 453 (Karn): Date of Order: 30^th
Oct., 2017:

A.
Y.: 2001-02:

Section
10A of I. T. Act, 1961

Due to conflict of opinion
of the two Division Benches, the following questions were referred to the Full
Bench of the Karnataka High Court:

“i)  Whether in the facts and in the circumstances
of the case, the Tribunal was justified in holding that interest from fixed
deposits, accrued interest on fixed deposits, interest received from Citibank,
Hong kong and interest of staff loans should be treated as business income of
the assessee even though the assessee is not carrying on any banking/financial
activity?

ii)  Whether the Assessing Officer was correct in
holding that the interest income cannot be held to be derived from eligible
business of the assessee (software development) for the purpose of claiming
deduction u/s. 10A of the Income-tax Act, 1961?”

The Full
Bench of the Karnataka High Court held as under:

“i)  Sections 10A and 10B of the Income-tax Act,
1961, are special provisions and a complete code in themselves and deal with
profits and gains derived by the assessee of a special nature and character
such as 100% export oriented units situated in special economic zones and
software technology parks of India, where the entire profits and gains of the
entire undertaking making 100% export of articles including software are given
100% deduction. The dedicated nature of the business or their special
geographical locations in software technology parks of India or special
economic zones makes them a special category of assesses entitled to the
incentive in the form of 100% deduction u/s. 10A or section 10B of the Act,
rather than it being a special character of income entitled to deduction from
gross total income under Chapter VI-A u/s. 80HH etc.

ii)   The computation of income entitled to
exemption u/s. 10A or section 10B of the Act is done at the prior stage of
computation of income from profits and gains of business in accordance with
sections 28 to 44 under Part D of Chapter IV before “gross total income” as
defined u/s. 80B(5) is computed and after which the consideration of various
deductions under Chapter VI-A in section 80HH etc., comes into picture.
Therefore the analogy of Chapter VI deductions cannot be telescoped or imported
in section 10A or section 10B of the Act.

iii)  The words “derived by the undertaking” in
section 10A or section 10B are different from “derived from” employed in
section 80HH, etc.

iv)  A provision intended for promoting economic
growth has to be interpreted liberally.

v)  The incidental activity of parking of surplus
funds with the banks or advancing of staff loans by such special category of
assesses covered u/s 10A or section 10B of the Act is an 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 the profits and gains derived by the undertaking engaged in the
export of articles as envisaged u/s. 10A or section 10B cannot be taxed separately
u/s. 56.

vi)  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 u/s. 10A and section 10B. 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.”