Section 10A of the Income tax Act, 1961 —Exemption to new undertaking in FTZ — (i) Whether receipt by way of reimbursement of expense eligible for exemption — Held : Yes

ITAT ‘E’ Bench, Mumbai.

Before D. K. Agarwal (J.M.) and D. Karunakara Rao (A.M.)

ITA Nos. 6041 & 6568/Mum./2002

A. Ys. 2003-04 & 2004-05. Decided on 6.5.2009

Counsel for assessee/Revenue : A. R. Shah/L. K. Agrawal

Section 10A of the Income tax Act, 1961 —Exemption to new
undertaking in FTZ —

(i) Whether receipt by way of reimbursement of expense
eligible for exemption — Held : Yes

(ii) Whether AO justified in denying the exemption in a
case where export proceeds received after 6 months but within the period of
one year — Held : No.
Section 2(24) r.w. Section 36 of the Income-tax Act, 1961 — Taxability of
delayed payment of employees’ contribution to ESIC — Held it is taxable as
business income and not under the head ‘Income from other sources’.

Per Karunakara Rao

Facts :

The issues before the Tribunal were as under :

1. The assessee was denied exemption u/s. 10A in respect
of Rs. 0.35 lac received from Export Promotion Council by way of
reimbursement of exhibition participation costs. The corresponding expense
was incurred by the assessee in the earlier year. According to the AO, the
receipt cannot be said to have been derived from export activity, hence the
claim for exemption u/s. 10A qua the said receipt was denied by him.
On appeal, the CIT(A) confirmed the AO’s order holding that the proximate
source of the receipt was the grant and was not the export proceeds.

2. Whether the delayed payments towards the employees’
contribution to ESIC u/s. 2(24) r.w. Section 36 were chargeable under the
head ‘Income from other sources’ as held by the AO or as business income as
claimed by the assessee.

3. The assessee was denied exemption u/s. 10A in respect
of the sum of Rs. 21.16 lacs since, the same was received beyond the
specified period of 6 months.

Held :

1. The Tribunal relied on the Delhi Tribunal decision in
the case of Perot System TSI Ltd. It noted that the said decision was in the
context of reimbursement by the EXIM bank. According to the Tribunal, the
decision had generated the legal principle viz., where the expenses
which were reimbursed had direct link with the business of the assessee’s
undertaking, the same were eligible for exemption u/s. 10A. Applying the
said proposition, the Tribunal held that the reimbursed amount received from
Export Promotion Council was directly linked to the business of the
assssee’s undertaking and therefore, entitled to deduction u/s. 10A.

2. The Tribunal agreed with the assessee’s reasoning that
when the contribution was made in time, such payments were allowed as
business expenditure, accordingly, the disallowance if any made in this
regard could only give rise to business income. Accordingly, it was held
that the delayed payments towards the employees’ contribution to ESIC was
taxable as business income.

3. The Tribunal noted that as per Section 10A(3) below
Explanation 1, the RBI was authorised to grant extension to the said period
of 6 months. Accordingly, relying on the Circular No. 28 of 30.3.2001 and
Circular No. 91 of 1.4.2003, the Tribunal agreed with the assessee that for
the unit in the SEZ, the RBI has granted extension period of one year.
Hence, it was held that the export proceeds realised within the extended
period were eligible for exemption u/s. 10A.

Case referred to :

Perot System TSI Ltd. (2007) (16 SOT 350) (Delhi).