Deduction under Section 10B is provided for interest on bank accounts, subsidy revenues, and insurance claims

Fact and issue of the case

The appeal by the assessee arises out of the order dated 30.08.2007 of the Ld. Commissioner of Income Tax (Appeals)- XVIII, New Delhi (“CIT(A)”) pertaining to the assessment year (“AY”) 2004-05

The assessee has taken the following grounds of appeal :- “1. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in excluding ‘interest income’ of Rs. 19,24,528/- from the profits for computing deduction under section 1 0B of the Act

That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in excluding other income [being (i) subsidy received of Rs. 81,000/- and (ii) insurance claims of Rs. 19,50,000/-] from the profits for computing deduction under section 1 0B of the Act, holding the same to have not been derived from the industrial undertaking of the appellant

That the CIT(A) erred on facts and in law in not appreciating that the aforesaid income’ was derived from the industrial undertaking of the appellant and was inextricably linked with the business of the appellant

Without prejudice that the CIT(A) while holding interest income of Rs. 19,24,528/- as income from other sources, did not allow deduction for interest expenditure amounting to Rs. 19,89,545/- incurred in respect of borrowed funds utilized for making the deposit on which such interest income was earned

That the CIT(A) erred on facts and in law in holding that the appellant did not place on record any material in order to establish that the interest income earned by the appellant had a nexus with such expenditure on account of interest

That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in excluding benefit under Duty Entitlement Pass Book (“DEPB”) Scheme, while computing deduction under section 80HHC of the Act

Without prejudice, the CIT(A) erred on facts and in law in not appreciating that only profit on transfer of DEPB entitlement ought to be excluded from the profit of the business while computing deduction under section 80HHC of the Act

The assessee is a company engaged in the business of manufacture and sale of rice. It is an exporter of basmati rice as also non-basmati rice. For AY 2004-05 it filed its return on 30.10.2004 declaring income of Rs. 55,93,622/- which was processed on 25.05.2005 under section 143(1) of the Income Tax Act, 1961 (the “Act”). Later on, the case was picked up for scrutiny and assessment was completed under section 143(3) of the Act on 27.12.2006 on total income of Rs. 1,11,57,590/- including therein, inter alia, disallowance of Rs. 19,24,528/- being interest income, disallowance of subsidy receipt of Rs. 8 1,000/- and disallowance of insurance claims of Rs. 19,50,000/- in computing deduction under section 10B of the Act as also denial of benefit claimed by the assessee under Duty Entitlement Pass Book (DEPB) scheme amounting to Rs. 2 1,67,878/- in computing deduction under section 80HHC and both the grounds of appeal before the Tribunal relate thereto

The facts relating to Ground No. 1 are that the Ld. Assessing Officer (“AO”) found from the bifurcated Trading, Profit & Loss account filed before him by the assessee that the profit of basmati exports included interest income of Rs. 19,24,528/-. On query, the assessee contended that interest income directly related to the core business of the company and constitutes profit directly derived from the business of manufacturing and export of rice and are eligible for deduction under section 1 0B of the Act. It was further submitted that the Tribunal has decided this issue in AY 1997-98 in favour of the assessee and furnished a copy thereof

The Ld. AO did not accept the contentions of the assessee. Placing reliance on the judgments of the Hon’ble Supreme Court in Cambay Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC) ; CIT vs. Sterling Foods (1999) 247 ITR 579 (SC) and CIT vs. Pandian Chemicals Ltd. (2003) 262 ITR 278 (SC) wherein the law laid down is that the profit and gain can be said to have been “derived” from an activity only if the activity is the immediate and effective source of the profit and gain or has direct nexus with the profit and gain, the Ld. AO held that the impugned interest income is at best “attributable to” the export activity of the assessee and has only incidental nexus with the export activity and constitute a ‘step removed’ from the export activity. Citing the decision of the Hon’ble Madras High Court in CIT vs. Madras Motors 257 ITR 60 (Mad) wherein it is held that interest earned on fixed deposits is not eligible for deduction under section 1 0B, and stating that the Tribunal in its order (supra) has fortified the stand of the Revenue that interest income could not be said to be derived from the export of article or thing and the matter was restored to the file of the AO for limited purpose on the issue of netting of interest which issue is covered against the assessee by the decision of Hon’ble Supreme Court in CIT vs. V.P. Gopinath 248 ITR 449 (SC), the Ld. AO proceeded to compute the eligible amount of deduction under section 10B at Rs. 1,82,59,833/- resulting in the disallowance of interest income of Rs. 19,24,528/- as also other income of Rs. 2 1,08,000/-

The facts relating to the Ground No. 2 are that the Ld. AO found that the assessee claimed deduction of Rs. 2 1,67,878/- under section 80HHC of the Act from profits derived from export of non-basmati rice. The export turnover thereof was of Rs. 50,53,83,3 1 1/-. During the year, the assessee earned export incentives in the form of DEPB credits. The Ld. AO noticed from the computation of the deduction under section 80HHC submitted before him that the export profit computed under section 80HHC(3)(c) has further been increased by an amount equivalent to 90% of the DEPB Licence Credits. 4.3 Vide Order Sheet entry dated 15.09.2006, the Ld. AO asked the assessee to prove with evidence that – (a) the assessee had an option to choose either the duty draw back or DEPB scheme, being the Duty Remission scheme; and (b) the date of draw back credit attributable to the customs duty was higher than the rate of credit allowable under DEPB scheme, being Duty Remission scheme; in order to avail the benefit of the newly inserted 3rd proviso to section 80HHC(3). Since compliance was not made, the Ld. AO rejected the claim of the assessee

The Ld. AO further noticed that the profits of non-basmati rice included Rs. 18,03,761/- earned as ‘interest income’ after netting of interest. Following the decision in CIT vs. V.P. Gopinath 248 ITR 449 (SC), he rejected the assessee’s claim of netting of interest. Finally in para 5.7, the Ld. AO recorded following finding holding that deduction allowable under section 80HHC is nil.

The assessee company has declared a profit of Rs.21. 19 lacs on the trading of non basmati exports. Therefore, after adjusting the profits of the non-basmati division by the 90% of DEPB credits of Rs.77,51,700/- and 90% of interest income amounting to Rs. 16,23,384/- and 90% of Other Misc. Income earned, there are negative profits. Further, to set off this negative profits, benefit of. 90% of DEPB credits is not available in view of the above discussion. In view of the amended provisions of the 80HHC and also in view of the decision rendered by the Apex Court in the case of Ipca Laboratories, deduction under section 80HHC is Nil as on negative profits deduction u/s 80HHC is not permissible

Observation of the court

The Hon’ble Delhi High Court in Hritnik Exports Pvt. Ltd. (supra) went on to observe further that the mode of determining the eligible deduction under section 1 0B is similar to the provisions of section 80HHC in as much as both the sections mandate 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 10B of the Act is a complete code providing the mechanism for computing the profits of the business eligible for deduction under section 10B of the Act. Once an income forms part of the business of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction under section 10B of the Act

In yet another decision in Pr. CIT-21 vs. Universal Precision Screws (ITA No. 392/2015 decided on 06.10.20 15), the Hon’ble Delhi High Court, taking note of its decision in Hritnik Exports Pvt. Ltd. (supra) and Karnataka High Court decision in CIT vs. Motorola India Electronics Pvt. Ltd. (supra) held that interest earned on FDRs would form part of the “profits of the business of the undertaking” for the purposes of computation of the profits derived from exports by applying formula under section 10B(4) of the Act

Full Bench decision of Hon’ble Karnataka High Court in Hewlett Packard Global Soft Ltd. (supra) may also be relied on for the proposition that all profits and gains of hundred percent EOU including incidental income by way of interest on bank deposits or staff loans would be entitled to hundred percent exemption or deduction under section 1 0B of the Act

In recent decision in CIT vs. Sankhya Technologies (P) Ltd. (2020) 427 ITR 318 (Mad), The Hon’ble Madras High Court held that interest on bank deposits was eligible to be included in profits of hundred percent export oriented unit for purpose of claiming deduction under section 1 0B of the 19. Following the decisions (supra) we decide Ground No. 1 in favour of the assessee by holding that interest income of Rs. 19,24,528/- would be entitled to claim exemption under section 10B of the Act. The Ld. AO is directed to modify the assessment accordingly

The exclusion of other incomes, namely, receipt of subsidy of Rs. 81,000/- and insurance claim of Rs. 19,50,000/- from the profits for computing deduction under section 10B is also not sustainable in view of the decision of Hon’ble Delhi High Court in Riviera Home Furnishing (supra) and the decision of Delhi Bench of the Tribunal in Moser Baer India Ltd. (supra) wherein it is held that the above receipts form part of the profit of business of the undertaking and thus eligible for deduction under section 1 0B of the Act. Respectfully following the decisions (supra) we set aside the orders of the Ld. CIT(A)/AO and direct the Ld. AO to amend the assessment order suitably. Ground No. 1.1 and Ground No. 1.2 are decided in favour of the assessee

The alternate claim made by the assessee in Ground No. 1.3 and 1.4 becomes infructuous in view of our finding that interest income of Rs. 19,24,528/- is not income from other sources but forms part of the business profit of the undertaking eligible for deduction under section 1 0B of the Act

Before us, it is the contention of the assessee that the amount of Rs. 13 lacs realized on transfer of DEPB represents gross realization and the issue of deduction of the said benefit under DEPB needs to be decided in the light of the judgment of the Hon’ble Supreme Court in Topman Exports (supra). We agree with the above contention of the assessee and restore the matter back to the file of the Ld. AO to decide the issue afresh keeping in view the judgment of the Hon’ble Supreme Court in Topman Exports (supra) after allowing opportunity of hearing to the assessee. Ground No. 2 and Ground No. 2.1 are decided accordingly

In the result, the appeal of the assessee is allowed with directions contained in para 22 above. Order pronounced in the open court on 6th April, 2023