Ancillary activities related incomes to be allowed u/s 10A/ 10B ?

CIT vs. Hewlett Packard Global Soft Ltd (Karntk High Court) (Full Bench)- 30 Oct 2017

Question of law discussed: Whether any ancillary activites which derived income will also become part of deduction from total business income as per sec 10A/ 10B?  


Important case facts/ discussion for easy references :

1- The assessee earned during the said Assessment Year 2001-02, interest income of `4,68,037/- on the Short Term Deposits made by it to the tune of `6,46,88,606/- out of its Surplus Funds temporarily parked in the Current Account held in Citi Bank, Hong Kong and also earned interest of `6,02,309/- from the Advances of loans to its staff members. The deduction in respect of both the said interest income was claimed as a 100% deduction under Section 10-A of the Act during the said relevant year as income from “Profits and Gains” of export business,

2- The Assessing Authority under the Act held that such interest income was not entitled to 100% deduction under Section 10-A of the Act, but such interest income was taxable under Section 56 of the Act, as ‘Income from Other Sources’,

3- In Pandian Chemicals Ltd. Vs. Commissioner of Income Tax, the Hon’ble Supreme Court dealing with a controversy with regard to interest on deposits with Electricity Board held that the same could not be treated as ‘Profits and Gains derived from Industrial Undertaking” for the purposes of Section 80-HH of the Act,

4- In Liberty India Vs. Commissioner of Income Tax, the Hon’ble Supreme Court dealing with the controversy of profit from Duty Exemption Payback Scheme (DEPB), Duty drawback incentives dealing with deduction under 80-IB of the Act held that the profit derived on sale of such DEPB and Duty draw back Entitlements by the assessee could not be said to be Profits and Gains “derived from” which are “ancillary” as compared with the words “attributable to” and therefore such profits on sale of DEPB/Duty drawback Entitlements was not deductible under Section 80-IB of the Act,

5-  the Division Bench of the Calcutta High Court in Commissioner of Income Tax, Kolkata-IV Vs. Hindustan Gum & Chemicals Ltd. [(2016) 72 Taxmann.com.90(Calcutta)] again held that interest earned on Surplus Business Funds deposited with Banks for short periods will be part of profits of business for the purposes of Section 10-B of the Act.

6- Learned court concluded as per the following para - The Scheme of Deductions under Chapter VIA 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 VIA 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 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. 

For reading full text of the judgement please refer link - http://itatonline.org/archives/cit-vs-hewlett-packard-global-soft-ltd-karnataka-high-court-full-bench-s-10a-10b-entire-law-on-the-concept-of-derived-from-the-undertaking-and-purposive-interpretation-of-statutes-explained/hewlett-packard-10a-10b-derived-from/