1. This appeal by assessee is directed against the order of Commissioner (Appeals)-XIII, New Delhi, dated 29-11-2002 for the assessment year 1999-2000.
2. The assessee-company is engaged in the business of manufacture of computer software exports and operates through the STP units located in Noida, Gurgaon and Chennai. It has opted for Tax Holiday under Section 10A in the assessment year 1997-98. Besides revenue from computer software development activities, the assessee-company derived interest income from deployment of funds, interest income from bank deposits interest from security deposits and miscellaneous income from the sale of assets etc. The assessee-company claimed exemption under Section 10A for its income of following nature against income from business of exports of software from software technology park: The assessing officer disallowed the claim of the assessee-company. The Commissioner (Appeals) affirmed the order of the assessing officer. The assessee is in further appeal before us. The issues in this regard are raised in Ground Nos. 1 to 10.
2.1 learned Counsel for assessee Shri Mukesh Butani made elaborate arguments. He also filed paper book containing 135 pages. Shri Butani submitted that learned Commissioner (Appeals) has not interpreted the wider scope of exemption under Section 10A prevailing in the year under appeal. Section 10A, as it stood prior to amendment by Finance Act, 2000 with effect from 1-4-2001, reads as follows: 10A. (1) Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee.
10A. (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 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....
The amended section came into force with effect from 1-4-2001 and applies to assessment year 2001-02 and thereafter. The said amendment is prospective in effect and we are concerned with the assessment year 1999-2000. Therefore we should to look to the section before the amendment. The language used in Section 10A in the relevant assessment year is not restrictive in scope unlike the language used in the amended Section 10A. The language used in the original section "any profits and gains derived by an assessee from an industrial undertaking" in contrast to the amended section "a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software". The Calcutta High Court in Jokhiram Keya v. Ghanshamdas Kedarnath AIR 1921 Cal. 244 and Satyanarain Biswanath v. Harakchand Rupchand held that the word "any" means one or more out of several and includes all.
The use of the expression "any" would be equal to the word "all" and as has been referred to in Stroud's Judicial Dictionary (3rd Edition, page 150), the word "any" excludes limitation or qualification. Even in the Oxford Dictionary "any" has been taken to mean "all" - Ashiq Hasan Khan v. Sub-Divisional Officer . In Veerappa Shiddalingappa Virupathi v. State of Mysore AIR 1965 Kar. 227(FB) it was held that the word "all" should be given a meaning as wide as possible in the context. In that case the words "any ward of the Municipal Borough" was interpreted to mean "every ward of the Municipal Borough". The Supreme Court in Shri Balaganesan Metals v. M.N. Shanmugham Chetty (1987) 2 SCC 701 while interpreting the Rent Control Act held that unless the Legislature had intended that both classes of tenants can be asked to vacate by the Rent Controller for providing the landlord additional accommodation, be it for residential or non-residential purposes, it would not have used the word "any" instead of using the letter "a" to denote a tenant. From the plain reading of the un-amended Section 10A as applicable to the facts of this case all profits of the undertaking including incidental and ancillary income such as interest from banks etc. would qualify for the benefit of exemption and the section does not place any restriction as in the case of Section 10(29) and the amended Section 10A.Orissa State Warehousing Corpn. v. CIT while interpreting the scope of Section 10(29) That on a plain reading of Section 10(29) of the Act the prerequisite element for the entitlement as regards the claim for exemption is the income which is derived from letting out of godowns or warehouses for storage, processing or facilitating marketing of commodities and not otherwise. The Legislature has been careful enough to introduce in the section itself, a clarification by using the words "any income derived from", meaning thereby obviously for marketing of commodities by letting out of godowns or warehouses for storage, processing or facilitating the same. If the letting out of godowns or warehouses is for any other purpose, question of exemption would not arise.
2.3 In the same judgment the Supreme Court also held that the words "any income" as appearing in the body of the statute are restrictive in their application by reason of the user of the expression "derived from". The court also held that having due regard to the language used, question of exemption would arise pertaining to that part of the income only which arises or is derived from the letting of godowns or the warehouses and for the purposes specified in Section 10(29).
2.4 Sh. Butani, therefore, submitted that "In this background if we read the original Section 10A the only interpretation that is possible is to hold that any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee". The industrial undertaking may carry on several business activities and that is not relevant for the purpose of interpreting the section as it stood before the amendment in 2001. At the time of introducing Section 10A in 1981, the Legislature thought it fit to grant exemption to an assessee of any profits and gains derived from an industrial undertaking. The language used in the original Section 10A is not restrictive in scope unlike the language used in the amended Section 10A.In the amended Section 10A, the Legislature has clearly specified that the assessee is entitled to 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 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. The legislative history of the fiscal statute could be traced and considered to understand its scope.K.P. Varghese v. ITO while stating the principle observed that this is in accord with the recent trend in juristic thought not only in western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. The courts therefore have started resorting to purposive interpretation. The law has to be found in the words in which the Parliament has enacted and it is for the court to interpret those words so as to give effect to that purpose. The primary rule of statutory interpretation is that the intention of the Legislation must be found in the words used by the Legislature itself. If a statute using an expression gives restricted meaning to the expression, there is no alternative but to adopt that meaning. If however, the expression used in a statute is of general character, it should be understood in the sense in which every person understands that expression. It is not necessary to import artificial considerations into the matter. Thus, where the definition of the word is not given, it must be construed in its popular sense, if it is a word of every day use. Popular sense means that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it CIT v. Taj Mahal Hotel . When the context makes the meaning of a word clear it becomes unnecessary to search for and select a particular meaning out of the diverse meanings a word is capable of according to lexicographers 1958 SCR 418.State of Bihar v. S.K. Roy held that subsequent legislation may be looked at in order to see what is the proper interpretation to be put upon the earlier Act where the earlier Act is obscure or ambiguous or capable of more than one interpretation.Gurudevdatta VKSSS Maryadit v. State of Maharashtra It is a cardinal principle of interpretation of statute that the words of a statute must be understood in their natural, ordinary and popular sense and construed accordingly to their grammatical meaning, unless such construction leads to some absurdity or unless there is something in the context or in the object of the statute to suggest to the contrary. The golden rule is that words of a statute must prima facie be given their ordinary meaning. It is yet another rule of construction that when the words of the statute are clear, plain and unambiguous, then the courts are bound to give effect to that meaning, irrespective of the censers quences. It is said that the words themselves best declare the intention of the law giver.
The courts have adhered to the principle that efforts should be made to give meaning to each and every words used by the Legislature and it is not a sound principle of construction to brush aside words in a statute as being inapposite surpluses, if they can have a proper application in circumstances conceivable within the contemplation of the statute." .
2.8 The Supreme Court held that the doctrine is that there is no equity about a tax, there is no presumption as to a tax having a rider. In case of a reasonable doubt, the construction most beneficial to the subject is to be adopted. If there are two interpretations possible, then effect is to be given to the one that favours the citizen and not the one that imposes a burden on him CIT v. Shahzada Nand & Sons , CIT v. Naga Hills Tea Co. Ltd. , 2.9 The word 'derived' is not a term of art. It demands an enquiry into the genealogy of the item or the product. But the enquiry should stop as soon as the effective source is discovered, and be not extended to another matter, however, closely connected with effective source in question is. The word 'derived' connotes drawing or receiving from a source. When something is stated to be derived from something else, the latter is a source, while the former is that which flows from that source. Profits and gains can be said to have been derived from an activity carried on by a person only if the said activity is the immediate and effective source of the said profit or gain CIT v. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC). In the present case the source is industrial undertaking. The industrial undertaking may carry out several business activities and earn profits and gains out of those business activities. Unless the Legislature specifies that under which business activity, the income is exempt or not exempt, it should be presumed that the entire profits and gains of the industrial undertaking is exempt from tax. In this case the Legislature by way of amendment in 2001 specified that the assessee is entitled to a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software.
2.10 The Delhi Bench of the ITAT in Picric Ltd. v. Joint CIT (2004) 90 ITD 301 (Del) negatived this contention. Very similar line of argument was advanced by the assessee in this case and the same is recorded in para 6 of the Tribunal order. The Tribunal held that the expression 'any profits and gains' would not include the income assessable under the head 'income from other sources' and only those profits and gains are to be exempted under Section 10B which have direct and proximate relationship with the activities referable to Export. Oriented Unit. In the same paragraph there is an observation by the Tribunal that the expression any profits and gains is qualified by the words 'derived by an assessee from a 100 per cent Export Oriented Undertaking and the words derived from have not been defined for the purpose of Section 10B like Section 80HHC and therefore its meaning has to be considered in the restricted sense as interpreted by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT . However, in the unamended Section 10A such an expression is not there and therefore the order of the Tribunal in this case can be distinguished.
2.11 The Bangalore Bench of the Tribunal in Wipro Ltd. v. Dy. CIT (IT Appeal Nos. 895 & 896 (Bang.) of 2003) bottom in para 8.3 observed that what is to be seen while computing deduction under Section 10A is whether the profit is derived from the undertaking to which section applies and unlike the amended provision with effect from 1-4-2001, there is no requirement that the profit has to be derived from export of articles or things or computer softwares. The royalty received from the products earlier developed by the eligible undertaking to which Section 10A applies is part of the export turnover of the undertaking and is entitled to relief under Section 10A. Shri Butani submitted that if this is the interpretation to be given to Section 10A, various items of income as narrated above should be treated as eligible for exemption under Section 10A of the Act. He also relied upon following case laws to support his arguments:Honda Siel Power Products Ltd. v. Dy. CIT (2001) 77 ITD 123 (Delhi)Asstt. CIT v. Gallium Equipment (P.) Ltd (2001) 79 ITD 41 (Delhi)(TM).
2.12 learned DR, on the other hand, strongly supported the appellate order. He submitted that there is no dispute that all such incomes are assessable as income from other sources. Even under the un-amended provisions of Section 10A as applicable to the year under appeal, any profits and gains which are derived by an assessee from an industrial undertaking to which this section applies is not to be included in the total income of assessee. Thus, the pre-requisite is the profits and gains derived from an industrial undertaking and not income which has no nexus with the industrial undertaking or which cannot be considered as derived from the industrial undertaking cannot be allowed exemption as provided in Section 10A of the Act. He also relied upon following case laws to support his argument that such income cannot be considered as income derived from an industrial undertaking:Pandian Chemicals Ltd. v. CIT 2.13 In reply, learned Counsel for assessee submitted that case laws relied by learned DR is in respect of deduction under Section 80HH or 80-I and not in relation to exemption under Section 10A. The amended provisions of Section 10A is similar to the provisions of Section 80HH or 80-I of the Act but applying the provision as applicable to the year under appeal any profits and gain which are derived from an industrial undertaking is not to be included in the total income.
3. We have heard the parties at length and also perused the orders of assessing officer and learned Commissioner (Appeals). We have also perused the decisions cited. Section 10A(1) as applicable to assessment year 2000-01 i.e., the year under appeal, at the relevant time, reads as under: 10A. Special provision in respect to newly established industrial undertaking in free trade zones. (1) Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee.
Reading the aforesaid provision, it is clear that any profits and gains derived from an industrial undertaking to which the section applies is not to be included in the total income of the assessee. The important words to be interpreted in the present case is the expression "any profits and gains derived from an industrial undertaking.
It is vehemently contended that there is substantial amendment in Section 10A with effect from 1-4-2001. We have considered both the sections earlier. Any profit and gain derived by an assessee from an industrial undertaking to which this section applies is not to be included in the total income of assessee. Thus, in effect, the profits and gains derived by an assessee from an industrial undertaking was to be treated as exempt and hence, not to form part of total income of the assessee. As per the amended law, deduction of such profits and gains as derived by an undertaking from export of article or computer software is to be allowed as deduction while computing the total income of the assessee. Thus, what was earlier exempt and was not forming part of the total income but will be allowed as deduction. However, the fact remains that whether exemption has to be granted or deduction has to be allowed, in both the cases only such income which is by way of profits and gains derived by an assessee from an industrial undertaking to it this section applies i.e., an undertaking which manufactures or produces articles or things in a free trade zone or electronic hardware technology park or software technology park. Thus, in both the cases what is required to be satisfied is that the exemption/ deduction is allowable only in respect of such profit and gain as are derived by an assessee from an industrial undertaking. Hence, even to claim exemption under Section 10A, the same can be granted provided such profits and gains are derived by an assessee from an industrial undertaking.
3.1 Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial. Co. Ltd. (supra) held thus: As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the Legislature has deliberately used the expression 'attributable to' and not the expression "derived from". It cannot be disputed that the expression "attributable to "is certainly wider in import than the expression "derived from". Had the expression "derived from "been used, it could have with some force been contended that the assessing officer balancing charge arising from the sale of old machinery and building cannot be regarded as prof its and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression "derived from". As for instance, in Section 80J. In our view, since the expression of wider import, namely, "attributable to", has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.
3.2 Hon'ble Supreme Court in the case of Sterling Foods (supra) was considering whether the profit from sale of important entitlements are to be considered as profit "derived from" industrial undertaking for the purpose of deduction under Section 80HH. Negativing the contention, Hon'ble Supreme Court held thus: Held, reversing the decision of the High Court, that the provisions of Section 28 as amended made no difference. The word "derive" is usually followed by the word "from" and it means : "get, to trace from a source arise for originate in, show the origin or formation of. The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements became available. There must be, for the application of the words "derived from". A direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain, derived from the assessee's industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relied under Section 80HH of the Income Tax Act, 1961.CIT v. Menon Impex (P.) Ltd. was considering the question whether interest from funds in connection with letters of credit is income derived from profit of the business of industrial undertaking so as to be entitled to get the benefit of Section 10A of the Income Tax Act. Allowing the appeal of revenue, Hon'ble Madras High Court held thus: Held, that the interest received by the assessee was on deposits made by it in the banks. It was the deposit which was the source of the interest income. The mere fact that the deposit was made for the purpose of obtaining letters of credit which were in turn used for the purpose of the business of the industrial undertaking did not establish a direct nexus between the interest and the industrial undertaking and, therefore, the assessee was not entitled to get the benefit of Section 10A in relation to the interest.
In coming to the conclusion, the Madras High Court referred to the decision of Hon'ble Supreme Court in Cambay Electric Supply Industrial Co. Ltd.'s case (supra) and Sterling Food's case (supra).
3.4 Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. (supra) was considering the question whether the interest on deposit with Electricity Board should be treated as income derived from the industrial undertaking for the purpose of deduction under Section 80HH.Hon'ble Supreme Court held thus: The word 'derived' has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamak haya Narayan Singh (1948) 16 ITR 325 (PC) when it said (page 328): The word "derived" is not a term of art. Its use in the definition indeed demands as enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered.
In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition.' This definition was approved and reiterated in 1955 by a Constitution Bench of this Court in the decision of Mrs. Bacha From Guzdar v. CIT . 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' 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 assessee of Pandian Chemicals Ltd . We see no reason to disagree with the reasoning given by the High Court in Pandian Chemicals Ltd's case 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.
3.5 In the present case, it is seen that the assessee has received interest on deposit in EEFC account and other interest on surplus funds parked. The interest has been received pursuant to deposit made and not as part of activity of industrial undertaking. Thus, the source of interest is deposit and not the industrial undertaking. For the application of words "derived from" there should be a direct nexus between income and the industrial undertaking. In the present case, there is no direct nexus but only an incidental connection that the fund of industrial undertaking are firstly placed in the deposit and thereafter on such deposit the interest is earned. The activity of industrial undertaking is to export and the moment the export proceeds are received, the activity of industrial undertaking comes to a half.
Thereafter any amount realized out of such export proceeds do not partake the character of income of the industrial undertaking but the genesis or the source lies in the deposit and not the industrial undertaking. Thus, it cannot be said that the interest on deposit is profit "derived from" the industrial undertaking. All the case laws referred to above in our discussion takes away the case of assessee for claim of deduction under Section 10A.3.6 We shall also discuss the decisions relied by learned Counsel for assessee.
In the case of Samtex Fashions Ltd. (supra) the Tribunal was considering the claim of deduction under Section 10A in respect of interest on margin money. The Tribunal, as a matter of fact, found that the margin money was kept with the bank for availing loan. Thus, the deposit was placed to avail the loan for the purpose of industrial undertaking and hence, deduction was allowed under Section 10A. The case is distinguishable on facts and hence of no help.Asstt. CIT v.Gallium Equipment (P.) Ltd. wherein the assessee was forced to give bank guarantee and hence was required to place fixed deposit to avail the guarantee limit. In such circumstances, the Tribunal held that the FDs found integral part of business and hence was eligible for deduction under Section 80-I. The said case is also distinguishable on facts.
3.8 In the case of Wipro Ltd. (supra), the Tribunal was considering the claim of deduction under Section 10A in respect of liquidated damages, right pack of retention money, credit balances, sales tax recovery, foreign exchange gain etc. All these items have direct nexus between the income and the industrial undertaking. The said decision was with reference to assessment years 1998-99 and 1999-2000. There was also no dispute that whether such income is to be assessed under the head "Profits and gains of income or income from other sources". In the present case, it is seen that it is merely placing of surplus funds and hence not business income. This case is also, accordingly, distinguishable on facts.
3.9 The decision of Hon'ble Bombay High Court in the case of Punit Commercial Ltd. (supra) is also distinguishable on facts as the issue therein was claim of deduction under Section 80HHC prior to its amendment with effect from 1992-93. Prior to such amendment, deduction under Section 80 Hon'ble High Court was available in respect of profit as computed under the head "Profits and gains of business or profession" and not in respect of income derived from industrial undertaking. It is to be noted that various judgments relied by learned Counsel for assessee are prior to the decision rendered by Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. (supra). After the authoritative pronouncement of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. (supra), the interest income which has no nexus with the activity of the industrial undertaking cannot be allowed as deduction. The Head Note in the case of Hindustan Lever Ltd. (supra) is extracted herein: Under the provisions of Section 2(5)(i) of the Finance (No. 2) Act, 1962, an assessee whose "total income includes any profits and gains derived from the export of any goods or merchandise out of India, shall be entitled to a deduction, from the amount of Income-tax and super tax with which he is chargeable for the assessment year commencing on 1-4-1962, of an amount equal to the income-tax and super tax calculated respectively at one-tenth of the average rate of income-tax and of the average rate of super tax on the amount of such profits and gains included in the total income". The word "derived" is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered.
The assessee exported groundnut oil which resulted in a loss.
However, for the exports made at a loss, the assessee was rewarded with import entitlements. It utilized the import entitlements in purchasing palm oil from foreign countries. The imported palm oil was consumed internally by the assessee for manufacturing other products. The contention of the assessee was that the oil which was purchased by the assessee from foreign countries on the strength of the import entitlement was at a rate much lower than the rate obtaining in the Indian market for similar products. Since the assessee paid a lower price for the imported palm oil, the assessee made a larger profit than it would, have made had it purchased palm oil locally at a higher rate. The assessee, therefore, claimed that it would be entitled to the benefit of Section 2(5)(i) of the Act in respect of the amount of profit it made in excess of what it would have otherwise made, if it had to buy palm oil locally. This contention was rejected by the income-tax authorities and the High Court. On appeal to the Supreme Court: Held dismissing the appeal, that in the instant case the immediate source of the profit was sale of goods. The export of other goods was not even the second degree but it had to be traced to an even more remote degrees. The import was of palm oil. The import was possible because of earlier export of goods at a loss. In the chain of sequence the earlier export would be four degrees away. The assessee's profit from sale of its goods in India could not be said to have been derived from export sales.
On the basis of our above discussion and considering the authoritative pronouncement by Hon'ble Supreme Court, the case laws relied by learned Counsel for assessee will not help his case. Accordingly, following amount cannot be considered as profits and gains derived by an assessee from an industrial undertaking so as to allow exemption under Section 10A of the Act: 4. As regards amount by way of reimbursement by Exim Bank, Shri Butani submitted that during the year under consideration, the appellant had received a grant from EXIM Bank, to the extent of 50 per cent of the expenses incurred in obtaining ISO quality certification for its business, per the bank's "Programme for Product and Process Certification". The said income has been shown as "other income" in the P&L A/c. With a view to promoting exports from India, EXIM bank provides various incentives to Indian companies to become globally competitive. In this context, it part finances expenses incurred on quality certification of products and processes to add credibility to the appellant in the international market. Shri Butani further submitted that the expense for obtaining quality certification has a direct link with the business of the appellant, therefore, income in relation to revenue expenditure would bear the character of a business receipt. Reliance in this regard is placed on Sree Ayyanar Spg. & Wvg.
Mills Ltd. v. CIT . Without prejudice to the aforesaid, treating such receipt as reimbursement would not make a difference, as the same would go to reduce the total expense of Rs. 23,52,000 already allowed in the P&L A/c against the business income.
This position has not been disputed by the assessing officer. It is submitted that when the expenses incurred in obtaining ISO certification is allowed as business deduction while computing the profits and gains of the export business, the income (in the nature of grant) which actually reduces the amount of expenses incurred by the appellant, should also be treated as forming part of eligible profit, being of the same nature as the expenses. Reliance in this regard is placed on the Bangalore Bench decision in Wipro Ltd.'s case (supra). In this case, income from sale of scrap, newspapers, stationery, batteries etc. were allowed to be netted against the eligible profit, thereby increasing the income of the appellant. Further, such reimbursement is merely the recoupment of expenditure incurred by the appellant for the purpose of business and is directly linked with the incurrence of expenditure. Therefore, the receipt of such amount is not from a separate source of income and is directly linked to the nature of the expenditure, such that it would constitute business income of the undertaking. It is further submitted that Section 14A has been wrongly applied by the assessing officer to the facts of the present case as they pertain to reimbursement of expenses incurred for running of the software business. Section 14A is only applicable to a situation where expenditure is incurred for earning exempt income. However, in the case of the appellant, the reimbursement of expenses is in nature of income and not expenses. Further, the said treatment has also been accepted by the assessing officer and Commissioner (Appeals). Therefore, provisions of Section 14A are not applicable.
4.1 learned DR, on the other hand, submitted that the incentives received by the assessee for obtaining ISO certification do not flow from industrial undertaking and hence, in view of the decision of Hon'ble Supreme Court in the case of Sterling Foods (supra), deduction under Section 10A cannot be granted in respect of such receipt.
5. We have considered rival submissions. In the present case, the fact is not in dispute that the assessee has received grant from Exim Bank, being 50 per cent of the expenses incurred in obtaining ISO quality certification. This implies that the assessee has incurred much more expenses. It is also mentioned that the total expenses in this regard were Rs. 23,52,000 which was reduced while computing profits of business. Accordingly, applying the principles laid down by Special Bench of the Tribunal in the case of Lalsons Enterprises v. Dy. CIT (2004) 89 ITD 25 (Delhi) (SB) as now approved by Hon'ble Delhi High Court in the case of CIT v. Shri RamHonda Power Equipment only net of the receipt can be excluded. Since in the present case, the expenses are more than the receipt and since there is direct nexus between the expenses incurred and earning the income, nothing has to be excluded while computing profit derived from industrial undertaking so as to compute deduction under Section 10A of the Act. Accordingly, Ground No. 4 is allowed.
6. Ground No. 6 is against denial of exemption under Section 10A on income from corporate charges of Rs. 20 lakhs earned from HCL Technologies Ltd. Similarly, Ground Nos. 9 and 10 relate to denial of exemption of Rs. 9,00,215 beings charges for use of work stations recovered from HCL Technologies Ltd. During the year under consideration, the appellant had received certain sums from HCL Technologies Ltd. as management and corporate charges. A sum of Rs. 1,00,000 was deducted at source. The said income has been shown as "other income" in the P&L A/c. During the year under consideration, the appellant had raised debit notes on HCL Technologies Ltd. for use of work stations including rent and satellite charges, printing and stationery charges etc. Such sums are shown as credit to the respective expense heads under the P&L A/c. The Assessing Officer held that the nature of payment is similar to that of reimbursement and hence to be treated as income from other sources. Learned Commissioner (Appeals)affirmed the action of assessing officer on the ground that corporate charges are not directly related with the business of the eligible undertaking. Hence, the same should be treated as income from other sources and hence, not eligible for deduction under Section 10A.6.1 Mr. Butani submitted that while computing exemption under Section 10A, any income derived from an industrial undertaking is not to be included in total income. Without prejudice to the aforesaid submissions treating such receipts as reimbursement would not make a difference as the same would go to reduce business expenses already incurred and allowed as such.
7. We have considered rival submissions. The assessee-company, part of HCL Group of Company, incurred certain expenses on behalf of HCL Technologies Ltd. The same were reimbursed in the form of corporate charges. Similarly, the assessee was also reimbursed for the use of workstations belonging to the assessee for and on behalf of HCL Technologies Ltd. Thus, what is received by assessee is by way of reimbursement of expenses. This implies that such receipt will be given to reduce the expenses incurred. Since the expenses are debited to profit and loss account and while computing profits of eligible undertaking, profits were reduced to the extent of expenses. The amount received by way of reimbursement of expenses cannot be reduced from the profits of business of eligible industrial undertaking. The assessing officer is, therefore, directed not to reduce the profits of business by the amount of Rs. 20 lakhs received by way of corporate charges and Rs. 9,00,250 received by way of reimbursement recovered for use of work stations. Accordingly, Ground Nos. 6, 9 and 10 ruled in favour of assessee.
8. Ground Nos. 7 and 8 are against denial of exemption under Section 10A of income of Rs. 14,51,506 earned from domestic software services.
During the year under consideration, the appellant had received an income of Rs. 11,93,172 from software services rendered in the domestic sector. The assessing officer held that professional services are in addition to software services as declared in P&L A/c. Income from these services is not even remotely connected with the business of software export from a STPI, hence, the income is treated as "income from other sources" which has not been disclosed. The Commissioner (Appeals) affirmed the action of the assessing officer on the ground that these professional receipts are in addition to the software services declared in the P&L A/c and not connected with the business of software export.
Hence, the same should be treated as "income from other sources". Mr.
Butani submitted that the assessing officer wrongly took the income as Rs. 14,51,506 on basis of amounts shown in the certificate of tax deduction issued to the appellant. The difference is on account of payments of Rs. 33,334 and Rs. 2,25,000 received from Apollo Hospital and Maharashtra State Electricity Board ('MSEB') respectively, which pertain to preceding and succeeding assessment years respectively. The appellant has accounted for such sums in the respective assessment years, hence, said amounts should not be considered. Further, it is to be noted that the assessing officer and Commissioner (Appeals) wrongly held that the professional income is in addition to the software services declared in the P&L A/c. It is submitted that the total software services income of Rs. 96,19,19,101 as shown in the P&L A/c is inclusive of income from professional services. The appellant is engaged in business of design and development of information technology enabled business transformation solutions, business consultancy and system integration services etc., which are recognized for exemption under Section 10A per Central Board of Direct Taxes ("CBDT") Notification No. SO 890(E), dated 26-9-2000. Therefore, income from professional services would qualify for exemption under un-amended Section 10A of the Act.
8.1 Without prejudice to the aforesaid, Mr. Butani submitted that the appellant should be allowed exemption on income from domestic services up to 25 per cent of the total export sales and with effect from 1-4-2001 proportionate benefit. The un-amended Section 10A was applicable to undertakings having exports not less than 75 per cent of the total sales during the previous year and domestic sales up to 25 per cent of the total sales were allowed to such undertakings. In Cybertech Systems & Software Ltd. v. Asstt. CIT (2006) 7 SOT 230 (Mum.), it was observed that under the erstwhile Section 10B, the exemption was available to either a 100 per cent export oriented unit or an undertaking whose exports were not be less than 75 per cent of the total sales. Circular No. 717, dated 14-8-1995, clarified that eligible units under un-amended Section 10A would get exemption even in respect of profits from 25 per cent domestic sales allowed to them. As long as domestic sales are within prescribed limits, exemption of profits can be justified as a concession incidental to export.
9. We have considered rival submissions and the relevant facts. While computing exemption under Section 10A, any profit derived by the eligible undertaking is not to be included in total income.
Accordingly, even the income from domestic software services will be eligible for exemption so long as the assessee fulfils the conditions laid down under Section 10A of the Act. It is also observed that the value of such domestic service is not even 1 per cent of the total services rendered by eligible undertaking. Even the domestic services were rendered from the very same eligible undertaking. Accordingly, whole of the profit of such undertaking is to be exempted under Section 10A of the Act. Ground Nos. 7 and 8 are accordingly decided in favour of the assessee.
10. Ground No. 11 is against disallowance of lease rent payment of Rs. 2,04,400 to Noida Authorities. In the year under consideration, the appellant had debited a sum of Rs. 2,04,400 as lease rent and late registration fee paid to Noida Authority, in respect of leasehold properties, of which possession was taken in February, 1998.
10.1 The assessing officer held that the assessee is able to get a capital asset by the lease rent payment. Accordingly, the payment is treated as capital expenditure and not as revenue expenditure. Learned Commissioner (Appeals) upheld the disallowance on the ground that the expenditure was incurred in connection with acquiring plot of land on long-term lease for 99 years. Thus, the assessee receives enduring benefit and hence, to be treated as capital expenditure not allowable under Section 37(1) of the Act.
10.2 Mr. Butani submitted that the business of the appellant was in existence and therefore, expenditure on account of lease rent should be allowed as revenue deduction. Further, the condition of "use" of the premises is no pre-condition for allowance. The expression "used" in Section 30 does not mean "actually utilized". Even, if the land was assumed to be not in use during the year, the provisions of Section 30 would not apply while provisions of Section 37 would apply. Reference can be made to decision of Calcutta Tribunal in the case of Vijay International v. Asstt. CIT 10.3 The learned DR submitted that the expenditure being capital in nature cannot be allowed.
11. We have considered rival submissions. As rightly contended by counsel for the appellant, the amount paid is not for acquiring any leasehold right by way of annual lease rent. Thus, the amount is regarding payment for continuing to enjoy leasehold rights. In such situation, the assessee do not acquire any new capital asset but merely maintains capital asset already acquired. Thus, the expenditure assumes the character of revenue in nature and not capital expenditure. We accordingly hold that the expenditure being revenue in nature are allowable as such.