Value Labs LLP, Hyd, Hyderabad V. DCIT, Circle-8(1), Hyderabad, Hyderabad

ITA 392/HYD/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2642 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 04-01-2018
• Assessment Year: 2009-2010
• Appeal Filed On: 24-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N SWAPNA
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Business income; Source of fund; Bad and doubtful debts; Commercial expediency
• Section: 10B; 56; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 392/HYD/2016 ASSESSMENT YEAR: 2009-10 M/S. VALUELABS LLP, HYDERABAD [PAN: AAEFV9532G] VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-8(1), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI P. MURALI MOHAN RAO, AR FOR REVENUE : SMT. N. SWAPNA, DR DATE OF HEARING : 04-01-2018 DATE OF PRONOUNCEMENT : 24-01-2018 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF TH E COMMISSIONER OF INCOME TAX (APPEALS)-9, HYDERABAD, DATED 12-01-2016. THE ISSUE IN THIS APPEAL IS WHETHER THE IN TEREST INCOME AND OTHER INCOME EARNED BY ASSESSEE IS ELIGIB LE FOR DEDUCTION U/S. 10A OF THE INCOME TAX ACT [ACT]. 2. BRIEFLY STATED, ASSESSEE IS A FIRM ENGAGED IN THE BUSINESS OF DEVELOPMENT AND EXPORT OF SOFTWARE AND HA S EARNED INCOME OF RS. 62,62,81,648/-. AFTER CLAIMING DEDUCTI ON OF RS. 62,55,84,569/- U/S. 10A OF THE ACT. ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME AT RS. 6,62,225/-. THE A SSESSING OFFICER (AO) HAS NOTICED THAT ASSESSEE HAS EARNED INTER EST INCOME I.T.A. NO. 392/HYD/2016 :- 2 - : OF RS. 4,62,35,101/- AND OTHER INCOME OF RS. 41,39, 680/-. CONSIDERING THAT THESE AMOUNTS ARE NOT DERIVED FROM TH E EXPORT OF SOFTWARE AND FOLLOWING THE PRINCIPLES LAID DOWN BY T HE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. STERLING FOODS [2 37 ITR 579] (SC) AND CIT VS. PANDIAN CHEMICALS LTD., [262 ITR 278], A O EXCLUDED THE ABOVE AMOUNTS FROM THE COMPUTATION U/S. 1 0A AND RESTRICTED THE DEDUCTION ACCORDINGLY. 3. BEFORE THE LD.CIT(A), ASSESSEE CONTENDED THAT INTERE ST INCOME AND OTHER INCOME HAVE DIRECT NEXUS WITH THE ACTI VITY OF BUSINESS AND THAT THESE RECEIPTS FORM PART OF BUSINESS OF ASSESSEE. IT RELIED ON THE FOLLOWING CASE LAW: I. ORDER OF ITAT, MUMBAI IN THE CASE OF M/S. JP MORGAN SERVICES INDIA PVT. LTD., VS. DCIT [33 SOT 327] (MUMBAI); II. JUDGMENT IN THE CASE OF CIT VS. PUNIT COMMERCIAL LTD., [116 TAXMANN 191] (BOMBAY); III. JUDGMENT IN THE CASE OF CIT VS. LOK HOLDING [308 ITR 356] (BOMBAY); IV. JUDGMENT IN THE CASE OF CIT VS. ELTEK SGS (P) LTD., [3 00 ITR 6] (DELHI); 4. LD.CIT(A), HOWEVER, DID NOT ACCEPT THE CONTENTIONS A ND FOLLOWING THE PRINCIPLES LAID DOWN BY THE HON'BLE S UPREME COURT IN THE CASE OF LIBERTY INDIA VS. CIT [183 TAXMAN 349] [ 317 ITR 218] (SC) AND ALSO OTHER DECISIONS AS STATED IN PARA 6.4 OF THE ORDER UPHELD THE ORDER OF AO. HENCE THE PRESENT APPEAL. I.T.A. NO. 392/HYD/2016 :- 3 - : 5. ASSESSEE IN THE COURSE OF PRESENT APPEAL, RAISED ADDITIONAL GROUNDS THAT AO HAS ERRED IN NOT EXCLUDING THE ABOVE INCOMES FROM TOTAL TURNOVER WHILE EXCLUDING FROM EXPOR T TURNOVER. IT IS NOTICED THAT AO HAS NOT EXCLUDED THE ABOVE INCOMES FROM THE EXPORT TURNOVER AND EXPORT TURNOVER WAS TAKEN AS ADMITTED BY ASSESSEE ITSELF. THEREFORE, THE ADDITIONAL GROUNDS RA ISED DOES NOT ARISE ON THE FACTS OF THE CASE AND AFTER BEING POINTE D OUT LD. COUNSEL DID NOT PRESS THE SAME. 6. COMING TO THE ISSUE OF TREATING THE INTEREST INCOME AND OTHER INCOME, IT WAS CONTENDED THAT THESE INCOMES ARE INC IDENTAL TO THE BUSINESS AND ARE TO BE TREATED AS BUSINESS PR OFITS. REFERRING TO THE PROVISIONS BEFORE THE AMENDMENT TO SEC TION 10B FROM 01-04-2001 AND SUBSEQUENT TO AMENDMENT BROUGHT ON 01- 04-2001, IT WAS SUBMITTED THAT THE PROFITS OF THE UNDERTAKI NG ARE TO BE CONSIDERED WHILE ALLOWING THE DEDUCTION U/S. 10 B. IT WAS SUBMITTED THAT THE HON'BLE HIGH COURT OF KARNATAKA (FULL B ENCH) IN THE CASE OF CIT VS. HEWLETT PACKARD GLOBAL SOFT LTD. , [87 TAXMANN.COM 182] (KARNATAKA) (FB) HAS EXAMINED THE LEG AL POSITION INCLUDING THE DECISION OF HON'BLE SUPREME CO URT AND CAME TO THE FOLLOWING CONCLUSION: '37. ON THE ABOVE LEGAL POSITION DISCUSSED BY US, W E ARE OF THE OPINION THAT THE RESPONDENT ASSESSEE WAS ENTITLED T O 100% EXEMPTION OR DEDUCTION UNDER SECTION 10-A OF THE ACT IN RESPECT OF THE INTEREST INCOME EARNED BY IT ON THE DEPOSITS MADE BY IT WITH THE BA NKS IN THE ORDINARY COURSE OF ITS BUSINESS AND ALSO INTEREST EARNED BY IT FROM THE STAFF LOANS AND SUCH INTEREST INCOME WOULD NOT BE TAXABLE AS 'I NCOME FROM OTHER SOURCES' UNDER SECTION 56 OF THE ACT. THE INCIDENTA L ACTIVITY OF PARKING OF SURPLUS FUNDS WITH THE BANKS OR ADVANCING OF STAFF LOANS BY SUCH SPECIAL CATEGORY OF ASSESSEES COVERED UNDER SECTION 10-A OR 10-B OF THE ACT IS 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 ITS PR OFITS AND GAINS DERIVED I.T.A. NO. 392/HYD/2016 :- 4 - : BY THE UNDERTAKING ENGAGED IN THE EXPORT OF ARTICLE S AS ENVISAGED UNDER SECTION 10-A OR SECTION 10-B OF THE ACT AND CANNOT BE TAXED SEPARATELY UNDER SECTION 56 OF THE ACT.' 6.1. IN VIEW OF THE ABOVE, IT WAS SUBMITTED THAT INTEREST INCOME AND OTHER INCOME WILL FORM PART OF BUSINESS I NCOME AND ACCORDINGLY IS ELIGIBLE FOR DEDUCTION U/S. 10A. LD. COUNSEL PLACED RELIANCE ON THE FOLLOWING DECISIONS: I. ORDER OF ITAT, MUMBAI IN THE CASE OF STATE STREET SYNTEL SERVICES PVT. LTD., (FORMERLY KNOWN AS SYNTEL SOURCING P. LTD) VS. DY.CIT IN ITA NO. 6026/MUM/2013 DT. 09-03-2016; II. ORDER OF ITAT, MUMBAI IN THE CASE OF STATE STREET SYNTEL SERVICES PVT. LTD., (FORMERLY KNOWN AS SYNTEL SOURCING P. LTD) VS. ACIT IN ITA NO. 3743/MUM/2013 DT. 29-02-2016; III. ORDER OF ITAT, MUMBAI IN THE CASE OF M/S. J.P. MORG AN SERVICES INDIA PVT. LTD., VS. THE DCIT IN ITA NO. 5547/MUM/2009 DT. 23-04-2013; IV. JUDGMENT OF HON'BLE HIGH COURT OF DELHI IN THE CASE O F PR.CIT VS. UNIVERSAL PRECISION SCREWS IN ITA NO. 392/2015, DT. 06- 10-2015; V. JUDGMENT OF HON'BLE HIGH COURT OF DELHI IN THE CASE OF RIVIERA HOME FURNISHING VS. ADDL. CIT IN ITA NO. 45 9/2015, DT. 19-11-2015; VI. ORDER OF ITAT, HYDERABAD IN THE CASE OF SHIVA SHANKA R GRANITES (P.) LTD., VS. ITO [81 ITD 106] (HYDERABAD); VII. ORDER OF ITAT, BANGALORE IN THE CASE OF ABB GLOBAL I NDUSTRIES AND SERVICES LIMITED (FORMERLY KNOWN AS ABB GLOBAL SERVICES LTD) VS. DY.CIT, IN ITA NO. 1353/BANG/2011, DT. 31-10-2013; I.T.A. NO. 392/HYD/2016 :- 5 - : VIII. ORDER OF ITAT, BANGALORE IN THE CASE OF DY.CIT VS. M /S. SUBEX LTD., IN ITA NOS. 673 & 674 (BANG)/2010, DT. 31 -01- 2011; IX. JUDGMENT OF HON'BLE HIGH COURT OF CALCUTTA IN THE CASE O F CIT VS. HINDUSTAN GUM & CHEMICALS LTD., [241 TAXMAN 4 01] (CALCUTTA); X. JUDGMENT OF HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. MOTOROLA INDIA ELECTRONICS (P) LTD., [46 TAXMA NN.COM 167] (KARNATAKA); 7. IN REPLY, LD.DR RELIED ON THE PRINCIPLES LAID DO WN BY THE HON'BLE SUPREME COURT IN THE CASE OF LIBERTY INDIA VS . CIT (SUPRA) AND FURTHER IN THE CASE OF PANDIAN CHEMICALS LTD., VS. CIT [262 ITR 278] (SC). LD.DR ALSO PLACED ON RECORD THE DECI SION OF HON'BLE HIGH COURT OF MADRAS IN THE CASE OF CIT VS. MENON IM PEX (P.) LTD., [259 ITR 403] (MADRAS) WHICH WAS FOLLOWED IN INDIA COMNET INTERNATIONAL VS. ITO [304 ITR 322] (MADRAS). IT WAS TH E SUBMISSION THAT THERE WAS NO NEXUS BETWEEN INTEREST EA RNED AND INDUSTRIAL UNDERTAKING. THEREFORE, ASSESSEE IS NOT ENTI TLED FOR DEDUCTION U/S. 10A. 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUS ED THE VARIOUS CASE LAW PLACED ON RECORD. AS SEEN FROM THE ORDER OF THE AO, AO HAS NOT TREATED THE INTEREST INCOME AND OTHER INCOMES AS INCOME FROM OTHER SOURCES. SO, SOME OF THE PRIN CIPLES LAID DOWN BY VARIOUS COURTS THAT THESE INTEREST INCOMES AND OTHER INCOMES SHOULD BE CONSIDERED AS BUSINESS INCOME AND NOT AS INCOME FROM OTHER SOURCES DOES NOT APPLY, AS THE AO HA S TREATED THE ABOVE INCOMES AS PART OF BUSINESS INCOME ITSELF. HOWEVER, THE I.T.A. NO. 392/HYD/2016 :- 6 - : ISSUE IS WHETHER THERE IS NEXUS BETWEEN THE EARNING OF INTEREST INCOME AND OTHER INCOMES WITH THE UNDERTAKING WHICH IS IN THE BUSINESS OF EXPORT OF SOFTWARE. THERE IS NO FINDIN G BY THE AO THAT THERE IS A NEXUS OR NOT TO THE EXTENT OF INTEREST INCOME I S CONCERNED. IN FACT THE AO HAS NOT DISCUSSED EVEN THE N ATURE OF INTEREST INCOME EARNED. AS FAR AS THE OTHER INCOMES AR E CONCERNED, WE HAVE PERUSED THE DETAILS PLACED ON RECORD AND IT IS NOTICED THAT THE OTHER INCOMES ARE OF FOLLOWING NATURE: RS. 1. EXCESS PROVISIONS REVERSED 27,57,647 2. BAD DEBTS RECOVERED 6,85,965 3. MISCELLANEOUS RECEIPTS 6,96,068 TOTAL: 41,39,680 8.1. OUT OF THESE, THE EXCESS PROVISIONS REVERSED PER TAIN TO PROVISIONS CREATED IN IMMEDIATELY PREVIOUS FINANCIA L YEAR 2007-08 WHICH ARE CONSIDERED EXCESS, INCLUDING AUDIT FEE EXC ESS. THESE AMOUNTS ARE INCOMES U/S. 41(1), IF THEY ARE ALLOWED A S DEDUCTION IN EARLIER YEAR. SINCE THE AMOUNTS ARE DIRECTLY CONN ECTED TO THE BUSINESS, THE EXCESS PROVISION REVERSED IS CERTAINLY HAVING A NEXUS WITH THE BUSINESS. 8.2. AS FAR AS THE BAD DEBTS RECOVERED ARE CONCERNED , AS SEEN FROM THE LEDGER COPY PLACED ON RECORD, THESE BAD DEBTS ARE PREVIOUSLY WRITTEN-OFF SO TO THAT EXTENT PROFIT IN THOSE Y EARS HAS COME DOWN. THEREFORE, THE RECOVERY OF THE BAD DEBTS C ERTAINLY HAS A BUSINESS CONNECTION. THE LAST ITEM IS THE MISCELLAN EOUS RECEIPTS. AS SEEN FROM THE LEDGER COPY, THESE ARE INCENTIVES REC EIVED FROM AIRLINES, RECOVERY OF SUBSCRIPTION FROM THE EMPLOYEE S, NOTICE PERIOD PAYMENTS RECOVERED FROM THE EMPLOYEES WHO RETIRED OR R ESIGNED, I.T.A. NO. 392/HYD/2016 :- 7 - : RECOVERY OF SALARY ADVANCES ETC., AND ALSO INCLUDES SALE OF SCRAP. THESE AMOUNTS ARE PART OF BUSINESS INCOME AND HAS A D IRECT NEXUS WITH THE ACTIVITY OF ASSESSEE. THEREFORE, WITHOUT CONSI DERING THE VARIOUS CASE LAW ITSELF, SINCE THESE AMOUNTS HAVE A DI RECT NEXUS (UNDER THE COMPANY LAW, THESE ARE TO BE REPORTED AS O THER INCOMES), WE ARE OF THE OPINION THAT THESE AMOUNTS ARE TO BE CONSIDERED AS PART OF BUSINESS INCOME AND CANNOT BE EXCLUDED FOR THE PURPOSE OF DEDUCTION U/S. 10A OF THE ACT. 8.3. THAT LEAVES US WITH THE ISSUE OF INTEREST INCOME. AS ALREADY STATED, THERE IS NO EXAMINATION OF NATURE OF INTE REST INCOME EARNED BY ASSESSEE. ASSESSEE ALSO HAD NOT PLACED ON RECORD THE DETAILS OF INTEREST INCOME EARNED, SO AS TO EXAMINE WHE THER IT HAS ANY NEXUS WITH THE BUSINESS. IN ALL THE CASE LAW REL IED UPON BY ASSESSEE, THERE IS A FINDING THAT AMOUNT OF INTEREST R ECEIVED IS HAVING A DIRECT NEXUS WITH THAT OF BUSINESS IN THE SEN SE THAT (I) THE DEPOSITS ARE SHORT TERM WHICH ARE NOT IMMEDIATELY RE QUIRED FOR THE BUSINESS; (II) THE INTEREST EARNED IS FROM THE EXCH ANGE EARNERS FOREIGN CURRENCY ACCOUNT (EEFC A/C). THE DECISION RELIED ON BY THE LD. COUNSEL IN THE CASE OF CIT VS. HEWLETT PACKARD GLOBAL SOFT LTD., (SUPRA), WHEREIN THE ISSUE INVOLVED IS WITH REF ERENCE TO INTEREST INCOME ON THE SHORT TERM DEPOSITS MADE BY IT, O UT OF ITS SURPLUS FUNDS TEMPORARILY PARKED IN THE CURRENT A/C A ND ALSO INTEREST EARNED FROM THE ADVANCE OF LOANS TO THE STAFF MEMBERS. ON THOSE FACTS, THE HON'BLE HIGH COURT OF KARNATAKA IN THE FULL BENCH DECISION, HELD THAT ALL PROFITS AND GAINS OF 100% EOU INCLUDING INCIDENTAL INCOME BY WAY OF INTEREST ON BANK DEPOSITS OR STAFF LOANS WOULD BE ENTITLED TO 100% EXEMPTION. I.T.A. NO. 392/HYD/2016 :- 8 - : 8.4. HOWEVER, IT IS NOT KNOWN IN THE PRESENT FACTS OF TH E CASE WHETHER THE INTEREST INCOME IS EARNED ON SHORT TERM DEPO SITS OUT OF SURPLUS FUNDS OR LONG TERM DEPOSITS WHICH HAS NO CONN ECTION WITH THE BUSINESS ACTIVITY OF ASSESSEE. LD. COUNSELS RELI ANCE ON THE ABOVE DECISIONS MAY APPLY TO THE FACTS OF THE CASE IN C ASE INTEREST EARNED ARE ON SHORT TERM DEPOSITS IN THE CURRENT A/C OR IN THE EEFC A/C. THE HON'BLE DELHI HIGH COURT IN THE CASE O F PR.CIT VS. UNIVERSAL PRECISION SCREWS (SUPRA) HAS ALSO EXAMINE D THE PRINCIPLES AND ALLOWED THE CLAIM ON THE FINDING THAT I NTEREST ON FDR WAS RECEIVED ON MARGIN MONEY KEPT IN THE BANK FOR UTILIZATION OF LETTER OF CREDIT AND BANK GUARANTEE LIMITS. IN THOSE CIRCUMSTANCES, THE DECISION OF THE ITAT WAS UPHELD WH ERE IN IT WAS HELD THAT SUCH INTEREST BEARS THE REQUISITE CHARACTERISTIC OF BUSINESS INCOME AND HAS NEXUS TO THE BUSINESS ACTIVITY OF ASSESSEE. SIMILAR PRINCIPLE WAS FOLLOWED IN OTHER D ECISION RELIED UPON BY THE LD. COUNSEL. 8.5. EVEN THOUGH THE AO HAS TREATED THE INCOME AS BUSINESS INCOME, THERE IS NO FINDING WHETHER THE INTE REST INCOME HAS A NEXUS WITH THE BUSINESS OF THE UNDERTAKING. J UST BECAUSE THE ASSESSEE HAS EARNED INTEREST INCOME OUT OF THE BUSIN ESS IT MAY NOT BE ELIGIBLE FOR DEDUCTION UNLESS IT HAS NEXUS WITH THE BUSINESS OF UNDERTAKING. CONSIDER A SITUATION IN WHICH AN ASSES SEE WHO HAS SURPLUS AMOUNTS AND EARNS SUBSTANTIAL INCOME BY WAY OF INTEREST ALONG WITH THE BUSINESS OF UNDERTAKING, FOR EXAMPLE, EXPORT OF SOFTWARE NOMINALLY. IN THESE CIRCUMSTANCES, IT CANNO T BE STATED THAT LEGISLATURE INTENDED TO EXCLUDE THE ENTIRE INCOME O F INTEREST EVEN THOUGH THE BUSINESS OF UNDERTAKING IS VERY MUCH L ESS, COMPARED TO THE INVESTMENTS MADE FOR EARNING THE INTEREST INCOME. I.T.A. NO. 392/HYD/2016 :- 9 - : THE INTENTION OF LEGISLATURE CANNOT BE MISUSED OR MISU TILISED BY SIMPLY UNDERTAKING AN EXPORT AND CONTENDING THAT ET/TT R ATIO GIVES 100% EXEMPTION TO ALL OTHER INCOMES, NOT CONNECTE D WITH THE BUSINESS OF THE UNDERTAKING. IT IS TO BE EXAMINED WHETHE R ASSESSEES EARNING OF INTEREST IS IN CONNECTION WITH TH E BUSINESS OF ASSESSEE OR NOT? AO IS DIRECTED TO EXAMINE THIS ASPEC T AND GIVE A FINDING ABOUT THE NATURE OF DEPOSITS MADE BY ASSESSEE, THE SOURCE OF FUNDS AND WHETHER IT HAS ANY NEXUS WITH THE EXPORT B USINESS OF THE UNDERTAKING. UNLESS SUCH FINDING IS GIVEN, THE PRI NCIPLES ESTABLISHED IN VARIOUS CASE LAW CANNOT BE APPLIED. 8.6. THEREFORE, IN THE INTEREST OF JUSTICE, WE RESTORE THE ISSUE TO THE FILE OF AO TO GIVE PROPER FINDINGS ON THE NATURE OF INTEREST INCOME EARNED AND ACCORDINGLY, CONSIDER THE CLAIMS O F ASSESSEE, KEEPING IN MIND THE PRINCIPLES LAID DOWN IN VARIOUS CASE LAW. ASSESSEE SHOULD BE GIVEN DUE OPPORTUNITY. IN THE RE SULT, GROUNDS PERTAINING TO OTHER INCOME ARE CONSIDERED ALLOWED AN D GROUNDS PERTAINING TO INTEREST INCOME ARE CONSIDERED ALLOWED F OR STATISTICAL PURPOSES. 9. IN THE RESULT, APPEAL OF ASSESSEE IS CONSIDERED A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH JANUARY, 2018 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEM BER HYDERABAD, DATED 24 TH JANUARY, 2018 TNMM I.T.A. NO. 392/HYD/2016 :- 10 -: COPY TO : 1. M/S. VALUELABS LLP, C/O. P. MURALI & CO., CHARTE RED ACCOUNTANTS, 6-3-655/2/3, 1 ST FLOOR, SOMAJIGUDA, HYDERABAD. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-8( 1), HYDERABAD. 3. CIT(APPEALS)-9, HYDERABAD 4. PR.CIT-2, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.