ITO 8(2)-4, MUMBAI V. ONWARD TECHNOLOGIES LTD, MUMBAI

ITA 5235/MUM/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62182 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 08-02-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 25-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A C TEJPAL
• Assessee Lawyers: ARVIND SOND E PARESH SHAPARIA
• Keywords: Business income; Depreciation; Business expenditure; Retrospective amendment; Unabsorbed depreciation
• Section: 43B; 10B; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI N.K. BILLAIY A(A.M) ITA NO. 5235/MUM/2010(A.Y. 2005-06) INCOME TAX OFFICER 8(2)-4, ROOM NO.213/216A, AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (APPELLANT) VS. M/S. ONWARD TECHNOLOGIES LTD., STERLING CENTRE, WORLI, MUMBAI 400 018. PAN:AAACO 3742J (RESPONDENT) ITA NO.5679/MUM/2010(A.Y. 2005-06) M/S. ONWARD TECHNOLOGIES LTD., STERLING CENTRE, WORLI, MUMBAI 400 018. PAN:AAACO 3742J (APPELLANT) VS. INCOME TAX OFFICER 8(2)-4, ROOM NO.213/216A, AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (RESPONDENT) REVENUE BY : SHRI A.C. TEJPAL ASSESSEE BY : S/SHRI ARVIND SONDE / PARESH SHAPARIA DATE OF HEARING : 29/03/2012 DATE OF PRONOUNCEMENT : 11 /04/2012 ORDER PER BENCH, ITA NO.5235/M/2010 IS AN APPEAL BY THE REVENUE WHI LE ITA NO.5679/M/2010 IS AN APPEAL BY THE ASSESSEE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 15/3/2010 OF CIT(A ) 17, MUMBAI RELATING TO ASSESSMENT YEAR 2005-06. ITA NO.5235/MUM/2010, REVENUES APPEAL: 2. GROUND NO.1 RAISED BY THE REVENUE READS AS FOLLO WS: ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 2 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION MADE BY TH E ASSESSING OFFICER ON ACCOUNT OF DELAYED PAYMENT OF EMPLOYEES CONTRIB UTION TOWARDS PROVIDENT FUND OF RS.30,49,9021- AND TOWARDS ESIC R S.1,544/-, WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW. 3. THE AO MADE AN ADDITION TO THE TOTAL INCOME IN R ESPECT OF EMPLOYEES CONTRIBUTION TO P.F. OF RS. 40,69,602/- AND CONTRIB UTION TO ESIC OF RS. 7,480/- THAT WERE PAID BEYOND THE DATE PROVIDED IN THE RELEVANT STATUTE. THE AO INVOKED THE PROVISIONS OF SECTION 56(2)(IC) AND TREATED THE DISALLOWANCE AS MADE ABOVE AS INCOME FROM OTHER SOURCES. BEFORE T HE CIT(A), THE ASSESSEE SUBMITTED THAT OUT OF THE DISALLOWANCE OF OF RS.7,4 80/- MADE BY THE AO, PAYMENT OF ESIC OF RS. 5936/- WAS MADE WITHIN THE G RACE PERIOD PROVIDED IN THE RELEVANT STATUTE AS UNDER: MONTH AMOUNT DUE DATE (INCLUDING 5 GRACE DAYS) PAID PAYMENT DATE JUNE 04 772 21.07.2004 772 17.07.2004 JULY 04 690 21.08.2004 690 17.08.2004 AUG.04 623 21.09.2004 623 15.09.2004 SEP.04 633 21.10.2004 633 19.10.2004 OCT.04 516 21.11.2004 516 13.11.2004 NOV.04 550 21.12.2005 550 15.12.2004 DEC.04 538 21.01.2005 538 15.01.2005 JAN.05 538 21.02.2005 538 17.02.2005 FEB.05 538 21.03.2005 538 16.03.2005 MAR.05 538 21.04.2005 538 20.04.2005 TOTAL 5936 FURTHER, OUT OF RS.40,69,602/- RELATING TO EMPLOYEE S CONTRIBUTION TO P.F. A SUM OF RS.10,19,700/- AS UNDER WAS ALSO PAID WITHIN THE GRACE PERIOD. MONTH AMOUNT DUE DATE (INCLUDING 5 GRACE DAYS) PAID PAYMENT DATE DEC.04 3,42,344 20.01.2005 19.01.2005 JAN.05 3,37,415 20.02.2005 17.02.2005 FEB.05 3,39,941 20.03.2005 19.03.2005 TOTAL: 10,19,700 ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 3 4. THE ASSESSEE POINTED OUT BEFORE CIT(A) THAT PAY MENTS MADE WITHIN THE GRADE PERIOD PERMITTED UNDER THE RELEVANT PROVISION S OF THE PF ACT AND ESIC ACT HAVE TO BE CONSIDERED AS PAYMENTS MADE ON OR BE FORE THE DUE DATE AND IN THIS REGARD RELIED ON THE FOLLOWING DECISIONS: (I) MADAUS PHARMACEUTICALS (P) LTD. VS. DCIT (24 SO T 180) (BOM) (II) SONY INDIA (P) LTD. VS. DCIT (114 ITD 448) (DE L) (III) ACIT VS. JINDAL SAW PIPES LTD. (118 TTJ 228) (DEL) (IV) CIT VS. SALEM CO-OPERATIVE SPINNING MILLS (284 ITD 621) (MAD) (V) HUNSUR PLYWOOD WORKS LTD. VS. DCIT (54 ITD 394) (BANGLORE) (VI) MARUBENI INDIA P. LTD. VS. JCIT (288 ITR 159) (DEL) 5. IT WAS ALSO POINTED OUT BEFORE CIT(A) BY THE AS SESSEE THAT AS HELD IN SHANGOLD INDIA LTD. VS. ITO, ITA NOS.6041 & 6568/MU M/2002 DATED 06.05.2009 WHEN THE CONTRIBUTION IS MADE IN TIME SU CH PAYMENTS WERE ALLOWED AS BUSINESS EXPENDITURE AND ACCORDINGLY, TH E DISALLOWANCE MADE IN THIS REGARD WOULD GIVE RISE TO BUSINESS INCOME. THU S, A SUM OF RS.10,19,700/- AND RS.5,936/- WAS ALLOWABLE AND THE BALANCE AMOUNT OF RS.30,49,902/- AND RS. 1,544/- OUGHT TO BE CONSIDER ED AS INCOME FROM BUSINESS. 6. THE CIT(A) HELD THAT THE PAYMENTS OF RS.5,936/- TOWARDS ESIC AND RS.10,19,700/- TOWARDS EMPLOYEES CONTRIBUTION TO P .F. DURING GRACE PERIOD HAS TO BE ALLOWED AS LAID DOWN IN THE DECISIONS REF ERRED TO BY THE ASSESSEE. IN RESPECT OF THE BALANCE AMOUNT OF RS.30,49,902/- AND RS. 1,544/- THE CIT(A) HELD THAT THE HONBLE SUPREME COURT IN THE C ASE OF ALOM EXTRUSIONS [319 ITR 306] HAS HELD THAT EMPLOYEES CONTRIBUTION TO P.F. AND ESIC WAS ALLOWABLE IF PAID BEFORE DUE DATE OF FILING RETURN. HE ALSO FOUND THAT THE SAID DECISION HAS BEEN FOLLOWED BY THE JURISDICTIONAL TR IBUNAL IN PIK PEN PVT. LTD. VS. CIT IN ITA NO.6847/MUM/08 DT.28.01.2010. IN THE CIRCUMSTANCES, THE DISALLOWANCE AND TREATMENT AS INCOME UNDER OTHER SO URCES WAS DELETED. ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 4 AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE HAS R AISED GR.NO.1 BEFORE THE TRIBUNAL. 7. AT THE TIME HEARING THE PARTIES AGREED THAT THE ISSUE RAISED BY THE REVENUE IS COVERED AGAINST THE REVENUE BY THE DECIS ION OF THE HONBLE DELHI HIGH COURT. IN CIT VS. AIMIL LIMITED THE HONBLE DELHI HIGH COURT IN ITA NO. 1063 OF 2006 ITA NO.755 OF 2008 ITA NO. 204 OF 2009 ITA NO. 1214/2008 WITH ITA NO. 1246/2008 ITA NO. 50/2009 IT A NO. 78/2009 JUDGMENT DATED DECEMBER 23, 2009 HAD TO DEAL WITH A CASE OF DISALLOWANCE U/S.36(1)(VA) OF THE ACT. THE HONBLE COURT DISCUS SED THE PROVISIONS OF S. 2 (24) (X) WHICH PROVIDES THAT AMOUNTS RECEIVED BY AN ASSESSEE FROM EMPLOYEES TOWARDS PF CONTRIBUTIONS ETC SHALL BE INCOME AND S. 36 (1) (VA) WHICH PROVIDES THAT IF SUCH SUMS ARE CONTRIBUTED TO THE E MPLOYEES ACCOUNT IN THE RELEVANT FUND ON OR BEFORE THE DUE DATE SPECIFIED I N THE PF ETC LEGISLATION, THE ASSESSEE SHALL BE ENTITLED TO A DEDUCTION. THE COUR T ALSO NOTICED THAT THE SECOND PROVISO TO S. 43B (B) PROVIDED THAT ANY SUM PAID BY THE ASSESSEE AS AN EMPLOYER BY WAY OF CONTRIBUTION TO ANY PROVIDENT FUND ETC. SHALL BE ALLOWED AS A DEDUCTION ONLY IF PAID ON OR BEFORE TH E DUE DATE SPECIFIED IN 36(1)(VA). AFTER THE OMISSION OF THE SECOND PROVISO W.E.F 1.4.2004, THE DEDUCTION IS ALLOWABLE UNDER THE FIRST PROVISO IF T HE PAYMENT IS MADE ON OR BEFORE THE DUE DATE FOR FURNISHING THE RETURN OF IN COME. IN ALOM EXTRUSIONS 319 ITR 306 (SC), THE DELETION OF THE SECOND PROVIS O HAS BEEN HELD TO BE WITH RETROSPECTIVE EFFECT. THE HIGH COURT HAD TO CONSIDE R WHETHER THE BENEFIT OF S. 43B CAN BE EXTENDED TO EMPLOYEES CONTRIBUTION AS W ELL WHICH ARE PAID AFTER THE DUE DATE UNDER THE PF LAW BUT BEFORE THE DUE DA TE FOR FILING THE RETURN. THE HONBLE COURT HELD THAT: (I) THOUGH THE REVENUE HAS ARGUED THAT A DISTINCTIO N IS TO BE MADE BETWEEN EMPLOYERS CONTRIBUTION AND EMPLOYEES CONTRIBUT ION AND THAT EMPLOYEES CONTRIBUTION BEING IN THE NATURE OF TRUST MONEY IN THE HANDS OF THE ASSESSEE CANNOT BE ALLOWED AS A DEDUCTION IF NOT PAID ON OR BEFORE THE DUE DATE ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 5 SPECIFIED IN THE PF ETC LAW, THE SCHEME OF THE ACT IS THAT EMPLOYEES CONTRIBUTION IS TREATED AS INCOME U/S 2 (24) (X) ON RECEIPT BY THE ASSESSEE AND ALLOWED AS A DEDUCTION U/S 36 (1) (VA) ON MAKIN G DEPOSIT WITH THE CONCERNED AUTHORITIES. S. 43B (B) STIPULATES THAT S UCH DEDUCTION WOULD BE PERMISSIBLE ONLY ON ACTUAL PAYMENT; (II) THE QUESTION AS TO WHEN ACTUAL PAYMENT SHOULD BE MADE IS ANSWERED BY VINAY CEMENTS 213 CTR 268 WHERE THE DELETION OF THE SECOND PROVI SO TO S. 43B W.E.F 1.4.2004 WAS HELD APPLICABLE TO EARLIER Y EARS AS WELL. AS THE DELETION OF THE 2ND PROVISO IS RETROSPECTIVE, THE C ASE HAS TO BE GOVERNED BY THE FIRST PROVISO. DHARMENDRA SHARMA 297 ITR 320 (DEL) & P.M. ELECTRONICS 313 ITR 161 (DELHI) FOLLOWED; (III) IF THE EMPLOYEES CONTRIBUTION IS NOT DEPOSIT ED BY THE DUE DATE PRESCRIBED UNDER THE RELEVANT ACTS AND IS DEPOSITED LATE, THE EMPLOYER NOT ONLY PAYS INTEREST ON DELAYED PAYMENT BUT CAN INCUR PENALTIES ALSO, FOR WHICH SPECIFIC PROVISIONS ARE MADE IN THE PROVIDENT FUND ACT AS WE LL AS THE ESI ACT. THEREFORE, THE ACT PERMITS THE EMPLOYER TO MAKE THE DEPOSIT WITH SOME DELAYS, SUBJECT TO THE AFORESAID CONSEQUENCES. INSO FAR AS THE INCOME-TAX ACT IS CONCERNED, THE ASSESSEE CAN GET THE BENEFIT IF T HE ACTUAL PAYMENT IS MADE BEFORE THE RETURN IS FILED, AS PER THE PRINCIPLE LA ID DOWN IN VINAY CEMENT . 8. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY MERIT IN GR.NO.1 RAISED BY THE REVENUE AND THE SAME IS DISMISSED. 9. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOLL OWS: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO REDUCE THE EXPENDITURE AMOUNTING TO RS.3,53,56,6481- FROTH TOT AL TURNOVER WHILE COMPUTING DEDUCTION U/S.10A, WITHOUT APPRECIATING T HE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW 10. THE FACTS OF THE CASE RELATING TO THIS ISSUE UNDER CONSIDERATION IN BRIEF ARE THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF EX PORT OF COMPUTER ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 6 SOFTWARE. THE ASSESSEE WAS ENTITLED TO CLAIM DEDU CTION U/S.10-A OF THE ACT. WHILE CLAIMING THE ELIGIBLE DEDUCTION U/S.10-A OF T HE ACT, THE ASSESSEE DEDUCTED THE FOLLOWING EXPENDITURE FROM THE TOTAL T URNOVER & EXPORT TURNOVER: S.NO. PARTICULARS AMOUNT (RS.) 1 TRAVELLING EXPENSES 1,15,73,886/- 2 TELE COMMUNICATION EXPENSES 57,62,895/- 3 MARKETING FEES 1,29,90,278/- 4 PROFESSIONAL FEES 6,68,102/- 5 SALARIES 20,28,520/- 6 MISCELLANEOUS EXPENSES 6,35,473/- 7 MARKETING COST 4,88,724/- 8 CONVEYANCE 41,370/- 9 SOFTWARE EXPENSES 11,67,400/- TOTAL: 3,53,56, 648/- U/S.10-A OF THE ACT, A DEDUCTION OF SUCH PROFITS AN D GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THING S OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS BEGINN ING WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UND ERTAKING BEGINS TO MANUFACTURE OR PRODUCE SUCH ARTICLES OR THINGS OR C OMPUTER SOFTWARE, AS THE CASE MAY BE, SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSE. THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS O R COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINE SS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPE CT OF SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURN OVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. FOR THE PURPOSE OF SEC.10-A EXPORT TURNOVER MEANS THE CONSIDERATION IN RESPECT OF EXP ORT BY THE UNDERTAKING OF ARTICLES OR THINGS OR COMPUTER SOFTWARE RECEIVED IN , OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACC ORDANCE WITH SUB-SECTION (3), BUT DOES NOT INCLUDE FREIGHT, TELECOMMUNICATIO N CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THI NGS OR COMPUTER SOFTWARE ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 7 OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRED IN FORE IGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. 11. THE AO EXCLUDED THE ABOVE ITEMS OF EXPENDITURE FROM THE EXPORT TURNOVER BUT DID NOT EXCLUDE THE SAME FROM THE TOTA L TURNOVER. THUS THE DEDUCTION CLAIMED U/S.10-A OF THE ACT BY THE ASSESS EE WAS ALLOWED AT A LESSER SUM THAN WHAT WAS CLAIMED BY THE ASSESSEE. 12. BEFORE THE CIT(A), THE ASSESSEE ARGUED THAT TH OUGH SECTION IOA OF THE ACT DOES NOT DEFINE THE TERM TOTAL TURNOVER, WHIL E CONSTRUING A WORD OR TERM THAT HAS NOT BEEN DEFINED IN THE SECTION ONE W OULD NORMALLY LOOK AT ITS MEANING AS IT IS UNDERSTOOD IN COMMON PARLANCE OR I N COMMERCIAL SENSE AND ALSO ITS DICTIONARY MEANING. PROVISIONS OF SECTION 8OHHE ARE IN MANY WAYS SIMILAR THE PROVISIONS OF SECTION 10A. SECTION 8OHH E DEFINES THE TERM TOTAL TURNOVER WHILE SECTION 10A DOES NOT DEFINE THIS TER M. SINCE THE OBJECTIVES OF BOTH THE, SECTIONS ARE SIMILAR, IT IS FOR CONSIDERA TION WHETHER SPECIFIC EXCLUSIONS PROVIDED IN SECTION 8OHHE IN THE DEFINIT ION OF TOTAL TURNOVER CAN ALSO BE CONSIDERED FOR THE PURPOSES OF DETERMINING TOTAL TURNOVER U/S.I0A. THE DEFINITION OF TOTAL TURNOVER CONTAINED IN SECTI ON 8OHHE EXCLUDES ANY FREIGHT, TELECOMMUNICATION CHARGES AND INSURANCE A TTRIBUTABLE TO THE DELIVERY OF THE COMPUTER SOFTWARE OUTSIDE INDIA; AN D EXPENSES, IF ANY, INCURRED FOREIGN EXCHANGE IN PROVIDING THE TECHNICA L SERVICES OUTSIDE INDIA. THE ASSESSEE THUS ARGUED THAT THE BASIS FOR CALCULA TING EXPORT TURNOVER AND TOTAL TURNOVER SHOULD BE THE SAME. THE ASSESSEE SUB MITTED THAT IN VIEW OF ABOVE, WHILE COMPUTING TOTAL TURNOVER THESE ITEMS S HOULD ALSO BE EXCLUDED. SINCE THE DEFINITION OF EXPORT TURNOVER EXCLUDE THE SE ITEMS, ON THE PRINCIPLE OF PARITY, IT IS NECESSARY THAT WHILE COMPUTING THE TOTAL TURNOVER AS WELL THESE ITEMS SHOULD BE EXCLUDED. BOTH THE EXPORT TUR NOVER AND THE TOTAL TURNOVER SHOULD BE CALCULATED ON THE SAME BASIS. TH E ASSESSEE POINTED OUT THAT THE ISSUE HAS ALREADY BEEN CONSIDERED AND DECI DED ACCEPTED THE ABOVE STAND ON BEHALF OF THE ASSESSEE IN THE FOLLOWING CA SES: ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 8 (I) KADRI MILLS (CBE) LTD. VS. JT. CIT 76 TTJ 38 (C HENNAI) (II) ITO VS. SAK SOFT LTD. 20 DTR 514/ 313 ITR 353 / 30 SOT 55 (CHENNAI) (SB). IN THE AFORESAID DECISIONS, IT WAS HELD THAT FOR TH E PURPOSE OF APPLYING THE FORMULA UNDER SUB SECTION (4) OF SECTION 10B, THE F REIGHT TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INC URRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA A RE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVER, WH ICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN THE FORMULA. 13. THE CIT(A) ACCEPTED THE ABOVE SUBMISSIONS ON B EHALF OF THE ASSESSEE AND HELD THAT THE EXCLUSION OF EXPENSES AMOUNTING T O RS.3,53,56,6481- FROM EXPORT TURNOVER ALONE IS NOT CORRECT. THE SAME HAS ALSO TO BE REDUCED FROM TOTAL TURNOVER. THE ASSESSING OFFICER WAS DIRECTED TO RE-COMPUTE DEDUCTION U/S. 10A ACCORDINGLY. 14. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVE NUE HAS RAISED GR.NO.2 BEFORE THE TRIBUNAL. WE HAVE HEARD THE SUBMISSION OF THE LEARNED D.R. WHO RELIED ON THE ORDER OF THE AO. IT IS NOTI CED THAT AN IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE A SSESSEE BY THE SPECIAL BENCH OF ITAT CHENNAI IN THE CASE OF ITO V. SAK SOFT LTD. 313 ITR (AT) 353 (CHENNAI)(SB) WHEREIN IT HAS BEEN H ELD AS UNDER: ' TO SAY THAT IN THE ABSENCE OF ANY DEFINITION OF ' TOTAL TURNOVER' FOR THE PURPOSE OF SECTION 10B, THERE IS NO AUTHORI TY TO EXCLUDE ANYTHING FROM THE EXPRESSION AS UNDERSTOOD IN GENER AL PARLANCE WOULD BE WRONG, AS THERE HAS TO BE AN ELEM ENT OF TURNOVER IN THE RECEIPT IF IT HAS TO BE INCLUDED IN THE TOTAL TURNOVER. THAT ELEMENT IS MISSING IN THE CASE OF FR EIGHT, ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 9 TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DE LIVERY OF THE GOODS OUTSIDE INDIA AND EXPENSES INCURRED IN FOREIG N EXCHANGE IN CONNECTION WITH THE PROVIDING OF TECHNICAL SERVI CES OUTSIDE INDIA. THESE RECEIPTS CAN ONLY BE RECEIVED BY THE A SSESSEE AS REIMBURSEMENT OF SUCH EXPENSES INCURRED BY HIM. MER E REIMBURSEMENT OF EXPENSES CANNOT HAVE AN ELEMENT OF TURNOVER. IT IS ONLY IN RECOGNITION OF THIS POSITIO N THAT IN THE DEFINITION OF 'EXPORT TURNOVER' IN SECTION 10B, THE AFORESAID TWO ITEMS HAVE BEEN DIRECTED TO BE EXCLUDED. SECONDL Y, THE DEFINITION OF EXPORT TURNOVER CONTEMPLATES THAT THE AMOUNT RECEIVED BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXC HANGE SHOULD REPRESENT 'CONSIDERATION' IN RESPECT OF THE EXPORT. ANY REIMBURSEMENT OF THE TWO ITEMS OF EXPENSES MENTIONE D IN THE DEFINITION CAN UNDER NO CIRCUMSTANCES BE CONSIDERED TO REPRESENT 'CONSIDERATION' FOR THE EXPORT OF THE COM PUTER SOFTWARE OR ARTICLES OR THINGS. THUS, THE EXPRESSIO N 'TOTAL TURNOVER' WHICH IS NOT DEFINED IN SECTION 10B SHOUL D ALSO BE INTERPRETED IN THE SAME MANNER. THUS, THE TWO ITEMS OF EXPENSES REFERRED TO IN THE DEFINITION OF 'EXPORT T URNOVER' CANNOT FORM PART OF THE TOTAL TURNOVER SINCE THE RE CEIPTS BY WAY OF RECOVERY OF SUCH EXPENSES CANNOT BE SAID TO REPR ESENT CONSIDERATION FOR THE GOODS EXPORTED SINCE TOTAL TU RNOVER IS NOTHING BUT THE AGGREGATE OF THE DOMESTIC TURNOVER AND THE EXPORT TURNOVER. IN THE FORMULA PRESCRIBED BY SECTI ON 10B(4) THE FIGURE OF EXPORT TURNOVER HAS TO BE THE SAME BO TH IN THE NUMERATOR AND IN THE DENOMINATOR OF THE FORMULA. IT FOLLOWS THAT THE TOTAL TURNOVER CANNOT INCLUDE THE TWO ITEM S OF EXPENSES RECOVERED BY THE ASSESSEE AND REFERRED TO IN THE DEFINITION OF 'EXPORT TURNOVER'.' THE AFORESAID DECISION HAD BEEN CONSIDERED AND AFFI RMED BY THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF TATA EL XSI LTD. & ORS. 2011- ITA NO.655/BANG/11 TIOL-684-HC-KAR-II WHEREIN IT HAS BEEN HELD THAT FOR THE PURPOSE OF COMPUTATION OF DE DUCTION U/S. 10A ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 10 OF THE ACT, IF ANY EXPENDITURE IS EXCLUDED FROM THE EXPORT TURNOVER, THE SAME HAS TO BE EXCLUDED FROM THE TOTAL TURNOVER ALSO. A SIMILAR VIEW HAS ALSO BEEN TAKEN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD. 2010-TIOL-456 -HC-MUM-IT. WE, THEREFORE, BY CONSIDERING THE TOTALITY OF THE F ACTS AS DISCUSSED HEREINABOVE, ARE OF THE VIEW THAT THE LD. CIT(APPEA LS) WAS JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE AND DIRECTING THE AO TO EXCLUDE THE EXPENSES BOTH FROM EXPORT TURNOVER AS WELL AS T OTAL TURNOVER WHILE CALCULATING THE DEDUCTION U/S. 10A OF THE ACT . WE THEREFORE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) ON THIS ISSUE. GR.NO.2 RAISED BY THE REVENUE IS ACCOR DINGLY DISMISSED. 15. IN THE RESULT, THE APPEAL BY THE REVENUE IS DIS MISSED. ITA NO.5679/MUM/2010, ASSESSES APPEAL: 16. GROUND NO.I RAISED BY THE ASSESSEE AS FOLLOWS: 1.THE LEARNED CIT(A) ERRED IN CONFIRMING INTEREST I NCOME OF RS. 4,22,131/- AS INCOME FROM OTHER SOURCES AS AGAINST BUSINESS INCOME. 2. THE LD. CIT(A) FAILED TO APPRECIATE THE FACT THA T: A) THE APPELLANT HAS DEBITED TO PROFIT & LOSS ACCOU NT OF I0A UNIT A SUM OF RS. 1,34,97,592/- AS INTEREST EXPENSES WHI CH HAS DIRECT NEXUS. B) THERE EXISTS DIRECT NEXUS BETWEEN THE INTEREST I NCOME EARNED AND INTEREST EXPENSES INCURRED: C) THE INTEREST INCOME REQUIRES TO CONSIDERED FOR C LAIM OF DEDUCTION U/S 10A. ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 11 3. THE LEARNED CIT(A) OUGHT NOT TO HAVE CONFIRMED I NTEREST INCOME OF RS. 4,22,131/- AS INCOME FROM OTHER SOURCES. 17. THIS GROUND RELATES TO INTEREST INCOME OF RS. 4 ,66,514/- WHICH WAS TREATED AS INCOME FROM OTHER SOURCES BY THE REVENUE AUTHORITIES AS AGAINST THE CLAIM OF THE ASSESSEE THAT INTEREST INCOME HAS TO BE TREATED AS PART OF INCOME WHICH IS ELIGIBLE FOR DEDUCTION U/S.10-A OF THE ACT. THE ASSESSING OFFICER HAD HELD THAT INTEREST INCOME FROM BANK OF RS.1,72,664/- AND OTHER INTEREST RS. 2,93,850/- AS INCOME FROM OTHER SOURCE , IN VIEW OF THE FACT THAT THIS INCOME WAS NOT DERIVED FROM THE INDUSTRIAL UND ERTAKING. THE DETAILS OF SUCH INTEREST INCOME WERE AS UNDER:- S.NO. PARTICULARS INTEREST INCOME (RS.) 1 INTEREST ON BANK MARGIN 19,253/- 2 INTEREST ON FIXED DEPOSIT 1,28,197/- 3 INTEREST ON LC MARGINS 25,130/- 4 INTEREST ON STAFF LOANS 1,00,139/- 5 STD. LIFE INS. REFUND 519/- 6 MISC. OTHERS 110/- 7 OTHER INTEREST INCOME TAX REFUND 1,02,284/- SICOM FD REFUND 90,882/- TOTAL: 4,66,514/- 18. THE ASSESSEE CLAIMED THAT SUCH INTEREST INCOME HAD ARISEN FROM BUSINESS ACTIVITIES BEING INTEREST ON MARGIN MONEY, LC MARGIN, F.DS. KEPT FOR RUNNING OF THE BUSINESS, INTEREST ON LOANS ADVA NCED TO STAFF ETC. THE ASSESSEE SUBMITTED THAT THESE INCOMES WERE TO BE TR EATED AS BUSINESS INCOME AS HELD IN CIT VS. INDO SWISS JEWELS LTD. (2 84 ITR 389), CIT VS. GOVINDA CHOUDHARY & SONS (203 ITR 881) (SC), ACIT V S. GALLIUM EQUIPMENT PVT. LTD. (254 ITR 1) (DEL), CIT VS. PUNIT COMMERCI AL LTD. (245 ITR 550) (BOM), SOVIKA INFOTEK LTD. VS. ITO (19 SOT 412) (BO RN), UCB INDIA (P)LTD. VS. ACIT (30 SOT 95) (BOM). WITHOUT PREJUDICE, IT WAS A RGUED THAT THE APPELLANT HAD DEBITED INTEREST PAID OF RS. 1,34,97,592/- IN T HE P&L A/C. WHICH WAS TO ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 12 BE SET-OFF AGAINST INTEREST EARNED AS THE INTEREST EXPENSES HAD DIRECT NEXUS WITH THE INTEREST INCOME AND ONLY THE NET INTEREST INCOME AFTER SUCH SET OFF HAS TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS ELIGIBLE FOR DEDUCTION U/S.10-A OF THE ACT. IN THIS REGARD, THE ASSESSEE RELIED ON THE DECISIONS IN CIT VS. PINK STAR (245 ITR 757) (BORN), DCIT VS. DI AMOND CREEK (82 ITD 291) (BORN), CIT VS. PARAMOUNT PREMISE (P) LTD. (19 0 ITR 259) (BORN), CIT VS. NAGPUR ENGINEERING CO. LTD. (245 ITR 806) (BORN ). 19. THE CIT(A) DID NOT ACCEPT THE SUBMISSION OF TH E ASSESSEE. HE HELD THAT IN INDIA CONNECT INTERNATIONAL VS. ITO [304 ITR 322 ] (MAD) AND PEROT SYSTEM TSI (INDIA) LTD. VS. ACIT [16 SOT 350] (DELHI TRIB. ) IT HAS BEEN HELD THAT INTEREST ON FDS ARE NOT ELIGIBLE FOR DEDUCTION U/S .I0A. HE ALSO HELD THAT IT HAS BEEN HELD IN E FUNDS INTERNATIONAL (P) LTD. VS. DCIT (2008) [25 SOT 306] (DELHI TRIB.) THAT INTEREST ON HOUSING LOAN GIVEN T O EMPLOYEES DOES NOT QUALIFY FOR EXEMPTION U/S. I0A. THE INTEREST ON BAN K MARGIN OF RS.19,253/- AND LC MARGIN OF RS.25,130/- WAS ACCEPTED AS HAVING NEXUS WITH BUSINESS ACTIVITY OF THE UNDERTAKING. IN THE CIRCUMSTANCES T HE TREATMENT OF BALANCE RS.4,22,1311- UNDER INCOME FROM OTHER SOURCES WAS S USTAINED. 20. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSES SEE HAS RAISED GR.NO.1 BEFORE THE TRIBUNAL. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSE WHO REITERATED THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE BEFORE THE REVENUE AUTHORITIES. IN PARTICULAR ATTE NTION WAS DRAWN TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF COMMISSIONER OF INCOME-TAX VS. INDO SWISS JEWELS LTD. 284 ITR 389 ( BOM). THE ASSESSEE WAS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTUR E OF INDUSTRIAL JEWELS. THE ASSESSEE HAD EARNED INTEREST INCOME OF RS. 7,07 ,711 DURING THE RELEVANT PREVIOUS YEAR. THE ASSESSING OFFICER TREATED IT AS INCOME FROM OTHER SOURCES. THOUGH THE ASSESSING OFFICER DID NOT ACCEPT THE EXP LANATION OF THE ASSESSEE, THE APPELLATE AUTHORITY IN THE FACTS OF THE CASE AN D IN THE LIGHT OF THE MATERIAL PLACED BY THE ASSESSEE ON RECORD, WAS SATISFIED THA T THE FUNDS WERE KEPT BY ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 13 THE ASSESSEE IN THE VARIOUS COMPANIES FOR SHORT TER MS FOR PAYMENT FOR IMPORTED MACHINERY. THE COMMISSIONER (APPEALS) AND THE TRIBUNAL HELD THAT THE INTEREST WAS ASSESSABLE AS BUSINESS INCOME. ON APPEAL TO THE HIGH COURT, IT WAS HELD THAT FROM THE FACTS AND CIRCUMST ANCES OF THE CASE IT WAS CLEAR THAT THE INTER-CORPORATE DEPOSITS WERE MADE B Y THE ASSESSEE FROM THE SURPLUS FUNDS THAT WERE SET APART FOR PAYMENT FOR I MPORTED MACHINERY. THE INTEREST EARNED ON THE SHORT TERM DEPOSITS OF THE M ONEY KEPT APART FOR THE PURPOSES OF BUSINESS HAD TO BE TREATED AS INCOME EA RNED FROM BUSINESS AND COULD NOT BE TREATED AS INCOME FROM OTHER SOURCES. 21. THE LD. D.R RELIED ON THE ORDERS OF THE REVENUE AUTHORITIES AND IN PARTICULAR RELIED ON THE DECISION OF THE HONBLE BO MBAY HIGH COURT IN THE CASE OF CIT VS. SWANI SPICE MILLS PVT. LTD. (2011) 12 TAXMAN.COM 432(BOM), WHEREIN IT WAS HELD THAT SURPLUS FUNDS OF AN ASSESS EE UTILIZED FOR DISCOUNTING BILLS ON WHICH ASSESSEE RECEIVES DISCOU NTING CHARGES HAVE TO BE ASSESSED AS INCOME FROM OTHER SOURCES. THE ASSESS EE IN THE CASE BEFORE THE HONBLE BOMBAY HIGH COURT WAS CARRYING ON BUSINESS OF EXPORT OF SEEDS, SPICES AND SIMILAR GOODS. EXPORT BILLS OF ASSESSEE AGAINST FULFILLMENT OF EXPORT ORDERS WERE SENT FOR COLLECTION TO BANKS AND ASSESSE RECEIVED DISCOUNTED VALE OF SALE PROCEEDS. ACCORDING TO ASS ESSEE, MONEYS WHICH WERE SO RECEIVED WERE UTILIZED FOR REPAYMENT OF ITS LOAN S. IF THE ASSESSEE HAD NO EXPORT ORDERS AND IF THERE WAS STILL BALANCE, THE A SSESSEE USED ITS FUNDS TO DISCOUNT PURCHASE BILLS OF PRIVATE PARTIES FOR SHOR T PERIODS OF THREE TO FIVE WEEKS. ON SUCH ACTIVITY BY UTILIZING SURPLUS FUNDS , THE ASSESSEE RECEIVED INTEREST. THE QUESTION BEFORE THE HONBLE BOMBAY H IGH COURT WAS WHETHER THE INTEREST INCOME WAS INCOME FROM BUSINESS OR INCOME FROM OTHER SOURCES. THE HONBLE BOMBAY HIGH COURT HELD THAT THE INTEREST INCOME DID NOT HAVE A DIRECT AND PROXIMATE RELATIONSHIP WITH E XPORT ACTIVITY AND HELD THAT THE INTEREST INCOME WAS INCOME FROM OTHER SOUR CES. THE HONBLE BOMBAY HIGH COURT IN THE AFORESAID CONSIDERED THE F OLLOWING DECISIONS: ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 14 CIT VS. ASIAN STAR CO.LTD. 326 ITR 56 (BOM), TUTICO RIN ALKALI CHEMICALS & FERTILIZERS LTD. VS. CIT 227 ITR 172 (SC), CIT VS. BOKARO STEEL LTD. 236 ITR 315 (SC), CIT VS. KARNATAKA POWER CORPN. 247 ITR 26 8 (KARN), BONGAIGAON REFINERY & PETROCHEMICALS LTD. VS. CIT 251 ITR 329( SC), CIT VS. GOVINDA CHOUDHURY & SONS 203 ITR 881(SC), CIT VS. KARNAL CO -OPERATIVE SUGAR MILLS LTD. 243 ITR 2 (SC), CIT VS. AUTOKAST LTD. 24 8 ITR 110 (SC), CIT VS. PARAMOUNT PREMISES (P) LTD. 190 ITR 259, SHREE KRIS HNA POLYESTER LTD. VS. DCIT 274 ITR 21 (BOM), COMMISSIONER OF INCOME-TAX V S. INDO SWISS JEWELS LTD. 284 ITR 389 (BOM), CIT VS. LOK HOLDINGS LTD. 3 08 ITR 356 (BOM), SOUTH INDIA SHIPPIN CORPN. LTD. VS. CIT 240 ITR 24 (BOM), MURLI INVESTMENT CO. VS. CIT 167 ITR 368 (RAJ), K.RAVINDRANATHAN NAIR VS . DCIT 262 ITR 669 (KER), SOUTHERN CASHEW EXPORTERS VS. DCIT 130 TAXMA N 203 (KER), URBAN STANISLAUS CO. VS. CIT 263 ITR 10 (KER), CIT VS. SH RI RAM HONDA POWER EQUIP 275 ITR 475 (DEL)CIT VS. GOLDTEX FURNISHING I NDUSTRIES 174 TAXMAN 187 (DEL), CIT VS. COSMOS INTERNATIONAL 318 ITR 314 (DEL), KASHMIR ARTS VS. CIT 166 TAXMAN 237 (DEL) CIT VS. RAVI RATNA EXPORTS (P) LTD. 246 ITR 443(BOM) AND PANDIAN CHEMICALS LTD. VS. CIT 262 ITR 278 (SC). AFTER CONSIDERING THE AFORESAID DECISIONS THE HONBLE BOM BAY HIGH COURT OBSERVED IN PARA-10 AS FOLLOWS: 10.THE TOTAL INCOME OF AN ASSESSEE WHICH IS CHARGE .ABLE TO TAX UNDER SECTION 4 HAS TO BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. SEC.14 PROVIDES THAT ALL INCOME SHALL, FOR TH E PURPOSES OF THE CHARGE OF INCOME-TAX AND COMPUTATION OF TOTAL INCOM E, BE CLASSIFIED UNDER THE FOLLOWING HEADS OF INCOME: (I)SALARIES; ( II) INCOME FROM HOUSE PROPERY; (III) PROFITS AND GAINS OF BUSINESS OR PRO FESSION; (IV) CAPITAL GAINS; AND (V) INCOME FROM OTHER SOURCES. THE HEAD INTEREST ON SECURITIES HAS BEEN OMITTED WITH EFFECT FROM 1-4-1 989. SECTION 28 DEFINES INCOME WHICH IS CHARGEABLE TO INCOME TAX UN DER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. SEC TION 56 STIPULATES THAT INCOME OF EVERY KIND WHICH IS NOT TO BE EXCLUD ED FROM THE TOTAL INCOME UNDER THE ACT SHALL BE CHARGEABLE TO INCOME- TAX UNDER THE HEAD INCOME FROM OTHER SOURCES, IF IT IS NOT CHAR GEABLE TO INCOME-TAX UNDER ANY OF THE HEADS SPECIFIED IN ITEMS A TO E OF SECTION 14. HENCE, INCOME CAN FALL FOR CLASSIFICATION UNDER THE HEAD INCOME FROM OTHER SOURCES IF THE INCOME IS OF A KIND WHICH IS NOT TO BE EXCLUDED FROM TOTAL INCOME AND IF IT IS NOT CHARGEABLE TO INCOME- TAX UNDER ANY OF THE ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 15 HEADS SPECIFICALLY ENUMERATED IN ITEMS A TO E OF SE CTION 14. THE QUESTION OF CLASSIFYING A HEAD OF INCOME UNDER SECT ION 56 CAN, THEREFORE ARISE WHERE IT DOES NOT FORM PART OF ANY OF THE SPECIFICALLY ENUMERATED HEADS. IN PARA 27 THE HONBLE COURT OBSERVED AS FOLLOWS: 27. ORDINARILY, WHERE AN ASSESSEE INVESTS FUNDS S URPLUS TO THE BUSINESS AND EARNS INTEREST, SUCH INCOME DOES NOT C ONSTITUTE BUSINESS INCOME BUT FALLS UNDER THE HEAD INCOME FROM OTHER SOURCES. MERELY BECAUSE AN ASSESSEE CARRIES ON BUSINESS AND THE INC OME OF THE BUSINESS IS INVESTED IN DEPOSITS, THAT WOULD NOT RE SULT IN AN INFERENCE THAT THE RETURN ON THE INVESTMENTS MUST PARTAKE OF THE CHARACTER OF BUSINESS INCOME. EVERY INCOME WHICH IS EARNED BY A N ASSESSEE WHO CARRIES ON BUSINESS IS NOT BUSINESS INCOME. ON THE CONTRARY, THE POSITION IN LAW IS THAT IT IS ONLY WHERE INCOME EAR NED ON ACCOUNT OF INTEREST SPRINGS OUT OF OR EMANATES FROM THE BUSINE SS ACTIVITY OF THE ASSESSE, THAT THIS INCOME CAN BE REGARDED AS BEING OF THE NATURE AND CHARACTER OF BUSINESS INCOME. IN PARA-35 THE HONBLE COURT OBSERVED AS FOLLOWS: 35. THE CONSISTENT LINE OF REASONING WHICH EMERGES FROM THE DECISION OF SEVERAL HIGH COURTS ADVERTED TO EARLIER IS THAT THE MERE FACT THAT AN ASSESSEE CARRIES ON BUSINESS WOULD NOT RESULT IN AN INFERENCE THAT THE INCOME WHICH IS EARNED BY WAY OF INTEREST WOULD FAL L FOR CLASSIFICATION AS BUSINESS INCOME. WHERE AN ASSESSEE INVESTS ITS S URPLUS FUNDS IN ORDER TO EARN INTEREST AND TO OBVIATE ITS FUNDS LYI NG IDLE, SUCH INCOME WOULD NOT FALL FOR CLASSIFICATION AS BUSINESS INCOM E. THIS IS PARTICULARLY SO IN A SITUATION WHERE THE BUSINESS OF THE ASSESSE E DOES NOT CONSIST IN THE INVESTMENT OF FUNDS. WHERE THE ASSESSEE ENGA GES IN AN INDEPENDENT LINE OF BUSINESS, INTEREST EARNED ON DE POSITS CANNOT BE REGARDED AS FALLING UNDER THE HEAD OF PROFITS AND G AINS OF BUSINESS OR PROFESSION. SUCH INCOME WOULD FALL FOR CLASSIFICATI ON AS INCOME FROM OTHER SOURCES. 22. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE ARE OF THE VIEW THAT THE AFORESAID DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SWANI SPICE MILLS (P) LTD. (SUPRA) RELIED UPON BY THE LEA RNED D.R. SUPPORTS THE CASE ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 16 OF THE REVENUE. THE DECISIONS RELIED UPON BY THE L EARNED COUNSEL FOR THE ASSESSEE HAVE ALL BEEN CONSIDERED BY THE HONBLE BO MBAY HIGH COURT IN THE CASE OF SWANI SPICE MILLS (P) LTD. (SUPRA). WE ARE THEREFORE OF THE VIEW THAT THE CIT(A) WAS RIGHT IN REJECTING THE CLAIM OF THE ASSESSEE AS RAISED IN GROUND NO.1 BEFORE THE TRIBUNAL AND WE THEREFORE DI SMISS GR.NO.1 RAISED BY THE ASSESSEE. 23. GROUND NO.II RAISED BY THE ASSESSEE READS AS FO LLOWS: II. DEDUCTION CLAIMED U/S 10A:- 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE COMP UTATION THE DEDUCTION U/S 10A BY INCLUDING MISCELLANEOUS INCOME , FINDER FEES & MARKETING FEES IN TOTAL TURNOVER AND BY SET FF OF THE ENTIRE BROUGHT FORWARD UNABSORBED DEPRECIATI6N AGAINST THE PROFITS OF THE STPI UNIT. 2. THE LEARNED CIT(A) FAILED TO APPRECIATE THE FACT THAT: A) MISCELLANEOUS INCOME, FINDER FEES & MARKETING FE ES CANNOT BE REGARDED TO AS PART OF TURNOVER OF BUSINESS OF T HE UNDERTAKING. B) THE ENTIRE BROUGHT FORWARD DEPRECIATION SHOULD N OT BE SET OFF AGAINST THE PROFITS OF THE STPI UNIT. 24. THE ABOVE GROUND RELATES TO RESTRICTION OF DED UCTION CLAIMED U/S. I0A TO RS.1,41,79,046/- AS AGAINST RS.2,70,38,837/- CLAIME D BY THE ASSESSEE. THE RESTRICTION IN THE DEDUCTION CLAIMED U/S. I OA WAS DUE TO THE FOLLOWING (I) INCLUSION OF MISCELLANEOUS INCOME, FINDER FEES & MARKETING FEES IN TOTAL TURNOVER, (II) SET-OFF OF UNABSORBED DEPRECIATION. 25. (I) INCLUSION OF MISCELLANEOUS INCOME, FINDER FEES & MARKETING FEES IN TOTAL TURNOVER: THE ASSESSING OFFICER HELD THAT THESE RECEIPTS WE RE INCIDENTAL TO THE BUSINESS OF THE ASSESSE AND THERE FORE INCLUDIBLE IN THE TOTAL TURNOVER OF THE STPI UNIT. THE ASSESSEE SUBMITTED T HAT AS PER SECTION ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 17 1OA(4), FOR THE PURPOSES OF (SUB-SECTION(1) AND (I A)], THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTW ARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS OF THE U NDERTAKING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUC H ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF TH E BUSINESS CARRIED ON BY THE UNDERTAKING. THUS, SECTION 10A REFERS TO THE T OTAL TURNOVER OF THE BUSINESS OF THE UNDERTAKING. THE INDUSTRIAL UNDERTA KING IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE, CAD / CAE SERV ICES, TRADING IN SOFTWARE AND HARDWARE AND ALLIED SOFTWARE AND IT EN ABLED SERVICES. THE MARKETING WAS DONE BY ASSESSEES SUBSIDIARIES, ONWA RDS TECHNOLOGIES USA AND ONWARD TECHNOLOGIES GMBH, GERMANY. MANAGEMENT F EES OF RS.25,68,O93/- WAS RECEIVED FROM ONWARD TECHNOLOGIE S USA FOR PROVIDING ADVICE, AND CONSULTANCY FOR OFFSHORE ACTIVITIES ON THE BASIS OF ACTUAL TIME SPENT BY KEY PERSONNEL OF THE APPELLANT FOR THIS WO RK. FINDER FEES OF RS.99,56,190/- WAS CHARGED ON ONWARD TECHNOLOGIES I NC. USA FOR RECRUITMENT (INTERVIEWING, CHECKING BACKGROUND& SKI LLS) OF MANPOWER TO BE APPOINTED BY THE SUBSIDIARY IN US MARKET. MISCELLAN EOUS INCOME OF RS.38,20,7221- INCLUDES EXCHANGE FLUCTUATION OF RS. 24,37,754!-, RECOVERY FROM STAFF FOR NOTICE PAY / LEASE SALARY RS.13,52,9 021-, REFUND FROM MSEB RS.1,3501-, PROFIT ON SALE OF ASSETS RS.25,4031-, S UNDRY BALANCES WRITTEN OFF RS.3,3591-. IT WAS ARGUED THAT THE ABOVE INCOMES CA NNOT BE REGARDED AS PART OF TURNOVER OF THE SAID BUSINESS AND HENCE THE SAME ARE TO BE EXCLUDED FROM TOTAL TURNOVER. THE CIT(A) AS WELL AS THE AO REJEC TED THE PLEA OF THE ASSESSEE. 26. BEFORE US NO SPECIFIC SUBMISSIONS WERE MADE ON THIS ISSUE. WE HAVE CONSIDERED THE ORDERS OF THE REVENUE AUTHORITIES AN D ARE OF THE VIEW THAT THE RECEIPTS IN QUESTION HAVE CLOSE NEXUS WITH THE ACTI VITIES OF THE UNDERTAKING. THE INCLUSION OF THESE RECEIPTS IN TOTAL TURNOVER I S HENCE SUSTAINED. ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 18 27. (II) SET-OFF OF UNABSORBED DEPRECIATION: THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD CLAIMED DEDUCTION U/S.I0A OF THE ACT FOR THE FIRST TIME IN THE RELEVANT ASSESSMENT YEAR. THE AO FURTHER NOT ICED THAT AS PER TAX AUDIT REPORT IN FORM NO.56F THE DATE OF COMMENCEMEN T OF MANUFACTURE OR PRODUCTION WAS 31.03.2000 AND THE DATE OF THE REGIS TRATION OF STPI UNIT WAS 29.03.2000. HENCE THE RELEVANT YEAR WAS TREATED AS SIXTH YEAR OF THE CLAIM. THE AO ALSO NOTICED THAT THE ASSESSEE HAD CLAIMED U NABSORBED DEPRECIATION OF RS.1,68,36,828/- RELATING TO A.Y.2003-04. THE AS SESSEE HAD NOT FURNISHED UNIT WISE BREAK-UP OF UNABSORBED DEPRECIATION. THE AO IN VIEW OF THE FACT THAT THE UNIT WAS INCURRING LOSSES YEAR AFTER YEAR TREATED THE ENTIRE UNABSORBED DEPRECIATION RELATING TO THE 1OA UNIT AN D REDUCED THE ELIGIBLE DEDUCTION U/S.10-A OF THE ACT. 28. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT A.Y .2005-06 WAS THE FIRST YEAR OF CLAIM OF DEDUCTION U/S. 1OA. PRIOR TO THAT YEAR, THE ASSESSEE HAS NOT CLAIMED ANY DEDUCTION U/S.1OA. HENCE, SEPARATE UNIT WISE DEPRECIATION AS PER I.T. ACT, HAS NOT BEEN WORKED OUT. THUS, IT CAN NOT BE HELD THAT THE ENTIRE UNABSORBED DEPRECIATION RELATES TO THE STPI UNIT. I T WAS ARGUED THAT UNABSORBED DEPRECIATION OF PAST YEAR SHOULD NOT BE CONSIDERED WHILE COMPUTING ELIGIBLE PROFITS. IT WAS ARGUED THAT SECT ION 1OA IS AN INCENTIVE OR RELIEF SECTION. IT SHOULD BE LIBERALLY CONSTRUED SU CH THAT IT DOES NOT ACT AS A PUNITIVE SECTION. THE LEGISLATURE ITSELF REGARDS TH E SECTION TO BE A DEDUCTION SECTION AND NOT AN EXEMPTION SECTION. BEING A DEDU CTION SECTION, IT SHOULD BE RESTRICTED IN APPLICATION TO A CASE OF POSITIVE INCOME EARNING DEDUCTION AND SHOULD NOT BE MEANT TO COVER THE NEGATIVE RESUL T. IN CASE OF AN ASSESSEE RUNNING MORE THAN ONE UNDERTAKING, ONE OF THEM BEIN G NON-ELIGIBLE UNDERTAKING, THE ASSESSEE CAN SET-OFF PAST LOSSES / DEPRECIATION AGAINST THE PROFITS OF NON-ELIGIBLE UNDERTAKING IN TERMS OF SEC TION 72 READ WITH CBDT CIRCULAR NO.2 DATED 7.7.1955. ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 19 29. IT WAS FURTHER SUBMITTED THAT THE PROVISIONS O F SECTION 1OA(6) DO NOT CREATE EMBARGO IN THE MATTER OF SET-OFF OF LOSS CAR RIED FORWARD EARLIER YEAR/S AGAINST PROFIT OF ELIGIBLE UNDERTAKING OR OTHER BUS INESS OR NON-BUSINESS INCOME DURING THE TAX HOLIDAY PERIOD. SECTION 1OA(4 ) REQUIRES COMPUTATION OF ELIGIBLE PROFIT FOR ELIGIBLE UNDERTAKING. IN OTH ER WORDS, THE COMPUTATION OF ELIGIBLE PROFIT U/S. 1OA IS SOURCE TAXATION RESTRIC TED TO THE ELIGIBLE UNDERTAKING. IN COMPUTING ELIGIBLE PROFIT ONLY AID IS TAKEN OF PROVISIONS OF CHAPTER IV-D. IT IS NOT AKIN TO COMPUTATION OF INCO ME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS PER SE - MORE PARTICULARLY, WHERE THE ASSESEEE HAS MORE THAN ONE UNDERTAKING. IMPACT OF SECTION 72, WO ULD HAVE RELEVANCE, IF AT ALL, TO COMPUTATION OF OVERALL BUSINESS INCOME UNDE R THE HEAD PROFIT AND GAINS OF BUSINESS AFTER AGGREGATING ALL SOURCE TAX ATION. SECTION 72 CANNOT HAVE BEARING ON COMPUTATION OF MERE SOURCE TAXATION OF ELIGIBLE UNDERTAKING. 30. WITHOUT PREJUDICE IT WAS POINTED OUT THAT THE A MOUNT OF UNABSORBED DEPRECIATION ALLOWED FOR SET-OFF BY ASSESSING OFFIC ER OF RS.1,68,36,828/- IS BASED ON THE ORDER U/S.154 DATED 08.03.2007 FOR THE A.Y.2004-05. HOWEVER, HE HAS NOT CONSIDERED CIT(A) ORDER DATED 03.09.2007 PASSED SUBSEQUENT TO THE ORDER U/S.154 DATED 08.03.2007 WHERE RELIEF OF RS.10,60,5051- WAS ALLOWED. HENCE, THE TOTAL UNABSORBED DEPRECIATION E LIGIBLE FOR SET-OFF AMOUNTS TO RS.1,78,97,333/- AS AGAINST RS. 1,68,36, 828/-. 31. THE CIT(A) HOWEVER REJECTED THE PLEA OF THE AS SESSEE FOR THE FOLLOWING REASONS: THE SUBMISSION HAS BEEN CONSIDERED. IT IS NOT DISP UTED THAT THE DATE OF COMMENCEMENT OF MANUFACTURE OF PRODUCTION WAS 31 .03.2000. IN THE CIRCUMSTANCES TREATING THE RELEVANT YEAR AS SIX TH YEAR OF THE CLAIM IS IN ORDER. THE ASSESSEE HAS NOT FURNISHED THE DET AILS OF DEPRECIATION UNIT WISE EITHER BEFORE THE ASSESSING OFFICER OR IN APPEAL PROCEEDINGS. IN THE CIRCUMSTANCES THE ACTION OF THE ASSESSING OF FICER IN SETTING OFF ENTIRE UNABSORBED DEPRECIATION TO 1OA UNIT IS SUSTA INED. HOWEVER, THE ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 20 ASSESSING OFFICER DIRECTED TO ADOPT THE CORRECT FIG URE AFTER GIVING EFFECT TO APPEAL ORDER IN EARLIER YEAR. 32. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSE SSEE HAS RAISED GR.NO.II BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE A SSESSEES LIMITED PRAYER WAS THAT THE REQUIRED DETAILS ARE NOW AVAILABLE AND CAN BE EXAMINED BY THE AO AFRESH. IN THIS REGARD IT WAS ALSO SUBMITTED TH AT THE HONBLE KARNATAKA HIGH COURT HAS ALSO APPROVED THE PRINCIPLE THAT NO SET OFF OF UNABSORBED DEPRECIATION SHOULD BE MADE BEFORE ALLOWING DEDUCTI ON U/S.10-A OF THE ACT. THE LEARNED DR RELIED ON THE ORDER OF THE CIT(A). 33. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN OUR VIEW THE ISSUE REQUIRES FRESH ADJUDICATION BY THE AO IN THE LIGHT OF THE LATER DECISION OF THE HONBLE KARNATAKA HIGH COURT ON THE ISSUE. IN A RE CENT CASE OF CIT VS. YOKOGAWA INDIA LTD., ITA NO.78/2011 JUDGMENT DATED 9.8.2011, THE HONBLE KARNATAKA HIGH COURT HELD THAT BENEFIT UNDER SECTIO N 10A OF THE INCOME-TAX ACT, 1961 (THE 'ACT') IS IN THE NATURE OF EXEMPTION AND NOT DEDUCTION. THE BENEFIT CONTINUES TO RETAIN THE CHARACTER OF AN EXE MPTION AND THAT THE PROFITS ELIGIBLE FOR RELIEF UNDER SECTION 10A OF THE ACT AR E TO BE COMPUTED PRIOR TO GIVING EFFECT TO THE SET-OFF AND CARRY FORWARD PROV ISIONS UNDER SECTION 70 AND 72 OF THE ACT. IT HAS BEEN HELD AS THAT, THE INCOME FROM A STPI UNIT HAS TO BE EXCLUDED AT SOURCE ITSELF BEFORE ARRIVING THE GROSS TOTAL INCOME LOSS OF A NON- STPI UNIT CANNOT BE SET OFF AGAINST THE INCOME OF T HE STPI UNIT WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE AC T. BROUGHT FORWARD LOSSES AND UNABSORBED DEPRECIATION CANNOT BE ADJUST ED WHILE COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT AND CAN BE S ET-OFF AGAINST THE INCOME AFTER THE COMPLETION OF TAX HOLIDAY PERIOD. FURTHE R THE REQUIRED DETAILS HAVE NOW BEEN MADE AVAILABLE BY THE ASSESSEE AND IT IS N ECESSARY FOR THE AO TO GO INTO THE QUESTION AS TO WHICH UNIT THE UNABSORBED D EPRECIATION PERTAINS TO. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) ON THIS ISSUE AND REMAND THE SAME ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 21 TO THE AO FOR FRESH CONSIDERATION. THUS GR.NO.II I S PARTLY ALLOWED FOR STATISTICAL PURPOSES. 34. IN THE RESULT, THE APPEAL BY THE REVENUE IS DI SMISSED WHILE THE APPEAL BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR ST ATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE 11TH DAY OF APRIL 2012 SD/- SD/- (N.K.BILLAIYA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 11TH APRIL 2012 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RA BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO. 5235&5679/MUM/2010(A.Y. 2005-06) 22 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 29/02/2012 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 01/03/2012 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER