M/S. ZENSAR TECHNOLOGIES LTD,MUMBAI vs. THE ACIT -2(3), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “J”, MUMBAI

BEFORE SHRI ABY T VARKEY, HON’BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER

ITA NO. 2908/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd v. ACIT-2(3) Magnet House, 2nd Floor Mumbai Narottam Morarjee Marg Ballard Estate, Mumbai- 400038 PAN: AAACF0742K (Appellant) (Respondent)

ITA NO. 4108/MUM/2008 (A.Y: 2003-04) ACIT- 2(3) v. M/s. Zensor Technologies Ltd Room No. 555, Aayakar Bhavan Magnet House, 2nd Floor Mumbai Narottam Morarjee Marg Ballard Estate, Mumbai- 400038 PAN: AAACF0742K (Appellant) (Respondent)

Assessee Represented by : Shri Nitesh Joshi Department Represented by : Shri. Karan P. Unavekar

Date of conclusion of Hearing : 22.02.2023 Date of Pronouncement : 12.05.2023

ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd

O R D E R PER S. RIFAUR RAHMAN (AM)

ITA NO.2908/MUM/2008 (A.Y: 2003-04) – ASSESSEE APPEAL

“1) (a) The Commissioner of Income tax Appeals-XXXII, Mumbai [hereinafter referred to as CIT(A)] ought to have held that no adjustment was required to be made of the loss incurred by certain 10A units against the profits by other 10A units for the purpose of allowing a deduction u/s. 10A. (b) The CIT(A) ought to have held that deduction u/s. 10A was available with respect to the 10A units which have made a profit without netting this off against other 10A units which have made losses. (c) The CIT(A) ought to have held that for the purpose of allowing deduction u/s. 10A, each unit had to be treated separately and deduction should be allowed only with respect to those units where there was a profit earned. 2) (a) For the purpose of arriving at the book profits the CIT(A) ought to have held that the following items are forming part of "profits of business", for the purpose of computing deduction under Section 80HHE and should not have been treated as being assessed as "Income from other sources". Particulars (Rs) (i) Interest on bank deposits 29,80,332/- (ii) Interest from others 10,11,671/- (iii) Rent 6,28,990/- (iv) Miscellaneous income 50,95,635/- 97,16,618

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd (b) The CIT(A) ought to have held that the Deputy Commissioner of Income- tax, Circle-2(3), Mumbai (hereinafter referred to as the AO) erred in not excluding the amount of Rs. 97,16,618 from income under the head "Business Income". Having held that Rs. 97,16,618 taxable under the head "Income from other sources" which has resulted in double taxation. 3) The CIT(A) ought to have held that since no dividend income has been received. the provision of Section 94(7) are not applicable and the short term capital loss of Rs. 8,56,000 arising on sale of units of Mutual Fund not be disallowed. 4) (a) The CIT(A) ought to have held that the appellants had not entered into any International transaction. (b) The CIT(A) ought to have held that the Deputy Commissioner of Income tax, Circle 2(3), Mumbai (hereinafter referred to as the AO) has erred in making an addition of Rs. 27.51 Lakhs to the Appellant's income based on the provisions of section 92(1) of the Act. The appellants submit that on the facts and in the circumstances of the case the AO ought to have held that the appellants had not entered into any international transaction falling within the scope of section 92(1) which justified the making of any addition to the appellants total income. (c) The CIT(A) ought to have held that the learned Additional Commissioner of Income-tax (TP-2), Mumbai (hereinafter referred to as (TPO) erred on facts and in law in adjusting the total income of the assessee to the extent of Rs. 27.51 Lakhs. The appellants objects to the Order of the TPO under section 92CA(3) of the Act. The appellants prays that the AO be directed to determine the total income as per Return of Income filed. (d) The CIT(A) ought to have held that the entire addition made by the AO on account of transfer pricing provisions was referred to be deleted. (e) The CIT(A) ought to have held that the appellants were not engaged in any activity relating to recruitment services.

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd (f) The CIT(A) erred in stating that provisions of skilled software services to its subsidiaries was one of the main responsibilities of the appellants and that this has been admitted by the appellants. (g) The CIT(A) erred in holding that such activity was a organized and regular activity of the appellants. (h) The CIT(A) ought to have held that credit should be allowed for the entire Corporate Management costs recovered from Zensar US. (i) The CIT(A) ought to have held that, Section 92 is not a charging section, as a result Chapter X is applicable only where any income arises from an international transaction. As such the TPO has, based on the facts of the case, erred on facts and in law in applying the provisions of Chapter X. (j) The CIT(A) ought to have held that, the TPO has, based on the facts of the case, erred on facts and in law in applying the provisions of Chapter X in a case where there has been no shifting of profits out of India. (k) The CIT(A) ought to have held that the question of making a TP adjustment with respect of personnel who have rejoined Zensar (India) and have left US Zensar does not arise.

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd section 10A of the Act are beyond the purview of the computation of mechanism of total income as defined under the Act. Consequently, the income u/s. 10A unit is required to be excluded before arriving at the total income of the assessee as this is a deduction provision and not an exempt provision.

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd was entitled to deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against normal business income. Furthermore, Ld. AR submitted that the Coordinate bench in assessee own case for the A.Y. 2001-02 has held that losses pertaining to the 10A unit the profits of the non-eligible deduction units and need not be adjusted against profits of the other 10A units. He submitted that same view was also taken by the Tribunal in assessee's in case in A.Y 2002-03. Copies of the orders are placed on record.

“8. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that the only matter before us is while computing business income AO rightly allowed

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd the losses pertaining to the 10 A unit to the profit of non-eligible deduction units. We noted that this issue is squarely covered by the decision of Hon'ble Bombay High Court in the case of Hindustan Unilever Ltd.(supra) and also the judgement of Hon'ble Supreme Court in the case of Yokogawa India Ltd (supra). Hence, on this account, the revision of assessment order initiated by CCIT is without any basis and hence, on merits the revision order is quashed.”

“7.1. We have heard rival submissions and perused the materials available on record. We find that assessee earned profits in its Ashok Plaza Unit at Pune which was eligible for deduction u/s.10A of the Act. The assessee also had three other units which incurred losses during the year and such losses were set off against the income from non-STP Unit. This was allowed by the Id. AO. The ld. CIT was of the opinion that the losses incurred in three other units should be set off with Pune unit and on the net amount, deduction u/s.10A of the Act should be allowed to the assessee. This was challenged by the assessee before us. We find that this issue is no longer res integra in view of the decision of the Hon'ble Supreme Court in the case of CIT vs. Yokogawa India Ltd., reported in 77 taxmann.com 41 wherein it has been held that Section 10A of the Act provides that the deduction contemplated therein is qua profits of eligible undertaking on a stand alone basis and without set off of losses of eligible or non-eligible unit or undertaking of the assessee. The relevant operative portion of the said judgment is reproduced hereunder:- "16. From a reading of the relevant provisions of Section 104 it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, "The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision" 17. If the specific provisions of the Act provide [first proviso to Sections 104(1): 10A (14) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No. 794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression "total income of the assessee" in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 104 the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in Section 10A as 'total income of the undertaking. 18. For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. All the appeals shall stand disposed of accordingly.

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd 7.2. Respectfully following the same, the ground Nos. 3(a) to 3(c) raised by the assessee are allowed.”

 The aforesaid appeal was heard by the Tribunal on 22 February 2023. In the course of hearing, the assessee has filed a chart identifying the issues arising in appeal as well as its brief submissions. At the time of hearing, the assessee was asked to file a detailed note on Ground no. 2(a) dealing with certain receipts to qualify for deduction under Section 80HHE of the Income-tax Act (the Act). Hence, we are filing the same.  Before the Honourable Tribunal, the assessee has inter-alia, raised the following Ground of appeal vide Ground No. 2(a) "For the purpose of arriving at the book profits, the CIT(A) ought to have held that the following items are forming part of profits of business for the purpose of computing deduction under Section 80HHE and should not have been treated as being assessed as 'Income from other sources Sr. No. Particulars Amount in Rs. (i) Interest on bank deposits 29,80,322 (ii) Interest from others 10,11,671 (ii) Rent 6,28,990 (iv) Miscellaneous income 50,95,635 Total 97,16,618

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd A. Facts in the case of the assessee At the outset, the assessee wishes to submit that it is not pressing for its claim treating 'Interest on bank deposits and Rent' as business income and not "Income from other sources. Hence, the assessee wishes to contest the treatment of following items of income as 'Income from other sources for the purpose of computing deduction under Section 80HHE of the Income-tax Act ("the Act'); Sr. No. Particulars Amount in Rs. 1 Interest from others 10,11,671 2 Recoveries of various charges incurred earlier 47,47,380 3 Insurance claim refund* 26,730 4 Incentive for Mutual fund investment* 3,21,525 (*Clubbed under the head 'Miscellaneous income amounting to Rs.50,95,6357-) The break up of recovery of various charges incurred earlier is as under: Amount Particulars Rs. Notice Pay Salary recovery and other recovery from 11,69,180 employee Recruitment charges recovery for employees leaving 31,38,297 within the threshold period and other recovery from suppliers Refund of Link Charges 89,015 Refund of Airfare claim 2,17,145 Refund towards ticket cancellation charges 1,33,743 Total 47,47,380 Our submissions B. The following income streams ought to be considered as 'Profits and gains from business and profession." 1) Interest from others- Rs. 10,11,671/- • It is humbly submitted that interest from others amounting to Rs. 10,11,671/- arose on account of interest on vehicle loan to staff arising on account of employment of various persons in the company to whom vehicle loans have been advanced as a welfare measure. The appellant submits that advancing of loan was an inherent part of business and is an incidence of carrying on of the

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd business. Accordingly, interest income arising in the hands of the assessee from granting of such loans was in the nature of 'Profits and Gains from Business and Profession • In this regard, attention is invited to the decision of the Mumbai Tribunal in the case of Shipping Corpn. of India Ltd (133 ITD 290). In the said decision, the Tribunal noted that the assessee had earned certain interest income on loans/advance to employees for vehicle and computer. The Tribunal (in Para 32) held that such advancing of loans is not parking of surplus funds but requirements of business. • Placing reliance on the above, the assessee humbly submits that interest amounting to Rs. 10.11.671/- ought not be considered as 'Income from other sources' but should be considered as regular business income of the assessee. 2) Recoveries of various charges incurred earlier - Rs. 47,47,380 • It is submitted that the amount of Rs. 47.47.380 comprises of expenses incurred earlier in the course of the business activity but now written back. • In this regard, attention is invited to the order of the Honourable Tribunal in the assessee's own case for AY 2001-02 (ITA No.4538/M/2005) (Para 2.1 Page no. 50 of the paperbook filed on 17 August 2021) The relevant extract of the order has been reproduced as under.. "2.1 The first dispute is regarding exclusion of certain items of income as given below while computing deduction under section 80HHE i. Salary recovery 24,57,100 Ii Air fare incentive and service charges received 34,13,242 iii. Reversal of provision for doubtful debts 1,56,000 iv. Scrap sale 2,86,230 v. Sale of special import license 4,03,414 2.1.1 The AO excluded the above items of income from the profit of business while computing deduction under section 80HHE. In appeal CIT(A) held that salary recovery, air fare incentive and service charges, reversal of provision for doubtful debts, scrap sale were integral part of the carrying on the business activities.

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd Therefore he held that these items of income were to be treated as part of business …………………………………. 2.1.3 We have perused the records and considered the matter carefully. Deduction under section 80HHE is allowed in respect of profit derived from the business of export of computer software. The phrase "profit derived from" has been defined in sub section 3 as the profit of business in the ratio of export turnover to total turnover Further profit of business have been defined in clause (d) of the Explanation I to sub- section 5 as the profit of business computed under the head "profits and gains of business or profession as reduced by certain items of income. Therefore one has to first compute the profit of business under the head "profit and gains of business or profession" While computing the profit of business, all items of income arisen during the carrying on of the business or which are incidental to the business have to be taken into account. In this case, the recovery of salary, air fare incentive and service charges, reversal of provision for bad and doubtful debts and scrap sale obviously have arisen during the course of carrying on of business • The assessee humbly submits that the for the financial year under consideration as well, assessee has been in receipt of income by way of salary recovery, recovery of recruitment charges, airfare claim received. Given that the issue involved has been decided in favour of the assessee in its own case for AY 2001-02, the said income receipts ought to be considered as in the nature of business income. • Reliance is also placed on the decision of the Supreme Court in the case of Rajputana Trading Co. Ltd (72 ITR 286). In this case, the assessee was carrying on both speculative and non-speculative business. The system of account regularly employed being mercantile, any liability for payment of difference on account of speculative transactions was allowed as a deduction in computing the profit or loss in speculative business. During the year under consideration, liability due to some of the creditors was written back and taken credit of in the profit and loss account. The amount was not set off against the speculative loss by the Assessing Officer either brought forward from the earlier years or suffered by the assessee during the accounting period on the ground that the liability written back and treated as business profit did not partake of the character of speculation profits.

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd • The Supreme Court accepted the contentions of the assessee that if once a particular item of loss is categorised as speculative loss then, in that case, if such loss is to be deemed to be income or profit from the business (say write back or recovery), it follows by necessary implication that such income or profit can only be income or profit arising from speculative business. • In the instant case, the expenses incurred by the assessee on payment of salaries. recruitment charges, airfare charges, link charges and ticket charges have been treated as deduction against the revenue earned by the assessee in the form of Profits and Gains from Business and Profession. Once these expenses have been treated as deduction to derive the business income of the assessee in the past, the income earned by the assessee by way of write back of these expenses cannot be considered as anything other than business income as laid down by the Honourable Supreme Court. 3) Insurance claim refund - Rs. 26,730 • It is submitted that there are times wherein an insurance policy is taken in between the financial year and annual premium is decided based on some assumptions and declared value of assets used for the purpose of business of the assessee viz., laptops and other related equipment. Any changes to the same, results in short/excess premium. In case if there is any excess premium, the same is adjusted/refunded by the insurance company to the Insured. • In the instant case, premium was paid by the assessee and subsequently, it was realized that excess premium had been paid which was subsequently refunded back to the assessee. • Given that the assessee had paid insurance premium in respect of assets and equipment used for the purpose of business and the same had been allowed as deduction, any receipt by way of refund of the said insurance premium cannot be treated as anything other than business income. In this regard, the assessee would like to again rely upon the principle laid down in the decision of the Supreme Court in the case of Rajputana Trading Co. Ltd (supra). C. Interpretation of clause (d) in Explanation to Section 80HHE of the Act • It is submitted that Section 80HHE of the Act provides for deduction of profits (to the extent as specified) derived by the assessee from the business of export out of India of computer

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd software or its transmission from India to a place outside India by any means and/or providing technical services outside India in connection with the development or production of computer software • . The term 'profits of the business' has been defined in clause (d) of Explanation to Section 80HHE as profits of the business as computed under the head "Profits and gains of business and profession" as reduced, inter-alia, by ninety percent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. (Emphasis supplied) • It is humbly submitted that profits derived by the assessee from the business of export out of India of computer software or its transmission from India to a place outside India by any means and/or providing technical services outside India in connection with the development or production of computer software cannot be restricted to the profits earned by undertaking the activity of export of computer software and/or providing technical services as specified therein but also has to take into account profits earned from activities which cannot be said to have been earned independent of these activities. • In this regard, attention is invited to the decision of the Karnataka High Court in the case of Motor Industries Co. Ltd (331 ITR 79). In the said decision, in the context of Section 80HHC of the Act, the High Court (in Para 12) held that it is only when an assessee has independent income which has no nexus with the income derived from export, which is in the nature of brokerage, commission, interest, rent or charges and inclusion of that income to the profits of the business, results in distortion, then, such income should be excluded. • Attention is also invited to the decision of the Bombay High Court in the case of Pfizer Ltd (330 ITR 62). In this decision, in the context of Section 80HHC of the Act. the High Court (in Para 9) observed that receipts by way of brokerage, commission, interest, rent or charges have been held, by the judgment of the Supreme Court in Ravindranathan Nair case (213 CTR 227) to constitute independent incomes. The Court further observed that being independent incomes unrelated to export, Parliament contemplated that ninety per cent of such receipts would have to be reduced from the profits of business as defined in Explanation (baa). The Court further held that the rationale for excluding ninety per cent of the receipts by way of brokerage, commission, interest, rent or charges is that these are independent incomes and their inclusion in the profits of business would result in a distortion.

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd • It is submitted that the income streams earned by the assessee viz., interest from others, recovery of various expenses incurred earlier and refund of insurance claim cannot be said to be incomes earned independent of the export activity under taken by the assessee. Hence, placing reliance on the aforesaid decisions of the Karnataka and Bombay High Court, it is submitted that these income streams are not in the nature of brokerage, commission, interest, rent or any charges similar in nature to these items of income and the same are relatable to the business activity of the assessee i.e. exporting of software. D. Income streams earned by the assessee are eligible for deduction under Section 80HHE of the Act 1) Interest from others- Rs. 10,11,671/ • The assessee humbly submits that since the interest from others amounting to Rs. 10.11,671/- being interest on loans given to employees for vehicles is in the nature of business income and not an independent source of income, the assessee is eligible to claim deduction for the same under Section 80HHE of the Act. • In this regard, reliance is placed on the decision of the Mumbai Tribunal, in the case of M/s Sajjan India Private Limited (ITA No. 3245/Mum/07) (Para 7 of the order) wherein it has been held that interest on loan to staff has nexus with the business of the relevant unit. Therefore, the same has to be considered as 'business income for the purpose of computing deduction under Section 80HHC of the Act. • Attention is also invited to the decision of the Full Bench of the Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd (403 ITR 453) wherein, the Honourable High Court, held inter-alia, that interest earned by it from the staff loans and such interest income would not be taxable as 'Income from other Sources' under Section 56 of the Act. • The High Court further held that the incidental activity of 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 profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act. • Attention is also invited to the decision of the Madras High Court in the case of AVM Cine Products (421 TTR 431) wherein the

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd High Court, held that interest income from staff loans is nothing but its regular business income. • In the context of interest income, the High Court held that an interest income earned by the assessee or received by the assessee during the year in question, in the ordinary and regular course of business is an integral part of business income itself. Like hundreds of business decisions taken by the assessee in its business, the deposit of money with the bank either under compulsion like maintaining the company with the bank or for opening of foreign letters of credit or for obtaining the loan itself or cash credit facility or the voluntary deposits made by it of the surplus funds, which would otherwise be lying idle, the assessee, in its own business or commercial prudence, makes a deposit in bank and incidentally earns an interest through it or interest from staff loans or customers on the belated payments and such interest income is nothing but its regular business income and hence eligible for deduction under Section 80-IA of the Act. • In view of the aforesaid principles laid down by judicial precedents, it is humbly submitted that the interest amounting to Rs. 10,11,671/- earned by the assessee on loan to employees ought to be considered as eligible for deduction under Section 80HHE of the Act. 2) Recoveries of various charges incurred earlier - Rs. 47,47,380 and insurance refund of Rs. 26,730 • • The assessee humbly submits that recoveries of various charges incurred earlier amounting to Rs. 47,47,380 and insurance refund amounting to Rs. 26,730/- are in the nature of business income, and hence the assessee is eligible to claim deduction for the same under Section 80HHE of the Act. • In this regard, attention is invited to the decision of the Bombay High Court in the case of Merck Ltd (389 ITR 70). In the instant case, the assessee had in the earlier previous year, revalued its assets which resulted in a loss. However, in the previous year relevant to the subject Assessment Year, the amount debited on account of re- valuation to the Profit & Loss Account in the earlier year, was reversed. Consequently, on reversal, the amount was credited to the Profit & Loss Account of the assessee in the previous year relevant to the Assessment Year. The Assessing Officer assessed the amount credited on account of re-valuation of assets as a part of the business income of the assessee. Further, while computing the deduction under Section 80HHC of the Act, the

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd Assessing Officer treated the amount credited to the Profit & Loss Account on account of re-valuation as falling under Explanation (baa) to Section 80HHC of the Act and 90% of the amount credited to the Profit & Loss Account on account of revaluation was reduced while computing deduction available under 80HHC of the Act. • On appeal, the Tribunal noted that the amount credited to the Profit & Loss Account on account of re-valuation did not arise out of any receipt. Further, it held that Explanation (baa) to Section 80HHC of the Act applies only to receipt by way of brokerage, commission, interest, rent charges or any other receipt of a similar nature included in the profits. The amount credited on account of revaluation of the assets though included in the business income did not fall in the nature of receipts spelled out in Explanation (baa) to Section 80HHC of the Act nor was it a receipt of similar nature. In the above view, the Tribunal held that Explanation (baa) to Section 80HHC of the Act cannot be invoked in the case of the amount credited to the Profit & Loss Account on account of re- valuation of the assets and that the assessee was entitled to the deduction under Section 80HHC of the Act without reduction of the amount credited to the Profit & Loss Account on re-valuation of assets. The High Court upheld the order of the Tribunal. • Attention is also invited to the decision of the Ahmedabad Tribunal in the case of Lubrizol Advanced Materials India Pvt Ltd (ITA No. 2811/Ahd/2011). In instant case, the assessee had claimed deduction under Section 10B of the Act in respect of refund of insurance charges which were in the nature of refund of excess amount paid to insurance company. The assessee further submitted that the aforesaid transactions were reduction in actual expenses incurred in connection with the business of export of manufactured goods and therefore should not be reduced from the amount of profit for working out deduction under Section 10B of the Act. The contention of the assessee was accepted by the Tribunal. • In view of the principles laid down by aforesaid judicial precedents, it is humbly submitted that receipts by way of recoveries of expenses incurred previously and insurance claim refund ought to be considered as eligible for deduction under Section 80HHE of the Act.

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd E. Ninety per cent of not gross receipts but only net receipts which have been included in profits of business of assessee as computed under head 'Profits and Gains of Business or Profession', are to be deducted under clause (1) of Explanation (d) to section 80HHE for determining profits of business • It is further submitted that as stated in earlier Paragraph, the term 'profits of the business' has been defined as profits of the business as computed under the head "Profits and gains of business and profession" as reduced, inter-alia, by ninety percent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. • Hence, if the assessee's contention of treating Miscellaneous income as 'Business Profits is accepted, it is humbly submitted, that ninety percent of interest from others, recoveries of expenses and insurance claim refund as reduced by expenses attributable to earning this income ought to be deducted for determining profits of business for the purpose of computing Section 80HHE of the Act. • In this regard, attention is invited to the decision of the Supreme Court in the case of ACG Associated Capsules (P) Ltd (343 ITR 89). In this decision, the Supreme Court, in the context of Section 80HHC of the Act held that ninety per cent of not gross rent or gross interest but only net interest or net rent, which has been included in profits of business of assessee as computed under head 'Profits and Gains of Business or Profession', is to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining profits of business. The relevant extract of the decision has been reproduced as under. 10. Under Clause (1) of Explanation (baa), ninety per cent of any receipts by way of brokerage, commission interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head "Profits and Gains of Business or Profession". The expression "included any such profits" in clause (1) of the Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head "Profits and Gains

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd of Business or Profession" Therefore, if any quantum of the receipts by way of brokerage, commission, interest rent, charges or any other receipt of a similar nature is allowed as expenses under Sections 30 to 44D of the Act and is not included in the profits of business as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of receipts cannot be reduced under Clause (1) of Explanation (baa) from the profits of the business. In other words, only ninety per cent of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining "profits of the business" of the assessee under Explanation (baa) to Section 80HHC" • In view of the above, it is humbly submitted that in the event it is held that "Miscellaneous income' are in the nature of Business Profits not eligible for deduction under Section 80HHE of the Act, then ninety percent of only that part of Miscellaneous Income which has been included in the profits of business (i.e. miscellaneous income as reduced by expenses attributable to earning this income) ought to be deducted for determining profits of business for the purpose of computing Section 80HHE of the Act. It is further submitted that recoveries in respect of expenses incurred earlier and insurance claim refund are actually expenses recovered by the assessee and liable to be adjusted against the expenses previously incurred by the assessee. Hence, it is humbly submitted that there will be no income arising in the hands of the assessee which would be required to be reduced from the profits of the assessee for the purpose of determining "profits of business of the assessee" under Section 80HHE of the Act. We request your Honours to take the above submission on record and oblige.”

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd charges from the employees like interest on vehicle loan and salary recovery during the year. Further recovered from other agencies like air fare incentive, reversal of provisions. These recoveries are relating to direct expenses which assessee has charged to the profit and loss for this year. These recoveries are nothing but excess expenses charged by the assessee and these recoveries should have been adjusted against the main expenses charged to the profit and loss account. In simple words, the assessee has booked the salary expenses, travelling charges and created provisions towards doubtful debts but subsequently recovered from the employees and other agencies, which ultimately reduce the main expenses charges to profit and loss account. This ultimately will reduce the actual expenses. Therefore, these recoveries will only reduce the actual expenses and will increase the profit earned by the assessee. Therefore, these recoveries are part of the business income. Therefore, these recoveries has to be treated as part of the business income earned for the purpose of deduction u/s 80HHE of the Act.

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd business given under clause (d) of explanation to section 80HHE of the Act. As per the above definition, any receipt by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits, which connotes the meaning that these income mentioned in the definition are having independent income stream, whereas the income earned by the assessee, in case, it is proved that are part of the same business, then the relevant income has to be part of the eligible business. In this case, the additional income like scrap sale are generated within the business, however, the business of the assessee is not manufacturing or related business. Therefore, the chances of regular generation of scrap sale are remote. Therefore, this is independent source of income. With regard to sale of special import license, we observe that the definition of profit of the business specified in the clause (d) of sec.80HHE is different to the section 80HHC. In 80HHC, as per clause (baa), the definition given is, ninety percent of any sum referred to in clauses (iiia) … (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. The section 80HHC has two kinds of receipts, first part is relating to export incentives and second part is other income of independent nature. The first part of the

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd receipts relating to export incentives are missing in the definition given in section 80HHE. Therefore, the legislature has not extended the above receipts in section 80HHE. Therefore, this portion of the additional income even though seems to be connected to the export business of the assessee, still the legislature has consciously kept this source of income outside the definition of ‘the profits of the business’ mentioned in the section 80HHE. Therefore, we cannot extend the above definition to these kind of receipts. In short, the receipts which is part of the business like recoveries from the employees and other agencies relating to the expenditure of the assessee are part of the business profit as explained in the above para and other receipts like scrap sales and export incentive cannot be part of the profit of the business, to determine the deduction available under the section 80HHE. Accordingly, the ground raised by the assessee is partly allowed.

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd ITA.NO. 4108/MUM/2008 (A.Y. 2003-04) - REVENUE APPEAL

“1. The CIT(A) has erred in deleting the disallowance of Rs.26,54,000/- being the Employee Stock Option expenses claimed by the assessee without appreciating the fact that no such option were exercised during the year. 2. The Ld. CIT(A) has erred in holding that the deduction u/s 80HHE be allowed to the assessee only on current year profits without first setting off the b/f losses from the gross total income.”

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd over the exercise price of the option is recognized as Deferred Employee's compensation and is charged to Profit and Loss account on straight line basis over the vesting period of the options. He brought to our notice pages 33, 36 and 37 of the paper book filed on 17 August 2021). In support of the contention that ESOP expenses have to be allowed on straight line basis over vesting period of the options, Ld. AR of the assessee relied on the following case law: -

(i) Biocon Limited ([2020] 121 taxmann.com 351) (Karnataka High Court) (ii) PVP Ventures Limited ([2012] 23 taxmann.com 286) (Madras High Court) (iii) New Delhi Television Limited ([2018] 99 taxmann.com 401).

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd “11. The Assessee has debited an amount of Rs.22.08 lakhs towards Employee Stock Option Expenses (ESOP) in the P&L Account. The Assessing Officer disallowed the same for the reason that the no option has been exercised during the year and that the Assessee did not provide any plausible reason for claiming the expenses as a deduction. The Ld.CIT(A) deducted the disallowance by relying on the decision of the Ld.CIT(A) in assessee’s own case for A.Y. 2002-03. The Ld.CIT(A) further held that the Employee Stock Option expenses is an allowable deduction as the same is an ascertained liability. 12. Before us, the Ld.DR supported the order of the Assessing Officer and submitted that the Ld.CIT(A) is not correct in deleting the disallowance. 13. The Ld.AR submitted that it is a settled issue that the ESOP expenses are an allowable expenditure and in this regard relied on the following decisions:- 1. PCIT vs New Delhi Television Ltd 398 ITR 57 (Del) 2. CIT vs PVP Ventures Ltd (2012) 211 Taxman 554 (Madras) 3. CIT vs Biocon Ltd (2021) 430 ITR 151 (Karnataka) 14. We heard the rival submissions and perused the material on rcord. We notice that the Hon’ble Delhi High Court in the case of PCIT vs New Delhi Television Ltd (supra) has considered a similar issue and held that – “4. The Special Bench ruling in Biocon Ltd. (supra) considered the matter rather elaborately and also examined all the previous decisions. It scrutinised different accounts of ESOPs and the points of time when they could have vested. The observations of the Special Bench in this regard, inter alia, are as follows (page 623 of 25 ITR (Trib)) : "When we consider the facts of the present case in the backdrop of the ratio laid down by the Hon'ble Supreme Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428 and Rotork Controls India (P.) Ltd. v. CIT[2009] 314 ITR 62 (SC), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing of the services. As regards the contention of the learned Departmental representative about the contingent liability arising on account of the options lapsing during the vesting period or the employees not choosing to exercise the option, we find that normally it is provided in the schemes of ESOP that the vested options that lapse due to non-exercise and/or unvested options that get cancelled due to resignation of the employees or otherwise, would be available for grant at a future date or would be available for being re-granted at a future date. If we consider it at micro level qua each individual employee, it may sound contingent, but if view it at macro level qua the group of employees as a whole, it loses the tag of 'contingent' because such lapsing options are up for grabs to the other eligible employees. In any case, if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liability. C. Fringe Benefit ….Act 2005, with effect from April 1, 2006. Memorandum explaining the provisions of the Finance Bill, 2005 highlights the details of the fringe benefits tax. It provides that : 'Fringe benefits as outlined in section 115WB, mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment'. Charging section 115WA of this Chapter provides that : 'In addition to the Income-tax charged under this

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd Act, there shall be charged for every assessment year . . .'fringe benefit tax in respect of fringe benefits provided or deemed to have been provided by an employee to his employees during the previous year'. Section 115WB gives meaning to the expression 'fringe benefits'. Sub- section (1) provides that for the purposes of this Chapter, 'fringe benefits means any consideration for employment as provided under clauses (a) to (d). Clause (d), which is relevant for our purpose, states that: 'any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees)' shall be taken as fringe benefit. The Explanation to this clause clarifies that for the purposes of this clause,—(/) 'specified security' means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and, where employees' stock option has been granted under any plan or scheme thereof, includes the securities offered under such plan or scheme. Thus it is discernible from the above provisions of the Act that the Legislature itself contemplates the discount on premium under ESOP as a benefit provided by the employer to its employee during the course of service. If the Legislature considers such discounted premium to the employees as fringe benefit or 'any consideration for employment', it is not open to argue contrary. Once it is held as ; consideration for employment, the natural corollary which follows is that such discount (/) is a expenditure; (ii) such expenditure is on account of an ascertained (not contingent) liability; and (Hi) cannot be treated as a short capital receipt. In view of the foregoing discussion, we are of the considered opinion that discount on shares under the ESOP is an allowable deduction. II. If yes, then when and how much ? Having seen that the discount under ESOP is a deductible expenditure under section 37(1), the

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd ne: question is that 'when' and for 'how much' amount should the deduction be granted ? The assessee is a limited company and hence it is obliged to maintain its accounts on mercantile basis Under such system of accounting, an item of income becomes taxable when a right to receive it is final acquired notwithstanding the fact that when such income is actually received. Even if such income actually received in a later year, its taxability would not be evaded for the year in which right to receive was finally acquired. In the same manner, an expense becomes deductible when liability to pay arises irrespective of its actual discharge. The incurring of liability and the resultant deduction cannot be marred by mere reason of some difficulty in proper quantification of such liability at that stage. The very point incurring the liability enables the assessee to claim deduction under mercantile system of accounting. \ have noticed the mandate of the Hon'ble Supreme Court in Bharat Earth Movers [2000] 245 ITR 428 tl if a business liability has definitely arisen in an accounting year, then the deduction should be allowed that year itself notwithstanding the fact that such liability is incapable of proper quantification at that stage and is dischargeable at a future date. It follows that the deduction for an expense is allowable on incurring of liability and the same cannot be disturbed simply because of some difficulty in the proper quantification. A line of distinction needs to be drawn between a situation in which a liability is not incurred and situation in which the liability is incurred but its quantification is not possible at the material time. Whereas in the first case, there cannot be any question of allowing deduction, in the second case, deduction has to be allowed for a sum determined on some rational basis representing the amount of liability incurred." 5. Having regard to the above discussion, especially that the previous order dated July 12, 2016 in ITANo. 366 of 2016 had considered the same items of expenditure,

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd under section 34, we are of the opinion that no question of law arises. The appeal is accordingly dismissed.” 15. Respectfully following the above decision we hold that the ESOP expenses be allowed as a deduction and therefore see no reason to interfere with the decision of the Ld.CIT(A). This ground is dismissed accordingly.”

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd eligible business'. Ld. AR submitted the relevant facts of the appeal are, there was no dispute that the deduction quantified u/s.80-IA is ₹.492,78,60,973/-. To make it clear, the said amount represents the net profit made by the Assessee from the 'eligible business' covered under sub-section (4), i.e., from the Assessee's business unit involved in generation of power. The claim of the Assessee is that in computing its 'total income', deductions available to it have to be set-off against the 'gross total income'. To illustrate, the 'gross total income' of the Assessee for the A.Y. 2002-03 was less than the quantum of deduction determined under Section 80-IA of the Act. The Assessee contends that income from all other heads including "income from other sources', in addition to 'business income', have to be taken into account for the purpose of allowing the deductions available to the Assessee, subject to the ceiling of 'gross total income'. The Ld.CIT(A) was of the view that there is no limitation on deduction admissible under Section 80-IA of the Act to income under the head 'business' only, with which the Supreme Court agreed. Accordingly, even in the case of the assessee, deduction u/s. 80HHE is to be made from the Gross Total Income which would also include Income from Other sources.

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd 24. Further, Ld. AR of the assessee submitted that the Coordinate Bench of the Tribunal in assessee own case for the A.Y. 2002-03 has held that where the deduction u/s. 80HHE of the Act was restricted to gross total income and such gross total income is computed after setting off the brought forward business losses, there cannot be any error in the Assessing Officer allowing deduction u/s. 80 HHE of the Act. Copy of the order is placed on record.

“6.4. We find that the issue in dispute is squarely addressed by the decision of the Hon'ble Supreme Court in the case of Reliance Energy Ltd., in Civil Appeal No.1327 of 2021 with Civil Appeal No.1328 of 2021; Civil Appeal No.1329 of 221; Civil Appeal No.2537 of 2015; Civil Appeal No.1408 of 2021; Civil Appeal No.1508 and Civil Appeal No.1509 of 2021 dated 28/04/2021. We find that the facts of the case and the issue in dispute which went before the Hon'ble Supreme Court has been duly addressed in para 3 & 4 of the said decision. In that case, the Hon'ble Supreme Court was concerned with the deduction u/s.80IA of the Act. Based on the interpretation of Section 801B and 80IA of the Act, it was held that in para 12 & 13 thereon that the profit eligible for deduction would be net profit made by the assessee from the eligible business and such deduction is to be allowed from gross total income. We find that similar view has been taken by the Hon'ble Jurisdictional High Court in the following cases:-

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd a) CIT vs. Tridoss Laboratories reported in 328 ITR 448 b) V.M.Salgaocar & Brothers (P) Ltd., vs. ACIT reported in 81 taxmann.com 357. c) CIT vs. Eskay Knit (India) Pvt. Ltd., in Income Tax Appeal No.184 of 2007 dated 25/03/2010. d) CIT vs. J.B.Boda & Co., Pvt. Ltd., in Income Tax Appeal No.3224 of 2009 dated 18/10/2010. 6.5. In the instant case, we find that if the set off of brought forward business loss was not taken into account, the assessee would have been entitled to deduction of the entire amount of profit eligible for deduction u/s.80HHE of the Act of Rs.7,65,2,042/-. But since the deduction under 80HHE of the Act is restricted to gross total income and such gross total income is to be computed after setting off the brought forward business losses, the assessee's claim of deduction got reduced. Hence, there cannot be any error in the Id. AO allowing deduction under 80HHE of the Act in the instant case. Hence no adjustment is warranted in the instant case as proposed by the Id. CIT. 6.6. We further find that the Id. DR vehemently placed reliance on the decision of Hon'ble Jurisdictional High Court in the case of Rohan Dyes and Intermediates Ltd., vs. CIT reported in 142 Taxman 503. In this case, the first issue which arose before the Hon'ble Court was similar to that as arose in the case of Ipca Laboratories Ltd., referred to supra coupled with further issue that if the combined net profit from the self- manufactured export and the trading export was the loss, then the deduction in respect of export incentives was to be allowed without setting off such net loss. We find that in this case also, the issue as arising in the present case of the assessee before us i.e. the computation of profit eligible for deduction by setting off brought forward business loss, did not arise for consideration and therefore, the decision rendered in Rohan Dyes and Intermediates Ltd., also becomes factually distinguishable with that of the assessee case. Accordingly, we hold that the Id. CIT grossly held in holding with the profits of the business for the year under consideration has to be reduced by the brought forward losses from earlier year for the purpose of computing profit eligible deduction u/s.80HHE of the Act. Accordingly, the ground No.2(a), 2(b) by the assessee are allowed.”

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ITA NO. 2908 & 4108/MUM/2008 (A.Y: 2003-04) M/s. Zensor Technologies Ltd own case for the A.Y. 2002-03, accordingly, we dismiss the ground raised by the revenue.

Order pronounced in the open court on 12th May, 2023

Sd/- Sd/- (ABY T. VARKEY) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 12/05/2023 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file.

//True Copy// BY ORDER

(Asstt. Registrar) ITAT, Mum

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