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Facts
The appeals concerned whether interest income earned by an assessee on housing loans advanced to its employees was eligible for deduction under Section 10B of the Income Tax Act. The Revenue argued that the income was not derived from the export business, while the assessee contended it was an integral part of its business operations.
Held
The Tribunal held that interest income earned on staff loans is considered part of the business activity of a 100% export-oriented undertaking and is eligible for deduction under Section 10A/10B of the Act, following various High Court and Supreme Court decisions. The income is not to be taxed separately under 'Income from other Sources'.
Key Issues
Whether interest income on employee housing loans is eligible for deduction under Section 10B for 100% export-oriented undertakings.
Sections Cited
10B, 10A, 80HHC, 80IB, 80IA, 56
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Income Tax Appellate Tribunal, DELHI BENCH “F”, DELHI
Before: SHRI VIKAS AWASTHY & SHRI AVDHESH KUMAR MISHRA
& 4240/DEL/2009 (A.Y.2003-04) आदेश/ORDER PER VIKAS AWASTHY, JM: These cross appeals for AY 2003-04 are directed against the order of Commissioner of Income Tax (Appeals)-XX, New Delhi dated 28.08.2009, for AY 2003-04. These appeals are listed for hearing in second round before the Tribunal.
Initially these cross appeals were decided by the Tribunal vide order dated 18.05.2012, whereby, both appeals were partly allowed. Aggrieved, by the Tribunal order, the Revenue filed appeal before the Hon’ble Delhi High Court in ITA No.691/2012. One of the substantial questions of law for consideration before the Hon’ble High Court in Revenue’s appeal was: “iii. Whether the interest on housing loan given to the employees qualifies for deduction u/s.10B of the Income Tax Act, 1961?” The Hon’ble High Court vide order dated 15.01.2025 remitted the issue to the Tribunal for consideration afresh. For the sake of completeness, the relevant extract of order by the Hon’ble Delhi High Court reads as under:- “16. Mr. Panda learned counsel would contend that the expense incurred while servicing housing loans of employees cannot possibly be said to be an expense connected with the business of the enterprise. He submitted that all deductions which are or could be claimed either under Section 10A or Section 10B are concerned with profits and gains that are derived by an undertaking. He also referred for our consideration what he describes to be a contrarian view taken by the Tribunal in the matter of E-funds International P. Ltd. v. Deputy Commissioner of Income-tax. The relevant passages from the decision of the Tribunal in eFunds are reproduced herein:- “20. Accordingly, the profits of the business in the given context would mean the profits of the business carried on by the undertaking to which the provisions apply. It means that in this background we are required to decide whether the interest income earned by the assessee from the housing loans advanced to its employees would also form the part of the profits from the business carried on by the undertaking for allowing deduction under section l0A of the Act .
& 4240/DEL/2009 (A.Y.2003-04) Undisputedly, the assessee undertaking is in the business of providing technology based solution to eFund groups entities and third party customers mainly outside India and these services are rendered through three units registered under Software Technology Parks of India (“STPI”) scheme. Hence, the interest income earned by the assessee on the housing loans given to its employees would certainly not form part of the profits of the assessee undertaking as there is no nexus between the activity carried on by the assessee and the income earned by way of interest on the housing loans advanced to its employees. In view of the discussion hereinabove the assessee is not eligible to claim deduction under section l0A of the Act on the income earned from the interest on the housing loan advanced to its employees. The decision of the Income-tax Appellate Tribunal (Jodhpur Bench) in the case of Sharda Gums and Chemicals [2001] 76 ITD 282 relied upon by the learned authorised representative for the assessee does not apply to the facts and issue under consideration first because the case law relates to the deduction claimed under section 80HHC of the Act on the interest earned by the assessee on FDRs whereas in the instant case we are concerned with the deduction claimed under section l0A of the Act in respect of interest earned by the assessee on housing loans advanced to the employees; second because in sub-section (3) of section 80HHC of the Act while computing the profits in the working formula for arriving at the export profits the words used are "profits of the business", whereas, while working out the same for deduction under section l0A in subsection (4) of the Act, the words used are "profits of the undertaking". The provisions of section l0A and section 80HHC of the Act cannot, therefore, be held to be at par.”
In so far as this aspect is concerned, we note that the Tribunal has disposed of the question by broadly observing that the CIT(A) had arrived at a clear finding that there was a direct nexus between the interest paid and interest received. The Tribunal thus clearly failed to engage with the stand of the appellant that interest expenditure could not be taken into consideration while computing profits and gains derived by an undertaking. Insofar as this question is concerned and since the Commissioner also canvasses for our consideration the view that was expressed by the Tribunal in eFunds, we are of the considered opinion that this question would merit being remanded to the Tribunal for consideration afresh.”
Thus, the solitary issue in the present proceeding for consideration is whether interest received by assessee on loans advanced to employees is eligible for deduction u/s.10B of the Act Income Tax Act,1961(hereinafter referred to as & 4240/DEL/2009 (A.Y.2003-04) ‘the Act’). The said issue emanates from ground no.4 in appeal by the Revenue. The said ground is an under:- “4. Whether in the facts and circumstances of the case, the ld. CIT(A) was right in allowing deduction u/s.10-B on interest earned from I.T. refund (Rs.24,84,307/-) and housing loan (Rs.1,27,741/-) given to employee being Non-business income.”
Ms. Monika Singh, representing the department submitted that section 10B(1) of the Act makes it clear that the deduction is allowable only on profits and gains derived by a 100%export-oriented undertaking from the export of articles or things or computer software. The expression derived from used in section 10B(1) of the Act has to be construed strictly when applied to exemption and tax benefits. Therefore, the income/profit i.e. eligible for deduction u/s. 10B(1) of the Act should have direct nexus to the export business activity of the undertaking. The ld. DR in support of her submissions placed reliance on the decisions rendered in the case of CIT vs. Sterling Foods, 237 ITR 579 (SC) and Liberty India Ltd. vs. CIT, 317 ITR 218 (SC).
Shri Nishank Vashitath, appearing on behalf of the assessee submitted that during the period relevant to assessment year under appeal, the assessee had received an interest of Rs.1,27,741/- on the loans given to employees. The assessee has netted of said interest income against the interest expenditure. He further submitted that the loan to employees was advanced from business income, therefore, interest on said loans is also part of business income only. The ld. Counsel in support of his submissions has drawn our attention to the decision of Full Bench of the Hon’ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd. 403 ITR 453, to contend that profit and gains of the undertaking include incidental income by way of interest on bank deposits or staff loans and would be entitle to 100% deduction u/s.10A and 10B of the Act. The & 4240/DEL/2009 (A.Y.2003-04) High Court held that such interest income arises in the ordinary course of export business of undertaking even though not as a direct result of export. To further buttress his arguments he placed reliance on the following decisions:- (i) PCIT vs. Infosys Ltd. 147 taxmann.com 520 (Kar.); & (ii) TCS vs. DCIT, 129 ITR (Trib) 667. The ld. Counsel pointed that the decision rendered by Hon’ble Karnataka High Court in the case of PCIT vs. Infosys Ltd. (supra) was challenged by the department before the Hon’ble Supreme Court of India, the SLP of the Department was dismissed by the Hon’ble Apex Court. The same is reported as 166 taxmann.com 172 (SC).
We have heard the submissions made by rival sides and have examined the orders of authorities below. We have also considered the decisions on which respective sides have placed reliance in support of their contentions. The short issue in present appeal before us is; Whether the interest income received by the assessee on loan advanced to the employees is eligible for deduction u/s.10B of the Act? Before proceeding further, it would be imperative to note the provisions of section 10B(1) of the Act. The same reads as under:- “(i) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.”
A bare perusal of sub section (1) to section 10B of the Act would show that the deduction is available on the profits and gains derived from the export of articles or things or computer software. The Hon’ble Apex Court in the case of CIT vs. Sterling Foods (supra) while interpreting the provisions of section 80HH of the & 4240/DEL/2009 (A.Y.2003-04) Act held that, “there must be, for the application of the words derived from, a direct nexus between the profits and gains and the industrial undertaking”.
In the case of Liberty India vs. CIT (supra), the Hon’ble Apex Court while examining the provisions of section 80IB r.w.s. 80I and 80IA of the Act held that duty draw back receipts/ duty entitlement passbook benefits do not form part of net profits of eligible industrial undertaking for the purpose of section 80IB, 80I and 80IA of the Act. The Hon’ble High Court observed that:- “14. Analyzing Chapter VI-A, we find that section 80-IB/80-IA are the Code by themselves as they contain both substantive as well as procedural provisions. Therefore, we need to examine what these provisions prescribe for "computation of profits of the eligible business". It is evident that section 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The word “derived from” is narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree”.
The Full Bench of Hon’ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd. (supra) after considering both the aforesaid decisions while dealing with the specific issue of assessee’s claim of deduction u/s.10B on interest on bank deposits or staff loans held as under:- 35. The Scheme of Deductions under Chapter VI-A in Sections 80-HH, 80-HHC, 80-IB, etc from the 'Gross Total Income of the Undertaking', which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10-B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI-A under Section 80-HH, etc. The computation of income entitled to exemption under Section 10-A or 10-B of the Act is done at the prior stage of computation of Income from Profits and Gains of & 4240/DEL/2009 (A.Y.2003-04) Business as per Sections 28 to 44 under Part-D of Chapter IV before 'Gross Total Income' as defined under Section 80-B(5) is computed and after which the consideration of various Deductions under Chapter VI-A in Section 80HH etc. comes into picture. Therefore analogy of Chapter VI Deductions cannot be telescoped or imported in Section 10-A or 10-B of the Act. The words 'derived by an Undertaking' in Section 10-A or 10-B are different from 'derived from' employed in Section 80-HH etc. Therefore all Profits and Gains of the Undertaking including the incidental income by way of interest on Bank Deposits or Staff loans would be entitled to 100% exemption or deduction under Section 10-A and 10-B of the Act. Such interest income arises in the ordinary course of export business of the Undertaking even though not as a direct result of export but from the Bank Deposits etc., and is therefore eligible for 100% deduction.
We have to take a purposive interpretation of the Scheme of the Act for the exemption under Section 10-A/10-B of the Act and for the object of granting such incentive to the special class of assessees selected by the Parliament, the play-in-the- joints is allowed to the Legislature and the liberal interpretation of the exemption provisions to make a purposive interpretation, was also propounded by Hon'ble Supreme Court in the following cases:— [I] In Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480, the Hon'ble Supreme Court held that:— "5. . . . . . Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it, too, has to be construed so as to advance the objective of the section and not to frustrate it. But that turned out to be the, unintended, consequence of construing the clause literally, as was done by the High Court for which it cannot be blamed, as the provision is susceptible of such construction if the purpose behind its enactment, the objective it sought to achieve and the mischief it intended to control is lost sight of. One way of reading it is that the clause excludes any undertaking formed by transfer to it of any building, plant or machinery used previously in any other business. No objection could have been taken to such reading but when the result of reading in such plain and simple manner is analysed then it appears that literal construction would not be proper. …" [II] In R.K. Garg v. Union of India [1982] 133 ITR 239/[1981] 7 Taxman 53, the Hon'ble Apex Court has held as under:— '8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints, because it has to & 4240/DEL/2009 (A.Y.2003-04) deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud [351 US 457: 1 L Ed 2d 1485 (1957)] where Frankfurter, J., said in his inimitable style: "In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events — self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability." The Court must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry"; "that exact wisdom and nice adaption of remedy are not always possible" and that "judgment is largely a prophecy based on meagre and uninterrupted experience". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid.' 37. On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction under Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as 'Income from other Sources' under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the & 4240/DEL/2009 (A.Y.2003-04) Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act.” [Emphasized by us] 10. Later taking a consistent view, the Hon’ble Karnataka High Court in the case of PCIT vs. Infosys Ltd. (supra) following the decisions rendered in the case of CIT vs. Hewlett Packard Global Soft Ltd. (supra) held that rental income received by the assessee from sub lease of the certain area in STPI would be eligible for deduction u/s.10A of the Act. In other words, the Hon’ble High Court held that the rental income received by the assessee was eligible for inclusion in profits as there were immediately connected with the business of the undertaking. The Revenue assailed the said findings of the CIT(A) in SLP before the Hon’ble Supreme Court of India. The SLP of the Revenue was dismissed on ground of delay as well as on merits. Thus, the issue whether rental income is eligible for deduction u/s.80A of the Act attained finality.
Following the decision rendered by Hon’ble Karnataka High Court in the case of Hewlett Packard Global Soft Ltd. (supra), Mumbai Bench of the Tribunal in the case of TCS vs. DCIT (supra) while considering assessee’s claim of deduction u/s.10AA of the Act on interest income concluded as under:- “23. We further notice that a similar view is expressed by the jurisdictional High Court in the case of Symantee Software India P. Ltd. while considering the deduction under section 10A of the Act. It is relevant to mention here that the manner of computing deduction under section 10A as per the provisions of sub-section (4) of the said section is similar to sub-section (7) of section 10AA and therefore the ratio of the above decisions rendered in the context of deduction under section 10A would equally be applicable to deduction claimed under section 10AA. Accordingly, respectfully following the above decision of the jurisdictional High Court and also the Full Bench of the hon'ble Karnataka High Court, we hold that interest income is also to be considered for the purpose of arriving at the profits eligible for deduction under section 10AA. The Assessing Officer is directed to recompute the deduction under section 10AA accordingly. Ground No. 4 of the appeal is thus allowed.”
& 4240/DEL/2009 (A.Y.2003-04) 12. Thus, in light of the decision rendered by Full Bench of the Hon’ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd. (supra), we find merit in submissions of the Counsel for the assessee. Hence, the issue is decided in favour of the assessee and against the department. Consequently, ground no.4 of appeal by the Revenue is partly allowed.
AY 2003-04 13. The Department only filed appeal against the Tribunal order before the Hon’ble High Court, therefore, it was only the findings of Tribunal against the department that were subject matter of appeal before the Hon’ble High Court. The issues decided by the Hon’ble High Court have no bearing on grounds raised in appeal by the assessee before the Tribunal. Apparently, the Registry has wrongly listed cross appeal of the assessee. Since, there is no direction from the Hon’ble High Court qua findings of the Tribunal on the appeal of the assessee, we see no reason to take up appeal of the assessee. The findings of Tribunal in appeal by the assessee have attained finality. Thus, there is no change in outcome of appeal by the assessee i.e. the appeal of assessee is partly allowed.