M/S.california Software Co., Ltd. 1205, D Block, Tidel Park v. The Commissioner Of Income Tax-I Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 12.02.2020 CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE R.SURESH KUMAR Tax Case (Appeal) Nos.206 & 207 of 2009 M/s.California Software Co., Ltd.T.S.No.140, Block No.2&95[th] Floor, Elnet Software CityC.P.T.Road, TaramaniChennai 600 113....Appellant in TCA 206/2009 M/s.California Software Co., Ltd.1205, D Block, TIDEL ParkNo.4, Canal Bank Road, TaramaniChennai 600 113....Appellant in TCA 207/2009Vs.The Commissioner of Income Tax-IChennai....Respondent in both TCAs Tax Case Appeals filed under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax Appellate Tribunal'A' Bench, Chennai dated 24.07.2008 in against the order of theCommissioner of income Tax Appeals-XII, 121, Mahatma GandhiRoad,Nungambakkam,Chennai-34dated15/06/2006inITA.No.134/05-06 against the order of the Assistant Commissionerof Income Tax vide PAN.No.CR.I.No./PA No.AABCC8506b dated11/03/2005 for the assessment year 2002-03.I.T.A.No.2049/Mds/06and against the order of the Commissioner of Income Tax(Appeals)-III, 121 Mahatma Gandhi Road Chennai 600 034 dated11/11/2003 in ITA.No.254/2003-04/A III against the DeputyCommissioner of Income Tax, Company Circle-1(3) Chennai dated14/08/2003 in Cr.No./PA No.CX4-117/AABCC8506D for the assessmentyear 2001-2002, I.T.A.No.557/Mds/04 respectively. For Appellant : Mr.R.Kumar for M/s.T.N.Seetharaman For Respondent : Mr.T.Ravi Kumar Senior Standing Counsel Page 1 of 7 https://hcservices.ecourts.gov.in/hcservices/ C O M M O N J U D G M E N T (Judgment of the Court was delivered by DR.VINEET KOTHARI,J) The Assessee M/s.Californa Software Co., Ltd. has filedthese appeals under Section 260A of the Act, calling in questionthe correctness of the order passed by the Income Tax AppellateTribunal, 'A' Bench, Madras dated 24.07.2008, wherein theTribunal held that the Assessee is not entitled to deductionunder Section 10-A / 10-B of the Act. 2. The appeals have been admitted by the Coordinate Benchof this Court on 22.04.2009 on the following substantialquestions of law: "T.C.A.No.206 of 2009 1.Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal is right in law inupholding the addition of Rs.1,11,07,792/- as deemedincome of the assessee company under Section 41(1)of the Income Tax Act, 1961?2.Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal is right in law inholding that the assessee company is not eligiblefor relief in respect of the sumof Rs.2,22,07,792/-under Section 10B of the Income Tax Act, 1961 asamended by the Finance Act, 2001 w.e.f. 01.04.2001?3. Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal is right in law inholding that the denying relief under Section 10B ofthe Act ignoring that the sum of Rs.1,11,07,792/- isa reversal credit entry of the debit entries ofRs.11,35,556/- and Rs.99,72,236/- made in assessmentyears 2000-01 and 2001-02 and are of the same natureand, accordingly the amount credited this year iseligible for the relief claimed vide decision CITVs.Abdul Rahman Industries (2007) 293 ITR 475 (Mad)? 4.Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal is right in law inholding that the interest of Rs.60,20,491/- earnedby the assessee on loan advanced to its wholly ownedsubsidiary in USA for working capital is notbusiness income of the assessee overlooking theprinciples laid down by the Supreme Court fordetermining the true nature of the Income?” Page 2 of 7 "T.C.A.No.207 of 2009 4.Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal is right in law inholding that the interest of Rs.60,20,491/- earnedby the assessee on loan advanced to its wholly ownedsubsidiary in USA for working capital is notbusiness income of the assessee overlooking theprinciples laid down by the Supreme Court fordetermining the true nature of the Income?” Page 2 of 7 "T.C.A.No.207 of 2009 1.Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal is right in law inholding that the interest of Rs.45,88,500/- earnedby the assessee on loan advanced to its wholly ownedsubsidiary in USA for working capital is notbusiness income of the assessee overlooking theprinciples laid down by the Supreme Court fordetermining the true nature of the income? 2. Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal is right in law indenying the relief in respect of interest amount ofRs.45,88,500/- under Section 10B of the Act asamended by the Finance Act, 2001 w.e.f.1.04.2001? 3. Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal is right in holdingthat sum of Rs.2,29,353/- being payments made by theappellant's employees in lieu of notice period arenot eligible for deduction under Section 10B of theAct?” 3. The Assessee Company had offered stock option scheme toits employees in the preceding assessment years and followingthe SEBI guidelines and standard accounting practices, the saidamount was debited to the Profit and Loss Account of theAssessee Company. The option given to the employees to convertthe said stock option into equity shares of the company was notexercised by the employees in subsequent years, as the rates ofsuch stocks went down and therefore, the company reversed thesaid entries and the differential amount was treated as incometo the Assessee under Section 41 of the Income Tax Act. Thequestion arose as to whether such income of the Assessee underSection 41 of the Act could be treated as 'export income' of theAssessee and was therefore entitled to deduction under Section10-A/10-B of the Act, which issue was decided by the learnedTribunal against the Assessee with the following reasons. “7................ We considered this issue. We are not able to agreewith the argument of the ld.C.A. This amount ofRs.1,11,07,792/-is not in the nature of profits andgains derived by the assessee from the export ofarticles or things for the profits and gains derived bya hundred percent export-oriented undertaking from the Page 3 of 7 https://hcservices.ecourts.gov.in/hcservices/ “7................ We considered this issue. We are not able to agreewith the argument of the ld.C.A. This amount ofRs.1,11,07,792/-is not in the nature of profits andgains derived by the assessee from the export ofarticles or things for the profits and gains derived bya hundred percent export-oriented undertaking from the Page 3 of 7 https://hcservices.ecourts.gov.in/hcservices/ export of articles or things or computer software. Asit is evidenced from the simple facts of the case, theamount of Rs.1,11,07,792/- has not been added to theincome of the assessee-company as profits and gainsderived from the export. Sub-section (3) of Section10B further provides that the relief is available onlyif the sale proceeds of articles or things or computersoftware exported out of India are received in, orbrought into India by the Assessee in convertibleforeign exchange. It means the receipt of convertibleforeign exchange should arise out of the sale proceedsof the articles specified in Section 10B by way ofexports. Therefore, nothing other than sale proceeds iscontemplated for the relief provided under Section 10B.There must be exports; exports must be of specifiedgoods; the consideration must be in the form of saleproceeds and actual receipts must be in convertibleforeign exchange. All the above terms have to besatisfied in order to claim relief under Section 10B.Obviously, the case of the assessee does not stand tothe above tests. Therefore, the first argument thatthe assessee that the relief under Section 10B shouldbe given on the income of Rs.1,11,07,792/- isdismissed. 9. The alternative contention of the ld.C.A., is thatthe said amount of Rs.1,11,07,792/- does not take thecolour of income at all. According to the ld.C.A., theearlier debit entry was passed only to satisfy thenorms prescribed by the SEBI while offering Employees'stock option and later the reversal entry was made asthe scheme was not materialised. Therefore, accordingto the ld. C.A., the expenses as well as the incomewere credited only by book entries and in fact there isno question of income at all. The credit has beenoccurred in the Profit & Loss Account only because ofthe necessity of accounting. Therefore, on the basisof real income concept, the amount of Rs.1,11,07,792/-cannot be treated as income at all.” 4.The learned counsel for the Assessee however submittedthat the controversy is covered by the judgment of a DivisionBench of this Court in the case of “Camiceria Apparels India PvtLtd -Vs- A.C.I.T” in TCA No.1972 and 1973 of 2008 decided on04.02.2019, which followed the Full Bench judgment of theKarnataka High Court in case of “C.I.T -Vs- Hewlett PackardGlobal Soft Ltd” decided on 30.10.2017 reported in (2017) 87Taxmann.com 182 (Kar) (FB), to which one of us (Dr.VineetKothari, J.) was a party. The relevant extract from the above Page 4 of 7 said judgments are quoted below for ready reference. Extract from Camiceria Apparels India Pvt Ltd -Vs-A.C.I.T”19. The relief provided for in terms of Sections10A, 10B and other special provisions addresses reliefto be granted to specified categories of undertakings,specified either by the activilities carried on by themor their location (in STPI/FTZ/EOU). The provision isattracted to the entire income derived from the'business of the eligible undertaking' as contradistinguished from the provisions of Section 80 IAfalling under Chapter VI A, which provides for adeduction only in respect of the income derived from/bythe eligible undertakings. The use of the word“business” in the context of the grant of the reliefwidens the scope of such benefit encompassing allincomes generated by such business activities. 20. Such special deduction is intended as abenefit to a special class of undertakings and asstated by the Supreme Court in the case of Bajaj TempoLTD. Vs. Commissioner of Income Tax, Bombay [(1992) 3SCC 78]. Since a provision intended for promotingeconomic growth has to be interpreted liberally, therestriction on it, too, has to be construed so as toadvance the 'objective of the section and not tofrustrate it';. We thus reject the reliance of theRevenue on the decisions referred to since they aredistinguishable in law for the reasons stated above. 21. The assessee before us has lost throughout inthe proceedings before the lower authorities and theissue has been held against it based on a decision ofthe Tribunal in the case of ABI Showatech (India) Ltd.V. DCIT that inturn relies on the judgment of thisCourt in the case of Menon Impex (supra) and otherorders of the Tribunal itself.22. In the case of Menon Impex (supra), the legaldistinction argued before us and noted above hasevidently not been placed for consideration before thatBench which decides the matter against the assesseefollowing the judgment of the Supreme Court in the caseof CIT V. Sterlings Foods ((1999) 237 ITR 579), thathas been rendered in the context of section 80I of theAct. 23. As far as the decision of this Court in IndiaComnet (supra) is concerned, the matter travelled inappeal to the Supreme Court which has, in its judgmentreported in 354 ITR 673 remanded the matter to theIncome Tax Appellate Tribunal for a decision afresh Page 5 of 7 https://hcservices.ecourts.gov.in/hcservices/ after detailed examination of the transaction inquestion. 24. In the light of the above discussion, weconclude stating that where the sole activity engagedin by the assessee is export, all incomes generated bythe conduct of the business of the unit would beeligible to the benefits under section 10A/10B. Theorders of the authorities below are reversed and theissue answered in favour of the assssee and against theRevenue. The substantial question of law is answered infavour of the assessee and against the Revenue. TheTax Case (Appeals) are allowed. No costs.”Extract from “C.I.T -Vs- Hewlett Packard Global Soft Ltd” 37. On the above legal position discussed by us, weare of the opinion that the Respondent assessee wasentitled to 100% exemption or deduction underSection 10A of the Act in respect of the interestincome earned by it on the deposits made by it withthe Banks in the ordinary course of its business andalso interest earned by it from the staff loans andsuch interest income would not be taxable as “Incomefrom other Sources' under Section 56 of the Act.The incidental activity of parking of Surplus Fundswith the Banks or advancing of staff loans by suchspecial category of assessees covered under Section10A or 10B of the Act is integral part of theirexport business activity and a business decisiontaken in view of the commercial expediency and theinterest income earned incidentally cannot bedelinked from its profits and gains derived by theUndertaking engaged in the export of Articles asenvisaged under Section 10-A or Section 10-B of theAct and cannot be taxed separately under Section 56of the Act.38. We therefore affirm and agree with the viewexpressed by the first Division Bench of this Courtin the case of Motorola India Electronics (P) Ltd.,(supra) and we do not agree with the view taken bythe subsequent Division Bench on 10/04/2014 in thepresent case.39. Both the questions thus framed above areanswered in favour of the Respondent Assessee andagainst the Revenue in terms indicated above and thematter is sent back to the Division Bench fordeciding this Appeal in accordance with theaforesaid opinion.” Page 6 of 7 Page 6 of 7 5. In view of the aforesaid two precedents, to which nocontrary view has been cited before us, we are inclined to takea view that the income brought to tax under Section 41 of theAct by reversal of the entry with regard to the stock optiongiven to the employees is also in the nature of 'export income'and therefore, the Assessee is entitled to exemption / deductionunder Section 10-A / 10-B of the Act and the view taken by thelearned Tribunal is not sustainable. 6. Accordingly, the present appeals filed by the Assesseedeserve to be allowed and the same are accordingly allowed.The questions of law framed above are answered in favour of theAssessee and against the Revenue. No costs. Sd/- Asst.Registrar (CS III ) /true copy/Sub Asst. Registrar KSTTo1.Income Tax Appellate Tribunal 'A' Bench,Chennai. 2.Commissioner of Income Tax Appeals-XIINo.121 Mahatma Gandhi RoadNungambakkam Chennai-34 3.The Commissioner of Income TaxAppeals-III121, Mahatma Gandhi RoadChennai-34 4.The Deputy Commissionerof Income TaxCompany Circle-1(3)Chennai +2 ccs to Mr.T.Ravikumar Advocate sr11583T.C.(A) Nos.206 & 207 of 2009nrl(co)aa09/03/2020 Page 7 of 7