Order in TC Nos.206 & 207 of 2009 (M/s.California Software Co., Ltd -Vs- C.I.T) dated 12.02.2020 IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 12.02.2020 CORAM HON'BLE DR.JUSTICE VINEET KOTHARI AND 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&9 5th Floor, Elnet Software City C.P.T.Road, Taramani Chennai 600113. Appellant in TCA 206/2009 M/s.California Software Co., Ltd. 1205, D Block, TIDEL Park No.4, Canal Bank Road, Taramani Chennai 600113. Appellant in TCA 207/2009 Vs. Commissioner of Income Tax-I Chennai Respondent in both TCAs Tax Case Appeals filed under Section 260A of Income Tax Act, 1961 against order of Income Tax Appellate Tribunal 'A' Bench, Chennai dated 24.07.2008 in I.T.A.No.2049/Mds/06 and 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 11 http://www.judis.nic.in Order in TC Nos.206 & 207 of 2009 (M/s.California Software Co., Ltd -Vs- C.I.T) dated 12.02.2020 COMMON JUDGMENT (Judgment of Court was delivered by DR.VINEET KOTHARI,J) Assessee M/s.Californa Software Co., Ltd. has filed these appeals under Section 260A of Act, calling in question correctness of order passed by Income Tax Appellate Tribunal, 'A' Bench, Madras dated 24.07.2008, wherein Tribunal held that Assessee is not entitled to deduction under Section 10-A / 10-B of Act. 2. appeals have been admitted by Coordinate Bench of this Court on 22.04.2009 on following substantial questions of law: "T.C.A.No.206 of 2009 1.Whether on facts and in circumstances of case, Appellate Tribunal is right in law in upholding addition of Rs.1,11,07,792/- as deemed income of assessee company under Section 41(1) of Income Tax Act, 1961? 2.Whether on facts and in circumstances of case, Appellate Tribunal is right in law in holding that assessee company is not eligible for relief in respect of sumof Rs.2,22,07,792/- under Section 10B of Income Tax Act, 1961 as amended by Finance Act, 2001 w.e.f. 01.04.2001? 3. Whether on facts and in circumstances of case, Page 2 of 11 http://www.judis.nic.in Order in TC Nos.206 & 207 of 2009 (M/s.California Software Co., Ltd -Vs- C.I.T) dated 12.02.2020 Appellate Tribunal is right in law in holding that denying relief under Section 10B of Act ignoring that sum of Rs.1,11,07,792/- is reversal credit entry of debit entries of Rs.11,35,556/- and Rs.99,72,236/- made in assessment years 2000-01 and 2001-02 and are of same nature and, accordingly amount credited this year is eligible for relief claimed vide decision CIT Vs.Abdul Rahman Industries (2007) 293 ITR 475 (Mad)? 4.Whether on facts and in circumstances of case, Appellate Tribunal is right in law in holding that interest of Rs.60,20,491/- earned by assessee on loan advanced to its wholly owned subsidiary in USA for working capital is not business income of assessee overlooking principles laid down by Supreme Court for determining true nature of Income? "T.C.A.No.207 of 2009 1.Whether on facts and in circumstances of case, Appellate Tribunal is right in law in holding that interest of Rs.45,88,500/- earned by assessee on loan advanced to its wholly owned subsidiary in USA for working capital is not business income of assessee overlooking principles laid down by Supreme Court for determining true nature of income? 2. Whether on facts and in circumstances of case, Page 3 of 11 http://www.judis.nic.in Order in TC Nos.206 & 207 of 2009 (M/s.California Software Co., Ltd -Vs- C.I.T) dated 12.02.2020 Appellate Tribunal is right in law in denying relief in respect of interest amount of Rs.45,88,500/- under Section 10B of Act as amended by Finance Act, 2001 w.e.f.1.04.2001? 3. Whether on facts and in circumstances of case, Appellate Tribunal is right in holding that sum of Rs.2,29,353/- being payments made by appellant's employees in lieu of notice period are not eligible for deduction under Section 10B of Act? 3. Assessee Company had offered stock option scheme to its employees in preceding assessment years and following SEBI guidelines and standard accounting practices, said amount was debited to Profit and Loss Account of Assessee Company. option given to employees to convert said stock option into equity shares of company was not exercised by employees in subsequent years, as rates of such stocks went down and therefore, company reversed said entries and differential amount was treated as income to Assessee under Section 41 of Income Tax Act. question arose as to whether such income of Assessee under Section 41 of Act could be treated as 'export income' of Assessee and was therefore entitled to deduction under Section 10-A/10-B of Act, which issue was decided by learned Tribunal against Assessee Page 4 of 11 http://www.judis.nic.in Order in TC Nos.206 & 207 of 2009 (M/s.California Software Co., Ltd -Vs- C.I.T) dated 12.02.2020 with following reasons. 7................ We considered this issue. We are not able to agree with argument of ld.C.A. This amount of Rs.1,11,07,792/-is not in nature of profits and gains derived by assessee from export of articles or things for profits and gains derived by hundred percent export-oriented undertaking from export of articles or things or computer software. As it is evidenced from simple facts of case, amount of Rs.1,11,07,792/- has not been added to income of assessee-company as profits and gains derived from export. Sub-section (3) of Section 10B further provides that relief is available only if sale proceeds of articles or things or computer software exported out of India are received in, or brought into India by Assessee in convertible foreign exchange. It means receipt of convertible foreign exchange should arise out of sale proceeds of articles specified in Section 10B by way of exports. Therefore, nothing other than sale proceeds is contemplated for relief provided under Section 10B. There must be exports; exports must be of specified goods; consideration must be in form of sale proceeds and actual receipts must be in convertible foreign exchange. All above terms have to be satisfied in order to claim relief under Section 10B. Obviously, case of assessee does not stand to above tests. Therefore, first argument that assessee that relief under Section 10B should be given on income of Rs.1,11,07,792/- is dismissed. Page 5 of 11 http://www.judis.nic.in Order in TC Nos.206 & 207 of 2009 (M/s.California Software Co., Ltd -Vs- C.I.T) dated 12.02.2020 9. alternative contention of ld.C.A., is that said amount of Rs.1,11,07,792/- does not take colour of income at all. According to ld.C.A., earlier debit entry was passed only to satisfy norms prescribed by SEBI while offering Employees' stock option and later reversal entry was made as scheme was not materialised. Therefore, according to ld. C.A., expenses as well as income were credited only by book entries and in fact there is no question of income at all. credit has been occurred in Profit & Loss Account only because of necessity of accounting. Therefore, on basis of real income concept, amount of Rs.1,11,07,792/- cannot be treated as income at all. 4.The learned counsel for Assessee however submitted that controversy is covered by judgment of Division Bench of this Court in case of Camiceria Apparels India Pvt Ltd -Vs- A.C.I.T in TCA No.1972 and 1973 of 2008 decided on 04.02.2019, which followed Full Bench judgment of Karnataka High Court in case of C.I.T -Vs- Hewlett Packard Global Soft Ltd decided on 30.10.2017 reported in (2017) 87 Taxmann.com 182 (Kar) (FB), to which one of us (Dr.Vineet Kothari, J.) was party. relevant extract from above said judgments are quoted below for ready reference. Extract from Camiceria Apparels India Pvt Ltd -Vs- A.C.I.T 19. relief provided for in terms of Sections 10A, 10B Page 6 of 11 http://www.judis.nic.in Order in TC Nos.206 & 207 of 2009 (M/s.California Software Co., Ltd -Vs- C.I.T) dated 12.02.2020 and other special provisions addresses relief to be granted to specified categories of undertakings, specified either by activilities carried on by them or their location (in STPI/FTZ/EOU). provision is attracted to entire income derived from 'business of eligible undertaking' as contra distinguished from provisions of Section 80 IA falling under Chapter VI A, which provides for deduction only in respect of income derived from/by eligible undertakings. use of word business in context of grant of relief widens scope of such benefit encompassing all incomes generated by such business activities. 20. Such special deduction is intended as benefit to special class of undertakings and as stated by Supreme Court in case of Bajaj Tempo LTD. Vs. Commissioner of Income Tax, Bombay [(1992) 3 SCC 78]. Since provision intended for promoting economic growth has to be interpreted liberally, restriction on it, too, has to be construed so as to advance 'objective of section and not to frustrate it';. We thus reject reliance of Revenue on decisions referred to since they are distinguishable in law for reasons stated above. 21. assessee before us has lost throughout in proceedings before lower authorities and issue has been held against it based on decision of Tribunal in case of ABI Showatech (India) Ltd. V. DCIT that inturn relies on judgment of this Court in case of Menon Impex (supra) and other orders of Tribunal itself. 22. In case of Menon Impex (supra), legal Page 7 of 11 http://www.judis.nic.in Order in TC Nos.206 & 207 of 2009 (M/s.California Software Co., Ltd -Vs- C.I.T) dated 12.02.2020 distinction argued before us and noted above has evidently not been placed for consideration before that Bench which decides matter against assessee following judgment of Supreme Court in case of CIT V. Sterlings Foods ((1999) 237 ITR 579), that has been rendered in context of section 80I of Act. 23. As far as decision of this Court in India Comnet (supra) is concerned, matter travelled in appeal to Supreme Court which has, in its judgment reported in 354 ITR 673 remanded matter to Income Tax Appellate Tribunal for decision afresh after detailed examination of transaction in question. 24. In light of above discussion, we conclude stating that where sole activity engaged in by assessee is export, all incomes generated by conduct of business of unit would be eligible to benefits under section 10A/10B. orders of authorities below are reversed and issue answered in favour of assssee and against Revenue. substantial question of law is answered in favour of assessee and against Revenue. Tax Case (Appeals) are allowed. No costs. Extract from C.I.T -Vs- Hewlett Packard Global Soft Ltd 37. On above legal position discussed by us, we are of opinion that Respondent assessee was entitled to 100% exemption or deduction under Section 10A of Act in respect of interest income earned by it on deposits made by it with Banks in ordinary course of its business and also interest earned by it from staff loans and such interest Page 8 of 11 http://www.judis.nic.in Order in TC Nos.206 & 207 of 2009 (M/s.California Software Co., Ltd -Vs- C.I.T) dated 12.02.2020 income would not be taxable as Income from other Sources' under Section 56 of Act. incidental activity of parking of Surplus Funds with Banks or advancing of staff loans by such special category of assessees covered under Section 10A or 10B of Act is integral part of their export business activity and business decision taken in view of commercial expediency and interest income earned incidentally cannot be delinked from its profits and gains derived by Undertaking engaged in export of Articles as envisaged under Section 10-A or Section 10-B of Act and cannot be taxed separately under Section 56 of Act. 38. We therefore affirm and agree with view expressed by first Division Bench of this Court in case of Motorola India Electronics (P) Ltd., (supra) and we do not agree with view taken by subsequent Division Bench on 10/04/2014 in present case. 39. Both questions thus framed above are answered in favour of Respondent Assessee and against Revenue in terms indicated above and matter is sent back to Division Bench for deciding this Appeal in accordance with aforesaid opinion. 5. In view of aforesaid two precedents, to which no contrary view has been cited before us, we are inclined to take view that income brought to tax under Section 41 of Act by reversal of entry with regard to stock option given to employees is also in nature of 'export income' and Page 9 of 11 http://www.judis.nic.in Order in TC Nos.206 & 207 of 2009 (M/s.California Software Co., Ltd -Vs- C.I.T) dated 12.02.2020 therefore, Assessee is entitled to exemption / deduction under Section 10-A / 10-B of Act and view taken by learned Tribunal is not sustainable. 6. Accordingly, present appeals filed by Assessee deserve to be allowed and same are accordingly allowed. questions of law framed above are answered in favour of Assessee and against Revenue. No costs. (V.K.,J.) (R.S.K.,J.) 12.02.2020 Index : Yes/No Internet : Yes/No KST To Income Tax Appellate Tribunal 'A' Bench,Chennai. Page 10 of 11 http://www.judis.nic.in Order in TC Nos.206 & 207 of 2009 (M/s.California Software Co., Ltd -Vs- C.I.T) dated 12.02.2020 DR.VINEET KOTHARI, J. AND R.SURESH KUMAR, J. KST T.C.(A) Nos.206 & 207 of 2009 12.02.2020 Page 11 of 11 http://www.judis.nic.in California Software Co. Ltd. v. Commissioner of Income-tax-I, Chennai