UNDERSTANDING EXEPMTIONS OF INCOME TAX WITH LATEST CASE LAWS:

Incomes falling under the category of section 10 of the Income tax act,  1961 are not taxable as they are exempted.  Everybody will love that all income they earned must be fall under category of section 10, however this is not the actual case.  Given below some of the summary of section 10A case laws judgments, which will help us in better understanding and best utilization of the exemption section.

Section 10(1)  - Agricultural Income

·         Trees standing on agricultural land are part of agricultural land and therefore compensation paid therefore would not suffer TDS in case land on which they are standing are treated as agricultural land. Refer, Special Land Acquisation Officer v ITO. 

·         Bangalore ITAT clarifies that growing of plant in Lab cannot be termed as agricultural activity.

Section 10(5)  - Leave Travel Concession

·         Employer is not under any statutory obligation to collect evidence to show that employees have actually utilised the amount paid towards leave concession or conveyance allowance u/s. 10(5). There is no circular of the CBDT requiring the employer to collect and examine the evidence supporting the declaration of the employees for the exemption. Refer, Larsen and Toubro Ltd,  313 ITR 1.

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Section 10(10C)  - Voluntary Retirement

·         An employee, who takes voluntary retirement, is entitled to exemption u/s. 10(10C). Refer, Krishana Gopla Saha, 121 ITD 368. 

Section 10(10CC)  - Tax paid by employer

·         Tax paid by employer in respect of salary paid to employees would constitute a non-monetary perquisite eligible for exemption under section 10(10CC). Refer, Transocean Discoverer vs. ACIT, 44 SOT 248.

Section 10(16)  - Scholarship.

·         Scholarship or Stipend received by a student from Government for pursuing higher studies can not be termed as salary and the same is exempt u/s. 10(16). Refer, Rahul Tagnoit, 123 TTJ 251 (Chd).

Section 10(23)  - Charitable Fund

·         Where the assessee is a Company registered u/s. 25 of the Companies Act, 1956 created for imparting, spreading and promoting knowledge in the field of accountancy, it will fall under the category of institutions which are for research and charitable purpose, eligible for exemption u/s. 10(23C)(vi) of the Act. Merely because such institution is charging fees and remuneration for research projects undertaken by it does not make it commercial activity. Refer, ICAI Accounting Research Foundation & Anr. 28 DTR 220.

·         Upto AY 2001-02 the prescribed authority for granting approval u/s. 10(23)(vi) was the Central Board of Direct Taxes (CBDT), thus approval granted by the CBDT for AY upto 2001-02 cannot be cancelled/rescinded by the Director General of Income Tax as the same was beyond his jurisdiction. Refer, Maharashtra Academy of Engineering & Educational Research 28 DTR 143. 

·         Generating Surplus and accumuilation of income will not disqualify an institution to benefits of section 10(23C). Refer, Maa Saraswati Educational Trust v UOI. 

·         Exemption under section 10 (23C) (iiiad) could not be denied the assessee society established for educational purposes on the ground that the society had paid lease rent to the sons and wife of the principal of the school who were owners of the land on which school building was constructed where such lease rent was reasonable .Salary to the principal also cannot be aground for refusing the exemption. Refer, Oasis Educational Society v Asst DIT. 132 TTJ 59.

·         Where the objects and activities of the assessee institution are educational in nature and the revenue has not brought any material on record to show that the college account was having surplus or profit, year after year and the revenue has not disputed that surplus was only because of salary grant from the State Government and another grant from UGC , revenue ‘s plea that the college run by assessee was for profit motive cannot be accepted .Expenditure on conducting entrance examination being application of income, non availability of evidence cannot be reason of denying the exemption under section 10 (23C)(iiiab). Refer, Shree Saket Mahavidyalaya Samiti v DyCIT, 132 TTJ 39.

·         Provisions of section 10-23C -do not expressly bar claim of tax exemptions to cases of indirect financing by government. Refer, Maharastra Rajya Sahakari Sangh Maryadit v ITO.

·         Denial of exemption u/s 10(23c)(vi) to an educational institution solely on the foundation that there has been some surplus profit is unjustified. Refer, St. Lawrence Educational Society v CIT.

·         Interest on temporary investments and profit on sale of mutual fund units earned by a venture capital fund was entitled to exemption under section 10(23B) prior to 1-4-2008. Refer, ITO v Kshittiji Venture Capital Fund.

·         Expenses incurred in connection with development of software by the employees at foreign branch should not be excluded from the export turnover for computing deduction under the section 10B. (A. Y. 2003-04). Refer, Zylog Systems Ltd. vs. ITO, 128 ITD 105. 

·         Application u/s 10(23C)(via) filed beyond time. Accounts not maintained properly. No evidence regarding activities. Registration u/s 80G and exemption u/s 12A in prior years not conclusive. Rejection of application was justified. Refer, All India J. D. Educational Society v. Director General of income tax(exemptions). 338 ITR 218.

·         In the case of Deputy Director of Income-tax v. Shanti Devi Progressive Education Society (Delhi), 340 ITR 320 it was held that admission fees received by school had been invested in creating new infrastructural facilities and hence entitled for exemption, as there was no diversion of fund.

Section 10(31) – Income from re plantation or replacement of rubber, coffee, cardamom or such other commodity was held to be exempt. Similarly rubber re plantation subsidy received by planters from rubber board is not taxable. Refer, CIT v Shahjahan, 221 ITR 594.

Section 10(38) – Long Term Capital Gain on listed securities.

·         Exemption under section 10(38) can be allowed only on sale of shares held as capital asset which has suffered Securities Transaction Tax (STT). If on date of sale, shares are converted into stock-in-trade, exemption would not be available under section 10(38). Provisions of section 10(38) are applicable only to capital assets and not in case of business transaction. (A. Y. 2006-07). Refer, Alka Agrwal v. Asst. Director of Income-tax, 48 SOT 493. 

Assessee was a promoter–director of a company “PLL”. PLL issued shares for public subscription through initial public offer (IPO) as per SEBI guidelines, which permitted existing shareholders also to sell their shares in IPO for diluting their equity holding. Assessee sold certain shares of “PLL” and received certain amount as sale consideration. Assessee claimed that said gains were not includible in his total income. Assessee has not paid Securities Transaction Tax (STT) on said shares. Assessing Officer has not allowed the exemption on the ground that the assessee has not paid STT on said shares and the Shares of PLL were not listed on any stock exchange on the date of sale. The Tribunal confirmed the order of Assessing Officer and held that the assessee was liable to be taxed at 20 percent. (A. Y. 2006-07). Refer, Uday Punj v. Dy. CIT, 133 ITD 354.

Section 10A.  – FTZ & SEZ

·         Blending and packing of tea for export in industrial unit in special economic zone amounts to manufacture or production of an article qualifying for exemption under section 10A, for the Asst. Year 2004-05 even though the then existing provisions of section 10A, for the Asst Year 2004-05 did not contain definition clause. Refer, Girnar Industries vs. CIT, 36 DTR 402.

·         After the amendment with effect from April 1, 2001, onwards the brought forward loss pertaining to the specific undertaking eligible for deduction u/s. 10A are allowed to be carried forward and set off against the income of such undertaking in the future assessment year and setoff within the block period itself. Refer, Global Vantedge P. Ltd., 1 ITR 326. (Trib)

·         Assessee having taken over the medical transcription unit from another company along with obligation of exports, etc, it is a case of purchase of business undertaking in view of circular no F. No 15/S/63–ITA-1) dt. 13 Dec 1963, it can not be said to be a case of formation of undertaking by using assets previously used and, therefore, assessee is entitled to deduction u/s. 10A, more so as deduction has already been allowed to the assessee for two assessment years. Refer, Heartland K.G. Information Ltd. 31 DTR 98.

·         There is no requirement in Notification No. 30 (RE) 1992-97 dt 22-3-1994, that a particular unit must be located in side STP and it is enough if the unit situated at a particular location is notified as STP, in view of the said notification, assessee’s unit located at Gurgaon with the approval of Government of India is entitled to exemption u/s. 10A. Refer, Xerox India Limited, 127 TTJ 84.

·         In the case of Honeywell Technology Solutions Lab Pvt. Ltd., 263 (2009) 41 - B BCAJ p 34. (December).,  it was decided that S. 10A was not forming part of sections mentioned in s. 29, business losses of the undertaking whose income was not exempt u/s. 10A, can not be setoff against profits of the undertaking whose income is exempt. Loss of the non STPI is allowed to be carried forward.

·         Assessee company’s unit at Chennai was approved as “Software Technology Park of India” (STPI), and subsequently after the approval obtained from respective authorities, operations were transferred to Kochi, and carried under same registration number. Held, assessee is entitled to exemption u/s. 10A as it was merely a case of shifting of  business rom one place to another and not a new business, and there is no violation of sub clause (ii) & (iii) of s. 10A(2), its only a seeking of continuation of exemption u/s. 10A. Refer, Paradigm IT (P) Ltd. 180 Taxmann 24.

·         Assessee is entitled to relief u/s. 10A on export of both manufactured goods as well as purchased goods. Refer, T. Two International (P) Ltd., 122 ITD 255.

·         Interest earned on fixed deposits and miscellaneous income, is not profit derived by an undertaking from export, hence not exempt u/s. 10A. Refer, Global Vantedge P. Ltd. 1 ITR 326 (Delhi ) (Trib).  Same was also confirmed in the case of Miracle Software Systems India v ACIT.

·          Deduction has to be made at the stage of computing the income under head “Profits & gains” and not at the stage of computing the gross total income. The deduction u/s. 10A attaches to the undertaking and not to the assessee. The losses of a non-eligible unit cannot be set off against the profits of an eligible unit and are eligible to be set-off against other income or to be carried forward. Refer, Scientific Atlanta.

·         In view of s. 10A(6) by the finance Act, 2003, unabsorbed depreciation relating to asst. yr. 1993- 94 and 1995-96 of an industrial unit located in free trade zone cannot be set-off against income of the unit for the asst. yr. 2003-04. Refer, Phoenix Lamps Ltd. 30 DTR 245.

·         Deduction u/s 10A in respect of an eligible undertaking u/s 10A is to be computed only QUA its profits, i.e without any adjustments or set off of any Loss from any other source, either eligible or non eligible units u/s 10A. Refer, F C I technology Services Limited v ACIT.  

·         Expenses incurred in Forex on computer software development onsite at client place outside india is not to be excluded from Export Turnover. Refer, Zylog Systems Limited v ITO.

·         Unabsorbed depreciation of earlier assessment years in which no deduction was claimed under section 10B is available for set off against other taxable income of the subsequent assessment years. Refer,  Patspin India Ltd. vs. Dy. CIT, 51 DTR 57.

·         Interest on bank deposit exemption under section 10A, is not eligible. When the amount to be proportioned did not include the unrealized sale proceeds, the same would also be included in the total turnover under section 10A. When assessee excluded travel expenses telecommunication charges and professional consultancy charges in the computation of “export turnover”, the same has to be reduced from the figure of ‘total turnover”, for the purpose of section 10A. Refer, Dy. CIT vs. IBS Software Services (P) Ltd, 137 TTJ 54.  

·         Maintenance of separate books of account for STP units is not a prerequisite to avail deduction under section 10A. Refer, IBM India P. Ltd. v. DCIT.  

·         From Assessment year 2001‐02 section 10A is no longer an exemption provision and it allows only deduction from total income , loss from 10A unit has to be adjusted against taxable profit of other unit after deduction under section 10A has been allowed in respect of eligible units. Assessee had incurred data line cost being telecommunication charges in respect of its unit and same was included in export turnover for purpose of deduction under section 10A. Assessing Officer excluded the data line cost from export turnover. Since expenses incurred on development of software in India could not be considered as expenses attributable to delivery of computer soft ware out side India , such expenses could not be excluded from export turnover.( Asst Year 2006‐07). Refer, Capgemini India ( P) Ltd v Addl CIT, 46 SOT 195.

·         Two issues where before the High Court for AY 2001‐02 & onwards, (i) Whether the loss incurred by a non‐eligible unit & (ii) whether the brought forward unabsorbed loss & unabsorbed depreciation of the eligible unit has to be set‐off against the profits of the eligible unit before allowing deduction u/s 10A/ 10B. Held that (a) S. 10A allows deduction “from the total income”. The phrase “total income” in s. 10A means “the total income of the STP unit” and not “total income of the assessee“. Consequently, s.

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·         10A deduction has to be given before computing the “profits & gains of business” under Chapter IV. Though s. 10A was amended to make it a “deduction” provision, it continues to remain in Chapter III and was not moved to Chapter VI‐A. The result is that even now s. 10A is in the nature of an “exemption” provision and the profits of the eligible unit have to be deducted at source level and do not enter into the computation of income.  (b) S. 10A(6) as amended by the FA 2003 w.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001‐02 & onwards is eligible for set‐off & carry forward for set‐off against income post tax holiday. This amendment does not militate against the proposition that the benefit of relief u/s 10A is in the nature of exemption with reference to commercial profits. However, to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post tax holiday, it is necessary that a notional computation of business income and the depreciation should be made for each year of the tax holiday period. Such loss is  eligible to be carried forward. But, as the income of the 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year’s or the brought forward business loss (and unabsorbed depreciation) against the s. 10A profits does not arise. Refer, CIT v Yokogawa India Ltd.

·         Section 10A provides for exemption only on profits derived on export proceeds received in convertible foreign exchange. Benefit cannot be extended to local sales made by units in special Economic Zone, whether as part of domestic tariff area sales or as inter unit sales within zone or units in other Zones. ( A.Y. 2004‐05). Refer, CIT v Electronic Controls & Discharge Systems (P) Ltd, 202 Taxman 33 ( Ker) (High Court).

·         The assessee made an application to the RBI on 7‐10‐2004 seeking extension of time for realisation of the export proceeds. The RBI granted approval in realisation of exports proceeds but said approval was issued in the context of the provisions of the FEMA and there was no formal approval was granted by the RBI under section 10A. The Tribunal held that once the assessee had applied for extension and had completed all the formalities and in response the RBI had taken the remittances on record, then non issuance of formal letter of approval by the RBI could not be held against the assessee, it must be held that the extension had been granted in substance and therefore the benefit of section 10A had to be allowed. The court upheld the order of the Tribunal. (A. Y. 2004‐05). Refer, CIT v Morgan Stanley Advantage Services (P) Ltd, 202 Taxmann 40.  

·         Interest on deposits made for obtaining letter of credit will not be entitled to the exemption  under section 10A . refer, CIT v Menon Impex (P) Limited  259 ITR 403.

Section 10B.  -  newly established EOU.

·         Technical data received from overseas clients on basis of which designs drawings and layouts created by assessee’s engineers using computer software is “management of electronic data” and the assessee is entitled to exemption under section 10B, 10BB. Refer, Dy. CIT vs. Tecnimont ICB Pvt. Ltd. 2 ITR 480 (Trib.) (Mumbai). 

·         In the case of ACIT v Bodhtree Consulting Limited, it was decided that To avail deduction u/s 10B an undertaking has to bring into india sale proceddings in convertible foreign exchange , which shall be physically brought to India.

·         Where assessee an export oriented unit, had domestic sale more than 25 percent of total sales value during relevant assessment year, it was entitled to partial deduction proportionately on export turnover as per provisions of sub s. (4) of s. 10B. Refer, Tube Investments of India Ltd., 121 TTJ 577.

·         Against total income of relevant assessment year and, it is out of balance income only that deduction u/s. 10B can be granted. Refer, Sword Global (I) (P) Ltd., 122 ITD 103.

·         Assessee firstly receiving the input data from its clients in the form of electronic file format and then after doing the job, handing over the final design in the electronic data satisfying the condition of “manufacture or production” of an article or thing within the meaning of s. 10B r.w.s. 10BB hence eligible for relief u/s. 10B.

·         It is not the requirement of the section that the assessee should itself own plant and machinery for manufacture even if the assessee gets it manufactured by others under its direct supervision, the assessee is entitled to exemption u/s. 10B. Refer, Techdrive (I) (P) Ltd., 122 TTJ 264.

·         The procedure laid down to avail / or not to avail concession provided u/s. 10B are just directory and not mandatory. Held, that letter filed for withdrawing the claim during assessment  proceeding cannot be rejected while framing assessment u/s 143(3). Also held that AO cannot thrust exemption u/s 10B. Refer, Techtran Polylenses Ltd., 177 Taxmann 28.

·         The activity of cutting, polishing and sizing of granites amounts to production and assessee engaged in such activity is entitled to exemption u/s. 10B. Refer, Fateh Granite (P) Ltd., 20 DTR 557.

·         Activity of processing of stone, marble, granite, etc., amounts to manufacture and therefore assessee was entitled to exemption u/s. 10B. Refer, Ramsons Organics Ltd., 31 DTR 83.

·         Interest income received by the assessee from its sister concern will be eligible for exemption u/s. 10B. Profit and gains of business or profession and income from other sources are different species of income. S. 2(24) of the Income-tax Act does not categories separately profits and gains of business or profession. The expression “profits and gains” as used in s. 2(24) is wider and is not confined to “profits and gains of business or profession”. S. 10B provides for exemption with respect to any “profits and gains” derived by the assessee, and is not confined to “profits and gains of business or profession”. Refer, Hycon India Ltd., 308 ITR 251.

·         Assessee having obtained order from the Development Commissioner stating that the assessee has been abonded and does not enjoy the status of 100% EOU, and the same having being produced before AO though not filed before the due date of filling of return as required by s. 10B(8), the assessee has to be held as opted out of the benefit of s. 10B and entitled to carry forward the loss. Refer, Torry Harris Sea Foods (P) Ltd, 28 DTR 165.

·         Gain on account of foreign exchange rate fluctuation qua export proceeds credited /deposited in EEFC account of assessee in foreign exchange is export realization ,hence constitutes profit derived from export business eligible for exemption u/s. 10 B. Refer, Banyan Chemicals Ltd., 117 ITD 376.

·         Deduction u/s. 10B is to be allowed from total income of assessee after adjusting unabsorbed depreciation. Refer, Jewellery Solutions International (P) Ltd., 28 SOT 405.

·         Filing of Audit Report u/s. 10B(5) along with the return is directory and not mandatory. Refer, Web Commerce (I) P. Ltd., 178 Taxman 310.

·         Delay in filing of return should not be a reason to deny assessee claim of exemption u/s 10B(1). Refer, ACIT v Dhir Global Industries (P) Limited.

·         Turover of 10B unit cannot be excluded from total turnover while computing deduction u/s 80 HHC. Refer, Tata BP Solar India Limited v Add CIT.

·         Firm converted in to company, change of ownership of unit not a reconstruction hence, deduction under section 10B is available. Refer, ITO vs. Veto Electro powers, 8 ITR 76.

·          Assessee being entitled to deduction under section 10B up to asst year 2005-06, provisions of section 10B (6) are not applicable in the relevant asst year ie 2004-05 and therefore unabsorbed depreciation brought forward from asst year prior to asst year 2000- 01 can be set off against business income or against any other head of income including income from other sources.(Asst year 2004-05) Refer, Dy CIT v Akay Falvours & Aromatics (P) Ltd, 55 DTR 1.

·         Assessee hundred percent export oriented undertaking (EOU),which has commenced production prior to 1st April 1994, exemption under section 10B was allowable even if its export was less than seventy five percent as under the pre amended provisions , the benefit was available by mere obtaining a certificate of EOU under the IDR Act. (Asst Year 1999-2000). Refer, CIT v Baehal Software Ltd, 240 CTR 316.

·         Purchasing of discarded hair and manufacture of wig is manufacture u/s 10. Refer, Deputy CIT v. R. Benjamin Cherian (Chennai) .

·         Assessee engaged in manufacturing of precious and semi precious stones . GP rate assessed was much higher as compared to another concern i.e. V.R. Exports. Assessing Officer clubbed the turnover of both the concerns and determined the average GP rate after considering the direct expenses and reduced deduction under section 10B. The Tribunal held that since there is no business between the assessee and VR Exports, provisions of section 80IA (10) are not applicable and net profit rate of the two concerns cannot be apportioned in the ratio of turnover of both concerns. (Asst year 2005‐06). Refer, ITO v Kanchan Tara Exports, 138 TTJ 592 ( JP) (Trib)..

·          Assessee company claimed the deduction under section 10B on the basis of the lease arrangement between the assessee company and the predecessor , the tribunal held that such claim of benefit under section 10 B for the balance unexpired period was not allowable because the claim was not based on the establishment of new industrial undertaking. ( Asst Years 2006‐07 & 2007‐08). Refer, Synergies Casting Ltd v Dy CIT, 57 DTR 503.

·         Activities of software programming carried on by the assessee company to render quality and testing assurance services to foreign clients and transmitting the same through internet are in the nature of back office operations covered by CBDT Notification no 890 (E) dt 26 th September , 2000 issued for the purpose of Explanation 2 to section 10B and therefore , assessee company registered as a 100 percent EOU with STPI is entitled to deduction under section 10B. The assessee company had raised the bills for the services rendered by it in consonance with the terms of agreement settled between it and its clients from time to time and STPI having certified that such services , it can not be said that profits shown by the assessee are on the higher side and therefore , profits of the assessee company could not be reworked by applying the provisions of section 80IA (10) for the purpose of allowing exemption under section 10B.( Asst years 2005‐06 to 2007‐08). Refer, Bebo Techlogies (P) Ltd v JCIT, 57 DTR 402.

·         Assessee, an EOU, approved by NEPZ authorities, being engaged in manufacture of articles and exporting the same cannot be denied exemption under section 10B only because , it was getting some job work done from its sister concern. ( A.Y. 2003‐04). Refer, CIT v Continental Engines Ltd, 60 DTR 40.

·         Assessee agricultural products processing company was engaged in manufacturing of gherkin pickles by purchasing raw gherkin and putting them through various process. Assessing officer held that the assessee is not doing the manufacturing hence not entitled to exemption under section 10B. The Tribunal held that the assessee started its business on 1-4-1999, and current assessment years fell within the permissible period of 10 years, therefore the provision of section 10B as it stood before its substitution , section 10B and explanation thereto had categorically held that manufacture include any ‘ process’ ,therefore assessee is entitled exemption under section 10B.( A.Ys 2005-06 to 2007-08). Refer, Sterling Agro Processing (P) Ltd v Asst CIT, 48 SOT 480.

·         Transaction of manufacturing machines in India by EOU and delivering them in India to another 100 percent EOU , which is alleged be the agent of a foreign buyer does not amount to “export out of India” either under the Customs Act or under the Income Tax Act, hence the assessee is not entitled to exemption under section 10B. (A.Y 2007-8). Refer, Swayam Consultancy (P) Ltd v ITO, 63 DTR 205.

·         In the case of Deputy CIT v. Cosmo Films Ltd. (Delhi), it was decided that charity and misc expenses should be excluded from allocation of expenses and Management salary is require to be allocate on proportion of sale.

The above are not the view points of the author, but only the summary of case laws.            

Thank you.