Bombay High Court Dismisses Revenue's Appeal in Section 10A Exemption Computation Case — Freight and Insurance Excluded from Total Turnover as They Have No Profit Element. The Court upheld the Tribunal's direction to compute exemption under Section 10A of the Income Tax Act, 1961 after excluding freight and insurance from total turnover, and also upheld other directions regarding PF/ESIC contributions, interest income, and foreign exchange gains.

Appeal by Revenue under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal for Assessment Year 2003-04.

The Revenue sought to set aside the Tribunal's order and restore the Assessing Officer's computation of exemption under Section 10A and other related deductions.

The Revenue was aggrieved by the Tribunal's decision to exclude freight and insurance from total turnover for Section 10A computation, to grant exemption on enhanced income due to PF/ESIC disallowance, to treat interest income as business income for Section 80HHC, to consider net interest for exclusion under clause (baa), and to allow foreign exchange gain exemption in the year of export.

The Assessing Officer had computed Section 10A exemption without excluding freight and insurance from total turnover. The Commissioner (Appeals) affirmed that view. The Tribunal reversed, directing exclusion of freight and insurance and also gave directions on other issues.

Whether the Tribunal was justified in holding that exemption under Section 10A should be computed after excluding freight and insurance from total turnover. Whether the Tribunal was justified in directing the Assessing Officer to grant exemption under Section 10A on the assessed income enhanced due to disallowance of employer's and employee's contributions towards PF/ESIC. Whether the Tribunal was justified in upholding the stand of the CIT(A) in treating the interest income as business income for the purpose of deduction under Section 80HHC. Whether the Tribunal was justified in upholding the stand of the CIT(A) considering the net interest and not gross interest for the purposes of exclusion under clause (baa) of Explanation to Section 80HHC. Whether the Tribunal was justified in directing the Assessing Officer to grant exemption under Section 10A on foreign exchange gain earned on realization of export receipts in the year of export and to exclude the gains on sales of earlier years from the profits of the year under consideration.

Revenue argued that freight and insurance should be excluded from total turnover for Section 10A computation. Revenue argued that the assessee is not entitled to Section 10A exemption on income enhanced due to PF/ESIC disallowance. Revenue argued that interest income should not be treated as business income for Section 80HHC. Revenue argued that gross interest should be considered for exclusion under clause (baa) of Explanation to Section 80HHC. Revenue argued that foreign exchange gain should not be exempt under Section 10A in the year of export.

For computing deduction under Section 10A of the Income Tax Act, 1961, freight and insurance must be excluded from total turnover because they have no profit element and the numerator (export turnover) and denominator (total turnover) must be comparable. The same principle applies to other issues, following the precedent in CIT v. Gem Plus Jewellery India Ltd. (2010) 330 ITR 175 (Bom).

The Tribunal held that the expression 'total turnover' has not been defined in Section 10A; Profits derived from export have to be computed by taking into consideration both the export turnover and total turnover of the business carried on by the undertaking; Both the export turnover and total turnover which constitute the numerator and denominator in the application of the formula under sub section (4) of Section 10A should be comparable; and Freight and insurance have no element of profit and hence, cannot be included in the total turnover of the business carried on by the industrial undertaking. The view which has been taken by the Tribunal is consistent with the view which has been taken by this Court in CIT v. Gem Plus Jewellery India Ltd. (2010) 330 ITR 175 (Bom).

The Assessing Officer passed an order for Assessment Year 2003-04. The assessee appealed to the Commissioner of Income Tax (Appeals), who partly allowed the appeal. The Revenue appealed to the Income Tax Appellate Tribunal, which allowed the assessee's appeal on the issues in question. The Revenue then filed an appeal under Section 260A of the Income Tax Act, 1961 before the High Court of Bombay.

• Income Tax Act, 1961: 10A, 80HHC, 260A