Incidental interest income of Section 10A/10B export undertakings qualifies as business profits, not income from other sources.

The Revenue appealed under Section 260A of the Income Tax Act, 1961, against the Tribunal’s order dated 3 July 2019 concerning assessment years 2010–11 and 2011–12.

The appeal was admitted on four substantial questions of law: two concerning disallowance of commission payments under Section 40(a)(ia), and two concerning amounts recovered from employees and liabilities written back.

The assessee submitted that the commission-payment questions were governed by Puma Sports India P. Ltd. and that the remaining questions were governed by the Full Bench decision in Hewlett Packard Global Soft Ltd.

1. Whether the Tribunal was right to set aside the Section 40(a)(ia) disallowance of commission payments on the ground that Section 195 did not apply, despite the Revenue’s contention that the assessee had not established the nature of the services.

2. Whether the Tribunal was right to hold that the nature of the commission payments was not in dispute, notwithstanding the Assessing Officer’s disallowance under Section 40(a)(ia).

3. Whether the Tribunal was right to set aside the addition concerning amounts recovered from employees and liabilities written back.

4. Whether the Tribunal was right to treat those amounts as business income rather than income from other sources, relying on Hewlett Packard Global Soft Ltd.

Section 40(a)(ia) concerns disallowance for failure to comply with applicable tax-deduction-at-source requirements, while Section 195 governs deduction of tax from payments to non-residents; the Court relied on the coordinate Bench decision in Principal Commissioner of Income Tax-5 v. Puma Sports India P. Ltd. in answering the questions concerning commission payments.

The Court also applied the Full Bench ruling in Commissioner of Income Tax v. Hewlett Packard Global Soft Ltd., which held that incidental income connected with the business of qualifying Section 10A or 10B undertakings may form part of their export-business profits and is not necessarily taxable as “Income from Other Sources” under Section 56.

For Questions 1 and 2, the Court accepted that the issues were answered by the coordinate Bench ruling in Puma Sports India P. Ltd.; it also noted that the Supreme Court had dismissed the special leave petition against that ruling.

For Questions 3 and 4, the Court followed the Full Bench decision in Hewlett Packard Global Soft Ltd. and concluded that the questions should be answered in the assessee’s favour.

The judgment does not separately explain how the Full Bench’s discussion of interest income from bank deposits and staff loans applies to the amounts recovered from employees and liabilities written back raised in the framed questions.

The appeal was accordingly disposed of.