AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

The relevant discussion as found in paragraph 16 of the judgment is quoted below for ready reference. The Respondent assessee during the relevant year operated four Units set up under the Scheme formulated by the Government in the name of Software Technology Parks of India (STPI) for 100% Export of the Computer Software Units. The said provision was substituted by Finance Act, 2000, with effect from 01/04/2001 in place of the earlier Section 10­A, which was inserted by Finance Act, 1981.

Both sub­sections and should be read together while computing the eligible deduction u/s 10B of the Act. We should not ignore sub­section of Section 10B which provides the specific formula for computing the profits derived by the undertaking from export.

However, the basic principle, namely, that the profit and gain must be derived from the concerned activity, is common to both the provisions. It is not in dispute that the assessee herein is a 100% export – oriented unit. Thus, sub­section of Section 10B stipulates that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, notwithstanding the fact that sub­section of Section 10B refers the profits and gains as are derived by a 100% EOU, yet the manner of determining such eligible profits has been statutorily defined in sub­section of Section 10B of the Act. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business.

prior period adjustment definition

“In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received by sale of import entitlements is to be construed as incomeof the business of the undertaking. There is a direct nexus between this income and the income of the business of the undertaking.

The Parliament intended to encourage the enterpreneurs to export the products from India. As part of that, it incorporated Section 10B of the Act.

On perusal of Section 10B discloses that the profits and gains derived from a 100% export oriented undertaking, shall not be included in the total income of an assessee. This almost falls into the category of the deduction provided for under Chapter VI A, except that the exemption or deduction is in its entirety.

What is a prior period adjustment and how is it reported in the financial statements?

prior period adjustment definition. The most common example is the correction of an error from a prior year. When such a correction is made, it is reported in the current period’s statement of retained earnings rather than in the current period’s income statement.

Section 80IA provides for a deduction of profits and gains derived by an undertaking or an enterprise from an eligible business. The relief under Section 10B, on the other hand, is granted in respect of the profits derived from the eligible activity of export, computed as a proportion of the profits of the business of the undertaking.

In Urban Stanislaus Co. vs. CIT 263 ITR 10 the assessee had contended that as a condition for obtaining a loan from the bank, 20% of the sale receipts had to be deposited by way of security. It was claimed that the interest earned on such deposit was business income for the purpose of Section 80HHC. This was negatived by the Kerala High Court by observing (ITR Page 12) that “the assessed can claim deduction in respect of the profits derived from the export of goods only when it is established that the income is solely related to the export. The obvious intention behind the provision in Section 80HHC is to promote exports. However, the income earned by way of interest from fixed deposit is not an income from exports.

Sub­section does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of Section 10B to exclude the same from the eligible profits.

The deduction in respect of both the said interest income was claimed as a 100% deduction under Section 10­A of the Act during the said relevant year as income from “Profits and Gains” of export business. But, the Assessing Authority under the Act held that such interest income was not entitled to 100% deduction under Section 10­A of the Act, but such interest income was taxable under Section 56 of the Act, as ‘Income from Other Sources’ and that is the bone of contention between the assessee and the Revenue before us. Though it does not partake the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of ‘income from Profits and Gains’ incorporated in Sub­section , the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act.

There was a restriction on the Assessee in that case from making pre­payment of its external commercial borrowings (‘ECB’). It could repay only to the extent of 10% of the outstanding loan in a year. This made the Assessee temporarily park the balance funds as deposits or with various sister concerns as inter corporate deposits until the date of repayment. The Assessee contended that the interest derived from the business of the industrial undertaking was eligible for exemption within the meaning of Section 10B and applied the formula under Section 10B of the Act for determining the profits from exports.

  • The question as to what can constitute as profits and gains derived by a 100% EOU from the export of articles and computer software came for consideration before the Karnataka High Court in CIT v. Motorola India Electronics Pvt.
  • There the Assessee had earned interest on the deposits lying in the EEFC account as well as interest earned on inter­corporate loans given to sister concerns out of the funds of the undertaking.

As per the formula so laid down, the entire profits of the business are to be determined which are further multiplied by the ratio of export turnover to the total turnover of the business. In case of Liberty India (supra), the Supreme Court dealt with the provisions of Section 80IA of the Act wherein no formula was laid down for computing the profits derived by the undertaking which has specifically been provided under sub­section of Section 10B while computing the profits derived by the undertaking from the export. Thus, the decision of the Supreme Court in Liberty India (supra) is of no help to the revenue in determining the claim of deduction u/s 10B in respect of the export incentives.

prior period adjustments are reported in the:

The Assessee’s contention that the expression “profits of the business of the undertaking” in Section 10B was wider than the expression “profits and gains derived by” the Assessee from a 100% EOU occurring in Section 10B was accepted by the ITAT. The ITAT noticed that unlike Section 80 HHC, where there was an express exclusion of the interest earned from the ‘profits of business of undertaking’, there was no similar provision as far as Sections 10A and 10B were concerned. It is clear from the plain reading of Section 10B of the Act that the said section allows deduction in respect of the profits and gains as are derived by a 100% EOU. Further, Section 10B of the Act stipulates specific formula for computing the profit derived by the undertaking from export.

The question as to what can constitute as profits and gains derived by a 100% EOU from the export of articles and computer software came for consideration before the Karnataka High Court in CIT v. Motorola India Electronics Pvt. The said appeal before the Karnataka High Court was by the Revenue challenging an order passed by the ITAT which held that the interest payable on FDRs was part of the profits of the business of the undertaking and therefore includible in the income eligible for deduction Sections 10A and 10B of the Act. There the Assessee had earned interest on the deposits lying in the EEFC account as well as interest earned on inter­corporate loans given to sister concerns out of the funds of the undertaking.

Thus, the provisions of sub­section of Section 10B of the Act mandate that the deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover by the total turnover. Thus, even though sub­section of Section 10B refers to the profits and gains as are derived by a 100% EOU, the manner of determining such eligible profits has been statutorily defined in, sub­ section of that section.

AccountingTools

Etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10­A or 10­B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI­A under Section 80­HH, etc. Therefore analogy of Chapter VI Deductions cannot be telescoped or imported in Section 10­A or 10­B of the Act. The words ‘derived by an Undertaking’ in Section 10­A or 10­B are different from ‘derived from’ employed in Section 80­HH etc.

Restating the Financial Statements

The mode of determining the eligible deduction U/S 10B is similar to the provisions of Section 80HHC inasmuch as both the sections mandates determination of eligible profits as per the formula contained therein. Once an income forms part of the business of the income of the eligible undertaking of assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. We are of the view that the basis of computation of the deductions enumerated under Chapter VIA is different from that set out for the special deductions like Section 10A and 10B.

IAS plus

Though it does not partake the character of a profits and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of income from Profits and Gains incorporated in Sub­section , the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. Therefore, the first substantial question of law raised in ITA No.428/2007 is answered in favour of the revenue and against the assessee and the first substantial question of law in ITA No.447/2007 is answered in favour of the assessee and against the revenue. The dedicated nature of business or their special geographical locations in STPI or SEZs.

Material Errors in Financial Statements

Therefore all Profits and Gains of the Undertaking including the incidental income by way of interest on Bank Deposits or Staff loans would be entitled to 100% exemption or deduction under Section 10­A and 10­B of the Act. The assessee earned during the said Assessment Year 2001­-02, interest income of `4,68,037/­ on the Short Term Deposits made by it to the tune of `6,46,88,606/­ out of its Surplus Funds temporarily parked in the Current Account held in Citi Bank, Hong Kong and also earned interest of `6,02,309/­ from the Advances of loans to its staff members.

prior period adjustments are reported in the:

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