ITO, WARD- 2(5), DEHRADUN vs. WINDLASS ENGINEERS & SERVICES PVT. LTD., DEHRADUN

The major controversy in the present appeal is in relation to assessee’s claim of deduction u/s. 80IC of the Income-tax Act, 1961. Of course, there is one more issue relating to deletion of addition made on account of difference in rate of foreign exchange.

As regards the first issue relating to claim of deduction u/s. 80IC of the Act, briefly, the facts are, the assessee is a resident corporate entity stated to be engaged in the business of manufacturing of petroleum drilling parts/equipments. For its manufacturing activity, the assessee has set up a unit at Dehradun. The assessee commenced its operation on 01.12.2007 and the assessment year 2008-09, being the initial assessment year, wherein, the commencement of operation has started, the assessee claimed deduction u/s. 80IC of the Act at 100% of its profits. Subsequently, the assessee made substantial investment in expansion of its manufacturing unit in financial year relevant to assessment year 2013-14. Based on substantial expansion undertaken, the assessee again claimed deduction u/s. 80IC of the Act at 100% of the business profits by treating the assessment year 2013-14 as the initial assessment year in so far as the expansion programmed is concerned. Following the same procedure in the return of income filed in the impugned assessment year, i.e., 2014-15, the assessee claimed deduction u/s. 80IC of the Act at 100% of the profits. While examining assessee’s claim of deduction u/s. 80IC of the Act, the Assessing Officer noticed that though, the assessee has claimed 100% deduction of its business profits in the initial assessment year, being the assessment year 2008-09, again he has claimed the maximum benefit of deduction of 100% business profit during the assessment year 2013- 14, as the initial assessment year. According to the Assessing Officer, such claim is not in the spirit of section 80IC of the Act, as the assessee can have only one initial assessment year. In that view of the matter, he restricted the deduction u/s. 80IC of the Act to 30% of the business profit. Contesting the disallowance made by the Assessing Officer, the assessee preferred appeal before learned Commissioner (Appeals).

Before us, learned Departmental Representative strongly relied upon the observations of the Assessing Officer. She submitted, as per the provisions contained u/s. 80IC of the Act, the assessee can have only one assessment year. She submitted, since the assessee has availed deduction u/s. 80IC of the Act by treating the assessment year 2008-09 as the initial assessment year, he cannot claim 100% benefit u/s. 80IC of the Act again from the assessment year 2013-14 based on the investment made in expansion of the project. In support of her contention learned Departmental Representative relied upon a decision of Hon’ble Supreme Court in the case of CIT vs. Classic Binding Industries (2018) 97 taxmann.com 405(SC).

Per contra, learned counsel appearing for the assessee submitted hat in a subsequent decision in case of PCIT vs. Aarham Softronics (2019) 102 taxmann.com 80(SC), Hon’ble Supreme Court has dissented with the view expressed in case of CIT vs. Classic Binding Industries (supra) and has held that the assessee can have more than one initial assessment year. Further, he submitted, in assessee’s own case in assessment year 2013-14, the Tribunal has decided the issue in favour of the assessee. Thus, he submitted, the issue stands squarely covered in favour of the assessee.

We have considered rival submissions and perused materials on record. We have also applied our mind to the decisions relied upon.

In our view, aforesaid conclusion reached by the first appellate authority is in consonance with the ratio laid down by the Hon’ble Supreme Court in the case of PCIT vs. Aarham Softronics (supra), wherein, while digressing from the view expressed in case of CIT vs. Classic Industries(supra), Hon’ble Supreme Court has held that even after availing 100% deduction of the profits in the initial five years, the assessee can still avail 100% deduction of its business profits from the previous year, in which substantial expansion is undertaken by treating it as initial assessment year, subject to, overall limit of 10 years as provided under section 80IC of the Act. Pertinently, in assessee’s own case, in assessment year 2013-14, similar deduction claimed by the assessee in respect of expanded unit was allowed by the Assessing Officer. However, while examining the assessment order in exercise of powers conferred under section 263 of the Act, the Revisionary Authority held that the assessee can have only one initial assessment year and once the assessee has availed 100% deduction of its profits in the initial five assessment years, it is no more eligible to claim 100% deduction of its profits after substantial expansion of the units.

Next issue arising for consideration is, deletion of addition of Rs.46,72,560/- representing difference due to foreign exchange fluctuation.

We have considered rival submissions and perused the materials on record. As could be seen from the facts on record, while computing deduction under section 80IC of the Act, the assessee had included the foreign exchange gain as part of its business profits. Being of the view that foreign exchange gain is not derived from or attributable to the business of the assessee, the Assessing Officer held that assessee is not eligible for deduction under section 80IC of the Act. Accordingly, he disallowed assessee’s claim. While deciding the issue in appeal, learned Commissioner (Appeals) held that the assessee is eligible to claim deduction under section 80IC of the Act in respect of the gain from foreign exchange fluctuation, as there is a direct and proximate connection with the manufacturing activities.

On examining the issue at depth, we do not find any infirmity in the decision of learned Commissioner (Appeals). Undisputedly, the foreign exchange fluctuation gain was derived by the assessee in course of its business of manufacturing and sale of products. Therefore, the foreign exchange gain is inextricably linked to the manufacturing activities of the assessee. We further find, as per the ratio laid down in the judicial precedents referred to by learned first appellate authority, foreign exchange gain is eligible for deduction under section 80IC of the Act.

In the result, appeal is dismissed.