GRANULES INDIA LIMITED,HYDERABAD vs. DCIT, CIRCLE-2(1), HYDERABAD

Further, assessee has raised following additional grounds of appeal: - “

The Learned counsel for the assessee, Shri Y.V. Bhanu Narayan Rao, CA, referring to the petition filed by the assessee for admission of 4 Granules India Limited additional grounds submitted that the appellant has taken certain grounds in respect of disallowance of deduction under section 10B of the Income Tax Act, 1961 (for short “the Act”) on foreign exchange gain in respect of ECB loan availed by appellant for purchase of plant and machinery and used exclusively for manufacturing and export of goods, and the above grounds could not be taken at the time of filing of the appeal and these grounds are purely legal grounds which can be taken at any time of the proceedings, including the pending proceedings before the Tribunal and therefore, in view of the decision of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT

The Learned Commissioner of Income-Tax (DR), Shri Narendra Kumar Naik, on the other hand, opposed petition filed by the assessee for admission of additional grounds and submitted that the grounds taken by the assessee are not legal grounds and further these grounds are purely factual disallowance in relation to deduction under section 10B of the Act, for which necessary facts needs to be examined by the Assessing Officer. However, there is no evidence as to whether the facts related to the above grounds are already on record before the A.O. at the time of 5 Granules India Limited assessment proceedings or not. Therefore, at this stage, the additional grounds filed by the assessee should not be admitted.

We have heard both the parties and considered the petition filed by the assessee for admission of additional grounds and after hearing both the sides, the appellant has explained the reasons for not raising the above grounds in appeal filed by the assessee and further the sole issue on merit is with regard to disallowance of deduction under section 10B of the Act which needs to be adjudicated along with the other grounds taken by the assessee on validity of the reopening of the assessment and therefore, in our considered view additional grounds filed by the assessee needs to be admitted. Thus, we admit the additional grounds filed by the assessee for adjudication.

Brief facts of the case are that the assessee company is engaged in the business of manufacturing bulk drugs (API), formulations / granulations (PFI) and tablets (FD), filed its return of income for the A.Y.2010-11 on 28.09.2010 declaring total income of Rs.10,55,64,805/- under normal provision and book profit of Rs.30,50,73,292/- under provisions of 115JB of the Act. The assessee had claimed exemption of Rs.10,22,92,474/- in respect of profit derived from 100% export-oriented 6 Granules India Limited undertakings and also filed relevant audit report in Form No. 56G, duly certified by the accountant. The assessment has been completed under section 143(3) r.w.s. 92CA(3) of the Act, on 24.03.2014 and assessed the total income at Rs.10,61,67,685/- and the book profits at Rs.30,50,73,292/-.

The case has been, subsequently reopened under section 147 of the Act for the reasons recorded, as per which, income chargeable to tax had been escaped assessment on account of excess allowance of deductions towards profit derived from 100% export-oriented undertakings under section 10B of the Act on the foreign exchange gains of Rs.8,16,29,962/-. Accordingly, notice under section 148 of the Act, dated 28.03.2017 was issued and served on the assessee. In response to the notice, the assessee furnished return of income on 28.06.2017 and also requested reasons for reopening of the assessment. The case was selected for scrutiny and during the course of the assessment proceedings, the A.O. issued notice under section 143(2) of the Act, dated 22.08.2017 along with notice under section 142(1) of the Act, dated 21.11.2017 and called upon the assessee to explain as to why the deduction claimed under section 10B of the Act in respect of foreign exchange gain on capital account shall not be disallowed. In response, the assessee vide letter 7 Granules India Limited dated 04.12.2017 raised objections for reopening of the assessment and also requested for reasons for reopening of the assessment. Further, the assessee vide letter dated 04.12.2017 once again made a request for reasons for reopening of the assessment. The A.O. vide letter dated 08.12.2017 furnished reasons recorded for reopening of the assessment as requested by the assessee. The assessee did not file any objections in response to reasons for reopening of the assessment furnished by the A.O. Therefore, the A.O. after taking note of the relevant submissions of the assessee and also the deduction claimed under section 10B of the Act towards profit from the eligible business which includes the gain received on foreign exchange fluctuations on account of External Commercial Borrowing (in short “ECB”) and sale of scrap and insurance claim to the tune of Rs.8,16,29,962/-, has observed that as per the provision of section 10B of the Act, a deduction of profits and gains as are derived by 100% export oriented undertakings from the export of articles or things or computer software for the period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. On a plain reading of the provisions of section 10B of the Act, it is very clear that 8 Granules India Limited profit derived from the undertaking should be reckoned in relation to the profit of the business of the undertakings which are directly have first degree nexus only to be allowable under section 10B of the Act. Since the appellant has claimed deduction under section 10B of the Act in respect of foreign exchange gain accrued on account of restatement of loan liability which is on account of capital account, the same cannot be allowed as deduction. Therefore, rejected the explanation of the assessee and disallowed a sum of Rs.8,16,29,962/- towards deduction claimed under section 10B of the Act and added back to the total income of the assessee.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee challenged the reopening of the assessment on the ground that the assessment has been reopened beyond four years from the end of the relevant assessment year without any allegation as to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The assessee had also challenged the additions made by the A.O. towards disallowance of deduction claimed under section 10B of the Act in respect to foreign exchange gain, sale of scrap and insurance claim on the ground that gain received by the appellant on account of 9 Granules India Limited fluctuations of foreign currency towards ECB loan is directly linked to the business of the assessee, because the appellant has availed ECB loans for the purposes of acquiring capital assets being plant and machinery and the same has been used for manufacturing and export of goods or articles. The appellant had also claimed that sale of scrap and insurance claim is also part of business activity of the assessee and related to export of turnover and therefore, assessee has rightly claimed deduction under section 10B of the Act.

The Ld.CIT(A) after considering the submissions of the assessee and also taking note of the certain judicial pronouncements including the decision of the Hon’ble Supreme Court in the case of CIT v. Kelvinator. India (2010) 187 taxmann.com 312, rejected the legal grounds taken by the assessee challenging validity of the reopening of the assessment by holding that the arguments of the appellant that reopening of assessment is based on “change of opinion” without there being any fresh tangible material is incorrect and misconceived. Further, the argument of the assessee that it has disclosed necessary facts in relation to assessment is also devoid of merit going by the facts available on record, because the assessee has failed to disclose fully and truly all material facts necessary for assessment which is evident from the 10 Granules India Limited relevant financial statements filed by the assessee and also the assessment order passed by the A.O. under section 143(3) r.w,s. 93CA(3) of the Act, dated 24.03.2014. Further, the Ld.CIT(A) had also rejected the arguments of the assessee in respect of disallowance of exemption claimed under section 10B of the Act by holding that the claim of the appellant that ECB loans borrowed has been utilized for acquiring plant and machinery used for manufacturing of export goods and therefore the foreign exchange gains derived by the assessee is having direct nexus with export of goods is devoid of merit and cannot be accepted. Therefore, observed that the A.O. has rightly held that foreign exchange gain derived from the appellant for restatement of existing loan liability cannot be considered as profit derived from a eligible undertaking engaged in the business of export of goods or things or computer software. Thus, rejected the argument of the assessee and upheld the additions made by the A.O.

Aggrieved by the order of the Ld.CIT(A), the assessee now is in appeal before the Tribunal.

Learned counsel for the assessee, Shri Y.V.Bhanu Narayan Rao, CA, submitted that the Ld.CIT(A) has erred in upholding the reopening of 11 Granules India Limited the assessment under section 147 of the Act, without appreciating the fact that assessment has been reopened on “change of opinion” without there being any fresh tangible material which is evident from relevant reasons recorded by the Assessing Officer for reopening of the assessment, where the A.O. has referred to the assessment records. Learned counsel for the assessee further submitted that, the original assessment in the present case was completed under section 143(3) of the Act and the assessment has been reopened under section 147 of the Act beyond four years from end of the relevant assessment year. Once the assessment has been reopened beyond four years from the end of the relevant assessment year, as per the provision to section 147 of the Act, where the assessment has been made under section 143(3) of the Act, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for, that assessment year. In the present case, the appellant disclosed all necessary facts with regard to deduction claimed under section 10B of the Act during the original assessment proceedings which is evident from the relevant Form No. 56G filed by the appellant along with other particulars including unit 12 Granules India Limited wise profit and loss account which includes income received in the form of foreign exchange gain, sale of scrap and insurance claim. Therefore, reopening the assessment without any allegation on the part of the assessee to disclose fully and truly all material facts necessary for assessment is nothing but reopening of the assessment on the very same set of facts and materials.

The Learned counsel for the assessee further submitted that, the assessment has been reopened on the basis of Revenue Audit Party objection and not on the basis of any fresh information available with the Assessing officer. Once the assessment has been reopened on RAP objection, then it is a case of non-application of mind to relevant materials and formation of belief of escapement of assessment, but purely on borrowed satisfaction which is not permissible under law. In this regard, he relied upon certain judicial pronouncements including the decision of the Hon’ble Supreme Court in the case of CIT v. Kelvinator of India Ltd., [320 ITR 561 (SC)]. The appellant had also relied upon the decision of the Hon’ble Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT [(1979) 119 ITR 0996] and the following cases: - i. IL & FS Investment Managers Ltd. v. ITO & Ors., 2008 TaxPub(DT) 2376 (Bom-HC)

Learned counsel for the assessee further referring to the additional grounds filed by the assessee submitted that, Ld.CIT(A) erred in upholding the disallowance under section 10B of the Act, in respect of profit derived from eligible 100% EOU undertaking, even though the 14 Granules India Limited appellant has proved that gain on foreign exchange fluctuation on ECB loans is directly and inextricably linked with export activity. Learned counsel for the assessee further referring to assessment order and Ld.CI(T) order submitted that even income derived from sale of scrap and insurance claim is also part of export activities of the assessee, because the same are generated during the course of manufacturing of goods and partakes the nature of income derived from the eligible unit and therefore, the A.O. ought to have allowed deduction under section 10B of the Act. The Ld.CIT(A) without appreciating the relevant facts simply upheld the additions made by the A.O. Therefore, he submitted that the additions made by the A.O. towards disallowance under section 10B should be deleted.

The Ld. Commissioner of Income-Tax (DR), Shri Narendra Kumar Naik, for the revenue, on the other hand supporting the order of the Ld.CIT(A) submitted that there is no merit in the arguments of the assessee in light of decision of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO [2002] 125 Taxman 963, because the appellant has not furnished any objections on reasons furnished by the A.O. for reopening of the assessment. Further, even assuming for a moment the A.O. has not disposed off any objections filed by the 15 Granules India Limited assessee by a separate order, it is not fatal to the assessment proceedings, because in the case of the GKN Driveshafts (India) Ltd. v. ITO (supra) the assessment proceedings has not been quashed, rather the matter has been remitted to the High Court for reconsideration. Further, the above issue has been considered by the Hon’ble Supreme Court in the case of Home Finders Housing Ltd., v. ITO [2018] 94 taxmann.com 84 (SC), where the court after considering the decision of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO (supra) has held that non-considering of the objection filed by the assessee by a separate order is not fatal to the assessment proceedings. The Ld.DR further submitted that, there is no merit in the argument of the Learned counsel for the assessee on the issue of reopening of the assessment because the assessment has been reopened after recording reasons, as per which, the income chargeable to tax had been escaped assessment on account of excess allowance of deduction under section 10B of the Act towards foreign exchange gain on capital account, sale of scrap and insurance claim and the details with regard to above claim has not been fully and truly disclosed by the assessee, either in the return of income or during the course of the assessment proceedings under section 143(3) of the Act. Further, there is no merit in the argument of the Learned counsel for the assessee on the issue of reopening of the 16 Granules India Limited assessment on the basis of RAP objection because, if we go through the relevant reasons recorded for reopening of the assessment, there is no reference of any RAP objection and the A.O. has independently applied his mind to the relevant material available on record and formed reasonable belief of escapement of assessment and therefore, the argument of the counsel for the assessee that reopening of assessment is on the basis of audit objection is incorrect.

The Ld. CIT(DR) further referring to the arguments of the counsel for the assessee on merits submitted that, foreign exchange gain or loss on capital account is not allowable as deduction or taxable as income. If foreign exchange loss / gain is on account of revenue account, the same needs to be taxed as revenue item or allowed as revenue expenditure, and this principle is supported by the decision of the Hon’ble Supreme Court in the case of CIT v. Woodward Governor India P. Ltd., (supra). However, the appellant has claimed deduction towards eligible profit from 100% EOU undertaking in respect of income derived from foreign exchange gain, insurance claim and sale of scrap although the above incomes are not directly derived from export activity. The A.O. after considering the relevant facts, has rightly disallowed the deduction 17 Granules India Limited claimed by the assessee and therefore, he submitted that the additions made by the A.O. should be upheld.

We have heard both the sides, perused the material on record and had gone through orders of the authorities below. We have also carefully considered the relevant reasons recorded for reopening of the assessment and various case laws referred upon by the Learned counsel for the assessee in support of his arguments and the case laws relied upon by the Ld.CIT(DR) in support of his contentions. There is no dispute with regard to the fact that the original assessment in the present case was completed under section 143(3) r.w.s. 92CA(3) of the Act, on 24.03.2014. It is also an undisputed fact that the assessment has been reopened under section 147 of the Act beyond four years from the end of the relevant assessment year on the ground that there is failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year. It was the argument of the counsel for the assessee that the appellant had disclosed necessary facts with regard to deduction claimed under section 10B of the Act in the return of income filed for the impugned assessment year and also during the course of the assessment proceedings in response to specific questionnaire issued by the Assessing Officer, where the appellant had 18 Granules India Limited furnished relevant report in form No. 56G, certified by the Accountant, along with annexures which including unit wise profit and loss account of eligible undertakings. Therefore, it is necessary for us to examine the validity of reopening of the assessment in light of provisions under section 147 of the Act and proviso provided therein along with arguments of both parties.

As per section 147 of the Act and proviso provided therein, where the assessment has been made under section 143(3) for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year. In other words, if the assessee disclosed fully and truly all material facts necessary for his assessment including on the issue of deduction claimed under section 10B of the Act, then after four years from the end of the relevant assessment year the assessment cannot be reopened. In the present case, the allegation of the A.O. was that there is a failure on the part of the assessee to disclose fully and truly all material facts. We find that although the appellant claims that 19 Granules India Limited it has furnished necessary facts with regard to deduction claimed under section 10B of the Act in the return of income filed for the impugned assessment year and during the course of the assessment proceedings under section 143(3) of the Act, but fact remains that except filing audit report in Form No.56G, indicating the amount of deduction claimed under section 10B of the Act, there is no other particulars has been furnished by the assessee, either in the return of income filed for the year under consideration or during the course of original assessment proceedings which is evident from relevant assessment order passed by the A.O. under section 143(3) rw.s. 94CA(3) of the Act, dated 24.03.2014. Therefore, in our considered view disclosure of fully and truly all facts necessary for the assessment is not mere submission of the return of income along with statement of total income and audit report in Form No. 56G indicating the amount claimed as deduction. But, the disclosure of complete facts, fully and truly indicating the amount of eligible deduction means, providing notes to the account in the statement of total income and explaining how the amount of deduction has been quantified for the year under consideration. In the present case, assessee neither provided any notes to accounts in its financial statements, nor explained the deduction claimed under section 10B of the Act in the statement of total income which is evident from the 20 Granules India Limited relevant financial statements prepared by the assessee. Therefore, we are of the considered view that it is a clear case of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year. We further noticed that as per Explanation 1, production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the assessing officer will not necessarily amount to disclosure within the meaning of the proviso. Therefore, in our considered view, mere submission of audit report in Form 56G along with return of income is not sufficient compliance of fully and truly disclosure of necessary facts with regard to deduction claimed under section 10B of the Act and therefore we are of the considered view that, reasons recorded by the Assessing Officer for reopening of the assessment is in accordance with law and therefore, the argument of the assessee on this ground has been rejected.

Coming back to the another facet of arguments of counsel for the assessee, in light of RAP objection dated 14.01.2015. The Learned counsel for the assessee raised an objection and argued that reopening of assessment on the basis of RAP objection is invalid, because the A.O. has not applied his mind independently to relevant materials which suggest 21 Granules India Limited the escapement of income. The assessee also relied upon judicial pronouncement including decision of the Hon’ble Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT (supra) and the decision of the Hon’ble Bombay High Court in the case of IL & FS Investment Managers Ltd. v. ITO & Ors (supra) and other plethora of cases and argued that the reopening of the assessment on the basis of RAP objections is invalid. We find that, nowhere in the reasons recorded for reopening of the assessment, the Assessing Officer referred to objections raised by the RAP with regard to deduction claimed under section 10B of the Act. Although, the Learned counsel for the assessee furnished copy of RAP objection and claimed that the reopening of assessment was on the basis of RAP objection, but in our considered view the A.O. independently applied his mind to relevant material available on record and formed a reasonable belief of escapement of income on account of excess allowance of deduction under section 10B of the Act which is evident from the relevant reasons recorded for reopening of assessment and therefore, in our considered view, the argument of the Learned counsel for the assessee on this issue in light of above decisions is devoid of merit and cannot be accepted and thus, rejected.

Coming back to the issue on hand. The A.O. disallowed deduction under section 10B of the Act in respect of income derived from foreign exchange gain on account of capital account being gains received from restatement of ECB loan, insurance claim and sale of scrap on the ground that the income derived by the appellant from above sources is not directly or inexplicitly linked to export of goods or things or articles or computer software as defined under section 10B of the Act and therefore appellant cannot claim deduction under section 10B of the Act. We find that, the appellant has borrowed ECB Loans for the purpose of acquiring assets for establishment of unit for manufacturing pharmaceutical products. Once the assessee acquired any asset in India out of loans borrowed from outside India, then any gain or loss on 24 Granules India Limited account of fluctuations in foreign currency either at the time of repayment of liability or on account of restatement of said liability as on the date of balance sheet should be capital in nature and adjusted to the cost of the asset as the case may be. However, the assessee cannot claim it as revenue in nature whether it is gain or loss, as held by the Hon’ble Supreme Court in the case of CIT v. Woodward Governor India P. Ltd., (supra). A similar view has been taken by the ITAT, Chennai Bench in the case of DCIT v. Astron Document Management (P.) Ltd., (2012) 49 SOT 46, where it has been held that gains derived by an assessee on conversion of funds from EEFC account into Indian rupee account does not have proximate or direct nexus with export transaction, and therefore, will not be eligible for deduction under section 10B of the Act.

In the present case, there is no dispute with regard to the fact that the appellant itself has claimed that it has availed ECB loans for the purposes of acquiring capital asset and the gains arising on account of foreign exchange fluctuations is for restatement of existing liability. Therefore, in our considered view it is a capital account and cannot be allowed as deduction including under section 10B of the Act. Similarly, the appellant has failed to prove any direct nexus between income derived from sale of scrap and insurance claim with export of goods or 25 Granules India Limited things or articles or computer software in order to allow deduction under section 10B of the Act. Therefore, in our considered view, deduction claimed under section 10B of the Act in respect of foreign fluctuations gains, insurance claim and sale of scrap is not eligible for deduction as per the provisions of section 10B of the Act. The A.O. after considering the relevant facts has rightly disallowed deduction claimed by the assessee. The Ld.CIT(A) after considering the relevant facts has rightly sustained the deduction made by the A.O. Thus, we are inclined to uphold the findings of the Ld.CIT(A) and dismiss the appeal filed by the assessee.

In the result, appeal filed by the assessee is dismissed.