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Income Tax Appellate Tribunal, DELHI BENCH “F” NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
O R D E R PER AMIT SHUKLA, JM:
The aforesaid appeals have been filed by the Revenue against the impugned orders dated 02.12.2015, passed by Commissioner of Income Tax (Appeals)-II, Gurgaon and dated 05.07.2016 passed by Commissioner of Income Tax (Appeals)- I, Gurgaon for the quantum of assessments passed u/s.143(3) for the Assessment Years 2009-10 and 2011-12, respectively. In the Assessment Year 2009-10 the Revenue has taken the following grounds:- “1. The Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs.1,38,67,815/- made by Assessing Officer by disallowing deduction u/s.10B to this extent claimed on duty
2 I.T.As. No.806 & 4939/DEL/2016 drawback received by the assessee as per Scheme framed by the Government under Customs Act.
2. Ld. CIT (A) has erred on fact and in law in deleting the disallowance to the extent of Rs.3,58,749/- on account of interest on the investment of Rs.29,89,571/- for non-business expenditure.
3. Ld. CIT (A) has erred on fact and in law in deleting the disallowance Rs.73,29,225/- out of interest under Proviso to section 36(1)(iii) being interest @12% on capital work in progress amounting to Rs.6,09,93,541/- J as assets were not put to use during this previous year.
4. Ld. CIT (A) has erred on fact and in law in deleting the disallowance of Rs.18,62,886/- made under section 14A of the Income Tax Act, 1961.”
In the Assessment Year 2011-12, the Revenue has taken the following grounds:-
“1. Ld. CIT(A) has erred on facts and in law in deleting the disallowance to the extent of Rs. 32,42,244/- on account of interest on the investment of Rs. 2,70,18,699/- for non-business expenditure.
2. The Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 31,59,173/- made by Assessing Officer by disallowing deduction u/s 10B to this extent claimed on duty drawback received by the assessee as per Scheme framed by the Government under Customs Act.
3. Ld. CIT(A) has erred on fact and in law in deleting the disallowance of Rs. 18,04,390/- made under section 14A of the Income Tax Act, 1961.”
3 I.T.As. No.806 & 4939/DEL/2016
At the outset, it has been submitted by the ld. counsel that all the issues involved in both the appeals are squarely covered by the decision of the Tribunal, in assessee’s own case for the Assessment Year 2007-08 and Assessment Year 2010-11.
In so far as the issue relating to deduction u/s.10B is concerned, the facts in brief are that the assesse is a manufacturer and distributor of steering and suspension components of four wheelers. It has two export units as EOU undertakings, one at Manesar and other at Gurgaon. The assesse had claimed deduction u/s.10B for an amount of Rs.6,78,92,066/-. The AO noted that assesse had included amount of Rs.1,10,12,152/- being export incentives as part of export turnover for the purpose of computing deduction u/s.10B. He held that export incentives in the form of duty drawback is not the income derived from the business of Export of Articles or things as required u/s.10B(1). Accordingly, excess deduction was computed by him at Rs.1,38,67,815/-.
Ld. CIT(A) following the ITAT order in assessee’s own case for the Assessment Years 2007-08 and 2008-09 in ITAs No.1321/Del/2012 and 1320/Del/2013 vide order dated 04.11.2015 had deleted the same addition.
We find that this issue of deduction under Section 10B on similar facts had come up for consideration before the 4 I.T.As. No.806 & 4939/DEL/2016 Tribunal wherein the Tribunal after following various decisions of Hon’ble Delhi High Court have deleted the addition after observing and holding as under:-
“5. We heard the rival submissions and perused the material on record. The first ground of appeal relates to whether DEPB benefits are eligible for deduction under Section 10B of the Act. The issue is no more res-integra as the Hon’ble Jurisdictional High Court in the case of Principle Commissioner of Income Tax Vs. Universal Precision Screws, dated 06.10.2015 and CIT Vs. XLNC Fashions, ITA No. 438/2014, dated 01.09.2014 and CIT Vs. Hritnik Exports Pvt. Ltd., ITA No. 219 & 239 of 2014, dated 13th November, 2014 held that the business profit should be considered for the purpose of deduction under Section 10B of the Act. The Hon’ble Delhi High Court in the case of XLNC Fashions (supra) held as follows: “Deduction under Section 10B of the Income Tax Act, 1961 (Act, in short) is to be made as per the formula prescribed by Sub-Section (4), which reads as under: “10B. Special provision in respect of newly established hundred per cent export- oriented undertakings- ……… ……….. …………….. (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking”. Sub-section (4), therefore, is the special provision which enables the assessee to compute the profits derived from the export of articles or things or computer software. We do not see any conflict between Sub- section (1) and Sub-section (4) to Section 10B, as Sub-section (1) states that deduction of such profits and gains as are derived by a hundred percent export-oriented undertaking from the export of articles or things or 5 I.T.As. No.806 & 4939/DEL/2016 software would be eligible under the said Section. Sub- section (1) is a general provision and identifies the income which is exempt and has to be read in harmony with Subsection (4) which is the formula for finding out or computing what is eligible for deduction under Sub-section (1). Neither of the two provisions should be made irrelevant and both have to be applied without negating the other. In other words, the manner of computing profits derived from exports under Sub-section (1), has to be determined as per the formula stipulated in Sub-Section (4), otherwise Sub-section (4) would become otiose and irrelevant. The issue in question in this appeal which pertains to the Assessment Year 2009-10, relates to duty draw back in the form of DEPB benefits. As per Section 28, clause (iii-c), any duty of customs or excise repaid or repayable as drawback to a person against exports under Customs and Central Excise Duties Draw Back Rules, 1971 is deemed to be profits and gains of business or profession. The said provision has to be given full effect to and this means and implies that the duty draw back or duty benefits would be deemed to be a part of the business income. Thus, will be treated as profit derived from business of the undertaking. These cannot be excluded. Even otherwise, when we apply Sub-section (4) to Section 10B, the entire amount received by way of duty draw back would not become eligible for deduction/exemption. The amount quantified as per the formula would be eligible and qualify for deduction/exemption. The position is somewhat akin or close to Section 80HHC of the Act, which also prescribes a formula for computation of deduction in respect of exports.” Further, in the case of Principal Commissioner of Income Tax Vs. Universal Precision Screws (supra) the Hon’ble Delhi High Court held as follows: “9. On the question of interest on the FDRs, the ITAT has referred to Section 10B (4) which states that for the purposes of Section 10B (1), the profits derived from export of articles or things or computer software “shall be the amount which bears to the profits of the business of the undertaking”, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of 6 I.T.As. No.806 & 4939/DEL/2016 the business carried on by the undertaking.’ As noted by this Court in CIT v. Hritnik Exports Pvt. Ltd. (decision dated 13th November, 2014 in & 239 of 2014), Section 10B (4) mandates the application of the formula for determining the profits derived from exports for the purposes of Section 10B(1). In other words, the formula would read thus:
Profits derived = profits of the business x export turnover from export of the undertaking total turnover 9A. In terms of the above formula, the question that would arise is whether the interest on the FDRs could form part of the ‘profits of the business of the undertaking’. The attention of the Court has been drawn to the decision of the Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (2014) 46 Taxmann.com 167 (Kar.) which held that there was a direct nexus between the interest received from the FDRs created by a similarly placed Assessee from the amounts borrowed by it. The High Court approved the order of the ITAT in that case which held that the entire profits of the business of the undertaking should be taken into consideration while computing the eligible deduction under Section 10B of the Act by ITA 392/2015 Page 5 of 5 applying the mandatory formula.”
6. Thus, the Hon’ble High Court has categorically held that the export benefits of DEPB interest should be considered for the purposes of deduction under Section 10B of the Act. Respectfully following the ratio laid down in the above cases, we direct the Assessing Officer to consider the export benefits for the purpose of deduction under Section 10B of the Act. Therefore, the reasoning of CIT(A) while allowing these grounds of appeal
is upheld. Hence, the ground of appeal file the Revenue is dismissed.”
7. Thus, respectfully following the same, the issue of claim of deduction u/s.10B is allowed in favour of the assesse and against the Revenue.
7 I.T.As. No.806 & 4939/DEL/2016
The next issue pertains to disallowance of interest of Rs.3,58,749/- on account of interest on investments. The AO noted that assesse had invested an amount of Rs.29,89,571/- in M/s. Talbros Automotive Company Ltd. which was interest free investment. The AO after referring to the decision of Hon’ble Punjab and Haryana High Court in the case of CIT vs. Abhishek Industries Ltd., 286 ITR 1 (P&H) had made disallowance of notional interest of Rs.3,58,749/-. The case of the assesse was that it was not any kind of interest free loan, albeit was for the purpose of investment and it has not incurred any interest expenditure in relation to the said investment, because the investment was made out of assessee’s own surplus funds and even the profit before depreciation and after tax was more than Rs.10 crore. Besides this, assesse had a share capital and reserve surplus of Rs.29.11 crore. Thus, no interest could have been disallowed.
Ld. CIT (A) following the earlier order of the Tribunal in assessment years 2007-08 and 2008-09 has deleted the said addition.
On perusal of the impugned order and the facts and issues placed before us, we find that first of all, AO has merely made the disallowance following the ratio laid down by the Hon’ble High Court in the case of CIT vs. Abhishek Industries Ltd. (supra), whereas the fact of the matter was that assesse is not given any interest free loan but made investment in M/s. Talbros Automotive Company Ltd. out of 8 I.T.As. No.806 & 4939/DEL/2016 its own surplus funds. Thus, there could not be case of giving any interest free loan. Moreover, we find that this issue has been decided in favour of the assesse not only in the Assessment Year 2007-08, but also in the Assessment Year 2010-11, wherein this issue has been decided in favour of the assesse. Accordingly, disallowance of interest made by the AO has rightly been deleted by the ld. CIT (A).
The next issue relates to deletion of disallowance of Rs.73,29,225/- out of interest under proviso to Section 36(1)(iii), being interest @12% on capital-work-in-process amounting to Rs.6,09,93,541/-. The facts in brief are that the assessee had shown capital-work-in-process at Rs.6,09,93,541/-, which AO noted that, this was in the nature of asset yet not in use. After invoking proviso to Section 36(1)(iii), Assessing Officer disallowed interest @12%. The case of assessee before the authorities below was that interest of Rs.5,04,552/- incurred in respect of acquisition of assets for extension of business has already been offered for disallowance by the assessee in computation of taxable income and the complete details of interest computation for the period up to assets put to use. This has been duly checked and certified by the auditors and thereafter auditors have considered the interest for the period between the date of disbursement of loan and date of putting the asset in use as per proviso to Section 36(1)(iii) and AO has not found any fault with the computation.
9 I.T.As. No.806 & 4939/DEL/2016
The ld. CIT (A) following the earlier years order for the Assessment Years 2007-08 and 2008-09 has deleted the addition.
We find that in Assessment Year 2007-08, the Tribunal has deleted the similar addition not only in the Assessment Year 2007-08, but also in the Assessment Year 2010-11. Otherwise also, once this fact has not been disputed that interest for the period between the date of disbursement of loan and date of putting the assets in use has been disallowed as per Section 36(1)(iii) by the assessee itself, then without there being any factual infirmity either for the period up to putting the asset in use or in the computation, no such disallowance can be made. Accordingly, this issue is decided in favour of the assesse.
Lastly, coming to the issue of disallowance at Rs.18,62,886/- made u/s.14A, again this issue had come up for consideration before the Tribunal in all the earlier years wherein disallowance have been deleted. From the perusal of the impugned order of the AO, we find that assesse has earned dividend of Rs.11,19,530/- and AO has mechanically applied Rule 8D for making the disallowance u/s.14A without any satisfaction having regard to the accounts maintained by the assessee as mandated in Section 14A(2). The Tribunal in the earlier years has deleted the disallowance on the ground that AO has not given any reasons as to how he is not satisfied with correctness of the claim of the assessee. Now it
10 I.T.As. No.806 & 4939/DEL/2016 is well settled principle laid down by the Hon’ble Apex Court in the case of Maxopp Investment Ltd. vs. CIT, (2018) 402 ITR 640 (SC) that recording of satisfaction by the AO is mandatory before proceeding to make any disallowance u/r 8D which here in this case has not been done. Accordingly, disallowance of Section 14A has rightly been deleted.
Since similar issues are involved in the Assessment Year 2011-12 exactly based on the same reasoning and on same set of facts, therefore aforesaid finding will apply mutatis mutandis in this year also.
In the result, both the appeals of the Revenue are dismissed. Order pronounced in the open Court on 26th July, 2019.