HYDRO PNEUMATIC ACCESSORIES INDIA P.LTD,MUMBAI vs. ITO 10(3)1, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “H” MUMBAI BEFORE SHRI C.N. PRASAD (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA No. 7735/MUM/2012 Assessment Year: 2008-09 Hydro Pneumatic ITO-10(3)(1), Mumbai. Accessories India Pvt. Ltd. Vs. 17, Raja Industrial Estate, P.K. Road, Nahur Village, Mulund (W), Mumbai- 400080. PAN No. AAACH1351A Respondent Appellant Assessee by : Mr. Dharan V. Gandhi, AR Revenue by : Mr. Abiram Kartikeyan, DR Date of Hearing : 31/07/2018 Date of pronouncement: 26/10/2018

ORDER PER N.K. PRADHAN, AM This is an appeal filed by the assessee. The relevant assessment year is 2008-09. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-22 [in short ‘CIT(A)’], Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’). 2. There has been a delay of 569 days in filing this appeal before the Tribunal. The assessee has filed an affidavit dated 27.12.2012 stating the following:

Hydro Pneumatic 2 ITA No. 7735/Mum/2012 “Uday S. Rao, aged about 54 years, having address at 214, Runwal Commercial Complex, L.B.S. Marg, Mulund (W), Mumbai-400080, do hereby state as under: 1. That I am the Auditor of the Appellant Company for the Assessee for AY 2009-09 and also look after Income Tax matters including appeals. 2. That for the AY 2008-09, the Assessee has received the CIT(A) Order on 08.04.2011 on which an appeal had been filed before ITAT belatedly due to my serious health problem which had infact incapacited me for a long duration. 3. That I have been looking after their Audit, taxation and Income Tax Appeal matters since long with sincerity and dedication. 4. That I had faced the following health hazards which had incapacited me for a long duration: 1. In 2002, I had a heart attack and underwent angioplasty. 2. 2007 Endoscopy was done in my case and was detected to have Antral Gastritis which persists till date. 3. 10th January, 2011, I experienced uneasiness and breathing problems and went for checkup. Was put on medication and was told to take rest for 6 months. 4. Since October, 2011, I had back ache and was treated with pain killers and Physiotherapy and was advised complete rest for 4 months. 5. 14th February, 2012 the pain increased and was diagnosed as suffering from a rare illness called ''Diffuse idiopathic skeletal Hyperostosis”. There is bone growth in the gaps of the spinal cord reducing my mobility drastically. 6. I went for follow up to KEM hospital and was advised long rest and Physiotherapy. 7. 09th November, 2012, I had fracture near the Knee and Ligament Tear. Right Leg was fully in piaster and could not move for three weeks. Now moving around with braces for the knee. I was virtually rendered complete immobile for nearly one and half months.

Hydro Pneumatic 3 ITA No. 7735/Mum/2012 5. That now I am deeply concerned for the case of the Assessee and on realizing that there had been delay, I have acted immediately to file the appeal by taking help of another counsel and the appeal was filed with a delay of 569 days with the bonafide cause occurred in deliberately. 6. That I understand that relying upon a Consultant is a bonafide cause upon the Assessee and the Assessee should not suffer because my health problem. 7. That the Assessee has a good case on merits. 8. That the delay in filing the appeal may kindly be condoned and the issue involved may be decided on merits as per the laws of Income Tax after due opportunity. 9. That whatever stated hereinabove is true and correct to the best of my knowledge and belief. Solemnly affirmed at Mumbai on this 27th day December, 2012.” 3. In support of his contentions, the Ld. counsel of the assessee relies on the decision in Collector Land Acquisition v. Mst. Katiji & Ors 167 ITR 471 (SC), Artist Tree Pvt. Ltd. v. CBDT (2014) 369 ITR 691 (Bom), Shri Y. P. Trivedi v. JCIT (ITA No. 5994/Mum/2010 for AY 2005-06), Lahoti Overseas Ltd. v. DCIT (ITA No. 3786/Mum/2012 for AY 2002-03) and Earth Metal Electricals (P) Ltd. v. ITO (ITA No. 239/Mum/2005 for AY 2001-02). 4. On the other hand, the Ld. DR submits that there has been inordinate delay of 569 days on the part of the assessee to file this appeal before the Tribunal. It is submitted by him that due care has not been taken by the assessee to file the appeal in time. Thus the Ld. DR submits that such gross negligence on the part of the assessee to file this appeal after a delay of 569 days should not be condoned.

Hydro Pneumatic 4 ITA No. 7735/Mum/2012 5. We have heard the rival submissions and perused the relevant materials on record. We begin with the decisions relied on by the Ld. counsel of the assessee. In Mst Katiji & Ors (supra), the principles of valuation was dismissed as time barred being 4 days beyond time by rejecting an application for condonation of delay. The Hon’ble Supreme Court, setting aside the order of the High Court dismissing the appeal before it as time barred, held : “1. Ordinarily a litigant does not stand to benefit by lodging an appeal late. 2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this when delay is condoned the highest that can happen is that a cause would be decided on merits after hearing the parties. 3. "Every day's delay must be explained" does not mean that a pedantic approach should be made. Why not every hour's delay, every second's delay? The doctrine must be applied in a rational common sense pragmatic manner. 4. When substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay. 5. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact he runs a serious risk. 6. It must be grasped that judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so.”

Hydro Pneumatic 5 ITA No. 7735/Mum/2012 In Artist Tree Pvt. Ltd. (supra), the assessee filed its return of income after delay of 22 months. Since there was a delay in filing the return beyond the period specified u/s 139(1) and (4) of the Act, the AO did not act upon the return. Thereafter, the assessee filed an application u/s 119(2)(b) before the CBDT for condonation of delay in filing the return. The assessee stated that at the relevant time, its office was shifted and certain records including tax deduction at source certificates were misplaced and it spent considerable time to retrieve the records resulting in the delay. The CBDT rejected the application on the grounds that (i) the audit accounts were prepared by September 14, 1997, and there was no proper explanation as to why the return was filed only on September 14, 1999. Further, there was no explanation as to why the application seeking condonation of delay was filed only on April 17, 2002. All this leads to the inference that the delayed return was only to avoid scrutiny; and (ii) no documentary evidence in support of misplacement of tax deduction at source certificates by the postal authorities on account of change in address of the assessee or evidencing delay in receipt of duplicate tax deduction at source certificates were produced. On a writ petition filed by the assessee, the Hon’ble High Court held that except for relevant assessment year, for all other assessment years, returns were filed within specified time; assessee was not a habitual late filer of return; return was substantially accepted in previous assessment year in scrutiny assessment; inference that late filing of return was adopted to avoid scrutiny assessment was not sustainable; nothing counterfeit or bogus in explanation was offered by the assessee and the assessee was not benefited by resorting to delay.

Hydro Pneumatic 6 ITA No. 7735/Mum/2012 In view thereof, the Hon’ble High Court directed the AO to decide the issue in accordance with law after subjecting return to scrutiny assessment. In Shri Y.P. Trivedi (supra), there was a delay of 496 days in filing the appeal. The assessee filed an application for condonation of delay as well as an affidavit. After considering the affidavit filed by the assessee as well as the affidavit of the Chartered Accountant of the assessee, it is observed by the Tribunal that the facts of the case do not suggest that the assessee has acted in a malafide manner or the reasons explained is only a device to cover an ulterior purpose. Therefore, taking a liberal approach, the Tribunal was satisfied with the reasons explained by the assessee that due to bonafide mistake and inadvertence, the appeal could not be filed within the period of limitation. Therefore, in the interest of justice, the Tribunal condoned the delay of 496 days in filing the appeal. In the case of M/s Lahoti Overseas Ltd. (supra), relied on by the Ld. counsel of the assessee, there was a delay of 2191 days in filing appeal before the Tribunal. The plea of the assessee was that the concerned employee, who was handling the tax matter left the assessee company and due to inadvertent mistake, the papers and documents, related to appeal remained to be handed over, which caused the delay. The Tribunal, relying on the judgment of the Hon’ble Supreme Court in Mst Katiji & Ors (supra), N. Balakrishnan v. M. Krishnamurthy (1998) 7 SCC 123 (SC) condoned the above delay of 2191 days in filing the appeal before the Tribunal.

Hydro Pneumatic 7 ITA No. 7735/Mum/2012 5.1 In the instant case, the assessee has filed copy of the medical report dated 04.07.2002, 10.01.2011, 14.02.2012, 21.03.2012 and 09.11.2012 of Shri Uday S. Rao, the auditor of the company. Shri Rao was the auditor of the assessee-company during the impugned assessment year and also he appeared before the AO during the assessment proceedings as mentioned by the AO at para 2 of the assessment order dated 16.12.2010. Having gone through the contents of the affidavit and the copy of the medical report, we find that the delay in the instant case is not caused deliberately, or on account of culpable negligence, or on account of malafides. Also refusing to condone the delay will result in a meritorious matter being thrown out at the very threshold. Therefore, following the ratio laid down in Mst. Katiji & Ors (supra), Artist Tree Pvt. Ltd. (supra), we condone the delay of 569 days in filing this appeal before the Tribunal. 6. The grounds of appeal filed by the assessee read as under: 1. Part disallowance of Deduction u/s 10B-Rs.16,10,585/- a The Ld. CIT(A) erred in confirming the disallowance u/s 10B overlooking and not appreciating the fact that the item of claim received in foreign exchange such as freight credits and also sundry balances written-off have direct nexus to the export activities to meet the requirements of the concept “derived from”, therefore, excluding the same from eligible profits amounts to not appreciating the facts and law property and hence, the disallowance may be deleted. b The Ld. Assessing Officer ought to have appreciating that the phrase, “profits and gains from the exports activities by a 100% export oriented units” as stated in Sec. 10B is elastic enough to

Hydro Pneumatic 8 ITA No. 7735/Mum/2012 cover such receipts which are infact received in foreign exchange and derived directly out of export activities; therefore, should from part of eligible profits. Hence, no disallowance u/s 10B is uncalled for and the same may be deleted. c Without prejudice to above, provision of Sec. 10B being an incentive provisions, should be construed liberally and more so when its claim u/s 10B had been allowed in the earlier year. 2. Levy of Penal Interest The appellant, on merits, denies its liabilities to penal interest. 6.1 The assessee has also filed an additional ground of appeal which is as under: 3) Total Turnover and export turnover wrongly calculated 1. Without prejudice to the other grounds, the Ld. Assessing Officer erred in taking the figure of Export turnover at Rs.10,67,67,838/- and Total Turnover at Rs.10,89,52,111/- for the purpose of calculating deduction u/s 10B. 2. Without prejudice to the other grounds, the Ld. Assessing Officer erred in taking other income comprising of rent, interest, net freight charges received and sundry balances written back as part of the total turnover for the purpose of calculating deduction u/s 10B. 3. Without prejudice to the other ground, the Ld. Assessing Officer erred in not taking the figure of export turnover as the total turnover for the purpose of calculating deduction u/s 10B. 6.2 We find that the above additional ground filed by the assessee is in relation to the subject matter which is already before the Tribunal by way of an appeal. Therefore, we admit the above additional ground.

Hydro Pneumatic 9 ITA No. 7735/Mum/2012 7. During the course of assessment proceedings the AO on perusal of Form 56G found that the assessee has calculated the profits of the export business including profit on freight charges as well as sundry balances written off. In response to a query raised by the AO to justify its claim, the assessee filed a reply which has been produced by the AO at page 2-4 of the assessment order dated 16.12.2010. However, the AO was not convinced with the said explanation of the assessee for the reason that as per section 10B(1), the deduction is allowable on such profits and gains as are derived by a 100% export oriented undertaking. In respect of sundry balance written off, the assessee has stated that this income has arisen on account of settlement of accounts of some of the suppliers. The AO further noted that the profits derived from export of article or thing is the only item which qualifies for deduction u/s 10B. The AO was of the opinion that the sundry balances written off are not profits on sale of article or thing of the current year and the amount is not received in foreign exchange and it is only cessation of liability u/s 41(1) and not connected with the export profits of the current year. With the above reasons, the AO held that the amount of freight charges and sundry balances written off do not qualify for deduction u/s 10B of the Act. 8. In appeal, the Ld. CIT(A) held that (i) freight income is not derived from export of articles or things but is a result of mutual agreement being an additional service provided by the assessee, (ii) even the gain on account of exchange rate fluctuation kept in DFRC account is not derived from export business, (iii) sundry balances written off are

Hydro Pneumatic 10 ITA No. 7735/Mum/2012 income by virtue of provisions of section 41(1) and hence not derived from business. Thus the Ld. CIT(A) held that the AO has rightly calculated deduction u/s 10B by excluding freight charges and sundry balances written off. 9. Before us, the Ld. counsel of the assessee submits that section 10B(4) explains what is the profit derived from export of articles as mentioned in sub-section (1). Further, sub-section (4) says that 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 and not the profits and gains from export of articles. The profits of the business of the undertaking include the profits and gains from export of the articles as well as other incidental income derived from the business of the undertaking. In this regard reliance is placed by him on the decision in CIT v. Hewlett Packard Global Soft Ltd. 87 taxmann.com (Karnataka) (FB); CIT v. Motorola India Electronics (P.) Ltd. 265 CTR 94 (Kar); CIT v. Hritnik Exports Pvt. Ltd. [ITA No. 219/2014 and 239/2014 (Del-HC)], Riviera Home Furnishing v. ACIT 237 Taxman 520 (Del) and WNS Global Services Pvt. Ltd. v. Addl. CIT 9 ITR (Trib) 662 (Mum). The Ld. counsel further submits that ‘turnover’ refers to the act of a businessman in ‘turning over’ the goods he deals in, services he renders or the facilities he provides, into money. Therefore, interest income, rent income, freight charges and sundry balances written back, cannot be considered as turnover for the purpose of section 10B of the Act. In this regard, reliance is placed by him on the decision in ITO v.

Hydro Pneumatic 11 ITA No. 7735/Mum/2012 Fashion Sports (I) (P) Ltd. 78 ITD 41 (Mum), CIT v. Lakshmi Machine Works 290 ITR 667 (SC) and CIT v. Sundaram Clayton Ltd. 281 ITR 425 (Mad). Finally, the Ld. counsel submits that the amount of freight expenses reduced from export turnover has to be reduced from total turnover as well. The Ld. counsel, in support of his contentions relies on the decision in CIT v. Gem Plus Jewellery India Ltd. (2011) 330 ITR 175 (Bom) and CIT v. Tata Elxsi Ltd. (2012) 349 ITR 98 (Karn.). 10. On the other hand, the Ld. DR relies on the order of the Ld. CIT(A) and submits that the freight income is not derived from export of articles or things but is a result of mutual agreement being an additional service provided by the assessee. The Ld. DR also states that even the gain on account of exchange rate fluctuation kept in DFRC account is not derived from the export business. Further, it is stated by him that sundry balances written off are income by virtue of provisions of section 41(1) and hence not derived from business. 11. We have heard the rival submissions and perused the relevant materials on record. In Hewlett Packard Global Soft Ltd. (supra), the Full Bench of the Hon’ble Karnataka High Court has held in the context of section 10A r.w.s. 10B that all profits and gains of 100% EOU including incidental income by way of interest on bank deposits or staff loans would be entitled to 100% exemption or deduction u/s 10A or 10B of the Act.

Hydro Pneumatic 12 ITA No. 7735/Mum/2012 In Riviera Home Furnishing (supra), it has been held that interest on FDRs which were under lien with Bank for facilitating letter of credit and bank guarantee facilities would qualify for deduction u/s 10B of the Act. In WNS Global Services (P) Ltd. (supra), it is held that written back amounting to Rs.3,29,942/- is eligible for deduction u/s 10A of the Act. In Fashion Sports (I) (P) Ltd. (supra), it is held that insurance claim cannot be included in the “total turnover” while computing the deduction u/s 80HHC of the Act. In Lakshmi Machine Works (supra), it is held in the context of section 80HHC that : “Section 80HHC of the Income Tax Act, 1961, is a beneficial section: it was intended to provide incentive to promote exports. The intention was to exempt profits relatable to exports. Just as commission received by the assessee is relatable to exports and yet it cannot form part of ‘turnover’ for the purposes of section 80HHC, excise duty and sales tax also cannot form part of ‘turnover’. Just as interest, commission, etc., do not emanate from the ‘turnover’ so also excise duty and sales tax do not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover such taxes had to be excluded. Commission, interest, rent, etc. do yield profits, but they do not partake the character of turnover and therefore, they are not includible in the ‘total turnover’. If so, excise duty and sales tax also cannot form part of the “total turnover” u/s 80HHC(3).” In the case of Sundaram Clayton Ltd. (supra), it is held that sales tax, excise duty, sales of raw materials, charges of miscellaneous income

Hydro Pneumatic 13 ITA No. 7735/Mum/2012 and commission do not form part of the turnover for the purpose of calculation of deduction u/s 80HHC of the Act. In Gem Plus Jewellery India Ltd. (supra), the Hon’ble Bombay High Court has held that : “The expression ‘total turnover’ has not been defined at all by Parliament for the purposes of section 10A. However, the expression ‘export turnover’ has been defined. The definition of ‘export turnover’ excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression ‘export turnover’ cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance do not have an element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary.” Further, in Gem Plus Jewellery India Ltd. (supra), it is held “that the foreign exchange was realized by the assessee within the period stipulated in law. The assessee had realized a larger amount in terms of Indian rupees as a result of a foreign exchange fluctuation that took place in the course of the export transaction. The gains had to be taken into account for the purpose of section 10A.” 11.1 In a recent decision in the case of CIT v. HCL Technologies Ltd. (2018) 404 ITR 719 (SC), the Hon’ble Supreme Court referring to the

Hydro Pneumatic 14 ITA No. 7735/Mum/2012 formula for computation of deduction u/s 10A of the Act held at page 731 as under: “In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under section 10A of the Income-tax Act are allowed only in export turnover but not from the total turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the respondent which could have never been the intention of the Legislature. Even in common parlance, when the object of the formula is to arrive at profit from export business, expenses excluded from export turnover have to be excluded from the total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover.” In the instant case, the AO has made disallowance of deduction u/s 10B by partially excluding freight credit received in foreign exchange and sundry balances written off from the eligible profits derived from export activities on general propositions. The AO has mentioned at para 2 of the assessment order dated 16.12.2010 that “in response to the notices Shri Uday Rao, CA attended and filed the details called for from time to time.” The assessment order passed by the AO clearly indicates

Hydro Pneumatic 15 ITA No. 7735/Mum/2012 that the he has disallowed the deduction u/s 10B partially by excluding freight credit received in foreign exchange and sundry balances written off from eligible profits without examining the details filed by the AR of the assessee before him. The Ld. CIT(A) has followed the order of the AO and confirmed the said disallowances without further examination. We have narrated at para 11 hereinbefore the ratio laid down in the decisions which are relevant to the present case. Therefore, following the ratio laid down in the decisions mentioned at para 11, we allow the grounds of appeal as well as the additional grounds filed by the assessee. 12. In the result, the appeal is allowed. Order pronounced in the open Court on 26/10/2018. Sd/- Sd/- (C.N. PRASAD) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 26/10/2018 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Sr. Private Secretary) ITAT, Mumbai