INCOME TAX OFFICER-9(3)(3), MUMBAI vs. GEBBS HEALTHCARE SOLUTIONS PRIVATE LIMITED, MUMBAI

This is an appeal filed by the Revenue against the order of CIT(A)-16, Mumbai dated 14/06/2017 for A.Y. 2013-14.

In this appeal revenue is aggrieved by the action of CIT(A) allowing assessee’s claim of deduction u/s.10AA and allowing claim of employees contribution to PF and ESIC.

Rival contentions have been heard and record perused.

The brief facts of the case are that the assessee has filed its return of income on 27/11/2013 declaring total income at Rs. Nil after claiming deduction of Rs.30,32,07,143/- u/s.10AA of the Act and book profit at Rs.26,70,01,145/- u/s.115JB of the Act. The case was selected M/s. GEBBS Healthcare Solutions Pvt. Ltd., for scrutiny and assessment order u/s.143(3) of the Act was completed assessing total income under normal provisions at Rs.45,10,543/- and at book profit of Rs.26,70,01,145/- u/s.115Jb of the Act.

During the course of assessment the AO observed that the assessee had claimed deduction u/s 10AA of the Act on profit from Airoli Unit which included interest income of Rs.25,02,849/-. The AO was of the view that the interest income included in the profit on which the assessee had computed the deduction u/s 10AA of the Act were not derived from the services/export activity and hence deduction on the same was not allowable. The AO thereby asked the assessee to explain as to why the deduction claimed should not be recomputed after excluding the interest income. In response the assessee filed its written submission contending that the interest income on FDR were related to its business activity and eligible for deduction u/s 10AA of the Act. However, the AO found the submission of the assessee unacceptable. The AO was of the view that these receipts were not derived from the export activity and hence were not eligible for deduction u/s 10AA of the Act. Accordingly, the AO reduced the business income of the assessee by Rs.25,02,849/- and added to the total income under the head income from other sources.

By the impugned order, CIT(A) directed the AO to allow assessee’s claim of deduction u/s.10B after having the following observation:- 6.2.5. The AO's order, the contention of the Appellant and material on record have been considered. I observe that that issue was already been considered by me in the earlier years i.e. Assessment Years 2010-11 and M/s. GEBBS Healthcare Solutions Pvt. Ltd., 2011-12. The issue is already been decided in favour of the appellant and the relevant part of the order for A.Y.2010-11 is reproduced as under: "The AO's order, the contention of the appellant and material on record have been considered. The AO had considered amounts aggregating to Rs.29,13,512/- i.e. sundry creditor balance w/back of Rs.6,36,913/-, interest income of Rs.3,19,161/- and lodging income of Rs.19,57,438/-as not derived from the export activity and hence not eligible for deduction u/s 10B of the Act, The AO thereby reduced claim for deduction u/s 10B by Rs.29,13,512/- and taxed the same as income from oilier sources. I find that sundry credit balance written back actually represents the sundry creditors related to the export business of the Appellant which are no more payable by the Appellant. The expenses related to these sundry creditors were also claimed in earlier years and considered as relating to export business of the Appellant. Under the circumstances these sundry balances w/back has a direct nexus with the export business of the Appellant and same shall be assessed under the head business income eligible for deduction u/s 10B of the Act. Similarly the interest income of Rs.3,19,161/- was earned by the Appellant on fixed deposit pledged with Bank/ Authorised brokers, which are pre requisite in order to carry the hedging transaction with the bank / brokers. The entire revenue was generated by the Appellant from overseas market and hedging transactions were entered into by the Appellant as a safeguard against exchange rate fluctuation arising in forex market. Thus I find that hedging is directly related to the export business of the appellant and hence interest earned o fixed deposit for hedging has a direct link with the export business of the Appellant and AO is directed to considered the same for deduction u/s 10B of the Act. Likewise, with respect to hedging income of R$.19,57,438/- I find that the debtors receivable of the Appellant are in foreign currency which are open to exchange fluctuation. The Appellant has entered into Forward contract with ICICI Bank for hedging its Export Proceeds to vulnerable exposure of Currency Risk and to hedge the Exchange Rate. Vie transaction of forward contract entered into by the Appellant was done with the object of protecting the export business of the Appellant from the exchange fluctuation risk and it has a direct nexus to the export business of the Appellant. The lodging income was not derived from any scheme framed by the government but had a direct proximate nexus with the export business of the Appellant. Accordingly I hold that the hedging income is 'derived from' the export business of the Appellant and 'same shall be assessed under the head 'income from business' and shall be considered for deduction u/s 10B of the Act as against assessment made by the AO under the head 'income from other sources'. Accordingly I direct, the AO to assess the income aggregating to Rs.29,13,512/- as business income of the Appellant and M/s. GEBBS Healthcare Solutions Pvt. Ltd., considered the same while allowing deduction u/s WB of the Act. This ground of appeal is accordingly allowed." There is neither any factual or legal change in the present case of the appellant. Therefore, following my own order for A.Y.2010-11 and 2011- 12, the AO is directed to assess the above income of Rs.25,02,849/- as business income and consider the same while allowing the deduction u/s 10AA of the Act. Accordingly, this ground of appeal is allowed.

Rival contentions have been heard and record perused.

I found that issue with regard to claim of deduction u/s.10AA with regard to the interest income has already been decided by the Tribunal in assessee’s favour in the A.Y.2010-11 vide order dated 05/01/2018. The precise observation of the Tribunal was as under:- “3.Second effective ground of appeal is about allowing the assessee’s claim of deduction u/s.10B on interest income(Rs.3.19 lakhs)and exchange loss (Rs.10.32 lakhs), and hedging gain(Rs.19.70 lakhs). During the assessment proceedings, the AO observed that during the year under consideration the assessee has claimed deduction u/s.10B of the Act on the profits from SEEPZ unit which included interest income, miscellaneous income and hedging gains of Rs.19,57,438/-. The AO was of the view that interest income, miscellaneous income and hedging gains were not derived from the services/export activity and that it was not entitled to claim deduction. After considering the submission assessee in that regard, he reduced the business income of the assessee by Rs.29.13 lakhs and added it to the total income of the assessee under the head income from other sources. 3.1.Before the FAA, the assessee made detailed submissions arguing that the disputed amount was integral part of the business profit derived from export business and claimed deduction u/s. 10B of the Act. It also relied upon certain case laws. After considering the available material, the FAA held that sundry credit balance written(Rs.6.36 lakhs) actually represented the sundry creditors related to the export business of the assessee, that the said expenses were claimed in the earlier years and were considered as part of export business, that the assessee was justified in claiming deduction u/s.10B for the sundry balances returned back, that the interest income (Rs.3.19 lakhs) was earned on fixed deposits pledged with bank / authorised brokers, that it was a pre- requisite to carry the hedging transaction, that the revenue generated by the assessee from overseas market and hedging transaction were entered into by the assessee as a safeguard against exchange rate M/s. GEBBS Healthcare Solutions Pvt. Ltd., fluctuation, that hedging is directly related to export business of the assessee, that the interest earned had direct link with the export business. He directed the AO to consider the amount in question eligible for deduction u/s.10B of the Act. With regard to hedging income, he held that the debtors receivable were in foreign currency and were opened to exchange fluctuation,that the assessee has entered into forward contract with ICICI Bank for hedging its export proceeds to vulnerable exposure of currency risk and to hedge the exchange rate, that the transaction were done with the object of protecting the export vision of the assessee from the exchange fluctuation risk, that it had a direct nexus to the export, that hedging income was not derived from any scheme framed by the Government, it had a direct proximate nexus with the export business of the assessee. Accordingly ,he held that hedging income was derived from export business and had assessed under the head income from business. Finally, he held that income aggregating to Rs.29.13 lakhs was eligible for deduction u/s.10B of the Act. 3.2.Before us, the DR supported the order of AO and the AR relied upon the order of the FAA. We have heard the rival submissions and perused the material before us. We find that that the FAA has given a finding of fact that sundry credit balance written back represented the sundry creditors related to the export business of the assessee and that the said expenses were considered as part of export business. There is nothing on record to prove that the order of the FAA is factually incorrect. Similarly, it is found that the disputed interest income was earned on fixed deposits pledged with bank or the authorised brokers, that it was a pre-requisite to carry the hedging transaction, that the revenue generated by it from overseas, that hedging transaction were entered into by the assessee as a safeguard against exchange rate fluctuation, that hedging is directly related to export business of the assessee. Considering these facts we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity, So, confirming the same, we decide the second effective ground of appeal against the AO. 4.Third effective GOA(Ground No. v & vi)is about applicability of provisions of section 115JB of Act. During the assessment proceedings, the AO observed that the assessee has filed its return of income on 14.10.2010 declaring book profit of Rs.4.77 crores u/s.115JB,that it had paid tax on the same, that later on it revised its income declaring book profit at Rs.Nil. He directed the assessee to explain as to why MAT should not be completed as per the provisions of 115JB of the Act. After considering the submission of the assessee ,the AO held that book profit was to be computed after making specified adjustment to the net profit, that the Finance 2007 widened the scope of MAT by including total income exempt u/s.10A & 10B in the book profit. He held that as per the memorandum explaining the provision of Finance Act,2007 MAT provisions were applicable to company on the income which was from any business or services derived from unit of M/s. GEBBS Healthcare Solutions Pvt. Ltd., SEZ, that provisions of section 115JB(6)was applicable to assessee claiming deduction provision of section 10AA of the Act and not an assessee claiming deduction u/s.10b of the Act. Accordingly, he held that assessee was liable to tax u/s.115JB of the Act. 4.1.Before the FAA, the assessee made detailed submissions. After considering the available material, he referred to the case Genesis International Ltd. (80 DTR-Mumbai-(TRIB) 4),wherein the Tribunal had decided the identical issue in favour of the assessee. He also relied upon the case of G Jewel Craft Ltd.(36 ITR-Trib-521)and the order of his predecessor for the A.Y.2009-10. Following the above mentioned two orders of the Tribunal, he directed the AO to exclude the income relating to SEZ unit, while computing book profit u/s.115JB of the Act. The DR left the issue to the discretion of the Bench. The AR supported the order of FAA.We find that the issue stand covered directly by the orders of the Tribunal delivered in the case of Genesis International Ltd. and G Jewel Craft Ltd.(supra).Respectfully, following the above orders, we decide third effective ground of appeal against the AO. 5.Last effective ground of appeal is about allowing the claim of the assessee of employee’s contribution to PF and ESCI, amounting to Rs.2.34 lakhs and Rs.4.15 lakhs respectively that were paid beyond the due dates specified in respective Act. The AO had disallowed the disputed amounts as they were paid beyond the due dates. However, the FAA relying upon the cases of Hindustan Organics Chemicals Ltd.(ITA. 399 of 2012 and Ghatge Patil Transporters Ltd. ITA 1002 of 2012 and 1034 of 2012) held that employee’s contribution to PF had to allowed as deduction ,if it was paid by the employer before the due date of filing of income. 5.1.Before us, the DR stated that the matter could be decided on merits. The AR relied upon the order of the FAA. We find that the issues stand covered by the above referred two judgment of the Hon’ble Jurisdiction of High Courts. Therefore, endorsing the order of the FAA, we decided the last ground of appeal of against the AO. As a result, appeal filed by the AO stands dismissed.”

During the assessment proceeding the AO observes that employees contribution towards PF of Rs.1,80,213/- and Employees contribution towards ESIC of Rs.13,86,420/- were paid after due date M/s. GEBBS Healthcare Solutions Pvt. Ltd., prescribed in respective Acts. The AO thereby asked the assessee to explain as to why same should not be treated as income from other sources. In response the assessee company submitted that the employee's contribution to PF and ESIC were paid before the due date of filling return of income and hence same should be allowed as deductible revenue expense u/s 43B of the Act. However, the AO did not accept the contention of the assessee and added Rs.15,66,633/- (1,80,213 + 13,86,420) being payment of PF and ESIC beyond due date prescribed under relevant Act treating the same as deemed dividend within the meaning of section 2(24)(x) r.w.s. 36(1)(va) of the Act. 11. By the impugned order CIT(A) deleted the addition by following the decision of the jurisdictional High Court in the case of Hindusthan Organics Chemicals Ltd., The precise observation of CIT(A) as under:- 6.4.4. The AO's order/ the contention of the appellant and materials on record have been considered. The employees contribution to PF and ESIC although paid beyond the due date prescribed under the respective Act's but however the same were paid before the due date of filing return of income by the appellant. Infact, the same were paid within the previous year itself. The decisions of Hon'ble Jurisdictional High Court in the case of CIT Vs. M/s Hindustan Organics Chemicals Ltd (supra) and CIT Vs. Ghatge Patil . Transports Ltd (supra) squarely covers this issue and decides in favour of the assessee. Thus respectfully following the decisions of hon'ble Jurisdictional Bombay High Court, I delete the addition of Rs. 15,66,633/- made by the AO u/s 36(l)(va) r.w.s. 2(24)(x) of the Act. Accordingly this ground of appeal is allowed.

Rival contentions have been heard and record perused.