VARDHMAN HOLDINGS LTD.,,LUDHIANA vs. ACIT,,

आदेश/ORDER PER ANNAPURNA GUPTA, A.M. : The impugned cross appeals by the assessee and the Revenue have been filed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-II, Ludhiana, (in short (“CIT(A)”) dated 17.11.2008 relating to assessment

2 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

year 2003-04 , u/s 250(6) of the Income Tax Act, 1961

(hereinafter referred to as ‘Act’).

Limited Company with its registered and corporate office at

Ludhiana (Punjab) and Baddi (HP). The business of the

assessee company is manufacturing and processing of yarn,

knitting yarn, fabrics and processed fabrics. The

manufacturing unit of the assessee at Baddi i.e. VSGM

Baddi is 100% Export Oriented Unit (EOU) and the assessee

had claimed exemption u/s 10B of the Act on the profits

earned from the same. The assessee has also claimed

deduction u/s 80HHC on profits earned from its business of

export of trading as well as manufactured goods. Further

the assessee company had claimed deduction u/s 80IB of

the Act on its Auro Spinning Unit-III, Auro Unit-IV and

Auro Unit-V, Auro Weaving-II and Auro Dyeing, Auro

Textiles, VSGM 100% EOU. During assessment proceedings,

the Assessing Officer (A.O) found that the main issues

involved in the case related to netting of interest, exemption

u/s 10B of the Act, deduction u/s 80HHC and 8IB of the

Act and dividend income and sales tax subsidy ,and

accordingly made disallowances/additions in relation to the

said issues in his order framed u/s 143(3) of the Act.The

said order was contested in appeal before the Ld.CIT(A) who

partly allowed the assessees appeal. The issues raised,

therefore, in the present appeals by both the parties pertain

to the said issues.

3 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

that all the issues raised in the cross appeals had been

dealt with by the I.T.A.T. in the case of sister concern of the

assessee, M/s Vardhman Textiles Limited vide their order

dated 4.5.2018 in relation to assessment year 2002-03 to

2005-06. A gist of the issues raised in the present appeal

and dealt with by the I.T.A.T. in the said order alongwith a

copy of the order was filed before us. It was stated that the

said order, therefore, was pertinent for adjudicating various

grounds raised in the cross appeals before us. Taking note

of the same we shall now proceed to adjudicate the cross

appeals and shall first be taking up the appeal of the

assessee in ITA No.88/Chd/2009.

ITA No.88/Chd/2009(Assessee’s appeal):

“1. That the Ld. CIT (A) has erred in law and on facts while confirming the action of the Assessing officer for taxing the capital receipt amounting to Rs.2,04,11,70//- on account of Sales Tax Exemption/Subsidy received from Government of Punjab as the revenue receipt of the appellant.” 5. The above ground is against the action of the CIT(A) in

treating the sales tax subsidy received by the assessee

amounting to Rs.2,04,11,707/- as revenue receipt against

capital receipt claimed by the assessee.

manufacturing Unit of the assessee, VSGM(Unit II)set up in

Ludhiana, had been granted incentive of Sales Tax

exemption in terms of Government notification No.1NC

4 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

11/15/43/96-5/IB 4176,dt.01-06-96 vide District Industries

Center, Ludhiana. During the impugned year, in the original

return filed, the assessee showed subsidy as revenue receipt

by way of credit in the Profit & Loss Account but

subsequently claimed the same as capital receipt in the

revised return filed. During assessment proceedings, the

assessee filed details of the scheme of Punjab Government as

per which the subsidy had been received and submitted that

since the incentive was given to spurt industrial growth as

well as for generation of employment opportunities to its

unemployed youth through rapid industrialization of the

State, the scheme was capital in nature. Reliance was placed

on certain case laws but the A.O. dismissed the contention

of the assessee after discussing the scheme in detail and

referring to judgment in the case of M/s Sahni Steel & Press

Works Ltd. Vs. CIT, 228 ITR 253 (SC) and DCIT Vs. Reliance

Industries Ltd., 88 ITD 273 (ITAT SB).

the order of the A.O. relying upon the judgment of the

Hon'ble Jurisdictional High Court in the case of CIT Vs.

Abhishek Industries Ltd., 286 ITR 1.

for assessee relied upon the submissions made before the

lower authorities stating that as per the scheme of the

Punjab Government the subsidy had been given to spurt

industrial growth as well as for generation of employment

opportunities through rapid industrialization in the State

5 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

and thus the subsidy received was capital in nature. Copy of

the Scheme was placed before us and reliance was placed on

several case laws as under:

((i) Tribunal's order in the case of Mahavir Spinning Mills vs. ACIT Ltd in ITA No. 344/09 A.Y 1997-98 dated 30.11.2015(Chd) ( Pg. 1-8) (ii) Tribunal's order in the case of Vardhman Textiles Ltd. vs. ACIT in ITA No. 392/07 AY 2001-02 dated 21.10.15(Chd) (Pg. 135-144) (iii) CIT vs. Nirma Ltd. 397 ITR 49 ( Guj) - Dated 08.6.16. (case law pgs. 212 - 218)

identical issue had been dealt with in the case of sister

concern of the assessee M/s Vardhman Textiles Ltd., as

pointed out earlier, wherein the I.T.A.T. had held the said

subsidy as being capital receipt. Our attention was drawn to

the relevant portion of the order dealing with the said issue

at pages 27 to 34, more specifically, to the findings of the

I.T.A.T. at para 39 of its order wherein following the decision

of the I.T.A.T. in the case of Vardhman Acrylic Ltd.,

Ludhiana Vs. ACIT & Other n ITA No.773/Chd/2012 &

Others relating to assessment year 2006-07 and the decision

of the I.T.A.T. in the case of Mahavir Spinning Mills Ltd. Vs.

JCIT in ITA No.344/Chd/2009 for assessment year 1997-98

the appeal of the assessee was allowed holding the subsidy

to be capital in nature.

of sister concern of the assessee M/s Vardhman Textiles

(supra) had held identical subsidy received from the Punjab

6 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

Government as capital in nature though at the same time

had heavily relied upon the order of the A.O.

contention of the Ld. counsel for assessee. We have gone

through the order passed by the ITAT in the case of M/s

Vardhman Textiles (supra),relied upon by the Ld.Counsel for

the assessee in support of its contention that the subsidy

was capital in nature, and find that the facts in the said

case were identical, the sales tax subsidy being received by

virtue of scheme of the Punjab Government vide the same

notification of the Department of Industries as in the case of

the assessee. The said fact finds mention in page 27 of the

order. The ITAT in the said case followed the decision of its

coordinate Bench in the case of Mahavir Spinning Mills Ltd.

vs JCIT in ITA No.344/Chd/2009, wherein, we find, this

issue had originally been decided by the ITAT against the

assessee following the decision of the jurisdictional High

Court in the case of Abhishek Industries(supra) ,but on

appeal by the assessee, the Hon’ble High Court had restored

the matter back to the ITAT to readjudicate the same in the

light of the decisions of the apex court in Ponni Sugars &

Chemicals Limited. Thereafter, the ITAT had held the

subsidy to be capital in nature .

stands covered as decided in favour of the assessee by the

above orders of the ITAT even after considering the decision

7 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

of the jurisdictional high court in the case of Abhishek

Industries (supra) .

by various decisions of the Hon'ble Apex Court laying down

the proposition that true test for determining the nature of

subsidy whether capital or revenue is the purpose test i.e. It

is the purpose for which the subsidy has been given which is

determinative of the nature of the subsidy and not the

manner of disbursement of the same. The manner of

calculating the same or even the point of time at which it is

disbursed. The Hon'ble Apex Court time and again had

reiterated this proposition right from M/s Sahni Steel &

Press Works Ltd. and CIT Vs. Ponni Sugar & Chemicals Ltd.

306 ITR 392 and its latest judgment in the case of CIT Vs.

Chaphalkar Brothers,Pune In Civil Appeal no.6513-6514 dt.

7th Dec 2017. In the present case undisputedly as per the

scheme of Punjab Government the purpose of disbursement

is to spurt industrial growth as well as to generate the

employment opportunities through rapid industrialization in

the State. There is no doubt, therefore, that the nature of

the subsidy is capital.

In view of the above ground of appeal No.1 raised by

the assessee is allowed.

“2. That the Ld. CIT (A) has erred in law and on facts while allocating Rs. one lac to dividend income earned by the appellant.”

8 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

action of Ld. CIT(A) in allocating expenses of Rs.1 lac

attributing the same to dividend income earned by the

assessee.

gross amount of dividend earned during the year amounting

to Rs.321.75 lacs u/s 56 of the Act, without setting off any

expenses incurred in relation to the same u/s 57 of the Act.

The A.O. allocated a sum of Rs.44.96 lacs (on proportionate

basis) out of personnel, finance and administrative

expenses, claimed as business expenses by the assessee,

attributing the same to having been incurred for the purpose

of earning dividend income. Thus the AO reduced the

business expenses claimed by the assessee on account of the

above, resulting in addition to its taxable income to the said

extent. Further the assessee had also claimed deduction of

the gross amount of dividend earned u/s 80M of the

Act,which was also reduced by the AO after netting expenses

incurred for earning the income as aforesaid. The Ld.CIT(A)

following his own order for assessment year 2002-03,

reduced the expenses allocated to Rs.1 lac.

no expenditure had been incurred for earning dividend

income. The Ld. counsel for assessee relied upon the order of

the I.T.A.T. in its own case for assessment year 2001-02 in

ITA No.280/Chd/2008 dated 28.12.2012 wherein I.T.A.T.

had upheld the allocation of Rs.2 lacs to dividend income

9 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

earned of Rs.4.50 crores. Copy of the order was placed

before us. Reliance was also placed on the decision of the

Hon'ble High Court in the case of the assessee itself for

assessment years 1994-95, 1995-96, 1997-98 and 2000-01

in ITA No.50/Chd/2012 dated 25.1.2013 wherein allocation

of Rs.1 to Rs.2 lacs in various years was upheld. Copy of the

order was placed before us. The Ld. counsel for assessee

also relied upon the order of the I.T.A.T. in the case of sister

concern of the assessee M/s Vardhman Textiles (supra)

pointing out that in the said order disallowance of Rs.2 lacs

was upheld in assessment year 2002-03 while in the rest of

the years the disallowance made was deleted. Our attention

was drawn to the relevant findings at page 13 & 14 of the

order as under:

“7.3 The similar matter was considered by the lTAT in the case of the assessee for the assessment year 2001-02 in ITA No.1174/CHD/2013 vide order dt.16/04/2014 wherein it has been held that the disallowance was made on surmises and there was no merit in the disallowances made wrongly on the premise that borrowed funds were used for investment purpose. The Tribunal has affirmed the confirming of disallowance of Rs. 1,00,000/- made by the Ld. CIT(A). In the instant year the Ld. CIT(A) has confirmed an amount of Rs.2,00,000/- being the expenses incurred for earning of the dividend income. Following the same rationale we hereby uphold the order of the Ld. CIT(A).” 18. The Ld. DR pointed out that this issue has been dealt

with in the case of the assessee in the preceding years right

up to the Hon'ble High Court, as pointed out by the Ld.

counsel for assessee, upholding allocation of expenses of

Rs.1 to Rs.2 lacs.

merit in the present ground raised by the assessee. As

10 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

pointed out by the Ld. counsel for assessee himself in the

earlier years also, the I.T.A.T. and even the Hon'ble High

Court had upheld the allocation of expenses ranging from

Rs.1 lac to Rs.2 lacs as being expenditure incurred for the

purpose of earning dividend income. Even the I.T.A.T. in the

case of sister concern of the assessee i.e. M/s Vardhman

Textiles (supra) had confirmed the disallowance of Rs.2 lacs.

Considering the past history of the assessee, wherein it has

been held by the Hon’ble High Court that expenses ranging

from Rs.1 to 2 lacs were to be allocated as incurred for

earning dividend income upto Rs.4.5 crores and the

Ld.Counsel for the assessee having not pointed out any

distinguishing fact in the present case the action of the

Ld.CIT(A) in allocating expenses of Rs.1 lac against dividend

income earned of Rs.3.21 crores is, therefore we hold, wholly

justified. We therefore, see no reason to interfere in the

order of the Ld. CIT(A) and the ground No.2 raised by the

assessee is, therefore, dismissed.

“3. The Ld. CIT (A) has erred in law and on facts while treating interest income amounting to Rs.34,73,788/- as “Income from other Sources” instead of “Income from Business or Profession”. 21. In the above ground, the assessee has challenged the

action of the Ld.CIT(A) in treating the interest income earned

by the assessee of Rs.34.74 lacs as income from other

sources.

11 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

for assessee pointed out that the figure of interest

mentioned in the assessment order was not correct and the

correct figures were tabulated before us as under:

AO's order Correct figures Gross interest received Rs. 294.83 Lacs Rs. 3.80 Cr. Interest from customers/supplier Rs. 257.22 Lacs Rs. 345.75 Lacs Interest from bank & others Rs. 37.61 lacs Rs. 34.74 Lacs Interest Paid Rs. 1255.57 Lacs Rs. 9.23 Cr. 23. Thereafter drawing our attention to the facts of the case

it was contended that during the course of assessment

proceedings the A.O. in the context of allowing deduction

u/s 80HHC raised a query as to why 90% of the interest be

not deducted from the profits of the business. The assessee

claimed whole of the interest to be in the nature of business

income and further contended that since it had also paid

interest of Rs.9.23 crores and if the same was netted against

the interest income earned there would be no income earned

by the assessee and thus no question of reducing 90% of the

same from the business of the assessee for the purpose of

calculating deduction u/s 80HHC of the Act. Details

regarding the same were filed before the A.O. but the A.O.

did not agree with the contention of the assessee and held

that the gross amount of interest received is to be treated as

income from other sources and thus reduced from the profits

of the business for the purpose of computation of deduction

u/s 10B/80IB/80HHC of the Act.

held that out of the gross interest received, interest received

12 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

on belated payments from customers/suppliers was in the

nature of business income while the other interest income

received from Banks and others amounting to Rs.34.74 lacs

was upheld as to be treated as income from other sources

for assessee reiterated the contention made before the lower

authorities that the interest income should be netted for all

purposes and the interest paid by the assessee of Rs.9.23

crores should be set off against the interest received for the

purpose of determining whether any interest is to be reduced

from the profits of the assessee for the purpose calculating

the deduction allowable to the assessee u/s 80HHC of the

Act. Reliance was placed on the following decisions in this

regard:

1) M/s ACG Associated Capsules Pvt. Ltd. Vs. CIT (2012) 343 ITR 89 2) Vardhman Holding Ltd. Vs. ACIT, ITA No. 280/Chd/2008 dated 28.12.2012 for Assessment year 2001-02. 26. It was further pointed out that identical issue had been

dealt with in the case of sister concern of the assessee M/s

Vardhman Textiles (supra) wherein netting of interest was

allowed. Our attention was drawn to the relevant discussion

on the issue at pages 38 to 43 pointing out that the issue

dealt with in the said case related to treatment of income as

income from other sources and the I.T.A.T. following the

decision of the Hon'ble Apex Court in the case of M/s ACG

Associated Capsules Pvt. Ltd. (supra) referred the matter to

the A.O. to allow the netting of interest if the assessee was

13 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

able to prove the nexus between the interest expenditure and

interest income.

in the contention raised by the Ld. counsel for assessee. As

pointed out by the Ld. counsel for assessee and as admitted

by both the parties, identical issue has been dealt with in

the case of sister concern of the assessee M/s Vardhman

Textiles (supra) wherein the matter has been restored back

to the A.O. to allow the netting if nexus is established

between the interest expenses incurred and interest income

earned. Following the same we restore the issue back to the

A.O. in the present case also for determining the nexus

between the interest expenditure and interest income earned

and thereafter allow the benefit of netting to the assessee.

Ground of appeal No.3 raised by the assessee is, therefore,

allowed in above terms.

the assessee since they related to the same issue of

calculation of deduction u/s 10B of the Act .The said

grounds read as under:

“4. (i) That the Ld. CIT(A) has erred in law and on facts while confirming the action of the assessing officer for applying method of calculating deduction u/s 10B other than that specified u/s 10B and at variance to the method regularly adopted by the appellant in earlier years and accepted by the department. (ii) That the Ld. CIT(A) has erred in law and on the facts while confirming the action of the Assessing officer for

14 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

increasing the Total Turnover of VSGM E.O.U. for calculating exemption u/s 10B of Income Tax Act by the following amounts: Particulars Amount (in Rs.) Excise Duty 64,96,590/- Export Turnover of Trading goods 2,98,73,357/-“ 30. These grounds are against the order of the CIT(A) in

upholding the order of the A.O. in treating the excise duty

and export turnover of traded goods as part of total turnover

of Export Oriented Unit (in short referred to as ‘EOU’) for the

purpose of calculating exemption u/s 10B of the Act.

Ld.Counsel for the assessee pointed out from the assessment

order that the A.O., after referring to various decisions held

that excise duty was to be treated as part of total turnover

for computation of deduction u/s 80HHC and included the

same in the total turnover of the assessee both for the

purpose of computation of deduction u/s 80HHC and 10B of

the Act. Further while computing the deduction u/s 10B at

the end of the order, the A.O. also added turnover of traded

goods to the total turnover. The assessee agitated the same

before the CIT(A), submitting that in view of the judgment of

the Hon'ble Apex Court in the case of CIT Vs. Lakshmi

machine Works, 290 ITR 667 (SC) both excise duty and

export turnover of traded goods should not be included in

total turnover for calculating deduction u/s 10B of the Act.

The CIT(A) did not agree with the submissions of the

assessee holding that the ratio was laid down in the context

of exclusion of excise duty for the purposes of section 80

HHC of the Act and therefore did not apply for exclusion of

the same for the purposes of section 10B. Further it was

15 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

held that as per the provisions of section 10B the turnover

of traded goods were to be included in the total turnover for

the purpose calculation of exemption u/s 10B of the Act.

for assessee reiterated the contention made before the lower

authorities stating that the provisions of sections 10B and

80HHC are pari-materia since they both relate to

computation of deduction on export and, therefore, the

decision of the Hon'ble Apex Court in the case of Lakshmi

machine Works (supra) would apply for the purpose of

section 10B also. Reliance was further placed on the

decision of the I.T.A.T. in the case of ACIT Vs. VMT Spinning

Company Ltd. dated 22.5.2008 in ITA No.690/2007 and on

the decision of the Special Bench of the I.T.A.T. in the case

of ITO Vs. Sak Soft Ltd. (2009) 313 ITR (AT 3353 (SB)(Mad)

for the proposition that the turnover of traded goods is to be

excluded from the total turnover. Further the Ld. counsel for

assessee drew our attention to the recent order passed by

the ITAT Chandigarh Bench in the case of sister concern of

the assessee M/s Vardhman Textiles (supra) pointing out

therefrom that both the issues of exclusion of excise duty

and turnover of traded goods from the total turnover had

been decided in favour of the assessee. Our attention was

drawn to the order of the I.T.A.T. at paras 10.1 pointing out

therefrom that the issue in the said case was identical, being

inclusion/exclusion of excise duty and export turnover of

traded goods in the total turnover of the assessee for

16 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

calculating deduction u/s 10B of the Act. Thereafter our

attention was drawn to the findings of the ITAT at para 10.5

holding that the decision of the apex court in the case of

Laxmi Machine works (supra) squarely applied to the issue

and directing the AO to recomputed the eligible profits as

per guidelines laid down therein. Our attention was also

drawn to page 35 of the order wherein following the decision

of the coordinate bench in the case of VMT Spinning

Co.Ltd.(supra), it was held that both the profits and the

turnover of export traded goods was to be excluded from the

profits and total turnover of the assessee for the purposes of

calculating deduction u/s 10B of the Act.

decided in the case of Vardhman Textiles (supra) as stated

above though he heavily relied upon the orders of the

authorities below.

case of M/s Vardhman Textiles (supra) and find that

identical issue had been dealt with in the said case wherein

it was held that the decision of the Hon'ble Apex Court in

the case of Lakshmi machine Works (supra) would squarely

apply for the purpose of calculation of deduction u/s 10B

and as per which excise duty was to be excluded from the

total turnover of the assessee. Further the I.T.A.T. had also

held that the turnover of the trading export activities was to

be excluded from the total turnover and the profits of the

trading export activity were to be excluded from the profits

17 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

for the purpose of calculating deduction u/s 10B of the Act

following the decision of the Tribunal in the case of VMT

Spinning Company Ltd. (supra). Since the issues in the

present case are identical to that in the case of M/s

Vardhman Textiles (supra) the decision rendered therein will

apply in the present case also, following which we hold that

excise duty be excluded from the total turnover for the

purpose of calculation of deduction u/s 10B of the Act. But

vis a vis the exclusion of export turnover of traded goods ,we

find that the in the case of VMT Spinning Mills(supra) ,it

was held that deduction u/s 10B was granted qua profits

earned on manufactured goods and therefore neither the

profits of traded goods was to be included in the profits nor

the turnover of traded goods was to be included in the total

turnover for calculating deduction u/s 10B of the Act.

Accordingly the AO is directed to calculate the deduction

u/s 10B of the Act after excluding both the profits and the

turnover of export traded goods from the profits of the

business and the total turnover.

Ground of appeal Nos.4(i) & (ii) raised by the assessee

are, therefore, allowed in above terms.

“(iii) That the Ld. CIT (A) has erred in law and on the facts while confirming the action of the Assessing officer for reducing profits of VSGM E.O.U. for calculating exemption u/s 10B by the following amounts: - Particulars Amount (in Rs.) - Loss on Export of Trading Goods 1,61,934/- - Rent received from employees 1,53,733/- - R & D Subsidy received 1,00,000/-

18 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

4,15, 667 /-“ 35. The above ground challenges the action of the Ld.CIT(A)

in reducing the following from the profits of the EOU while

calculating exemption u/s 10B of the Act:

1) Loss on export of traded goods = Rs.1,61,934/- 2) Rent received from employees = Rs.1,53,733/- 3) R & D subsidy = Rs.1,00,000/- 36. Brief facts relating to the issue are that the assessee

had claimed deduction u/s 10B on its EOU unit amounting

to Rs.1,97,20,837/- being 90% of the profits amounting to

Rs.2,18,92,041/-, attributable to the export turnover of the

undertaking in proportion to the total turnover of the

undertaking. The said deduction was computed after

reducing both the turnover of traded goods from the total

turnover and the profit/loss on export of traded goods .Since

the assessee had incurred losses in the trading activity

amounting to Rs.1,61,934/- the same were added to the total

profits of the undertaking. Further no adjustment was made

to the profits of the undertaking in respect of rent and

miscellaneous income i.e. R & D subsidy. The A.O. held that

the rent and miscellaneous income was to be reduced from

the same. Further he also, reduced the profits by the loss

incurred on export of traded goods. The CIT(A) upheld the

order of the A.O.

as regards the loss on traded goods the same is not to be

considered in computing the deduction u/s 10B of the Act in

19 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

view of the decision of the I.T.A.T. in the case of ACIT Vs.

VMT Spinning Company Ltd. (supra). As far as the rent and

R& D subsidy, it was contended that these incomes regularly

arose in the course of business and had to be included in

the taxable income for the impugned year. Further it was

pointed out that the I.T.A.T. in the case of M/s Vardhman

Textiles (supra) had held the rent received to be included in

the profits for the purpose of calculating deduction u/s

80HHC of the Act. Our attention was drawn to the relevant

findings at para 6.10 of the order wherein the issue was

decided in favour of the assessee following the decision of

the Hon'ble Jurisdictional High Court in the case of CIT Vs.

Metalman Auto Pvt. Ltd., 366 ITR 434 and VMT Spinning

Company Ltd. in ITA No.654/Chd/2005 vide order dated

317.2006.

issue of treatment of loss/profit on export traded goods, the

same has been dealt with by us in Ground No. 4(i) & (ii)

above, directing exclusion of the same from the profits of the

business of the assessee, at para 33 of our order above. As

for rent received from employees, we find that in the case of

the assessee itself for A.Y 2001-02, it was conceded by the

assessee before the Tribunal that 90% of the same was to be

excluded . Even otherwise ,section 10B grants deduction to

profits derived by a 100% EOU from export of articles or

things.Rent received even from employees, cannot be said to

be derived from export of goods. As for the decision of the

20 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

jurisdictional High court relied upon by the Ld.Counsel for

the assessee in the case of Metalman (supra), the issue was

not in relation to rent received and therefore the same would

not apply in the present case. Even R &D subsidy received,

cannot be said to be derived from export of goods but is

clearly on account of scheme of the government granting the

subsidy. R&D subsidy also,we hold ,is not entitled to

exemption u/s 10B of the Act. The issue is squarely covered

by the decision of the apex court in Liberty India vs

Commissioner of Income Tax(2009) 317 ITR 218,wherein it

was held that incentives received on account of schemes of

government cannot be said to be derived from the business

activity carried out by assessees, for the purpose of grant of

deduction u/s 80IB of the Act. Since section 10B is

identically worded using the term “derived from exports”,the

interpretation given to the said term will apply in relation to

exemption claimed u/s 10B of the Act also.

In view of the above we hold that loss on export traded

goods,rent received and R&D subsidy received all are to be

excluded for calculating deduction u/s 10B of the Act.

Ground of appeal No.4(iii) is therefore partly allowed in

above terms.

“(iv) That the Ld. CIT(A) has erred in law and on the facts while reducing profits of VSGM E.O.U. by proportionate Head office expenses amounting to Rs.79,60,109/- while calculating deduction u/s 10B.”

21 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

order of the A.O. allocating head office expenses of

Rs.79,60,109/- to EOU unit thus reducing the eligible

profits of the undertaking for the purpose of calculation

deduction u/s 10B of the Act.

had incurred total head office expenses amounting to

Rs.11,91,43,587/- and had not allocated any expenses to

any of the units on the ground that secretarial function

performed by the head office had nothing to do with the

manufacturing units. The A.O. did not agree with the

submissions of the assessee and held that the head office

was providing service to all units and, therefore, he

proportionately allocated a sum of Rs.79,60,109/- to the

EOU unit, thus reducing its profits eligible for deduction

u/s 10B of the Act. The CIT(A) dismissed the claim of the

assessee following the order in the case of the assessee for

assessment year 2002-03.

contentions; i) that out of the total head office expenses

certain expenses had already been added back in the

computation of income and as such those were not liable to

be allocated. The expenses referred to were as under:

1) Charity and Donation = Rs. 2,06,900/- 2) Prior period expenses = Rs.10,88,093/- 3) Loss on sale of fixed asset = Rs.1,66,246/- 4) Provision for fall in value Of investment = Rs.47,33,280/-

22 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

Total: = Rs.61,94,519/- 43. The Ld. counsel for assessee also contended that if any

allocation was to be done it should be of the net expenses

incurred by the assessee after reducing income earned by

the head office which the Ld. counsel for assessee contended

amounted to Rs.4,70,49,661/- by way of interest and other

miscellaneous receipts. Reliance was placed on the decision

of the I.T.A.T. in the case of Emerson Electric Company

(India) Pvt. Ltd. Vs. DCIT in ITA No.4142/Mum/2015 dated

25.9.2017. It was also pointed out that in the recent

decision of the I.T.A.T. in the case of sister concern i.e. M/s

Vardhman Textiles (supra) the I.T.A.T. had held only net

expenses to be allocated. Our attention was drawn to the

relevant findings of the I.T.A.T. at pages 19 to 22 of the

order.

covered by the decision of the I.T.A.T. in the case of VMT

Spinning Company Ltd. (supra) though he heavily relied

upon the orders of the authorities below.

case of M/s Vardhman Textiles (supra) has adjudicated this

issue holding that only net expenses, after reducing income

earned therefrom, of the head office are to be allocated, we

direct the A.O. to recompute the deduction after allocating

net head office expenses only as per the directions of the

I.T.A.T. in the case of M/s Vardhman Textiles (supra). We

also agree with the contention of the Ld. counsel for

23 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

assessee that the expenses already added back need not be

allocated again for the purpose of calculating profits of

eligible units. We, therefore, direct the A.O. to verify the fact

of disallowance of certain expenses suo moto by the assessee

and thereafter not reallocate the same to the head office for

the purpose of calculating eligible profits for deduction u/s

10B of the Act. Ground of appeal No.4(iv) is accordingly

allowed.

under:

“5. (i) That the Ld. CIT(A) has erred in law and on the facts in excluding Export Turnover of units claiming exemption u/s 10B from Export Turnover of the appellant while calculating the deduction u/s 80HHC of Income Tax Act. (ii) Without prejudice to ground No. 5(i) above, the Ld. CIT(A) has erred in law and on facts while directing to exclude 100% of export turnover of the EOUs instead of 90% of export turnover of EOUs from the eligible export turnover for deduction u/s 80HHC of Income Tax Act.” 47. The above ground is against the action of the Ld.CIT(A)

in excluding export turnover of units claiming exemption u/s

10B of the Act from the export turnover of the company

while calculating deduction u/s 80HHC of the Act.

claimed exemption of export profits both u/s10B and 80

HHC of the Act .He held that since the said profits were

exempt u/s 10B of the Act ,they did not form part of the

gross total income of the assessee and were therefore not

eligible for deduction u/s 80HHC of the Act. He, therefore,

reduced 90% of the export turnover and total turnover of

EOU unit from the export and total turnover of the company

24 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

for computing deduction u/s 80HHC of the Act. The

Ld.CIT(A) rejected the claim of the assessee by referring to

the orders in assessee’s case for assessment years 2001-02

and 2002-03 and following the same directed that 100% of

the turnover be reduced as opposed to 90% done by the AO.

judgment of the Tribunal in the case of Mahavir Spinning

Mills Ltd. in ITA No.212/2005 for assessment year 2001-02

dated 5.1.2016 holding that the turnover of 10B unit is not

to be excluded for the purpose of computing deduction u/s

80HHC of the Act. Our attention was drawn to the relevant

findings of the Tribunal at page 48 of the order, a copy of

which was placed before us. It was also contended that this

issue has also been decided by the Hon'ble High Court in

favour of the assessee in the case of M/s Mahavir Spinning

Mills Ltd. vs Commissioner of Income Tax, Ludhiana in ITA

No.408 of 2007 dated 02-09-16, for assessment year 1998-

The Ld. DR, on the other hand relied upon the order of

the authorities below.

various case laws referred to before us. The issue before us

is whether for the purpose of computing deduction u/s

80HHC in a case where deduction u/s 10B is also being

claimed, whether the export turnover and total turnover of

the EOU unit would be taken into consideration or not. We

have gone through the order of the Hon'ble High Court in the

25 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

case of M/s Mahavir Spinning Mills Ltd.(supra) for

assessment year 1998-99 and find that the question of law

before it was identical to the issue at hand whether export

turnover of units exempt u/s 10B of the Act are to be

included in export turnover for 80HHC purposes. The

question framed reads as under:

“i) Whether on a true and correct interpretation of Section 80 HHC of the Income Tax Act, 1961, the Tribunal has erred in law in holding that the export turnover of the unit whose profits are exempt under section 10B of the Income Tax Act, 1961 is not to be included in the 'export turnover' for the purposes of calculating the deduction under section 80HHC of the Income Tax Act, 1961?” 51. The Hon’ble High Court, we find, ruled in favour of the

assessee holding that in view of the definition of the said

term in section 80HHC, no such exclusion is provided. The

relevant finding of the Hon’ble High Court at para 16 of its

order is as under:

“16. We are, therefore, unable to agree with the decision of the Tribunal and of the CIT (Appeals) upholding the assessment order. The Tribunal held that the turnover of sales made by the assessee for which deduction under section 10B had been claimed did not answer the description of the turnover eligible for deduction under section 80HHC and therefore, the Assessing Officer rightly excluded such turnover from export turnover while computing relief available to the assessee under section 80HHC of the Act. We are unable to agree. Section 80 HHC clearly defines the terms export turnover, total turnover and profits of business. None of these definitions exclude the export turnover in respect whereof benefit has been derived under section 10B. To accept the respondent's contention would require the section to be rewritten and the expression to be redefined which is not permissible.” In view of the same we agree with the Ld.Counsel for

the assessee that export turnover for which exemption u/s

10B of the Act has already been claimed, is to be included in

the turnover for purposes of calculating deduction u/s 80

HHC of the Act. Ground of appeal No.5(i)&(ii) raised by the

assessee is therefore allowed.

26 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

“5. (iii) The Ld. C1T (A) has erred in law and on facts while apportioning all the Administrative, Financial Expenses and Depreciation being expenses not relating to trading activities of appellant's business for calculating indirect cost of trading exports while calculating deduction u/s 80HHC of Income Tax Act.” 53. This ground is against the action of the CIT(A) in

apportioning all administrative and financial expenses and

depreciation for calculating indirect cost of trading goods

while calculating deduction u/s 80HHC of the Act.

u/s 80HHC of the Act had calculated the indirect cost of

trading goods at Rs.90.76 lacs , by allocating common

expenses which were not directly relating to manufacturing

or trading units where trading was done between both the

trading and manufacturing activities. The assessee

submitted before the A.O. that as per Explanation-d to

section 80HHC(3) direct cost meant cost directly attributable

to the trading goods exported out of India and as per

Explanation-(e) to the said section, indirect cost meant cost

not being direct cost allocated in the ratio of turnover in

respect of trading goods to the total turnover. The A.O. did

not agree with the submissions of the assessee and

calculated the indirect cost at Rs.244.07 lacs, by allocating

all expenses of the company. The Ld.CIT(A) disposed off the

appeal of the assessee with the direction to the A.O. to

compute direct and indirect cost of trading cost as per

findings given in the appellate order dated 25.1.2008 in the

case of the assessee for assessment year 2001-02.

27 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

the appellate order followed by the Ld.CIT(A) in the case of

the assessee for assessment year 2001-02 had been decided

in favour of the assessee by the Tribunal vide its order in

ITA No.249/2008 and ITA No.280/2008 dated 28.12.2012. It

was pointed out that the I.T.A.T. after going through the

facts of the case allowed the appeal for statistical purposes

directing the A.O. to recompute indirect cost relating to

trading goods in line with the direction given by the I.T.A.T.

in the case of VMT Spinning Company Ltd. Vs. ACIT in ITA

No.682/2007 for assessment year 2003-04. It was further

pointed out that in the case of sister concern of the assessee

i.e. M/s Vardhman Textiles (supra), identical issue had

been dealt with by the I.T.A.T. in its recent order dated

4.5.2018, wherein the order of the CIT(A) had been upheld,

setting aside the issue for reworking the indirect cost of

trading goods in accordance with the decision of the Special

Bench of the I.T.A.T. in the case of Surendra Engineering

Corporation Vs. ACIT, 86 ITD 121 (SB) (Mum).

lower authorities.

ITAT in the case of the VMT Spinning Co. Ltd. , for A.Y 2003-

04,in ITA no.682/chd/07 dt.13.07.2012, wherein each item

of expenditure headwise was taken into consideration for

allocation to traded goods. The directions given in the said

decision was by the ITAT in the case of the assessee for A.Y

28 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

2001-02 in ITA No.249 & 280/chd/08 dt.28-12-12. We

accordingly direct the assessing officer to recompute the

indirect cost relatable to traded goods in line with the

directions given in para 18-25 of the order of the ITAT in

the case of VMT Spinning(supra) for A.Y 2003-04 dt.13-07-

statistical purposes.

“5. (iv) That the Ld. CIT(A) has erred in law and on the facts while reducing profits of business eligible for deduction u/s 80HHC by 90% of interest received from suppliers and customers amounting to Rs.3,45,75,013/-“ 59. This ground is against the action of the CIT(A)in

reducing the profits of the business eligible for deduction

u/s 80HHC by 90% of interest received from suppliers and

customers amounting to Rs.3,45,75,013/-. The AO had

reduced 100% of the said interest. The CIT(A) held that the

interest from customers/suppliers was in the nature of

business income but 90% of the same should be deducted

from the profits of the business for computing deduction u/s

80HHC of the Act.

the interest from customers and suppliers being in the

nature of business income there is no reason for deducting

90% of the same from the profits of the company for the

purpose of calculating deduction u/s 80HHC of the Act.

Reliance was placed on the decision of the Hon'ble Punjab &

Haryana High Court in the case of Phatela Cotgin Industries

29 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

P. Ltd. Vs. CIT (2007) 303 ITR 411 (P&H) for the proposition

that the interest from customers was eligible for deduction

u/s 80HHC/80IA of the Act. It was further contended that

in any case, the interest income to be reduced should be

that after netting the interest expenses incurred and in this

regard reliance was placed on the decision of the High Court

in the case of M/s ACG Associated Capsules Pvt. Ltd. (supra)

and the decision of the ITAT Chandigarh Bench in the case

of ACIT Vs. Mahavir Spinning Mills Ltd. in ITA No.212/2015

for assessment year 2001-02 dated 5.1.2016. It was also

pointed out that in the case of sister concern of the assessee

i.e. M/s Vardhman Textiles (supra) the I.T.A.T. in a recent

decision had held that 90% of such interest earned from

customers and suppliers need not be reduced for the

purpose of calculating deduction u/s 80HHC of the Act. Our

attention was drawn to the relevant findings at pages 11 to

13 of the order.

court in the case of ACG Capsules (supra) has laid down the

law that only net interest earned ,excluding interest paid in

relation to the same, is to be considered for the purpose of

exclusion from the profits for calculating deduction u/s

80HHC of the Act. Following the same, we restore this issue

to the AO to determine the net interest earned ,as per the

ratio laid down in the case of ACG Capsules(supra) and

thereafter decide the issue in accordance with law. This

30 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

ground of appeal No.5(iv) is therefore allowed for statistical

purposes.

“5. (v) That the Ld. CIT(A) has erred in law and on the facts while reducing 90% of rent received from employees amounting to Rs.23,68,054/- from profits of business eligible for deduction u/s 80HHC.” 64. This ground is against the action of the CIT(A) in

reducing 90% of the rent received from the employees

amounting to Rs.23,68,054/- while computing profits of the

business eligible for deduction u/s 80HHC of the Act. The

CIT(A) decided the issue against the assessee following his

own order for assessment year 2001-02.

the rent income received was in the nature of business

income and, therefore, 90% of the same need not be reduced.

It was pointed out that in the case of sister concern of the

assessee, Vardhman Textiles (supra), the rental income

shown as part of miscellaneous income was held by the ITAT

not be reduced to the extent of 90% of the same from the

profits of the business. Our attention was drawn to the

relevant findings of the IATA at page 11-13 of the order.

has been dealt with by us in the context of exclusion of rent

received for the purposes of calculating deduction/exemption

u/s 10B of the Act in ground no.4(iii) raised by the assessee.

Since section 10B and 80 HHC are para materia, allowing

deduction/exemption of profits derived from exports, our

31 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

decision rendered in the context of section 10B of the Act, at

para 38 of our order above will apply for purposes of

section 80HHC also, following which, we dismiss this

ground raised by the assessee.

“5. (vi) That the Ld. CIT(A) has erred in law and on the facts while not allowing deduction u/s 80HHC (3)(c)(iii) on export incentives amounting to Rs.4,85,35,947/-.” 68. This ground is against the action of the CIT(A) in not

allowing deduction u/s 80HHC(3)(c)(iii) on export incentives

being DEPB of Rs.4,85,35,947/-.

transfer of sale of licences, REP/DEPB (Rs.53.34 lacs

premium on DEPB) and claimed deduction u/s 80HHC(3) as

per auditor’s certificate. The A.O. while computing deduction

u/s 80HHC reduced the gross sale proceeds of DEPB of

Rs.4,85,35,947/- and denied the benefit of deduction on the

basis of the provisions of section 80HHC(3) as the export

turnover of the company existed Rs.10 crores. The CIT(A)

following his own order for assessment year 2001-02

dismissed the claim of the assessee.

the proviso to section 80HHC(3) had been struck down and

as such the assessee was entitled to deduction u/s 80HHC

on premium on sale of DEPB /REP licences. Reliance was

placed on the decision of the Hon'ble Gujarat High Court in

the case of Avani Exports Vs. CIT (2012) 348 ITR 349. The

32 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

Hon'ble Jurisdictional High Court in the case of Guru Nanak

Exports, Phagwara Vs. ACIT Jalandhar (2012) CWP

NO.11328 of 2009 and Vijay Silk House (Bangalore) Ltd Vs.

UOI, WP No.2446/2010 (Bombay High Court). It was also

pointed out that in the case of sister concern i.e. M/s

Vardhman Textiles (supra) the I.T.A.T. had allowed the claim

of the assessee agreeing that the proviso had been held to be

ultra vires. Our attention was drawn to the findings of the

I.T.A.T. in the said case at pages 34 to 35 as under:-

“17.1 The Assessing Officer has not allowed deduction under section 80HHC(3)(c)(iii) on export incentives. The assessee submitted before the Ld.. CIT(A) that this amendment is not applicable as company adoption to choose duty drawback or DEPB being duty remission scheme. He argued that the Assessing Officer had reduced total DEPB amounting to Rs.4.10 Crores instead of losses from transfer of DEPB amounting to Rs.12.34 Crores from export incentives while calculating deduction under proviso to Section 80HHCJ3). He further argued that amendment relating to export incentives is not applicable and DEPB of Rs.4.10 Crores included duty drawback of Rs.36.15 Lacs on which no restriction to allow deduction under section 80HHC have been laid in taxation provisions. 17.2 Ld. CIT(A) has confirmed the addition based on the earlier order in the assessees own case, relying on the decision of Hon'ble jurisdictional High Court in the case of Liberty India Ltd. (supra). 17.3 Before us the assessee brought to our notice the order of Hon'ble jurisdictional High Court in the case of Guru Nanak Exports in C.W.P No. 11328 of 2009 dt. 03/10/2012 wherein the amendment brought with retrospective effect has been held ultra-vires with regard to the retrospective nature of the amendment. 17.4 Since the amendment is not applicable to the case of the assessee before us this ground of appeal f the assessee is hereby allowed.” 71. Ld.DR relied on the order of the authorities below.

agreement with the Ld.Counsel for the assessee that the

third proviso to section 80HHC(3), applying which the

assessees claim of deduction u/s 80HHC on sale of DEPB

was denied, was brought on the statute by theTtaxation

Amendment Act, 2005 and its retrospectivity from

33 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

01.04.1998, was categorically struck down by courts in the

judgements relied upon by the Ld.Counsel for the assessee.

Since the impugned year falls before 2005, the third proviso

is not applicable to the assessee. The denial of deduction

u/s 80HHC of the Act on sale of DEPB is therefore set aside.

This ground of appeal of the aseessee is therefore allowed.

before us which reads as under:

“ That the authorities below have erred in treating the interest reimbursement of Rs.8,32,78,691/- under Technology Upgradation Fund Scheme (FUFS) as revenue receipts instead of capital receipt.” 74. The assessee has contended that it is a purely legal

ground which may be admitted for adjudication. Agreeing

with the contention of Ld. counsel for assessee and following

the judgment of the Hon'ble Supreme Court in the case of

NTPC Vs. CIT 299 ITR 383, the additional ground raised by

the assessee is being admitted for adjudication being a

purely legal ground.

facts relating to the issue stating that the assessee had paid

interest to the bank amounting to Rs.24,55,51,691/- on term

loans raised by it and said interest was debited in the Profit

& Loss Account of the assessee company. As per the TUF

Scheme of the Government the assessee had received

subsidy of Rs.8,32,78,691/- which was credited in the Profit

& Loss Account and accordingly taxed. It is this TUFS

subsidy of Rs.8.32 crores, the Ld. counsel for assessee

34 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

pointed out that the assessee is claiming as capital receipt.

The Ld. counsel for assessee contended that this issue of

treatment of interest subsidy under TUF Scheme has been

dealt with in a number of decisions holding the same to be

capital in nature. Our attention was drawn to the following

case laws in this regard:

1) CIT Vs. Shamlal Bansal, ITA No.472/2010 ` dated 17.1.2011 (P&H). 2) M/s CNV Textiles Pvt. Ltd. Vs. DCIT, ITA No.746/Mad/2014, dated 21.11.2014. 3) DCIT Vs. M/s Gloster Jute Mills Ltd., ITA No.687/Kol/2010, dated 2.7.2014. 4) DCIT Vs. Satluj Textiles & Industries Ltd., ITA No.5142/Del/2013, dated 3.7.2015. Copies of the above orders were also placed before

us.

issue arose in the case of the sister concern of the assessee

M/s Vardhman Textiles (supra) where the matter had been

restored to the CIT(A) to adjudicate the same. It was pointed

out that in the said case also this issue had been raised as

an additional and since it has not been considered by the

authorities below it was remanded to the CIT(A). Our

attention was drawn to para 23.5 of the order holding so.

ground had not been there before the CIT(A) an opportunity

to be provided to the Revenue to deal with entire gamat of

the issue.

35 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

of subsidy received of interest under TUF Scheme back to

the CIT(A) for adjudicating afresh directing him to pass a

speaking order in this regard after considering all the facts

relating to the scheme and the judicial precedent in this

regard. The assessee would be at liberty to make

submissions as deemed fit before the CIT(A). Thus additional

ground of appeal is, therefore, allowed for statistical

purposes.

statistical purposes.

No.118/Chd/2009.

ITA No.118/Chd/2009(Revenue’s Appeal):

“1. That the Ld. CIT(A)-II has erred in law & facts in deleting the addition of Rs.44,96,028/- made u/s 14A by the A.O. on proportionate basis out of personnel, administrative and misc. expenses for earning of dividend income.” 82. The above ground relates to the issue of attributing

expenses to dividend income earned by the assessee which

the A.O. had attributed to the extent of Rs.44.96 lacs. The

CIT(A) had reduced the same to Rs.1 lac. This issue has been

dealt with by us in ground No.2 raised by the assessee in its

appeal as above wherein we have upheld the restriction of

attribution of expenses to the extent of Rs.1 lac at para 19of

our order above. The ground of appeal No.1 raised by the

36 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

Revenue, therefore, stands adjudicated as above and thus

dismissed.

“2. Ld. CIT(A) has erred in law & facts in directing the A.O. to consider interest income received by the assessee on delayed payment from customers as "business income" instead of "Income of other sources" as considered by the A.O.” 84. The Revenue interest he above ground has challenged

the action of the Ld.CIT(A) in treating the interest received

by the assessee on delayed payments from customers as

business income instead of income from other sources as

held by the A.O. The CIT(A) had held the said interest

income to be in the nature of business income of the

assessee following his order in the case of the assessee for

assessment year 2002-03 wherein the decision of the Hon'ble

Jurisdictional High Court in the case of Phatela Cotgin

Industries P. Ltd. Vs. CIT, 167 Taxman 9 had been followed.

The Ld. DR was unable to bring to our notice any contrary

decision in this regard. In view of the same, we do not find

any reason to interfere in the order of the CIT(A) holding the

interest income earned from delayed payments from

customers etc. as business income. Ground of appeal No.2

raised by the Revenue is, therefore, dismissed.

“3. That the Id. CIT(A) has erred in law & facts in allowing deduction u/s 10B on sale of sample forming part of misc. income which have no nexus with the profits derived from the undertaking claiming exemption u/s 10B.”

37 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

direction of the Ld.CIT(A) allowing deduction u/s 10B on

sale of samples which form part of miscellaneous income.

The A.O. had held that since it had no nexus with the profits

derived from the undertaking, the assessee was not eligible

to claimed deduction u/s 10B of the Act on the same. The

Ld.CIT(A), on the other hand, held that this income from sale

of samples had to be taken as income derived from 100%

EOU since the samples sold were manufactured by the EOU

only. The Ld. DR was unable to controvert this finding of the

Ld.CIT(A) before us. On the contrary, it was pointed out to

us that in the case of Vardhman Threads Ltd. Vs. ACIT, the

I.T.A.T. in this order passed in ITA No.556/Chd/2008 dated

28.4.2014 had held that the sale of samples was related to

normal business of the assessee entitling it to deduction u/s

80IB of the Act. In view of the above, there is no doubt,

therefore, that the CIT(A) had rightly held the assessee to be

eligible for deduction on sale of samples u/s 10B of the Act.

Ground of appeal No.3 raised by the Revenue is, therefore,

dismissed.

under:

“4. That the Ld. CIT(A) has erred in law by directing the A.O. for fresh adjudication/ verification of direct and indirect cost attributable to trading of export goods as per provisions of section 80HHC of I.T.Act. 1961, whereas the same was calculated as per data supplied by the assessee.” 88. The above ground challenges the action of the CIT(A)

directing fresh adjudication/verification of the direct or

38 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

indirect cost attributable to the trading on export goods fpp

of calculating the eligible deduction of the assessee u/s

80HHC of the Act. The Ld. DR pointed out that this ground

of appeal was common to that raised by the assessee in it is

appeal in ITA No.88/Chd/2009 above in ground No.5.(iii).

Since the issue has been adjudicated by us in the case of the

assessee at para 55 of the order above upholding the order

of the CIT(A), the ground of appeal No.4 raised b the

Revenue stands covered by our decision as above. In view of

the same, ground No.4 raised by the Revenue is dismissed.

“5. That the Ld. C1T(A) has erred in law & facts in directing the A.O. to treat the interest received from customers and suppliers to be the income eligible for deduction u/s 10B.” 90. In the above ground the Revenue has challenged the

action of the Ld.CIT(A) in treating the interest receipts from

customers and suppliers as being eligible for deduction u/s

10B of the Act. The Ld. DR in this regard relied upon the

order of the A.O. but at the same time pointed out that the

Hon'ble Jurisdictional High Court in the case of Phatela

Cotgin Industries P. Ltd. Vs. CIT, 303 ITR 411 had

categorically held that the interest from customers/suppliers

was entitled to deduction u/s 80HH and 80I of the Act. In

view of the above, we find no reason to interfere in the order

of the Ld.CIT(A) and ground raised by the Revenue,

therefore, is dismissed.

39 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

“6. That the Id. CIT(A) has erred in law & facts in allowing deduction u/s 80HHC(3)(c)(i) on adjusted profit of business after increasing the same with the loss on trading goods exported amounting to Rs.1,45.02.286/- and directed the A.O. to calculate deduction u/s 80HHC(3)(c)(i) accordingly.” 92. The above ground raised by the Revenue is against the

direction of the Ld.CIT(A) allowing deduction u/s 80HHC of

the Act on the adjusted profits of the business after

adjusting loss on sale of traded exports as against the order

passed by the A.O. without making such adjustment. This

issue has risen in the case of the assessee’s appeal also in

ground No.4.(iii) wherein we have held that both the

profit/loss on the export of trading goods and the turnover

of export trading goods need to be adjusted for the purpose

of calculating/determining the eligible deduction u/s 10B of

the Act at para 38 of our order above. Following the same we

uphold the order of the Ld.CIT(A) in allowing the adjustment

of loss on export of trading goods for the purpose of

calculating deduction u/s 10B of the Act. Ground of appeal

No.6 raised by the Revenue is, therefore, dismissed.

under:

“7. That the Id. CTT(A) has erred in law & facts in allowing the deduction u/s 80IB in case of Aurodying Mills as the unit is not doing manufacturing activities.” 94. In the above ground the Revenue has challenged the

action of the Ld.CIT(A) in granting deduction u/s 80IB of the

Act to Auro Dying Mills of the assessee. The A.O., it was

pointed out, had denied the said holding that the unit was

not undertaking any manufacturing activities. The Ld.CIT(A),

on the other hand, had allowed the claim of the assessee on

40 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

finding that identical issue had arisen in the case of the

assessee in assessment year 2002-03 wherein the same was

allowed in first appeal vide order dated 29.4.2008.

but was unable to controvert the finding of the Ld.CIT(A)

that the issue had been decided in favour of the assessee in

the preceding assessment year. Nor did the Ld.DR bring to

our notice any order of higher authorities reversing the

CIT(A) ‘s order on this issue for the preceding year. In view

of the same, we do not find any reason to interfere in the

order of the CIT(A) holding that Auro Dying Mills was eligible

for deduction u/s 80IB of the Act. In view of the above,

ground No.7 raised by the Revenue is dismissed.

“8. That the Id. CIT(A) has erred in law & facts in allowing 100%) deduction u/s 80HHC instead of 90% as available for the year under consideration in computing book profit of the assessee u/s 11 5JB.” 97. The Revenue has challenged the action of the Ld.CIT(A)

in allowing 100% deduction u/s 80HHC of the Act for the

purpose of computing book profits u/s 115JB of the Act as

against 90% of the profits allowed by the A.O.

covered in favour of the assessee by the order of the I.T.A.T.

in the case of the assessee itself for assessment year 2001-

02 in ITA No.249/Chd/2008 dated 28.12.2012 wherein at

para 55 the I.T.A.T. had noted that the Ld. DR had conceded

41 ITA Nos.88 & 118/Chd/2009 A.Y.2003-04

that the issue stood covered in favour of the assessee in the case of Ajanta Pharma Ltd. Vs. CIT, 327 ITR 305.

Order pronounced in the Open Court.

Sd/- Sd/- संजय गग� अ�नपणा� ग�ता ANNAPURNA GUPTA) (SANJAY GARG ) �याय�क सद�य/Judicial Member लेखा सद�य/Accountant Member �दनांक /Dated: 26th November, 2018 *रती* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आय�त / CIT 4. आयकर आय�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File

आदेशानसार / By order, सहायक पंजीकार/ Assistant Registrar