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Income Tax Appellate Tribunal, MUMBAI BENCH “L”, MUMBAI
Before: SHRI RAJENDRA & SHRI AMIT SHUKLA
आदेश ORDER �ी अिमत शु�ला, �याियक सद�य PER AMIT SHUKLA, J.M.:
The aforesaid cross appeals have been filed by the assessee as well as by the revenue against impugned order dated 21.10.2014, passed by Ld. CIT (Appeals)-18, Mumbai for the quantum of assessment passed under section 143(3)
2 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 for the assessment year 2011-12. We will first take-up assessee’s appeal, vide which following grounds have been raised:-
“On facts and in law, the learned CIT(A) had erred in confirming the disallowance of Rs.3,33,089/- made by the Assessing Officer out of interest u/s.14A of the I.T. Act. Under the facts and circumstances of the matter, the learned CIT(A) ought to have deleted the said disallowance of Rs.3,33,089/-. 2. On facts and in law, the learned CIT(A) had erred in not directing the Assessing Officer to allow deduction u/s.IOB in respect of Rs.50,76,063/- being the Cash Discount even though the same forms part of Business Income of Lote Unit. Under the facts and circumstances of the matter, the learned CIT(A) ought to have directed the Assessing Officer to allow deduction u/s.1OB in respect of Rs.50,76,063/-. 3. On facts and in law, the learned CIT(A) had erred in not directing the Assessing Officer to allow deduction u/s.10B in respect of Rs.8,91,809/- being Miscellaneous credit balance w/back even though the same forms part of Business Income of Lote Unit. Under the facts and circumstances of the matter, the learned ClT(A) ought to have directed the Assessing Officer to allow deduction u/s. 1 OB in respect of Rs.8,91,809/-. 4. On facts and in law, the learned CIT(A) had erred in not directing the Assessing Officer to allow deduction u/s.10B in respect of Rs.31,87,918/- being Scrap sales even though the same forms part of Business Income of Lote Unit. Under the facts and circumstances of the matter, the learned CIT(A) ought to have directed the Assessing Officer to allow deduction u/s.10B in respect of Rs.31,87,918/-. 5. On facts and in law, the learned CIT(A) had erred in not directing the Assessing Officer to allow deduction u/s. 1 0B in respect of Rs. 11 ,29,423/- being the insurance claim written back even though the same forms part of Business Income of Late Unit. Under the facts and circumstances of the matter, the learned CIT(A) ought to have directed the Assessing Officer to allow deduction u/s.1OB in respect of Rs.11,29,423/-. 6. On facts and in law, the learned CIT(A) has failed to appreciate that deduction u/s.1OB is governed by sub-section (4) of Section 10B of the I.T. Act. 7. On facts and circumstances of the matter, the learned CIT(A) had erred in confirming the disallowance of
3 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 Rs.17,30,158/- being the processing charges paid to M/s. Neutron Products Inc. of USA u/s.40(a)(i) of the I.T. Act. Under the facts and circumstances of the matter, the learned CIT (A) ought to have deleted the said disallowance of Rs.17,30,158/-. 8. On facts and in law, the learned CIT(A) had erred in confirming the disallowance of Rs.20,83,203/- paid to M/s. Sustainability Support Device u/s.40(a)(i) of the I.T. Act. Under the facts and circumstances of the matter, the learned CIT (A) ought to have deleted the said disallowance of Rs.20,83,203/-. 9. On facts and in law, the learned CIT(A) had erred in confirming the disallowance of Rs.36,146/- paid to M/s. ICIC Prising, U.K. u/s.40(a)(i) of the I.T. Act. Under the facts and circumstances of the matter, the learned CIT(A) ought to have deleted the said disallowance of Rs.36,146/-. 10. On facts and in law, the learned CIT(A) had erred in confirming the disallowance of Rs.16,100/- paid to M/s. Plats, USA u/s.40(a)(i) of the I.T. Act. Under the facts and circumstances of the matter, the learned CIT(A) ought to have deleted the said disallowance of Rs. 16,100/-. 11. On facts and in law, the learned CIT(A) had erred in confirming the disallowance of Rs.1,46,672/- paid to M/s Shenzhen Zero Power Intelligence Co. Ltd. China u/s 40(a)(i) of the I.T. Act. Under the facts and circumstances of the matter, the learned CIT(A) ought to have deleted the said disallowance of Rs.1,46,672/-. 12. Without prejudice to the Grounds of Appeal No.7 to 11 above, the learned CIT(A) had erred in not enhancing the deduction u/s.10B in respect of various disallowance made u/s.40(a)(i) of the I.T. Act. Under the facts and circumstances of the matter, the learned CIT(A) ought to have directed the Assessing Officer to enhance the deduction u/s.10B accordingly. 13. On facts and in law, the learned CIT(A) had erred in confirming the addition of Rs.92,553/- being the alleged information received from the AIR database/26AS. Under the facts and circumstances of the matter, the learned CIT (A) ought to have deleted the said sum of Rs.92,553/-. 14. On facts and in law, the learned CIT (A) had erred in confirming the addition of Rs.3,33,089/- as expenditure in relation to earning of exempt income while computing Book Profit u/s.115JB of the I.T. Act. Under the facts and circumstances of the matter, the learned CIT (A) ought to have deleted the said addition of Rs.3,33,089/-.
4 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 15. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon. ITAT to decide this appeal according to law”.
The brief background of the case are that, the assessee is a Public Limited Company engaged in the manufacturing of pharmaceutical products from its two plants situated at Mahad, District Raigarh; and Lote, District Ratnagiri. The plant at Lote has converted into Export Oriented Unit (EOU), the permissions for which was granted on 28.07.2008 and accordingly, the assessee was entitled for claim of deduction on its profits under section 10B. For the year under appeal, the assessee had declared book profit of Rs.62,21,88,779/- under section 115JB and under the normal provisions of the Act, the assessee had claimed deduction under section 10B of Rs.30,07,58,200/-. So far as the assessment under normal provisions of the Act, the AO had made addition on account of disallowance under section 14A; disallowance of deduction under section 10B on various receipts; and disallowance under section 40(a)(i) on various payments made to different non-resident parties for non-deduction of TDS. Apart from that, disallowance on difference of amount of interest income on account of mismatch of information received from the AIR database 26AS was also made. Now, we will deal with the issues raised in various grounds:-
In ground No.1, the assessee has challenged the disallowance under section 14A of Rs. 3,33,089/-.
Facts in brief are that, the assessee had shown dividend income of Rs.29,50,018/-from the Mutual Fund Reinvestment
5 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 Scheme, which was claimed as exempt under section 10(35). For the purpose of disallowance under section 14A, the assessee had made suo-motto disallowance of Rs.79,049/- which was computed in accordance with the Rule 8D(2)(iii), that is, for indirect expenditure. However, the Assessing Officer noted that, assessee had borrowed funds and had also claimed interest expenditure on such borrowings to the extent of Rs.4.67 crores. In response to the show cause notice, the assessee submitted that the borrowings have not been used for the purpose of investment at all and it had huge surplus funds which far exceeded the investment made, therefore, no disallowance of expenditure could have been made. The relevant submissions of the assessee before the Assessing Officer is reproduced hereunder:- “As submitted in our letter No. Sh/IT1CV-1 11 dated 16.12.2013, the disallowance amounting to Rs. 79,049/- is calculated being ½% of the opening & closing amount of the investments held as per clause (iii) of Rule 8D (2). With regard to the query that why proportionate interest should not be considered for disallowance under clause (ii) of Rule 8D (2), we would like to submit that borrowed funds have not been used for the purpose of investment in Mutual Funds. Kindly refer to the Balance Sheet as on 31.03.2011, the Loan Funds as on 31.03.2010 were Rs. 7,183 lakhs which has been increased to Rs. 8,869 lakhs as on 31.03.2011. As such, there is increase of Rs. 1686 lakhs. As against that the Gross Block of fixed Assets has increased from Rs. 11,094 lakhs as on 31.03.2010 to Rs. 14,865 lakhs as on 31.03.2011 i.e. increase of Rs. 337 lakhs. From these statements, it is clear that the increased borrowing of Rs. 1,686 lakhs have been invested mainly in the fixed Assets and it can safely to be concluded that no amount of borrowed funds have been used for the purpose of investments which was a small amount of Rs. 316 lakhs (investment as on 31.03.2010 were Rs. Nil). In this respect, we also draw your kind attention towards the ratio of the Hon'ble Bombay High Court's decision in the case of CIT vs. Reliance Utilities & Powers Ltd (2009) 313 ITR 340/178 Taxman 135 wherein the Bombay High Court clearly held that if there were funds available, both interest free and interest bearing, then a presumption would arise that interest free funds have been generated for investments. In the case of assessee, shareholders fund as on 31.03.2010 were Rs. 9,918 lakhs
6 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 which has increased to Rs. 14,369 lakhs as on 31.03.2011 which was sufficient to cover the investment of Rs.316 lakhs. In view of the above, it is submitted that no amount of interest is disallowable under clause (ii) of Rule 8D of the Income-tax Act." 5. However, the Ld. Assessing Officer held that the assessee could not substantiate its contention through the movement of funds about the exact utilization of borrowed funds point to point and also assessee had not maintained or furnished any separate account or working for the activity relating to the investment in shares. Accordingly, he disallowed proportionate interest expenditure as per Rule 8D(2)(ii) for Rs.3,33,089/-. This, disallowance has been confirmed by Ld. CIT(A) also on the ground that, assessee could not substantiate that, no borrowed funds were utilized for the purpose of purpose of investment, except for giving the explanation that it had huge surplus interest free funds for investment in mutual funds.
After hearing both the parties and on perusal of the impugned orders as well as material placed on record, we find that assessee’s ‘reserves and surplus’ funds as shown in the Balance sheet as on 31st march, 2011 was at Rs.13,382.3 lakhs and share capital was Rs.987.5 lakhs, as against this interest free/surplus funds, the assessee had made investments in the mutual funds of Rs.316.20 lakhs. Thus, when assessee had such a huge surplus funds, then presumption is that, the investments must have been made from the surplus funds only. This proposition finds due support from the decisions of Hon’ble jurisdictional High Court in the cases of CIT v Reliance Utilities & Powers Ltd, reported in [2009] 313 ITR 340; and CIT vs. HDFC Bank,
7 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 reported in 366 ITR 505. The Hon’ble High Court has reiterated that, if assessee has surplus/ interest free funds in the form of reserves and share capital which exceeds the investments, then presumption has to be drawn in favour of the assessee that the investments has been made from the coffers of surplus/interest free funds and not from the borrowed funds. Thus, respectfully following the ratio laid down by the Hon’ble jurisdictional High Court we hold that, no disallowance on account of interest expenditure under Rule 8D(2) should be made in the facts of the present case. Accordingly, ground No.1 of the assessee is allowed.
In ground No.2, the assessee has challenge the disallowance under section 10B in respect of cash discount of Rs.50,76,063/-. The assessee had received a sum of Rs.50,76,063/- on account of cash discount, which was included as part of its eligible profit qualifying under section10B. The assessee had contended that, it was in the nature of discount received on account of early payments and, therefore, it has direct relationship with the purchases as they go to reduce the cost of purchases, hence, it is directly attributable or derived from the export business of the undertaking. However, the Assessing Officer held that, it is not on account of money received or receivable while effecting the exports per se and, therefore, these receipts cannot be included as part of the eligible profits for claiming the deduction under section 10B. The Ld. CIT(A) confirmed the action of the AO and held that, cash discount was received for making early payments and it has no relationship
8 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 with the export of the assessee and accordingly hold that income derived from the export activities.
Before us, the Ld. Counsel submitted that, same issue of allowance/disallowance under section 10B in respect of cash discount was also subject matter of scrutiny in the assessment years 2009-10 and 2010-11 wherein, the Assessing Officer after raising specific query and after considering the explanation of the assessee allowed the claim under section 10B in respect of cash discount. On the other hand, Ld. DR strongly relied upon the order of the CIT(A).
After considering the rival submissions and on perusal of material on record, we find that it is not in dispute that the cash discount received relates to early payment for the purchases made for the raw materials. Such a discount has gone to reduce the cost of the purchases of raw materials, hence the discount received on the purchases of raw materials is directly attributable to the trading account and therefore, it is part of the profit derived from export oriented undertaking. This is further clarified from sub-section (4) of section 10B. For the sake of ready reference sub-sections (1) & (4) are reproduced here under:- “10B. Special provisions in respect of newly established hundred per cent export-oriented undertakings.- (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or
9 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 computer software, as the case may be, shall be allowed from the total income of the assessee.
xxx xxx xxx xxx xxx xxx xxx xxx
(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.
The aforesaid provisions stipulate that, deduction under section 10B shall be computed by apportioning the profits of the business of the undertaking in the relation of turnover to the total turnover. Though, section 10B refers to profits and gains as derived by a 100% EOU, yet the manner of determining such eligible profits has been provided in sub- section (4) of section 10B. As per the formula prescribed therein, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Under this sub-section, it is not required that assessee should establish a direct nexus with the business of an undertaking albeit, once an income forms part of the business of the undertaking then the same would be included in the profits of the business of the undertaking. Here in this case, once it is admitted that, cash discount goes to reduce the cost of the purchase which in turn has direct impact on the income which is part of the business of the eligible undertaking then there is no further mandate in the provision of section 10B to exclude the same from the eligible profits. In any case, once this issue has been allowed in favour of the assessee by the Assessing Officer in the earlier two years, then as a matter of consistency the
10 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 same is to be allowed in this year also, specifically when no contrary law has been brought to our notice. Accordingly, ground No.2 is treated as allowed.
In ground No.3, the assessee has challenged disallowance under section 10B of Rs.8,91,809/- in respect of ‘Miscellaneous credit balance written back’. The assessee has credited a sum of Rs. 8,91,809/- in respect of miscellaneous credit balance written back which it had included as part of its eligible income for deduction under section 10B. The assessee’s case before the AO was that, these balances written back had arisen on account of difference in quantity / quality and being direct relation with the purchases as they go to reduce the coast of the purchases. It was accordingly, contended that, the deduction under section 10B on this account cannot be disallowed. The Ld. Assessing Officer held that, the immediate source of accrual of the credit of Rs.8,91,809/- is on account of writing off the purchases liabilities and not on account of exports per se. Therefore, these receipts cannot be included as part of the eligible profits for claiming deduction under section 10B. Even if it goes to reduce the cost of the purchase and ultimately to the trading receipts, then also it does not qualify for deduction under section 10B as it cannot be said to be derived from immediate source of exports. Accordingly, he disallowed the claim of deduction on this amount. This has been confirmed by the Ld. CIT (A) also.
Before us, the Ld. Counsel submitted that, in the AYs 2009-10 and 2010-11, the AO has himself allowed the claim
11 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 of deduction on this ‘miscellaneous credit balance written back’ after raising the specific query in his order passed under section 143(3). Not only that, the Tribunal in assessee’s own case for the assessment year 2002-03 in ITA No.3015/Mum/2006 order dated 05.06.2013 have allowed the same in the context of section 80IB which would be applicable for section 10B also. On the other hand, Ld. DR strongly relied upon the order of the Assessing Officer and CIT (A).
We have heard the rival submissions and also perused the relevant material and impugned orders placed on record. Here again, it is an undisputed fact that, this amount represents purchases which were not payable to various parties and it goes to reduce the cost of purchases, directly affecting the trading account. The Assessing Officer himself has admitted that these amount go to reduce the cost of purchase and is on account of the trading receipts, however, he has denied the claim of deduction mainly on the ground that, it is not a direct source of export income. As discussed above, section 10B stipulates that, deduction under the section shall be computed by apportioning the profits of the business of the undertaking in the relation of turnover to the total turnover. Though, section 10B refers to profits and gains as derived by a 100% EOU, yet the manner of determining such eligible profits has been provided in sub-section (4) of section 10B. As per the formula prescribed therein, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Once the income forms the part of the business
12 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 undertaking, the same would be included in the profits of the business of the undertaking. Here in this case, once it is admitted that, it goes to reduce the cost of the purchase and directly affects the income which is part of the business of the eligible undertaking, then there is no further mandate in the provision of section 10B to exclude the same from the eligible profits. Thus, we do not agree with the finding of the Assessing Officer as well as CIT (A) that it does not form the part of the profits of the business of the undertaking. Moreover, in the earlier years, as pointed out by the Ld. Counsel, this issue has been decided in favour of the assessee by the Assessing Officer himself and the Tribunal too in context of section 80IB has allowed the same. Thus, we hold that assessee is eligible for deduction u/s 10B on this income and accordingly, ground raised by the assessee is allowed.
In ground No.4, the assessee has challenged disallowance under section 10B in respect of scrap sales. The assessee had received sum of Rs.31,87,998/- on account of scrap sales which it had included as part of its eligible profits for deduction under section 10B. The assessee’s contention was that, these receipts from sale of scarp has direct relationship with the purchases as they have gone to reduce the consumption of raw materials and also the cost of the manufacturing. Thus, it was contended that the same should be allowed as deduction. However, the Assessing Officer disallowed the same on the ground that the scrap sale of Rs.31,87,998/- is not eligible for claiming deduction under section 10B and in support, he relied upon the following decisions:-
13 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 a. CIT v. Madras Motors Ltd. 257 ITR 60;
b. CIT Vs. Ashok Leyland Ltd., 297 IIR 107 (Mad); and
c. Sajjan India Ltd., Mumbai vs Assessee in ITA Nos. 6727 and 6728 and 7091 7092 dt. 10 August, 2012. 14. This has been confirmed by Ld. CIT(A) on the ground that, sale of the scrap in the local market has nothing to do with the export.
Before us, it has been submitted by the ld. Counsel that firstly, this issue has been decided in favour of the assessee by the Tribunal in assessee’s own case for the assessment year 2002-03 in ITA No.3015/Mum/2006 vide order dated 05.06.2013 and again this has been accepted by the Assessing Officer in the scrutiny proceedings after raising specific query in the assessment years 2009-10 and 2010-11. On the other hand, Ld. DR strongly relied upon the order of the Assessing Officer and CIT (A).
We have considered the rival submissions and gone through the relevant finding given in the impugned orders. First of all, the decisions as cited by the Assessing Officer are not relevant to the facts of the present case and moreover the sale of scrap is generated on account of manufacturing activity of the assessee and has a proximate relationship to its trading account, because the assessee has reduced the cost of manufacturing which directly affects the income of the business of the undertaking. Our finding given qua the ground no.2 and 3 will apply here also. Further in earlier years as stated by ld. counsel the sale of scrap has been allowed as deduction by the Department and by the Tribunal
14 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 and therefore, as a matter of consistency in this year no divergent view can be taken and hence we direct the AO to allow the deduction u/s 10B on sale of scrap. Accordingly, ground no. 4 is treated as allowed.
In ground No.5, assessee has challenged the disallowance in respect of ‘insurance claim written back’ in respect of section 10B for sums amounting to Rs.11,29,423/-, contending that the same forms part of business income of Lote Unit.
At the outset, the Ld. Counsel submitted that, here it is not a case of insurance claim written back but loss of raw materials which again relates export business eligible for deduction under section 10B of the Act. This fact, he submitted that was not been properly represented and adjudicated, therefore, this matter should be restored back to the file of the Assessing Officer to examine the same afresh. A short write up on this point has also been submitted before us in support of the contention raised before us, which is reproducincome and treated by the Assessing Officer as not derived from the eligible undertaking solely on the ground of the above referred accounting entry. It is the case of the assessee that the lower authorities have not properly understood the accounting entry. “3. As regards the insurance claim written back, it is submitted that the Assessing Officer has found an amount of Rs.11,29,423/- as insurance claim receivable reduced from the total of the expenditure on the debit side of the Profit & Loss account. It is the case of the assessee that this credit has arose due to
15 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 corresponding debit given in the account of insurance claim receivable account. The corresponding debit amount is appearing on the asset side of the balance sheet. It is submitted by the assessee before the lower authority that the amount has been considered as income and treated by the Assessing Officer as not derived from the eligible undertaking solely on the ground of the above referred accounting entry. It is the case of the assessee that the lower authorities have not properly understood the accounting entry.
It is submitted before Your Honours that if the accounting entry is properly appreciated there would not be any occasion to make any disallowance. It is submitted that the journal entry passed in the books is revenue neutral. It is submitted that in the interests of justice and in order to cause a proper verification as well as appreciation of the facts the matter may kindly be set aside to the file of the Assessing Officer with a direction to decide the issue as per the law de novo”
Ld. DR submitted that before the AO as well as CIT (A), assessee has stated that is in respect of insurance claim written back and no such plea or fact was placed before them. However, he agreed that in case the actual fact has not been placed, then mater should be restored back to the file of the Assessing Officer for fresh examination.
After considering the submissions of the Ld. Counsel, we are of the opinion that this issue needs to be remanded back to the file of the Assessing Officer for proper examination and ascertainment of proper facts, whether the receipts of Rs.11,29,423/- is on account of loss of raw material or it is in respect of insurance claim written back. The Assessing Officer
16 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 shall decide the issue accordingly, after giving opportunity to the assessee to represent its case. Accordingly, ground No.5 is allowed for statistical purposes.
Ground No.6 is stated to be general in nature and hence no adjudication is required.
In ground Nos. 7 to 11, the assessee has challenged various disallowances made under section 40(a)(i) to the payments to various parties abroad, the details of which are as under:- Sr. Purpose of payment for gain Amount No. Rs. I Process charges paid to M/s Neutorn Products Inc of USA. 17,30,158 Ii European Chemicals Agency Registration fee Reimbursed to M/s Sustainability Support 20,83,203 Services, Sweden. iii Subscription for chemical pricing data and Petrochemical reports paid to M/s Reed Business Information Credit Services, UK. 36,146 Iv Subscription for chemical pricing data and petro- chemical reports paid to M/s Plants in UK and USA. 16,100 V Product report charges (NPB reports) reimbursed to M/s Shenzhen Zero Power Intelligence Co Ltd, 1,46,672 China
Before us, the Ld. Counsel submitted that in ground No.12, the assessee has taken the plea that, even if such disallowances are upheld then such an enhancement will only go to increase the profit of the undertaking and accordingly, the deduction under section 10B has to be allowed on this enhanced income. This proposition he contended that, is duly supported by the decisions of the Hon’ble jurisdictional High Court in the case of CIT vs. Gem Plus Jewellery India Ltd, reported in [2011] 330 ITR 175 (Bom) and same has been
17 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 followed and reiterated again by the Hon’ble Bombay High Court in the case of CIT vs Ntrance Customer Services Pvt. Ltd, in Income Tax Appeal No.1725 of 2013, order dated 24th November, 2015, wherein disallowance of 40(a)(i) was held to be eligible for deduction under section 10A following the ratio laid down in the case of Gem Plus Jewellery India Ltd. (supra).
On the other hand, Ld. DR relied upon the order of the Assessing Officer and CIT (A) and submitted that, such a disallowance should be examined independently and any such disallowance cannot entail deduction u/s 10B.
After considering the rival submissions on this preliminary plea taken by the ld. Counsel and the decisions of the Hon’ble jurisdictional High Court as relied upon by him, we find that, in the later case, that is, CIT vs. Ntrance Customer Services Pvt. Ltd (supra) the following substantial question of law was formulated by the Hon’ble Court:- “(i) Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in not appreciating that the disallowance u/s 40(a)(ia) has been enacted by the legislature to discourage non deduction of at tax source and by allowing deduction u/s 10A on the disallowance, the very purpose of this enactment by legislature would be defeated?
The Hon’ble High Court has dealt with this issue in the following manner:- The grievance of the Revenue is that the entire object of Section 40(a) (ia) of the Act is to discourage an assessee from not deducting tax at source and, therefore, where the expenditure has been dis-allowed, the dis-allowed
18 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 expenditure must suffer tax. Therefore, the benefit of deduction under Section 10A of the Act cannot be extended to such income, which is a result of disallowance. It is further submitted that the decision of this Court in Gem Plus Jewellery India Ltd. (Supra), would have no application as it dealt with the situation of the disallowance under Section 43- B of the Act and not under" Section 40 (a) (ía) of the Act. On a specific query, Mr. Suresh Kumar; learned Counsel for the Revenue, on instructions, informs us that the entire income of the Respondent Assesses is only on account of activity entitled for deduction under Section 10 A of the Act.
The grievance made by the Revenue in fact stands concluded b the decision of this Court in the case of Gem Plus Jewellery India Ltd. (Supra), where disallowance of expenditure under Section 43-B of the Act was added to the income of the Assessee therein but deduction under Section IIOA of the Act was sought to be denied to the extent of disallowed expenditure. This Court did not accept the Revenues contention in its appeal in Gem Plus Jewellery India Ltd. (Supra) by making following observations :- "12. .... 'The disallowance of the provident fund / ESIC payments has been made because of the statutory provisions - Section 43B in the case of the employer's contribution and section 36(v) read with section 2(24) (x) in the case of the employee's contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the Assessing Officer is an increase in the 1OA the addition made on account of the disallowance of the provident fund / ESIC payments ought to be ignored cannot be accepted No statutory provision to that effect having been' made, the plain consequence of the 4isallowance made by the Assessing Officer must follow. The second question shall accordingly, stand answered against the revenue and in favour of the assessee".
(emphasis supplied) 8. In the present case also, the plain consequence of disallowance of the expenditure would be to add back the disallowed expenditure to the Respondent -Asses sees
19 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 income. The entire income of the Respondent-Assessee is attributable to the activity of export of computer softwares and is entitled to deduction under Section 10A of the Act. In the circumstançhe disallowed expenditure, becomes a part of the incorne derived from the activity of export of software and entitled to the deduction under Section 10-A of the Act. In these circumstances, as the issue stands concluded by the decision of this Court in the case of Gem Plus Jewellery IndiaL'(Supra) against the Revenue and in favour of the Respondent assessee, no substantial question of law arises for our consideration”.
Here in this case also, the disallowance on account of various payments will only go to increase the profit of the assessee derived from the business undertaking of EOU. The consequence of such a disallowance of expenditure would only add back to the income and, therefore, such an enhanced profit would be entitled/ eligible for deduction under section 10B. Thus, respectfully following the decisions of jurisdictional High Court, we hold that, even if the disallowances under section 40(a)(i) are confirmed, then assessee would be entitled for deduction under section 10B on the disallowed expenditure and consequently on the enhanced income. Thus ground no. 12 is allowed.
In view of our finding given above, the various disallowances under section 40(a)(i) on account of various payments as incorporated above as taken in ground no. 7 to 11 will become academic and hence, no adjudication is required and accordingly, ground nos. 7 to 11 stands dismissed.
20 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 28. In ground No.13, the assessee has challenged the disallowance made on account of mismatch of income from AIR database 26AS of Rs.92,553/-. Before us, the Ld. Counsel submitted that, the Assessing Officer has not given any details or the information received from AIR database. As per the information, the assessee had received interest of Rs.35,545/- from M/s. Mehta Petro Refinery and Rs.6,52,677/- from State Bank of India. The Assessing Officer noted that, the assessee has only credited interest amount of Rs.5,60,124/- received from the State Bank of India and balance interest has not been shown and accordingly, difference amount was added him.
The Ld. CIT(A) partly confirmed the said amount of Rs.92,553/- which could not be reconciled by the assessee.
After hearing both the parties, we are of the opinion that, Assessing Officer should first of all give all the relevant information to the assessee as received from AIR data base and once the entire information has been provided along with the details, then assessee should be required to reconcile the same. Accordingly, we are remanding this matter back to the file of the Assessing Officer, who will first provide the entire details relating to the amount paid by the parties to the assessee and then AO will give opportunity to the assessee to reconcile and explain the same and thereafter he shall examine and decide the issue accordingly. Thus, ground No.13 is allowed for statistical purposes.
Ground No. 14 relates to disallowance under section
21 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 14A while computing the book profit under section 115JB. It has been admitted by both the parties that this ground is consequential to ground No.1 and accordingly the same is dismissed as in fructuous.
In Revenue’s appeal following grounds have been raised:- “1. Whether on the facts and in the circumstances of the case and in law, was the Ld. CIT(A) justified in deleting the disallowance of notional income amounting to Rs. 39,60,676/- gained on account of restatement of liabilities which arises only when an assessee follows a particular method of accounting which has no direct or immediate nexus with the export made which should have been excluded from computing deduction under section 10B of the I.T. Act, 1961.
Whether on the facts and in the circumstances of the case and in law, was the Ld. CIT(A) justified in deleting the disallowance of Rs.37,82,474/- arising on actual payments / receipts made in foreign currency during the year which did not form part of the profits of the eligible undertaking and should have been excluded from computing deduction under section 10B of the I.T. Act, 1916.
Whether on the facts and in the circumstances of the case and in law, was the Ld. CIT(A) justified in deleting the disallowance of Rs.1,77,43,147/- relying on the decision of Hon’ble ITAT in assessee’s own case for AY 2003-04 and AY 2004-05 where the issue of foreign exchange gain was in fact not subject matter of appeal. The said issue was subject matter of appeal for AY 2002-2003 which was not agitated further only due to low tax effect”.
The main issue raised are with regard to disallowance under section 10B in respect of foreign exchange fluctuation. The AO noted that, the assessee had shown income earned by way of foreign exchange fluctuation of Rs.1,77,43,147/-, break-up of which are as under:-
22 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 a Notional gains arising on restatement of liabilities at the year end amounting to: Rs.1,39,60,676 b Gains arising on actual payments or receipts made in foreign currency during the year: Rs. 37,82,474 Total gains earned on account of foreign exchange Fluctuation: Rs.1,77,43,147
The Assessing Officer has disallowed the same on the ground that it is not arising on account of export per se which are fixed amount on billed amount and cannot be held arising on account of foreign exchange fluctuation.
The Ld. CIT(A) has allowed the same by holding that, in the present case the gain on foreign exchange fluctuation has undertaken from direct export made by the assessee, therefore, the same is eligible for deduction.
Before us, it has been submitted by the ld. counsel that, in the AYs 2009-10 and 2010-11, the Assessing Officer has himself allowed the same after raising a specific query and moreover, the Tribunal in assessee’s own case for the AY 2002-03 (supra) has also decided the issue in favour of the assessee. Ld. DR however, relied upon the order of the AO.
After hearing both the parties and on perusal of the relevant finding given in the impugned orders as well as material placed on record, we find that first of all, it is an undisputed fact that foreign exchange fluctuation has arisen out of export activity carried out by the assessee, which is its primary activity. If the gain has arisen on account collection of export proceeds then it has a direct nexus with the business carried out by the assessee and also is inextricably
23 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 linked to the profits of the business of the undertaking and consequently assessee is entitled for claim of deduction under section 10B. The reasons given by us in the assessee’s appeal with regard to allowability of claim under section 10B will also apply here on this issue also. Moreover, the Tribunal in assessee’s own case in the context of section 80IB has allowed the similar claim and same ratio will apply mutatis mutandis in the context of 10B also. Accordingly, the order of the CIT(A) in deleting the disallowance is upheld and grounds raised by the revenue stands dismissed.
In the result, assessee’s appeal stands partly allowed for the statistical purpose and that of the revenue stands dismissed.
Order pronounced in the open court on 22nd September, 2016.
Sd/- Sd/- (राज�) (अिमत शु�ला) लेखा सद�य �याईक सद�य (RAJENDRA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 22nd September, 2016. ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT (Appeal) –18, Mumbai. 4) The CIT-8, Mumbai 5) िवभागीय �ितिनिध “एल”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “L” Bench, Mumbai. 6) गाड� फाईल \
24 वन�त ओग�नी�स �ल�मटेड Vanati Oprganics Ltd ITA 7177/Mum/2014 ITA 7776/Mum/2014 Copy to Guard File. आदेशानुसार/By Order / / True Copy / / उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, मुंबई Dy./Asstt. Registrar I.T.A.T., Mumbai *च�हान व.िन.स *Chavan, Sr.PS