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Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH
Before: Shri Rajpal Yadav & Shri Amarjit Singh
आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
This assessee’s appeal for A.Y. 2009-10, arises from order of the CIT(A)-III, Baroda dated 16-07-2013, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.
The assessee has raised following grounds of appeal:-
I.T.A No. 2338/Ahd/2013 A.Y. 2009-10 Page No 2 M/s. Sameer E-Clipe (Products) Pvt. Ltd. vs. ITO
“1. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of AO in not allowing deduction on income amounting to Rs 4,67,161/- U/s 10B of the Income Tax Act, 1961 . 2. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of AO in not allowing deduction on income amounting to Rs. 18,78,150/- U/s 10B of the Income Tax Act, 1961. 3. The learned commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of AO in holding that unabsorbed brought forward business loss is required to be set-off before allowing deduction U/s 10B of the Act. 4. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of AO in charging interest u/s. 234B of the Income Tax Act, 1961. 5. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of AO in charging interest u/s. 23 4C of the Income Tax 1961. 6. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of AO in initiating penalty proceeding u/s. 271(1)(c) of the Income Tax Act, 1961.”
The fact of the case pertaining to the issue in appeal is as under:-
During the course of assessment proceedings, the assessing officer observed that assessee has earned income of Rs. 30,44, 688/- on account of development/service charges included in the turn-over on which deduction u/s. 10B was claimed. The assessing officer asked the assessee why not exemption u/s. 10B should not be disallowed because development charge income is not directly attributable to the manufacturing activity. The assessee explained that such maintenance charges are related to product supplied and manufactured by the assessee, therefore, such income is a part of
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the export proceed in respect of good sold by the assessee. The assessing officer has not accepted the explanation of the assessee and concluded that the assessee was not eligible for exemption u/s. 10B of the act. The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has provided part relief to the assessee by observing as under:- “5.3. I have considered the facts of the case and submission made by the AR of the appellant. So far as development charges of Rs.11,66,538/- are concerned, during the course of appellate proceedings for the Assessment year 2008-09 in appeal No. CAB/III-167/2010-11, the appellant had submitted that the development charges consist of (i) development cost of tooling and (ii) income by way of maintenance charges of the products supplied by the appellant. No such bifurcation has been provided for the current year. But from the copy of the ledger account of miscellaneous income submitted by the appellant, it is seen that the income on account of tooling cost earned by the appellant is Rs. 6,99,377/-. In the appellate order for the A.Y 2008-09 dated 13/12/2012 in appeal 'no.CAB/IIM67/2010-11, I have held that deduction u/s 10 B is allowable on such income. Following the same, AO is directed the allowed deduction u/s 10 B on this income of Rs. 6,99,377/-. Accordingly, the respective expenditure spent for earning this income will also be taken into account while computing this deduction. 5.3.1 So far as balance amount of Rs. 4,67,161/- earned by the appellant and shown as development charges are concerned, these are not in the nature of development charges. Following the appellate order for the AY 2008-09, it is held that no deduction, u/s 10B is allowable on such expenditure. 5.3.2 So far as balance amount of Rs.18,78,150/- is concerned, this is in the nature of liquidated damages. The appellant has placed reliance on decision of IT AT, Ahrnedabad in ITA Nos. 1418 & 1450/Ahd/2006 in the case of Banco Products (India) Ltd, A copy of this order has also been furnished. In this decision, the issue involved was as to whether compensation received on account of failure of foreign supplier to supply the goods as per the schedule was business income or not and accordingly whether deduction u/s 80 HHC was allowable on this income or not. In the current appeal, the issue involved is as to whether compensation received on account of low order quantity can be said to have been derived from the 100% export oriented unit from the export of articles or things or computer software, or not. In this respect, Hon'ble MP High Court in its decision in the case of [2005] 144 TAXMAN 67 (MP). Commissioner of Income-tax v, Alpine Solvex Ltd., has held as follows:- "It was not in dispute that the sum claimed by the assessee to be in the nature of profit said to be derived from the industrial undertaking was not an amount earned directly by sale of its finished commodity manufactured in its undertaking/plant. In other words, the amount claimed was alleged to be received by the assessee from its supplier and purchaser not as a price/value of the goods but it was in the nature of compensation/damages on account of breach alleged to have been committed by them qua assessee in performance of contract. Thus, such sum could not be equated at par with actual profit which the assessee earned by sale of the finished goods. [Para 10]
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The assessee was entitled to claim deduction of that amount which it had derived as direct profit by sale of manufactured goods in its newly set up industrial undertaking. The object underlined in sections 80HH and 80-1 is to give incentive to the assessees who, earn/derive income from their actual manufacturing activity, i.e., by sale of their products. Any indirect or incidental profit cannot be regarded as profit earned out of main business activity. It has to be taxed as an income earned from other sources as defined under section 56(1) read with section 14(f) [Para 11] The words derived from as used in section 80HH/80-I have got to be given restricted meaning and, hence, such type of earning (even assuming it to be genuine) cannot be included within the meaning of expression 'profit/gains derived from industrial undertaking'. [Para 12] Therefore, the view taken by the Tribunal could not be accepted. In that view of the matter, the appeal succeeded and was allowed." 5.3.2.1 This decision has been followed by ITAT, Mumbai Bench in its decision in the case of [2012] 23 taxmann.com 407 (Mum.)/ Deputy Commissioner of Income-tax, 8(2) v. Parekh Plast India (P.) Ltd. 5.3.3 Following these decision the claim of the appellant is rejected and accordingly no deduction u/s 10 B is allowed on account of such receipt of commitment damaged compensation. The appellant, has further requested that only net income may be reduced. But it has not furnished any detail of expenses incurred for earning such compensation except for mentioning a lumpsum figure. Hence, such request is also rejected.”
Third ground of appeal is against decision of the Ld. CIT(A) that unabsorbed brought forward business loss to be set off before allowing deduction u/s. 10B of the act. The assessing officer has shown carry forward losses of Rs. 6,10,629/- for assessment year 2003-04 and out of the same Rs. 1,72,029/- was claimed as set off against short term capital gain and income from domestic sale and remaining loss of Rs. 4,38,600/- was claimed to be carried forward to the next year. The assessee claimed exemption u/s. 10B of the act without setting off the carry forward business losses which was found by the assessing officer not allowable on the ground that the assessee has sufficient positive income from business and it should have set off the complete amount of unabsorbed loss against the business income. In the appellate proceedings, the ld. CIT(A) has
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sustained the disallowance made by the assessing officer by observing as under:- “7.3. I have considered the facts of the case and submission made by the AR of the appellant. The decisions relied upon by the appellant in the case of M/s. Black & Veatch Consulting Pvt. Ltd. (supra) and M/s. Yokogawa India Ltd. (supra) are pertaining to section IDA of the IT Act, 1961 and hence are not applicable here. The decision in the case of Hindustan Unilever Ltd. (supra) pertains to section 10B of the IT Act, 1961 but in this case the issue involved here was as to whether loss sustained by an export oriented unit can be set off against normal business income or not. Thus, this decision is also not applicable here. On the contrary, in following decisions, it •has been held that unabsorbed depreciation brought forward to the current year has to be set-off first against the income of the current year before computing deduction u/s. 10B: (i) Himalsingika Seide.Ltd, 286 ITR 255 (Kar), (ii) Patspin India Ltd, 203 Taxman 47 (Ker) Accordingly, following these decisions, the action of the AO is upheld and this ground of appeal is dismissed.”
During the course of appellate proceedings it was brought to our notice that ground no. 1 of the assessee was decided against it in the case of the assessee for the assessment year 2008-2009 by the co-ordinate bench of the ITAT vide ITA 506/Ahd/2013. Regarding ground no. 2, the Ld. counsel has placed reliance on the decision of Co-ordinate Bench of the ITAT in the case of Banco Product India Ltd vide ITA No. 1418 & 1450/Ahd/2016 as per page no. 109 of the paper book. On the other hand, ld. departmental representative supported the order of ld. CIT(A). The ld. counsel has contended that deduction u/s 10B is to be allowed before set off of brought forward business losses and unabsorbed depreciation and stated that this issue was decided in favour of the assessee by the decision of hon’ble supreme Court in the case of CIT vs. Yokagawa India (2017) taxmann.com 41 (SC).
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We have heard both the sides and perused the material on record carefully. We have noticed that ground no. 1 of the assessee was decided against it in the case of the assessee itself for the assessment year 2008-2009 by the co-ordinate bench of the ITAT vide ITA 506/Ahd/2013 wherein it was held as under:- “7. The Id. counsel for the assessee, thereafter, made reference to the order of the IT AT, Ahmedabad in the case of Lubrizol Advanced Materials India P. Ltd. (supra) and IT AT, Mumbai Bench in the case of Jewelex International P. Ltd. (supra). The ratio in both these decisions is also to the similar effect. On due consideration of the facts of the present case, in the light of the above decisions, I find that in all these decisions, the income might not been derived by the assessee from manufacturing, but was assessed as business income. For example, in the case of CIT Vs XLNC Fashions, ITA No.438 of 2014 referred by the Hon'ble Delhi High Court receipts related to DEPB benefits. The Hon'ble Court has observed that such receipts are to be treated as profit derived from business of the undertaking. In the present case, the income of the assessee from maintenance or services was not assessed as its income from business. It has been assessed as "income from other sources". It has also to be kept in mind that the assessee has nowhere pleaded that service was only provided on the items sold by it. Therefore, to my mind, the Id.Revenue authorities have rightly rejected the claim of the assessee. I do not find any error in the order of the Id.CIT(A). The appeal of the assessee is dismissed.”
Respectfully following the decision of the coordinate bench on the issue the ground no.1 of the assessee is dismissed. Regarding ground no. 2, we have perused the decision of the Co-ordinate Bench of the ITAT in the case of Banco Product India Ltd vide ITA No. 1418 & 1450/Ahd/2016 as per page no. 109 of the paper book wherein at para 4 to 6 it was held as under:-
“4. The next common issue in these appeals is against the order of CIT(A) in restricting the deduction u/s.80HHC on the net amount of compensation after reducing the net from the business profit. 5. After hearing the rival contentions and going through the facts and circumstances of the case, we find that the assessee-company received compensation from overseas supplier as per the order of Tribunal in litigation at Great Britain (UK). This amount was received with respect to some dispute arose
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in connection with the supply of raw materials. The Assessing Officer held that the compensation received from an overseas supplier cannot be considered as business income as this amount was received with respect to the some dispute arose in connection with the supply of raw material and by no stretch of interpretation it can be regarded as income derived from the business activity of the assessee. In view of discussion, the Assessing Officer treated the compensation received by assessee as other receipts. The CIT(A) treated this compensation business income by holding that the transaction of purchase of raw materials was in the normal course of business and compensation received is for default of the supplier in supplying the raw materials. Accordingly, CIT(A) directed the Assessing Officer to re-compute the deduction u/s.80HHC by excluding only net income and not the gross in view of clause (baa) to this Section. Aggrieved, both came in appeal before us. 6. We find that compensation is received on account of failure of the foreign supplier to supply the goods as per the schedule for shipment. The goods were not supplied despite the schedule of shipment was revised and therefore the assessee had to procure the material from the open market in order to prevent interruption of production and for this the assessee had to pay higher cost than what was agreed with the original supplier. That the assessee made total claim of US $ 3,4000 out of which US $ 2,08,257 represent cost incurred in respect of excess price paid to buy copper from alternative source and the balance was on account of interest and legal costs. We find that the arbitrator finally settled the claim of US $ 1,00,000 which the assessee claims is nothing but reimbursement of expenses incurred for buying materials from open market and towards interest and legal expenses. In view of the above facts, we are of the view that the compensation is finally settled by arbitrator on account of reimbursement of expenses incurred for buying materials from open ITA Nos.1418, 1450/Ahd/06; 3 & 89/Ahd/07, 877/Ahd/09 & CO 80/A/09 Page 4 Banco Products (I) Ltd. v. ACIT & DCIT Cir-1(1) BRD AYs 02-03, 03-04 & 05-06 market, interest and legal expenses, these are nothing but receipts directly related to export business, hence, nothing is to be excluded from the profits of business in view of clause (baa), while computing deduction u/s.80HHC of the Act. Accordingly, this issue of the Revenue's appeal is dismissed and that of the assessee is allowed.” After considering the decision of the coordinate bench on the identical matter we are not inclined with the findings of the Ld. CIT(A), therefore, the appeal of the assessee is allowed on this issue. Regarding third ground of appeal of the that deduction u/s 10B is to be allowed before set off of brought forward business losses and unabsorbed depreciation. In this connection, we observed that this issue is covered in favour of the assessee by the decision of hon’ble
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supreme Court in the case of CIT vs. Yokagawa India (2017) taxmann.com 41 (SC). Therefore, we observed that the deduction under section 10B of the Act would be allowed to the assessee in the first instance before allowing the adjustment on account of brought forward depreciation losses, and in case there are any leftover profits, then, the same are to be adjusted against brought forward unabsorbed depreciation/loss as claimed by the assessee in its return of income. The grounds of appeal no.4 to 6 are consequential not required any adjudication.
In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 23-11-2017
Sd/- Sd/- (RAJPAL YADAV) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 23/11/2017 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद