ADDL CIT 8(3), MUMBAI vs. SULHUR MILLS LTD, MUMBAI

आयकर आयकर आयकर अपीलीय आयकर अपीलीय अपीलीय अिधकरण अपीलीय अिधकरण अिधकरण,“ “ “ “ ई” ” ” ” खंडपीठ अिधकरण खंडपीठ खंडपीठ मुंबई खंडपीठ मुंबई मुंबई मुंबई INCOME TAX APPELLATE TRIBUNAL,MUMBAI-“ E”,BENCH सव�ी राजे��, लेखा सद�य एवं एवं संदीप गोसांई, �याियक सद�य एवं एवं Before S/Sh. Rajendra,Accountant Member & Sandeep Gosain,Judicial Member आयकर आयकर अपील अपील संसंसंसं/.ITA No.8846 /Mum/2010 , िनधा�रण िनधा�रण वष� वष�/Assessment Year-2006-07 आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� Addl. CIT-8(3) Sulphur Mills Ltd. Room No.217, Ayakar Bhavan Vs. 604/605, 349 –Business Point M.K. Marg, Western Highway Express Mumbai-400 020. Andheri (E),Mumbai-400 069. PAN No.AABCS 8736 K (अपीलाथ� /Assessee ) (��यथ� / Respondent) आयकर आयकर अपील अपील संसंसंसं/.ITA No.9186 /Mum/2010 , िनधा�रण िनधा�रण वष� वष�/Assessment Year-2006-07 आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� Sulphur Mills Ltd. Addl. CIT-8(3) Mumbai-400 069. Vs. Mumbai-400 020. (अपीलाथ� /Assessee ) (��यथ� / Respondent) िनधा�रती िनधा�रती ओर ओर सेसेसेसे/Assessee by :Sh. K.S. Chokshi & Ms. M.R. Patel - ARs िनधा�रती िनधा�रती ओर ओर राज�व क� ओर से/ Revenue by :Sh. Aarsi Prasad-DR सुनवाई सुनवाई सुनवाई क� सुनवाई क� क� तारीख क� तारीख तारीख / Date of Hearing : 17- 11 -2015 तारीख घोषणा क� तारीख / Date of Pronouncement : 01.01.2016 आयकर आयकर आयकर अिधिनयम आयकर अिधिनयम अिधिनयम,1961 क� अिधिनयम क� क� धारा क� धारा धारा 254(1)केकेकेके अ�तग�त धारा अ�तग�त अ�तग�त आदेश अ�तग�त आदेश आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dt.6.10.10 of CIT(A)-18,the Assessing Officer (AO) and the assessee have filed cross appeals raising various grounds of appeal. Assessee-company,engaged in the business of manufacturing of sulphur products and agro- chemicals filed its return of income on 14.11.2006 declaring total income of Rs.7.93 crores.The AO completed the assessment on 24.12.2008 u/s. 143(3) of the Act determining the income of the assessee at Rs.10.54 crores. ITA 8846/Mum/2010 Assessment year 06-07(Revenue’s appeal): 2.First Ground of appeal raised by the AO deals with disallowance of Rs.18.59 lacs made under section 40(a)(ia) of the Act with regard to deduction claimed u/s. 10(B) of the Act. During the assessment proceedings the AO found that the assessee had added expenses of Rs.18,59,902/-inadmissible u/s. 40(a)(ia) for the year under appeal pertaining to the EOU for the purposes of computation of deduction admissible u/s.10B of the Act, that it had reduced disallowance of Rs.17.67 lacs made in the earlier AY, which was admissible in view of the subsequent payment.As per the AO the assessee had increased deduction admissible u/s.10B, that the same expenses were to be considered for deduction in subsequent AY, that it would affect the deduction at least for one year when the assessee would no longer remain eligible for deduction, he disallowed an amount of Rs.18.59lacs while computing the assessment. 2.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA).Before him,it was argued that the AO had made the disallowance on the presumption that the year under appeal was last year for claiming deduction, that it was 5th year of claiming deduction,that the presumption of AO was factually incorrect.After considering the submission of the assessee and the assessment order, the FAA held that the assessee did not deduct and pay TDS in time on expenses of Rs.18.59 lacs, that the expenses were added back in computation,that the income thereby was enhanced on which deduction

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u/s. 10B was claimed, that the AO was not justified in denying the deduction,that the claim made by the assessee would reduce deduction in the subsequent AY.He directed the AO to allow deduction claimed by the assessee. 2.2.Before us,the Departmental Representative(DR)supported the order of the AO.On a query by the Bench,he fairly conceded that this was not the last year for claiming deduction u/s.10B.The Authorised Representative (AR) relied upon the order of the FAA.He referred to the case of S.B. Builders and Developers(45 SOT 335)and Gem Plus Jewellery India Limited (233CTR240)and Pyramid Entek Pvt. Ltd.(ITA 6186-6400/Mum/2012 AY.09-10 dt.10.7. 2014). 2.3We have heard the rival submissions and perused the materials before us. We find that in the case of S.B. Builders and Developers(supra), the issue has been decided in favour of the assessee.In the case of Pyramid Entek Pvt. Ltd.(supra),similar issue had arisen.After conside -ring the rival submissions the Tribunal had decided the issue as under : “ 7. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. Without going into the issue of correctness of disallowance under section 40(a)(ia) we find that even the amount in question is liable to be disallowed under section 40(a)(ia), the same would be eligible for deduction under section 10B as it would increase the eligible profits of the assessee. CIT(A) has relied upon the decision of ITA No. 6186/M/12 &ITA No.6400/M/12 AY: 2009-10 5 Hon'ble Jurisdictional High Court in the case of Gem Plus Jewellery India Ltd. (supra), wherein while deciding the question of granting of exemption under section 10A on the enhanced income due to disallowance of employers as well as employees contribution towards PF/ESIC, the Hon'ble Jurisdictional High Court has held in para-12 as under :- “12. By reason of the judgment of the Supreme Court in CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306 the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the Assessing Officer has not, the Court is informed, been challenged by the assessee. As a matter of fact the question of law which is formulated by the revenue proceeds on the basis that the assessed income was enhanced due to the disallowance of the employer's as well as the employees' contribution towards Provident Fund/ESIC and the only question which is canvassed on behalf of the revenue is whether on that basis the Tribunal was justified in directing the Assessing Officer to grant the exemption under section 10A. On this position, in the present case it cannot be disputed that the net consequence of the disallowance of the employer's and the employee's contribution is that the business profits have to that extent been enhanced. There was, as we have already noted, an add back by the Assessing Officer to the income. All profits of the unit of the assessee have been derived from manufacturing activity. The salaries paid by the assessee, it has not been disputed, related to the manufacturing activity. 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 business profits of the assessee. The contention of the revenue that in computing the deduction under section 10A 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 disallowance made by the Assessing Officer must follow. The second question shall accordingly, stand answered against the revenue and in favour of the assessee.” Since the CIT(A) has followed the above decision of Hon'ble Jurisdictional High Court while granting the deduction under section 10B in respect of disallowance made under section 40(a)(ia) therefore, we do not find any error or illegality in the order of CIT(A) qua this issue. The ground raised by the revenue has accordingly become academic in nature. 8. In the result assessee’s appeal is allowed and revenue’s appeal is dismissed.” 2

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Respectfully following the above, we decide Ground No.1 against the AO. ITA No.9186/M/2010 Assessment year 06-07(Assessee’s appeal): 4.During the course of hearing before us the AR did not press Ground.No.1 and 3. With regard to Ground No.5, he stated that considering the smallness of tax effect the assessee was not interested in pursuing the same.Hence, grounds No.1, 3 and 5 stand dismissed as not pressed.He further stated that Gr.No.4 was consequential in nature and was not to be adjudicated. 5.Gr.No.2 is about deduction u/s.10B of the Act.During the assessment proceedings,the AO found that the assessee had claimed deduction u/s.10B in respect of EOU at Panoli amounting to Rs.5.89 crores,that it had earned interest in the EOU under the heads Interest received for customers(Rs.12,648/-),Interest on FDR with Bank of India (Rs.31.97 lacs) and Interest on deposits(Rs.11.93 lacs). He directed the assessee to explain as to why deduction u/s.10B in respect of interest income should not be disallowed.After considering the submission of the assessee, the AO held that the interest receipts were not derived from exports.He referred to the cases of Cambay Electrical Supply Industrial Company.Ltd. (113 ITR 84), Sterling Foods and Pandiyan Chemicals Ltd. (233 ITR 497),that the interest income could at best be said to have been attributable to the export,that same was not derived from the business of the assessee, that gross interest receipts were to be disallowed for calculating the deduction u/s. 10B of the Act.For the similar reasons incomes credited under the head ‘CSD refund receipt- (Rs.9.31lacs),handling charges(Rs.1.79 lacs),cheque bouncing charges(Rs.1.37 lacs), miscellaneous income(Rs.50,398/-) and sundry balances written back (Rs.4,00,738/-) were held not to be eligible for deduction u/s.10B.He was of the opinion that the incomes credited under above mentioned five heads were not derived from the EOU.As a result, he made a further addition of Rs.16.99 lacs. 5.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).After considering the submission of the assessee and the assess - ment order,the FAA held that the interest on deposit with bank for opening LOC was not derived from industrial undertaking and was not eligible for deduction u/s.10B. He referred to the case of Menon Impex Pvt. Ltd. 259 ITR 403.He also referred to the case of KK Doshi (245 ITR 849);CJ International(13SOT 280);Orchid Chemicals and Pharmaceuticals (97 ITD 277),Sovika Infotech Ltd.(19SOT412) and held that to claim deduction u/s. 10B of the Act, the income should have been derived from the export activity of the undertaking, that the AO had rightly disallowed the claim made by the assessee. 5.2.During the course of hearing before us the AR contended that section 10B was a self containing code,that no adjustment was permissible while calculating deduction u/s10B.He referred to the cases of Advance Detergent Ltd.(188 taxmann 15),Nirma Industries Ltd (153 taxmann 550);Hritnik Exports P.Ltd.(IT Appeal No.219 and 239 of 2014);Motorola India Electronics(46 taxmann .com167);Technocraft Industries(India)Ltd.(43 taxmann.com.110); Empire Pumps Pvt.Ltd.(IT Appeal no.187 of 2003);Lubrizol Advance Materials India (P.) Ltd.(42taxmann.com.263),Gem Plus Jewellery India Ltd(233CTR240). With regard to other five items the AR argued that the AO could not make any adjustment while computing the income as per the provision of section 10B,that the income was assessed as business income,that same could not be assessed as income from other sources,that the provisions of section 10B provided straight jacket formula and same had to be applied.He referred to the order of Century Textiles and Industries Ltd. (ITA 3926/Mum/2005-AY01-02dated 16.5. 3

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2012), Arvind Footwear (ITA 363/Luck/2010 order dt.27.8.13),Tessitura Monti India(P) Ltd. (ITA/7127/Mum/2010 AY05-06, dt.11.01. 2013).DR supported the order of the FAA.The Departmental Representative (DR) supported the order of the FAA. 5.3.We have heard the rival submissions and perused the material before us.We find that the AO had made the disallowance as he was of the opinion that the income earned by the under various heads was not derived from the activities of the industrial undertaking-though it could be attributable to the business activities of the assessee.We find that the issue of interest income accruing to the assessee has been dealt with by the Hon’ble Courts.They have held that Interest received for customers,Interest on FDR with Banks and Interest on deposits has to be taken as part of the business income of the assessee and is entitled for 10B deduction. We would like to refer to the cases of Advance Detergent Ltd.(supra),Nirma Industries Ltd (supra);Hritnik Exports P.Ltd.(supra);Motorola India Electronics (supra); Technocraft Industries(India)Ltd.(supra); Empire Pumps Pvt.Ltd.(supra);Lubrizol Advance Materials India (P.)Ltd.(supra) in our support.Now,coming to the other five items of income we would like to mention that the AO is not permitted to make any adjustments while computing the deduction u/s.10 A or 10B of the Act.Here,we would like to reproduce relevant portion of the order of Tessitura Monti India(P) Ltd.(supra) and same reads as under: “4.3 It would, thus, appear to us that the process of determination of quantum of profits derived by a 100% E.O.U. from the relevant exports would involve three steps. The section applies only to an eligible undertaking, i.e., a 100% E.O.U., receiving export proceeds in convertible foreign exchange. As such, the first step would be to ascertain if the assessee’s undertaking is an eligible undertaking u/s.10B. The profits of the business of the undertaking would be required to be computed as the second step, which represents the most crucial step. This is as it provides for the profits derived by an undertaking from the export of articles or things or computer software to be the profits of the business of the undertaking in a defined ratio, i.e., that of ‘ET’ to ‘TT’. The expression ‘profit of the business of the undertaking’ is not defined under the provision. One thing, however, is clear; that the third step, i.e., the adjustment by way of apportionment of such profit in the ratio of ‘ET’ to ‘TT’ is toward further limiting the profits of the business of the undertaking to that derived from exports only. This is as the eligible profits must be firstly derived by the undertaking and, secondly, from its exports (s. 10B(1)). And it is this, the third step, that sec. 10B(4) is toward. Also, as a 100% E.O.U is licensed to undertake only exports, the other element of TT would normally include either the export proceeds that are not brought into India within six months (or such extended period as may be allowed) or the sale proceeds of a part of its production that it could under the terms of the 100% EOU license sell in the domestic market, or the sale of other products (of the assessee’s undertaking) which arise incidentally to its operations in the domestic market. In fact, the second proviso to the provision is only by Finance Act 2002, w.e.f. 01/4/2003; its earlier version, since omitted, bearing a tolerance of up to 25% of the total sales for domestic turnover. Coming to the second step afore-said, the words ‘business of the undertaking’ are wider in ambit than the words ‘profit of the undertaking’ and could only have been so provided with a purpose. In our considered view, therefore, any profit which is derived from the business of the assessee’s undertaking would qualify to be the profits of the business of the undertaking, and upon suitable apportionment toward excluding as much of it as can be regarded as attributable to the domestic turnover or non-qualified exports, can be said to be the profits derived by the 100% E.O.U from exports, as contemplated in section 10B(1), and on which deduction there-under is to be allowed. All that was required, if not so, was to define the profits of the business to mean the profits of the eligible business as computed under the head ‘profits and gains of business or profession’. In other words, the word ‘derived’ would continue

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to control or guide the word ‘profits’ in the deduction provision, but the activity from which the same are derived is the economic activity that comprises the business of the eligible undertaking, rather than being restricted strictly to the eligible undertaking. As such, as long as a receipt is intimately and inextricably connected with the ‘business of the undertaking’, it cannot be excluded in reckoning the eligible profits u/s. 10B(1).” Considering the above,we decide ground no.2 in favour of the assessee. As a result,appeal filed by the AO stands dismissed and the appeal of the assessee stand partly allowed. फलतः िनधा�रती अिधकारी �ारा दािखल क� गई अपील नामंजूर क� जाती है िनधा�रती क� अपील अंशतः मंजूर क� जाती है. Order pronounced in the open court on 1st January, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 01 जनवरी,2016 को क� गई । Sd/- Sd/- (संदीप गोसांई/Sandeep Gosain ) (राजे�� / Rajendra) �याियक सद�य/Judicial Member लेखा सद�य/Accountant Member मुंबई Mumbai, �दनांक Date: 01.01.016 व.िन.स.Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1. Assessee /अपीलाथ� 2. Respondent /��यथ� 3.The concerned CIT(A)/संब� अपीलीय आयकर आयु�, 4.The concerned CIT /संब� आयकर आयु� 5. DR “ E” Bench, ITAT, Mumbai /िवभागीय �ितिनिध के खंडपीठ,आ.अ.�याया.मुंबई 6. Guard File/गाड� फाईल स�यािपत �ित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai.