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2007 (12) TMI 307 - AT - Income TaxDeduction under section 80HHC - Export oriented undertaking - Computation of the business Profits - 100 per cent EOU - Eligible for deduction u/s 10B - Prior period expenses and income - Whether the taxable portion of the profits of the 100 per cent EOU should be taken into consideration while computing the profits of the business in terms of Explanation ( baa ) to section 80HHC. Deduction under section 80HHC - exclusion of 90 per cent of the gross interest - HELD THAT - Identical view has also been taken in the case of Shri Ram Honda Power Equip 2007 (1) TMI 86 - HIGH COURT DELHI . In view of the settled position and respectfully following the decision we set aside the orders of the revenue authorities on this point and direct the Assessing Officer to work out the deduction under section 80HHC by excluding 90 per cent of the net interest. In view of our finding above ground No. 1 of the assessee s appeal is allowed and ground No. ( b ) of the Department s appeal is dismissed. Whether the taxable portion of the profits of the 100 per cent EOU should be taken into consideration while computing the profits of the business in terms of Explanation ( baa ) to section 80HHC - In our considered opinion the Assessing Officer should have also taken into consideration the 10 per cent taxable income of the 100 per cent EOU as forming part of the profits of the business for the purposes of section 80HHC. The Department would have had a point if the assessee had sought to include even the exempt portion of the EOU income (90 per cent) in the profits of the business but that is not the case here. Further it is also the settled position that the Assessing Officer should take into consideration the assessed business income and not the returned income while computing the profits of the business in terms of clause ( baa ) of Explanation to section 80HHC of the Act. That not being done the order of the Assessing Officer on this issue suffers from infirmity. Thus we direct the Assessing Officer to add taxable income of EOU to arrive at the profit of the business for the purpose of computing deduction under section 80HHC for the year under appeal. Consequently the direction of the CIT(A) to the Assessing Officer especially when he himself admitted the explanation of the assessee and legal position to be in favour of the assessee to have a fresh look is not called for and hence vacated. Ground No. 2 of the assessee s appeal is thus allowed and ground No. ( c ) of the department is dismissed. Exclusion of excise duty in computing the total turnover - This ground is no longer res integra and is covered against the Department by the judgments in CIT v. Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME COURT and CIT v. Catapharma (India) (P.) Ltd. 2007 (7) TMI 203 - SUPREME COURT . It has been held in those judgments that excise duty and sales-tax are indirect taxes and do not involve any turnover and therefore such taxes have to be excluded from the total turnover under section 80HHC(3) of the Act. In view of the above this ground of the department fails. Computation of the Profits of the business of the 100 per cent EOU - The Department has not disputed any of the facts asserted by the assessee. In that view of the matter the CIT(A) was justified in accepting the assessee s contention that the travelling and conveyance expenses of the 100 per cent EOU were Rs. 1, 25, 565 only which had already been debited while computing the profits of the business of the 100 per cent EOU and that the said expenditure was not required to be increased since the assessee did not incur any other amount for travelling and conveyance relating to the 100 per cent EOU. Further once the entire expenditure incurred on travelling and conveyance of the 100 per cent EOU was debited in the separate accounts maintained for it we find no justification for apportioning the expenditure under the said head appearing in the consolidated accounts of the assessee as referable to the 100 per cent EOU on the basis of turnover ratio of 21 per cent worked out by the Assessing Officer. Keeping in view the totality of the facts and circumstances of the case and the accounts of the assessee we find no merit in the grounds raised by the Department and the same are dismissed. The order of the CIT(A) on this issue therefore stands confirmed. Eligible for deduction u/s 10B - Interest income part of the profits of the business of the 100 per cent EOU - The entire business income of the 100 per cent EOU will be the profits of the business of the undertaking . It has been held above that the interest earned on temporarily surplus business funds of the 100 per cent EOU deposited with banks for short periods is business income and has in fact been so assessed. It is not in dispute that the surplus funds were of the 100 per cent EOU. As such the interest earned thereon has to be regarded as part of the profits of the business of the undertaking . We further find that the Tribunal in the case of Cheviot Co. Ltd. ( supra ) for assessment years 2003-04 and 2004-05 relied upon by the assessee has dealt with similar issue. In those cases the difference between the provisions of sections 10B and 80HH was noted and after considering the judgments of the Hon ble Supreme Court in Sterling Foods case 1999 (4) TMI 1 - SUPREME COURT and in P.R. Prabhakar v. CIT 2006 (7) TMI 121 - SUPREME COURT approving Tribunal in International Research Park Laboratories Ltd. v. Assistant CIT 1994 (7) TMI 304 - ITAT DELHI- D SPECIAL BENCH it was held that the profits of the business of the undertaking would include its entire business income. Keeping in view the above discussion and the decision of the Tribunal we are of the considered opinion that the assessee has to succeed. The Assessing Officer is directed to treat the interest of Rs. 28, 74, 473 as part of the profits of the business of the 100 per cent EOU eligible for deduction under section 10B and compute the deduction accordingly. The Assessing Officer should deduct the sum of Rs. 8, 01, 30, 294 (Rs. 7, 72, 54, 821 Rs. 28, 74, 473) and not only Rs. 7, 72, 54, 821 from the profit as per profit and loss account for the purpose of separate consideration under section 10B. Ground Nos. 3 4 and 5 of the assessee s appeal are thus allowed. Prior period expenses and income - Considering the totality of the facts and circumstance of the case we find substantial force in the contention of the assessee s learned counsel that the Assessing Officer was not justified in taking into consideration only the income excluding the related expenditure of the earlier years and disallowing the expenditure as prior period expenditure. Income and expenditure is correlated. If income is to be considered then automatically expenditure in relation to such income needs to be taken care of. The assessee deserves to succeed on this ground. In the result the appeal of the assessee is allowed and that of the department is dismissed.
Issues Involved:
1. Computation of profits for deduction under section 80HHC. 2. Inclusion of taxable portion of profits from 100% EOU in business profits. 3. Exclusion of excise duty in total turnover for section 80HHC. 4. Allocation of expenses for 100% EOU. 5. Inclusion of interest income in profits for deduction under section 10B. 6. Deduction of prior period expenses. Detailed Analysis: 1. Computation of Profits for Deduction under Section 80HHC: The primary issue was whether 90% of gross or net interest should be deducted while computing business profits under Explanation (baa) to section 80HHC. The Assessing Officer (AO) used gross interest, but the assessee argued for net interest. The CIT(A) sided with the assessee but directed re-examination. The Tribunal concluded that the interest income treated as business income should consider net interest, following the Special Bench decision in Lalsons Enterprises and the Delhi High Court in Shri Ram Honda Power Equip. Thus, the AO was directed to exclude 90% of the net interest for section 80HHC computation. 2. Inclusion of Taxable Portion of Profits from 100% EOU in Business Profits: The issue was whether the taxable portion of profits from the 100% Export Oriented Unit (EOU) should be included in business profits for section 80HHC. The AO excluded it, but the CIT(A) found merit in the assessee's contention and directed a fresh look. The Tribunal agreed with the assessee, noting that the AO should have included the taxable income of the 100% EOU in the business profits computation. The Tribunal directed the AO to add the taxable EOU income to the business profits for section 80HHC purposes. 3. Exclusion of Excise Duty in Total Turnover for Section 80HHC: The Department contested the exclusion of excise duty in computing total turnover for section 80HHC. The Tribunal referenced Supreme Court judgments in Lakshmi Machine Works and Catapharma (India) (P.) Ltd., which held that excise duty and sales tax are indirect taxes and should be excluded from total turnover. Thus, this ground of the Department was dismissed. 4. Allocation of Expenses for 100% EOU: The Department challenged the CIT(A)'s direction to allocate only Rs. 1,25,565 for travelling and conveyance expenses for the 100% EOU instead of Rs. 97,85,388. The Tribunal found that the assessee maintained separate accounts for the EOU and had already debited the actual expenses. The Tribunal dismissed the Department's contention, upholding the CIT(A)'s decision to allocate the actual expenses of Rs. 1,25,565. 5. Inclusion of Interest Income in Profits for Deduction under Section 10B: The issue was whether interest income from surplus funds of the 100% EOU should be included in business profits for section 10B deduction. The AO excluded it, treating it as income from other sources, relying on the Sterling Foods case. The Tribunal noted that the interest income was assessed under business income and not other sources. It referenced the Calcutta High Court in Tirupati Woollen Mills and the Tribunal's own decisions in Cheviot Co. Ltd., concluding that such interest income should be included in the business profits of the EOU for section 10B purposes. 6. Deduction of Prior Period Expenses: The assessee claimed a deduction for prior period expenses of Rs. 47,972, which the AO disallowed. The CIT(A) directed verification of whether the liability crystallized during the relevant year. The Tribunal noted that Rs. 23,888 was already disallowed under section 43B, and the remaining Rs. 24,084 should be considered if related to the relevant year. The Tribunal found the AO's action inconsistent as it considered prior period income but excluded related expenses. Thus, the Tribunal allowed the assessee's claim. Conclusion: The Tribunal allowed the assessee's appeal and dismissed the Department's appeal, directing the AO to recompute deductions and profits as per the Tribunal's findings on each issue.
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