2009 (12) TMI 659 - AT - Income Tax

Summary

Issues Involved:
1. Deduction/Exemption under section 10A of the Income-tax Act.
2. Brought forward depreciation relating to assessment year 1996-97.
3. Treatment of interest receipt.
4. Treatment of excess freight received.
5. Deduction under section 80HHC of the Income-tax Act.

Detailed Analysis:

1. Deduction/Exemption under section 10A of the Income-tax Act:
The revenue challenged the CIT(A)'s direction to reduce the value of goods received on loan basis from both export turnover and total turnover for computing deduction under section 10A. The assessee, engaged in manufacturing jewellery in a 100% export-oriented unit, claimed deductions under section 10A. The Assessing Officer (AO) restricted the deduction based on the net amount of foreign exchange realized, excluding the value of goods received on loan. The CIT(A) directed the AO to treat the net realizable sale price as both total turnover and export turnover. The Tribunal upheld the CIT(A)'s decision, agreeing that the net realizable sale proceeds should be treated as export turnover for the purpose of section 10A.

2. Brought forward depreciation relating to assessment year 1996-97:
For assessment years 2002-03 and 2003-04, the AO denied the assessee's claim to carry forward unabsorbed depreciation from assessment year 1996-97, citing section 10A(6)(i). The CIT(A) disagreed, but the Tribunal sided with the AO, stating that section 10A(6)(i) prevents the carry forward of depreciation for undertakings enjoying section 10A benefits. The Tribunal restored the AO's order, denying the carry forward of unabsorbed depreciation.

3. Treatment of interest receipt:
For assessment year 2002-03, the AO excluded interest income from business profits, arguing it was not derived from the industrial undertaking. The CIT(A) agreed that interest income should not be considered for section 10A deduction but treated it as part of business income. The Tribunal upheld this decision, noting the interest was earned from surplus funds parked temporarily, thus not derived from the industrial undertaking.

4. Treatment of excess freight received:
The assessee argued that excess freight received should be considered business income and eligible for section 10A deduction. The AO and CIT(A) disagreed, and the Tribunal affirmed that freight charges cannot be treated as profits derived from the industrial undertaking under section 10A. The Tribunal referenced Supreme Court decisions in Cambay Electric Supply Industrial Co. Ltd. v. CIT and CIT v. Sterling Foods to support this conclusion.

5. Deduction under section 80HHC of the Income-tax Act:
For assessment year 2003-04, the assessee claimed deduction under section 80HHC for the 10% of profits not exempt under section 10A. The AO denied this, but the Tribunal found no bar in section 80HHC or section 10A against claiming this deduction. The Tribunal allowed the assessee's claim and directed the AO to consider the 10% of relatable profits for section 80HHC deduction, subject to fulfilling the conditions of the section.

Conclusion:
The Tribunal partly allowed the revenue's appeals and dismissed the assessee's cross-objection for assessment year 2002-03. For assessment year 2003-04, the Tribunal allowed the assessee's cross-objection for statistical purposes, directing the AO to consider the 10% of relatable profits for section 80HHC deduction.