2016 (7) TMI 1374 - HC - Income Tax

Deduction under section 80-I/80-IA on vatav kasar and discount income and sales tax set off - Held that - So far as issue with regard to Vatav kasar incidental charges and advances written off are concerned the same is covered by the decision in the case of CIT v. Nirma Ltd. reported in 2014 (10) TMI 388 - GUJARAT HIGH COURT . So far as issued with regard to vatav kasar discount and sales tax set-off under section 80-I is concerned the same is covered by the decision in the case of CIT v. Meghalaya Steels Ltd. reported in 2016 (3) TMI 375 - SUPREME COURT - Decided in favour of assessee. Netting of interest is concerned the same will be now governed by the decision of the apex court in the case of ACG Associated Capsules Pvt. Ltd v. CIT reported in 2012 (2) TMI 101 - SUPREME COURT OF INDIA as held that Ninety per cent of not the gross interest/rent but only the net interest/rent which has been included in the profits of the business of the assessee as computed under the heads PGBP is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business. Matter remanded back to A.O. to work out the deductions Decided in favor of assessee Allowance of job work charges confirmed. Refund of excise duty - Held that - The same is covered in favour of the assessee in view of the decision of the apex court in the case of CIT v. Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME Court . Accordingly the issue is answered in favour of the assessee and against the Revenue. Expenditure on effluent treatment plant - allowable business expenditure - Held that - A similar issue has come up before the Gujarat High Court in the case of Alembic Glass Industries Ltd. 1975 (11) TMI 42 - GUJARAT High Court wherein it was held that the assessee being member of federation of Gujarat Mills and Industries contribute a sum of 5, 000 for construction of a building and auditorium and the amount was held to be an allowable deduction. In addition to coming to the conclusion that there was commonality of business it was further held that the expenditure was in connection with the expansion of the existing business. In view of the aforesaid decision of the Gujarat High Court we are of the opinion that the contribution made by the assessee is an allow able deduction and the Commissioner of Income-tax (Appeals) was justified in allowing the same Foreign exchange fluctuation under section 80-IA allowability - Held that - This issue will be now governed by the decision of this court in the case of CIT v. Priyanka Gems reported in 2014 (3) TMI 938 - GUJARAT HIGH COURT as held that Primarily no distinction possible on the basis of different situations under which foreign exchange fluctuation may result. We are conscious that law permits hedging of foreign exchange fluctuation risk to an importer or an exporter. The exporter may therefore take steps as found commercially prudent to safeguard himself against drastic foreign exchange rate fluctuations and in the process may also limit the possibility of gain in case of favourable currency rate trends. Nevertheless the resultant gain in foreign exchange rate would still be due to the export made by the assessee. In any case no such facts are recorded by the Assessing Officer in any of these cases. We would therefore not entertain such speculative contention. Duty drawback - Held that - This issue will be now governed by the decision of the apex court in the case of Liberty India v. CIT reported in 2009 (8) TMI 63 - SUPREME COURT wherein held that duty drawback rebate etc. should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. - They should be treated as separate items of revenue or income and accounted for accordingly - Decided in favour of the Department and against the assessee. Disallowance in respect of amount paid to farmers on account of damage/penalty - Held that - As decided in Swadeshi Cotton Mills Co. Ltd. v. CIT 1997 (5) TMI 5 - SUPREME Court the authority has to allow deduction under section 37(1) of the Act wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature i.e. partly of compensatory nature and partly of penal nature the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature.

Issues Involved:
1. Foreign exchange fluctuation and duty drawback as income derived from industrial undertaking under sections 80-I and 80-IA.
2. Net interest exclusion while calculating deductions under sections 80-I and 80-IA.
3. Laboratory sample testing charges and sales tax set-off as part of eligible profit for section 80HHC.
4. Deduction under section 80-I for interest, vatav, kasar, incidental charges, advances written off, and managerial remuneration.
5. Depreciation on building and Baroda unit.
6. Disallowance of deferred revenue expenses towards CEPT and payment to different agencies for effluent treatment plant.
7. Deduction under section 80HHC on various incomes.
8. Disallowance of amount paid to farmers and contribution for effluent treatment plant.
9. Refund of excise duty under section 43B.
10. Deletion of disallowance of job work charges.
11. Treatment of duty drawback under section 80-IA.
12. Depreciation on a new project at Baroda.
13. Vatav, kasar, laboratory testing fees, and sales tax set-off for the purpose of computation of deduction under section 80HHC.

Detailed Analysis:

1. Foreign Exchange Fluctuation and Duty Drawback:
The Tribunal held that foreign exchange fluctuation and duty drawback are incomes derived from industrial undertakings and eligible for deduction under sections 80-I and 80-IA. This was confirmed by the Tribunal in favor of the assessee, supported by CIT v. Meghalaya Steels Ltd. and ADCI Dye Chem P. Ltd. v. Deputy CIT.

2. Net Interest Exclusion:
The issue of net interest exclusion while calculating deductions under sections 80-I and 80-IA is governed by the decision in ACG Associated Capsules Pvt. Ltd. v. CIT, which states that only the net interest should be excluded, not the gross interest. This principle was upheld by the Tribunal and confirmed by the High Court.

3. Laboratory Sample Testing Charges and Sales Tax Set-off:
The Tribunal confirmed that laboratory sample testing charges and sales tax set-off form part of eligible profit for the purpose of computation of deduction under section 80HHC, supported by CIT v. Priyanka Gems, which held that foreign exchange gain arising from export business is eligible for deduction.

4. Deduction under Section 80-I:
The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) allowing deduction under section 80-I for interest, vatav, kasar, incidental charges, advances written off, and managerial remuneration, supported by CIT v. Nirma Ltd., which held that such incomes are derived from industrial undertakings.

5. Depreciation on Building and Baroda Unit:
The Tribunal confirmed the order allowing depreciation on building and Baroda unit, supported by consistent Tribunal views and upheld by the High Court.

6. Disallowance of Deferred Revenue Expenses:
The Tribunal confirmed the order deleting the disallowance of deferred revenue expenses towards CEPT and payment to different agencies for the effluent treatment plant, supported by CIT v. Navsari Cotton and Silk Mills Ltd., which held such expenses as allowable deductions.

7. Deduction under Section 80HHC:
The Tribunal confirmed the order allowing deduction under section 80HHC on various incomes, supported by CIT v. Amba Impex, which held that foreign exchange gain related to export business is eligible for deduction.

8. Disallowance of Amount Paid to Farmers:
The Tribunal confirmed the order deleting the disallowance of ?97,23,550 paid to farmers, supported by Swadeshi Cotton Mills Co. Ltd. v. CIT, which held that compensatory payments are allowable under section 37 of the Act.

9. Refund of Excise Duty:
The Tribunal confirmed the order deleting the addition under section 43B of ?2,18,08,262 being the refund of excise duty, supported by CIT v. Lakshmi Machine Works, which held such refunds as allowable deductions.

10. Deletion of Disallowance of Job Work Charges:
The Tribunal confirmed the order deleting the disallowance of job work charges, supported by consistent Tribunal views and upheld by the High Court.

11. Treatment of Duty Drawback:
The Tribunal held that duty drawback is not eligible for deduction under section 80-IA, supported by Liberty India v. CIT, which held that duty drawback and DEPB benefits are not profits derived from industrial undertakings.

12. Depreciation on New Project:
The Tribunal confirmed the order allowing depreciation on a new project at Baroda, supported by consistent Tribunal views and upheld by the High Court.

13. Vatav, Kasar, Laboratory Testing Fees, and Sales Tax Set-off:
The Tribunal confirmed the order allowing these incomes for the purpose of computation of deduction under section 80HHC, supported by CIT v. Meghalaya Steels Ltd., which held such incomes as part of eligible profit for deduction.

Conclusion:
The High Court upheld the Tribunal's decisions on all issues, confirming the orders in favor of the assessee and against the Department, with certain issues governed by landmark judgments such as ACG Associated Capsules Pvt. Ltd. v. CIT, CIT v. Meghalaya Steels Ltd., and Liberty India v. CIT.

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