2012 (12) TMI 653 - AT - Income Tax

Computation of Deduction u/s 10B Whether interest received/ receivable from its customers on the delayed payments is treated as part of eligible profit Held that - As the factum of the nature of interest income received needs verification by the AO. In case said interest is received/ receivable by the assessee from its customers on the delayed payments, relatable to the export sales, then such interest is to be included as part of the eligible profits, for computing the exemption u/s 10B. However, where such interest due from the parties is not so relatable to the export sales made by the undertaking, then the assessee is not entitled to the benefit of exemption u/s 10B on such other incomes. Remand back to AO Eligible profit u/s 10B Whether interest received from employees on housing loans are includible in eligible profit Held that - Following the decision in case of Joyco India P.Ltd. (2008 (9) TMI 416 - ITAT DELHI-D) that the interest receivable from employees on housing loans advanced to them by the assessee undertaking, being linked to the business of the undertaking and such interest , being included as business is eligible for the aforesaid deduction. In favour of assessee Deduction u/s 10B Whether provisions written back are eligible for deduction u/s 10B Held that - There is no dispute that the above categories of expenses have been incurred by the assessee during the course of carrying of the eligible business of its industrial undertaking. Such reduction of expenses may not constitute income derived from the industrial under taking but all the same since such expenses in the past have reduced the eligible profits of the industrial under taking as a consequence the reduction in such expenses, which is portrayed by the Provision no longer required written back deserves to be considered to compute profits of the industrial undertaking eligible for deduction. In favour of assessee Deduction u/s 80HHC - Computation of indirect cost of trading goods which are to be worked out for computing deduction u/s 80HHC Assessee is preparing a consolidated statements of P&L account for export of its manufactured items and of traded items - Held that - As per the assessee, the AO had excluded only proportionate expenses related to export while assessee had excluded all the expenses related to manufacturing i.e. domestic as well as exports and at located only expenses which were common for trading as well as manufacturing. Therefore issue remand back to AO Adjustment of deduction u/s 80HHC while calculate book profit u/s 115JB AO, while computing the book profits u/s 115JB, had made certain adjustments by re-computing turnover of the business i.e. on account of the income to which Sec. 10B applies and hence, also excluded the profits eligible for deduction u/s 80HHC Assessee while calculating the book profits u/s 115JB had appropriated the income and expenditure of Sec. 10B in the same ratio which was used to calculate the deduction u/s 10B and reducing there from 100% of the profits, eligible for deduction u/s 80HHC - Held that - As concluded from the facts of the case we find no merit in the allocation made by the AO of different components of income with different total turnover. Therefore, direct AO to recompute the book profits u/s 115JB. Issue remand back to AO

Issues Involved:
1. Computation of exemption under Section 10B of the Income Tax Act.
2. Calculation of deduction under Section 80HHC of the Income Tax Act.
3. Method of calculating indirect costs for trading goods under Section 80HHC.
4. Adjustments to book profits under Section 115JB of the Income Tax Act.

Detailed Analysis:

Issue 1: Computation of Exemption under Section 10B

The assessee, engaged in manufacturing yarn at a 100% export-oriented unit, claimed exemption under Section 10B. The dispute arose regarding the inclusion of 'other income' in the exemption claim. The 'other income' comprised:

- Interest from customers on delayed payments: Rs. 23,10,475/-
- Interest received from employees towards housing loans: Rs. 89,752/-
- Interest received on income tax refund: Rs. 51,062/-
- Interest received from banks: Rs. 82,009/-
- Provisions written back: Rs. 3,18,210/-

The Tribunal held that interest from customers on delayed payments should be verified by the AO. If it relates to export sales, it should be included in eligible profits for Section 10B exemption. Interest from employees on housing loans was deemed eligible for exemption, following Joyco India P. Ltd. v. ITO. Claims for interest on income tax refunds and bank interest were dismissed as not pressed. Provisions written back were allowed for exemption under Section 10B, following the Tribunal's decision in M/s Vardhman Threads Ltd. v. DCIT.

Issue 2: Calculation of Deduction under Section 80HHC

The assessee's challenge to the calculation method under Section 80HHC(3)(c)(i) was dismissed as the issue was covered against the assessee by the Tribunal's decision in Mahavir Spinning Mills Ltd. and the Hon'ble Madras High Court's judgment in M/s. Ambatture Clothing Ltd.

Issue 3: Method of Calculating Indirect Costs for Trading Goods

The AO's method of calculating indirect costs for trading goods under Section 80HHC was contested. The Tribunal directed the AO to recompute these costs, excluding expenses directly related to manufacturing activities. The AO was instructed to:

- Verify personnel expenses, excluding those directly related to manufacturing.
- Adjust administration and other expenses, considering both manufacturing and trading activities.
- Recalculate financial expenses, excluding those directly related to manufacturing.
- Recompute depreciation, excluding assets used solely for manufacturing.
- Include only common selling expenses for both manufacturing and trading activities.
- Ignore minor miscellaneous expenses.

The Tribunal emphasized that only export sales should be included in the total turnover for Section 80HHC deduction.

Issue 4: Adjustments to Book Profits under Section 115JB

The assessee's additional ground for 100% deduction under Section 80HHC on book profits was admitted. The AO's adjustments to book profits, excluding profits eligible for Section 80HHC deduction, were contested. The Tribunal directed the AO to recompute book profits under Section 115JB, using a uniform ratio of export turnover to total turnover for income and expenditure allocation.

Conclusion:

The appeal was partly allowed, with specific directions for recomputation and verification by the AO on various issues.

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