2012 (12) TMI 783 - AT - Income Tax

Deduction u/s 80IB Denial of Profit from DEPB - gross sale v/s net sales - Held that - This issue is no more res integra in view of the judgment of M/s Liberty India Versus Commissioner of Income Tax 2009 (8) TMI 63 - SUPREME COURT wherin held that deduction u/s 80-IB cannot be allowed on the amount of DEPB and duty drawback credited to the profit and loss account - the case of M/s Topman Exports Versus Commissioner of Income Tax, Mumbai 2012 (2) TMI 100 - SUPREME COURT OF INDIA relied upon by assessee is not applicable to the fact situation prevailing in these grounds - against assessee. Exclusion of interest on fixed deposits from eligible profits for the purposes of deduction u/s 80-IB and 80HHC - Held that - As decided in Pandian Chemicals Ltd. v. CIT 2003 (4) TMI 3 - SUPREME COURT interest income does not qualify for deduction u/s 80-HH as it cannot be characterized as having been derived from industrial undertaking in the language of section 80-IB also, similar expression - Rs.derived from - has been employed which is there in section 80-HH. As the interest on fixed deposits from bank cannot be held to be Rs.derived from eligible undertaking, in our considered opinion, the same cannot qualify for deduction u/s 80-IB. As the interest income in the present circumstances as Business income , it will merit inclusion at the first instance and thereafter 90% of the net interest is to be allowed as per the mandate of the Hon ble Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. v. CIT 2012(2) TMI 101 - SUPREME COURT OF INDIA - direct the AO to reduce 90% of the net interest income after verifying the amount liable to be deducted from the gross interest receipt Deduction u/s 80-IB - Exchange fluctuation gain Held that - Assessee was held to be eligible for deduction in respect of foreign exchange gain relying on CIT v. United Riceland Ltd. . No contrary judgment has been brought to notice - ground of appeal allowed. Deduction u/s 80HHC on processing charges and Scrap sales Held that - As decided in CIT v. Dresser Rand India Pvt. Ltd. 2010 (4) TMI 153 - BOMBAY HIGH COURT following the judgment in the case of K.Ravindranathan Nair 2007 (11) TMI 10 - SUPREME COURT OF INDIA the amount of processing charges are not eligible for deduction u/s 80HHC but deserves to succeed insofar as the question of deduction u/s 80-IB on the amount of processing charges is concerned - the assessee to be eligible for deduction u/s 80HHC / 80-IB on the amount of scrap sales. Deduction u/s 80HHC on DEPB license - Held that - As per M/s Topman Exports Versus Commissioner of Income Tax, Mumbai 2012 (2) TMI 100 - SUPREME COURT OF INDIA the assessee cannot be denied deduction u/s 80HHC on DEPB licenseb - in favour of assessee. Addition in respect of MODVAT Credit Held that - Amount of tax, duty, cess etc. is liable to be included in the value of purchases, sales, opening and closing stock. It is not appropriate to include the closing Modvat in the figure of closing stock without modifying the figures of purchases, sales and opening stock as confirmed in CIT Versus MAHALAXMI GLASS WORKS P. LTD. 2009 (4) TMI 182 - BOMBAY HIGH COURT - restore the matter to the file of A.O. for deciding it afresh in accordance with the afore-noted judgements and the provisions of section 145A - These grounds are, therefore, allowed. Disallowance on account of life membership fee of N.S.C.I. Held that - The issue raised in this ground is fairly settled in assessee s favour in view of the binding precedents of the Hon ble High Court in the case of Otis Elevator v. CIT 1991 (4) TMI 53 - BOMBAY HIGH COURT on the point - in favour of assessee. Deduction u/s 80HHC - Rate difference, Discount received and Sundry expenses written off Held that - Assessee could not produce any material on record to indicate the details of such amounts. Also in the appeal of the assessee as well as Revenue, the third item has been mentioned as Sundry expenses written off . It is obvious that the Rs.write off of any amount is always debited to the Profit and loss account and hence there can be no question of any deduction on such amount. Be that as it may, the availability of deduction u/s 80-IB / 80HHC cannot be adjudicated in respect of these three amounts unless their nature is clearly put forth - set aside the impugned order and remit the matter back to AO for deciding this issue afresh.

Summary

Issues Involved:

1. Deduction under Section 80-IB on DEPB sale proceeds.
2. Deduction under Section 80-IB and 80HHC on interest from fixed deposits.
3. Deduction under Section 80-IB on exchange fluctuation gain.
4. Deduction under Section 80HHC and 80-IB on processing charges and scrap sales.
5. Deduction under Section 80HHC on DEPB license.
6. Addition under Section 145A in respect of Modvat credit.
7. Disallowance of life membership fee as capital expenditure.
8. Deduction under Section 80HHC on rate difference, discount received, and sundry expenses written off.

Issue-wise Detailed Analysis:

1. Deduction under Section 80-IB on DEPB Sale Proceeds:
The assessee claimed a deduction under Section 80-IB on DEPB sale proceeds amounting to Rs.3,26,78,524. The Assessing Officer (AO) denied this deduction, stating that the sale proceeds of DEPB were not "derived from" the eligible undertaking. The CIT(A) upheld this denial. The Tribunal referred to the Supreme Court judgment in Liberty India v. CIT, which clarified that DEPB benefits are not eligible for deduction under Section 80-IB. The alternative contention for netting off the DEPB sale proceeds with its face value was also rejected, as the Supreme Court in Topman Exports v. CIT did not support such a netting for Section 80-IB purposes. Thus, the Tribunal dismissed the grounds related to DEPB sale proceeds.

2. Deduction under Section 80-IB and 80HHC on Interest from Fixed Deposits:
The assessee received interest on fixed deposits amounting to Rs.62,950, which were used as margin money for bank facilities. The AO excluded this interest from eligible profits for Section 80-IB deduction. The CIT(A) upheld this exclusion. The Tribunal, referring to the Supreme Court judgment in Pandian Chemicals Ltd. v. CIT, held that interest income, not "derived from" the industrial undertaking, does not qualify for Section 80-IB deduction. However, for Section 80HHC, the interest income falls under "Profits and gains of business or profession," and 90% of the net interest income should be reduced as per the Supreme Court judgment in ACG Associated Capsules Pvt. Ltd. v. CIT. The AO was directed to verify and adjust the net interest amount accordingly.

3. Deduction under Section 80-IB on Exchange Fluctuation Gain:
The assessee claimed a deduction under Section 80-IB for exchange fluctuation gain of Rs.1,87,240. The AO and CIT(A) denied this deduction. The Tribunal, referencing the jurisdictional High Court judgment in CIT v. United Riceland Ltd., held that foreign exchange gain is eligible for deduction under Section 80-IB. Therefore, this ground was allowed in favor of the assessee.

4. Deduction under Section 80HHC and 80-IB on Processing Charges and Scrap Sales:
The AO denied deductions under Sections 80HHC and 80-IB for processing charges of Rs.4,64,265 and scrap sales of Rs.8,19,692. The CIT(A) allowed the deduction under Section 80-IB but not under Section 80HHC. The Tribunal, following the jurisdictional High Court judgment in CIT v. Dresser Rand India Pvt. Ltd., held that processing charges are not eligible for Section 80HHC deduction. However, the Special Bench of the Tribunal in DCIT v. Rajeshkumar Drolia allowed Section 80-IB deduction for job work charges. Thus, the Tribunal allowed the Section 80-IB deduction for processing charges but denied the Section 80HHC deduction. For scrap sales, the Tribunal allowed deductions under both Sections 80HHC and 80-IB, following its own precedent in the assessee's case.

5. Deduction under Section 80HHC on DEPB License:
The Tribunal referred to the Supreme Court decision in Topman Exports v. CIT, which allowed the deduction under Section 80HHC on DEPB license. Consequently, the Tribunal allowed this ground in favor of the assessee.

6. Addition under Section 145A in Respect of Modvat Credit:
The AO made an addition of Rs.13,06,976 under Section 145A for Modvat credit. The Tribunal noted that adjustments should be made to purchases, sales, and opening stock to include the amount of tax, duty, cess, etc., as per Section 145A. Citing the jurisdictional High Court judgment in CIT v. Mahalaxmi Glass Works Pvt. Ltd., the Tribunal set aside the order and directed the AO to re-compute the adjustments as per the legal provisions and judgments.

7. Disallowance of Life Membership Fee as Capital Expenditure:
The AO disallowed Rs.6,00,000 paid as life membership fee to NSCI, treating it as capital expenditure. The CIT(A) allowed the deduction. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court judgment in CIT v. Principal PNB Asset Management Co. Pvt. Ltd., which allowed similar deductions.

8. Deduction under Section 80HHC on Rate Difference, Discount Received, and Sundry Expenses Written Off:
The Tribunal noted the absence of clear details about the nature of these amounts in the assessment order. The matter was remitted to the AO for fresh adjudication after determining the true nature of these amounts.

Conclusion:
The appeals for the assessment years 2003-2004, 2004-2005, and 2005-2006 were partly allowed and partly dismissed based on the above analyses. The Tribunal upheld and applied relevant legal precedents and statutory provisions to reach its conclusions.