2015 (1) TMI 394 - HC - Income Tax

Deduction u/s 80HHC - Deduction u/s 80IA - Whether, the Appellate Tribunal is right in law on facts in holding that while computing deduction u/s. 80IA exchange rate difference and duty draw back should be treated to be derived from the industrial undertaking - Held that - Duty drawback receipts and DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purpose of deduction u/s 80-I/80I-A/80I-B of the Act - So far as question regarding foreign exchange difference is concerned, the same is squarely governed by the decision of this Court in the case of Commissioner of Income-Tax vs. Priyanka Gems reported in 2014 (3) TMI 938 - GUJARAT HIGH COURT wherein this Court has answered the question in favour of the assessee and held that that the foreign exchange gain arising out of the fluctuation in the rate of foreign exchange cannot be divested from the export business of the assessee and once export is made, due to variety of reasons, the remission of the export sale consideration may not be made immediately and that all foreign currencies received by the assessee need not be converted into Indian Rupees on the last date of the accounting period. - Tribunal is justified in holding that while computing deduction u/s. 80IA exchange rate difference should be treated to be derived from industrial undertaking whereas the Tribunal has committed an error in holding that duty draw back should be treated as derived from industrial undertaking - Decided partly in favour of Revenue.

Summary

Issues:
- Appeal against ITAT order for Assessment Years 1995-96, 1996-97, and 2000-01
- Deduction u/s 80HHC for sales tax, excise duty, duty drawbacks, and foreign exchange difference
- Interpretation of whether certain receipts are 'derived' from industrial undertakings

Analysis:
1. The appellant, engaged in manufacturing and sale of dyes, appealed against the ITAT order for Assessment Years 1995-96, 1996-97, and 2000-01 regarding deduction u/s 80HHC for sales tax, excise duty, duty drawbacks, and foreign exchange difference. The CIT (Appeals) and ITAT decisions were in question.

2. The ITAT set aside the CIT (Appeals) decision and allowed the revenue's appeal, leading the appellant to challenge the decision. The Tribunal relied on precedents to exclude octroi, sales tax, and excise duty from 'total turnover,' but erred in treating duty drawbacks as 'derived' from industrial undertakings.

3. The judgment referred to the Supreme Court's decision in Liberty India vs. Commissioner of Income Tax, stating that duty drawbacks and DEPB benefits do not form part of net profits for deduction purposes. The Court also cited Commissioner of Income-Tax vs. Priyanka Gems, emphasizing that foreign exchange gains from export business are integral and not divested due to fluctuation.

4. The Court held that duty drawbacks should not be treated as 'derived' from industrial undertakings, aligning with Liberty India's ruling. However, foreign exchange differences should be considered 'derived' from industrial undertakings based on the nature of export business and accounting principles.

5. The judgment concluded by partially favoring the Department and the assessee, modifying the ITAT orders accordingly. It upheld the treatment of exchange rate differences as 'derived' from industrial undertakings but rejected the same for duty drawbacks. The Tax Appeals were partly allowed based on the above analysis.