2015 (4) TMI 466 - AT - Income Tax

Reduction of amount of profits eligible for deduction u/s. 80HHC from the book profits u/s. 115JA - MAT computation - Held that - As decided in case of Ajanta Pharma Ltd 2010 (9) TMI 8 - SUPREME COURT if the dichotomy between eligibility of profit and deductibility of profit is not kept in mind then s. 115JB will cease to be a selfcontained code. In s. 115JB, as in s. 115JA, it has been clearly stated that the relief will be computed under s. 80HHC(3)/(3A), subject to the conditions under sub-cls. (4) and (4A) of that section. The conditions are only that the relief should be certified by the chartered accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in cl. (iv) of Explanation to s. 115JB subject to the conditions specified in sub-cls. (4) and (4A) of that section to obliterate the difference between eligibility and deductibility of profits as contended on behalf of the Department. Therefore, respectfully following the above precedents, we hereby hold that the AO is required to re-compute the taxable profit for the purpose of computation of book profit u/s.115JA of the Act in the light of the guide lines laid down by the Hon Courts as cited above. - Decided in favour of assessee. Reduction of amount of profits derived by eligible industrial undertaking referred in s. 80IA from the book profits u/s. 115JA - Held that - This issue has already been decided in Assessment Year 1999-2000 wherein held that as per the Appellant the deduction U/s 80IA on Silvasa Unit, however the A.O. had allocated certain expenses and reduced the Profit to compute the deduction U/s 80IA. But it was pleaded that this issue was not decided by Ld. CIT(A). Also in the past for A.Y. 1998-99 this very issue was restored back to the file of Ld. CIT (A) in assessee's own case - Thus for this year as well, this ground may be treated as allowed but for statistical purposes only. - Decided in favour of assessee for statistical purpose only. Inclusion of Exchange Rate Fluctuation/Difference in respect of balances under the Exchange Earners Foreign Currency Account (EEFC Account) in total turnover for the purpose of deduction u/s. 80HHC - Held that - This issue is directly covered in favour of the assessee by an order of Honble Gujarat High Court in the case of CIT vs, Alps Chemicals Pvt Ltd 2014 (10) TMI 251 - GUJARAT HIGH COURT wherein held held that an exporter had an option to keep certain percentage of export receipts in EEFC a/c. The assessee received higher amount in Indian rupees on such amount due to fluctuation in the foreign exchange rate. Conscious of the fact that the assessee had received the proceeds of the export transaction and gained due to fluctuation the court held that such gain cannot only be said to have been 'derived' from export business but the fluctuation gain arose subsequent to receiving the sale consideration hence part of the export sales . The gain was not due to delayed realization of export proceeds. - Decided in favour of the assessee Inclusion of Sale of scrap in total turnover for the purpose of deduction u/s. 80HHC - Held that - For the purpose of availing deduction u/s.80HHC, income from sale proceeds of sale scrap was not included in the total turnover but it was shown separately as relying on Punjab Stainless Ltd. case 2014 (5) TMI 238 - SUPREME COURT - Respectfully, following the above decision, we hereby direct to re- compute the turnover after excluding the sale amount of scarp. - Decided in favour of assessee. Disallowance u/s. 14A - Held that - the basic information about the availability of the interest free funds can only be furnished by the assessee. Reply before the A.O. only suggested that the profit was ploughed back but the amount, stated to be ₹ 16.25 Crores invested in the firm, actually invested out of the said interest free fund is to be established. Certain basic information such as fund flow statement is not available before us. Side by side, A.O. has simply applied a formula which was only giving the figures of the total income verses exempted income, however, before applying the said formula it is also a requirement to establish that the interest bearing borrowed funds have actually been applied to earn the exempted income and then if such expenditure is not separately identifiable then on prorate basis disallowance can be calculated. Moreover this is A.Y 1999-2000, which is before the introduction of Rule 8D. We therefore direct that if the assessee is placing reliance on the above cited decisions then the connected information should be placed before the A.O. and to accomplish it, we hereby restore this ground back to AO to decide as per law accordingly. - Decided in favour of assessee for statistical purposes. Addition of expenses attributable to earning exempt income for the purpose of computation of book profits u/s. 115JA - Held that - There is a latest decision CIT vs. Gujarat State Fertilizers and Chemicals (2013 (7) TMI 701 - GUJARAT HIGH COURT) wherein it was held that the A.O. had added the amount of estimated expenditure on earning of dividend income u/s 14A. So by referring sec. 115JB(2) it was held by the A.O. that it was required to be added in the profit shown in the P&L A/c. Commissioner of Appeals had deleted the addition in the normal computation, consequently deleted such addition under sec 115JB on the ground that this would not serve any purpose. The Tribunal affirmed this . In the High Court it was held that when the said sum was added as an expenditure estimated on earning of dividend income U/s 14A had been deleted , the said deletion for the purpose of Sec. 115JB required to be confirmed . For that reason we hereby restore this issue back to the file of A.O. - Decided in favour of assessee for statistical purposes. Disallowance of expenses for increase in share capital - Held that - There are few examples such as payment of stamp duty for issue of public subscription of debentures which was held as revenue expenditure U/s 37(1); even though after the insertion of Sec. 35D. Likewise other expenditure pertaining to issue of debenture is entitled U/s 37(1) and the provision of Sec. 35D are not going to effect such deduction. So the outcome of the above discussion is that the provision of amortisation is not intended to supersede any other provision of the income tax act under which such expenditure is otherwise admissible as a deduction . Under the fitness of circumstances it is therefore required to restore this issue back to A.O. to examine both the aspects i.e. Revenue Expenditure or Capital Expenditure and then decide the question of disallowance. Resultantly this ground is restored back for denovo adjudication - Decided in favour of assessee for statistical purposes. Addition on account of payment made to Synergy Research Centre Pvt. Ltd. - CIT(A) deleted the addition - Held that - CIT(A) has held that the AO s conclusion that the payment of ₹ 40 lacs was made against the sale proceeds of shares and not against research was merely on presumption. There was no material on record to justify such presumption. Side by side, the assessee had brought on record the evidence about the payment of ₹ 40 lacs against scientific research were carried out by SRCL. The ld.CIT(A) has, therefore, placed reliance on the facts as already considered by his predecessor and the view taken by the AO was reversed. No judicial requirement to interfere with the findings of ld.CIT(A) - Decided against revenue. Discount paid to M/s. Antrish and M/s. Dukan allowed by CIT(A) - Held that - appointment of M/s.Antariksh Pharma and M/s.Dukan have provided certain facilities to the assessee related to administrative as well as business services. Dadhas had a very good network of committed dealers, who have managed the business. Both those entities were otherwise registered with Sales Tax Department as Registered Dealers. Even during the course of search, certain correspondences relating to installation of various systems at M/s.Dukan was seized and since the activities was not merely on paper, therefore it was held that the payment was reasonable and the addition was directed to be deleted. We hereby endorse the view taken by the First Appellate Authority primarily on the ground that in a situation when a search was conducted and no material was found, then according to us, the amount was rightly directed to be deleted. - Decided against revenue. Disallowance of interest payment - CIT(A) deleted addition - Held that - Since in the past a consistent view had been taken that once the Revenue had accepted the business decision of appointment of the said firms then in the same breath could not question the assessee s other decision taken in the ordinary course of business. We therefore follow the view already taken by the respected coordinate benches and affirm the decision of CIT(A) - Decided against revenue. Unaccounted sale of spent solvent - CIT(A) deleted the addition - Held that - It was merely presumed by the A.O. that even for the post search period the Solvent might have been sold on the same rates. But the basic question is that when even for search period the impugned addition did not survive on account of lack of evidence then how such presumption could be approved for the post search period. The reasoning appears to be convincing especially when no contrary material is available on record form the side of the Revenue. - Decided against revenue. Addition made on account of DEPB sale for 80IA deduction - CIT(A) deleted the addition - Held that - This issue is well settled by in the case of Liberty India 2009 (8) TMI 63 - SUPREME COURT wherein it was held that Duty Drawback receipts and DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purpose of deduction U/s 80I / 80IA / 80IB. It was commented by S.C. that Sec. 80IB provides for the allowing of deduction in respect of profits and gains derived from the eligible business. The connotation of the words 'derived from' is narrower as compared to that of the words ' attributable to.' By using the expression ' derived from' Parliament intended to cover sources not beyond the first degree. - Decided in favour of revenue. Addition to depreciation allowance - - CIT(A) deleted the addition - Held that - Depreciation not claimed by the assessee could be deducted despite the introduction of the block-assets concept.For the year under consideration, which is before the amendment took place, the depreciation cannot be foisted upon the assessee. Therefore, this ground of the Revenue is hereby dismissed.- Decided against revenue. Inclusion of sales-tax & excise duty as part of total turnover for 80HHC purpose - CIT(A) deleted the addition - Held that - As decided in Laxmi Machine Works 2007 (4) TMI 202 - SUPREME Court for the legal proposition that Excise Duty & Sales Tax are indirect taxes so do not involve any element of 'Turnover'. Respectfully following this precedent we hereby affirm the findings of CIT(A) - Decided against revenue. Gross interest,Gross lease rent & Operational charges for computing 'Profit of the Business' for 80HHC purpose - CIT(A) deleted the addition - Held that - As relying on ACG Associated Capsules Pvt. Ltd., 2012 (2) TMI 101 - SUPREME COURT OF INDIA and Topman Exports, reported 2012 (2) TMI 100 - SUPREME COURT OF INDIA arriving at the conclusion that 90% of the net interest which had been included in the profits of the business was required to be deducted as per Explanation (baa) of section 80HHC. On the same line, we hereby direct to compute the 80HHC deduction. - Decided against revenue. Adjustment to trading export profit on account of export promotion expenses - Held that - CIT(A) has given certain findings on facts which were not confronted to the AO. The ld.CIT(A) has noted that the assessee had maintained the details about export promotional expenses which were stated to be identifiable. It was also noted by him that those expenditure were attributable to different products. Further, he has noted that the assessee has furnished accurate details of the direct expenses attributable to turnover of the products including the overseas sales promotional expenses. Since those were new evidences, which were entertained by the ld.CIT(A), therefore it is demanded by the ld.CIT-DR to give an opportunity to examine those evidences which were entertained by the ld.CIT(A) at the back of the AO. Considering the said preliminary technical objection of the assessee, we hereby restore this ground to the file of ld.CIT(A) with the direction to give opportunity to both the sides and then decide as per law. - Decided in favour of revenue for statistical purposes. Reducing deduction under section 80-IA - Assessing Officer has disallowed depreciation and the profit on sale of DEPB - Held that - while dealing ground No.6 of the Revenue s appeal and held that the depreciation could not be foisted upon the assessee compulsorily. Therefore, the relief given by the ld.CIT(A) upto this extent is affirmed. Next is the question of DEPB sale which has already been held against the assessee, therefore in consequence thereof, we hereby hold that the relief was wrongly granted by the ld.CIT(A). - Decided partly in favour of revenue.

Summary

Issues Involved:
1. Reduction of amount of profits eligible for deduction under section 80HHC from the book profits under section 115JA.
2. Reduction of amount of profits derived by eligible industrial undertaking referred in section 80IA from the book profits under section 115JA.
3. Inclusion of Exchange Rate Fluctuation/Difference in total turnover for the purpose of deduction under section 80HHC.
4. Inclusion of Sale of scrap in total turnover for the purpose of deduction under section 80HHC.
5. Reduction of unrealized export proceeds from export turnover for the purpose of deduction under section 80HHC.
6. Disallowance under section 14A.
7. Addition of expenses attributable to earning exempt income for the purpose of computation of book profits under section 115JA.
8. Disallowance of deduction under section 80IA in respect of sale of import licenses.
9. Allocation of expenses to Silvassa unit eligible for deduction under section 80IA on account of exchange rate difference reduced from Miscellaneous Expenses.
10. Disallowance of expenses for increase in share capital.
11. Deletion of addition made on account of payment made to Synergy Research Centre Pvt. Ltd.
12. Deletion of addition made on account of discount paid to M/s. Antrish and M/s. Dukan.
13. Deletion of addition made on account of interest payment.
14. Deletion of addition made on account of unaccounted sale of spent solvent.
15. Deletion of addition made on account of DEPB sale for 80IA deduction.
16. Deletion of depreciation allowance.
17. Exclusion of sales-tax & excise duty from the total turnover for computing the deduction under section 80HHC.
18. Consideration of gross interest, lease rent, and operational charges for computing profit of business for working of deduction under section 80HHC.
19. Adjustment to trading export profit on account of export promotion expenses.
20. Reduction of deduction under section 80IA.
21. Deletion of disallowance made out of interest payment on account of transactions with Virtous Finance Ltd.

Issue-wise Detailed Analysis:

1. Reduction of amount of profits eligible for deduction under section 80HHC from the book profits under section 115JA:
The Tribunal held that the deduction under section 80HHC should be worked out on the basis of adjusted book profits under section 115JA of the Act and not on the basis of profits computed under the regular provisions of law. This decision was in line with the Supreme Court's rulings in Ajanta Pharma Ltd. and Bhari Information Tech.Sys.P.Ltd.

2. Reduction of amount of profits derived by eligible industrial undertaking referred in section 80IA from the book profits under section 115JA:
The Tribunal restored this issue back to the file of Ld. CIT(A) as it was not decided by the first Appellate Authority. This was in line with the decision for A.Y. 1998-99 in the assessee's own case.

3. Inclusion of Exchange Rate Fluctuation/Difference in total turnover for the purpose of deduction under section 80HHC:
The Tribunal held that the assessee is entitled to the claimed deduction, following the Gujarat High Court decision in the case of CIT vs. Alps Chemicals Pvt Ltd, which ruled that such gains are part of the export sales.

4. Inclusion of Sale of scrap in total turnover for the purpose of deduction under section 80HHC:
The Tribunal directed to re-compute the turnover after excluding the sale amount of scrap, following the Supreme Court decision in Punjab Stainless Ltd., which held that proceeds from the sale of scrap should not be included in the "total turnover."

5. Reduction of unrealized export proceeds from export turnover for the purpose of deduction under section 80HHC:
The ground was dismissed as not pressed by the assessee.

6. Disallowance under section 14A:
The Tribunal restored this ground back to the AO to decide as per law, directing that the assessee should provide the necessary information to establish the availability of interest-free funds.

7. Addition of expenses attributable to earning exempt income for the purpose of computation of book profits under section 115JA:
The Tribunal restored this issue back to the file of AO, noting that it is consequential depending upon the outcome of the main issue under section 14A.

8. Disallowance of deduction under section 80IA in respect of sale of import licenses:
The ground was dismissed as not pressed by the assessee.

9. Allocation of expenses to Silvassa unit eligible for deduction under section 80IA on account of exchange rate difference reduced from Miscellaneous Expenses:
The Tribunal restored this issue back to the file of Ld. CIT(A) as it was not decided by the first Appellate Authority.

10. Disallowance of expenses for increase in share capital:
The Tribunal restored this issue back to AO to examine both the aspects of Revenue Expenditure or Capital Expenditure and then decide the question of disallowance.

11. Deletion of addition made on account of payment made to Synergy Research Centre Pvt. Ltd.:
The Tribunal upheld the deletion of the addition, noting that there was no material on record to justify the AO's presumption that the payment was for the acquisition of shares rather than for scientific research.

12. Deletion of addition made on account of discount paid to M/s. Antrish and M/s. Dukan:
The Tribunal upheld the deletion of the addition, noting that in a situation when a search was conducted and no material was found, the amount was rightly directed to be deleted.

13. Deletion of addition made on account of interest payment:
The Tribunal upheld the deletion of the addition, following the past decisions that there was no reason for an estimated proportionate disallowance of interest when the assessee had substantial interest-free own funds.

14. Deletion of addition made on account of unaccounted sale of spent solvent:
The Tribunal upheld the deletion of the addition, noting that the addition was based on presumption without any evidence.

15. Deletion of addition made on account of DEPB sale for 80IA deduction:
The Tribunal held that the DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purpose of deduction under section 80IA, following the Supreme Court decision in Liberty India.

16. Deletion of depreciation allowance:
The Tribunal upheld the deletion of the addition, following the Gujarat High Court decisions that depreciation not claimed by the assessee could not be foisted upon the assessee.

17. Exclusion of sales-tax & excise duty from the total turnover for computing the deduction under section 80HHC:
The Tribunal upheld the exclusion, following the Supreme Court decision in Laxmi Machine Works that Excise Duty & Sales Tax do not involve any element of 'Turnover.'

18. Consideration of gross interest, lease rent, and operational charges for computing profit of business for working of deduction under section 80HHC:
The Tribunal upheld the consideration of net interest, lease rent, and operational charges, following the Supreme Court decision in ACG Associated Capsules Pvt.Ltd.

19. Adjustment to trading export profit on account of export promotion expenses:
The Tribunal restored this ground to the file of Ld. CIT(A) with the direction to give opportunity to both the sides and then decide as per law.

20. Reduction of deduction under section 80IA:
The Tribunal upheld the deletion of the addition in respect of depreciation and DEPB sale but noted that the rest of the allocation was not contested by the assessee.

21. Deletion of disallowance made out of interest payment on account of transactions with Virtous Finance Ltd.:
The Tribunal upheld the deletion of the addition, following the past decisions that there was no reason for an estimated proportionate disallowance of interest when the assessee had substantial interest-free own funds.

Conclusion:
The appeals of both the assessee and the revenue were partly allowed, with several issues being restored to the respective authorities for re-examination and decision as per law.