2015 (4) TMI 473 - 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 - Respectfully following the precedents 2015 (4) TMI 466 - ITAT AHMEDABAD wherein held that if the dichotomy between eligibility of profit and deductibility of profit is not kept in mind then s. 115JB will cease to be a self-contained 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. Thus 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. 80IB Old Section 80IA from the book profits u/s 115JA - whether the computation carried out by the AO of the amount of profits derived by eligible industrial undertaking referred in S. 80IA for the purpose of computation of book profits under explanation to Sec. 115JA(1) should be made with reference to the book profits and not the taxable profits? - 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 2011 (1) TMI 1305 - ITAT AHMEDABAD 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. Deduction of Lease Equalisation Charge from Book Profits u/s 115JA - whether addition on account of Lease equalization charge in computing the Book Profits under explanation to sec. 115JA (1) should be deleted? - Held that - The assessee has explained that where the annual lease charge is less than the minimum statutory depreciation, a lease equalization credit would arise. Further, it was explained that the lease equalization charge is equal to the annual lease charge less minimum statutory depreciation. Therefore, a separate lease equalization account was opened by the assessee in which there was a corresponding debit or credit to the lease adjustment account. Almost on identical facts in the case of GE Capital Transportation Financial Services Ltd (2007 (7) TMI 343 - ITAT DELHI-D ) it was held that any adjustment made by the Assessing Officer by adding the amount of lease equalization charges while computing the book profit was unjustified. Likewise, in the case of TVS Finance & Services Ltd (2009 (2) TMI 283 - MADRAS HIGH COURT) opined that the lease equalization charges over the period of lease is equal to the difference between the quantum of principal recovered and the residual value. The provision was made as per ICAI guidelines note, therefore, same is not contingent in nature. It was held that the lease equalization charges is not to be included in computing book profit u/s 115JA of the Income-tax Act. Thus we direct to allow the claim - Decided in favour of assessee. Treatment of Exchange Rate Fluctuation as miscellaneous income forming part of total turnover for the purpose of deduction u/s 80HHC - Exchange rate difference on the balances in the EEFC account ought to be treated as export turnover for the purpose of computing the deduction u/s 80HHC - Held that - This issue has already been decided by us in Assessment Year 1999-2000 wherein held that now 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 - This issue has also been dealt with by us while deciding ground No.4 for Assessment Year 1999-2000, wherein 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. Loss on Trading Exports for working out the deduction u/ 80HHC - whether loss computed in respect of the trading turnover should be considered as nil for working out the overall deduction u/s 80HHC? - AO held that where an assessee is engaged in export of trading goods and manufactured goods, then the profit of the two should be clubbed - CIT(A) has placed reliance on Ipca Laboratories Ltd 2001 (7) TMI 99 - BOMBAY High Court and affirmed the calculation of the Assessing Officer - Held that - The said decision of the Hon'ble Bombay High Court of Ipca Laboratories Ltd was affirmed by the Hon'ble Supreme Court in 2004 (3) TMI 9 - SUPREME Court wherein the Hon'ble Court was of the view that loss from business of export for the purpose of computing u/s 80HHC do not qualify because the opening words are profit derived from such exports . Therefore, the view taken by the Hon'ble High Court was affirmed and the assessee's contention was dismissed. - Decided against assessee. Disallowance of deduction u/s 80IB Old Section 80IA in respect of sale of DEPB - 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 against assessee. Disallowance of share issue expenses u/s 35D - Held that - This issue has already been dealt with by us in Assessment Year 1999-2000 wherein held 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. Interest payment to the Dadhas - CIT(A) allowed the relief - 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 solvents - CIT(A) deleted the addition - Held that - The post search period and in the financial year under consideration the Assessing Officer has simply presumed that the assessee might have sold the spent solvents; therefore, following the past history of the case, we hereby hold that the addition merely based upon the presumption; hence, rightly deleted by ld. CIT(A). - Decided against revenue. Compulsory depreciation allowance - CIT(A) deleted the addition - Held that - 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. Inclusion of insurance claim as part of total turnover for 80HHC purpose - CIT(A) deleted the addition - Held that - The fundamental condition is that exclusion of 90% from business profit arises only if such item of profit is included in business profit. Section 28 of the Act provides for inclusion of certain items as business income because such items otherwise would not have fallen under business profits but for such specific inclusion. In so far as the question of insurance receipt is concerned, an examination is required that whether it was on account of loss of goods so as to consider that the insurance receipt form part of the total turnover or not. Because of this reason, we hereby restore this ground back to the stage of the Assessing Officer to examine the nature of receipt and then decide according to law as discussed above. - Decided in favour of revenue for statistical purposes. 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 of trading export profit for 80HHC purpose - CIT(A) deleted the addition - Held that - The Revenue should not have any grievance because the ld. CIT(A) has followed the decision in the case of Ipca Laboratories (supra). - Decided against revenue. Deduction under section 80IA reduced by CIT(A)- Assessing Officer has disallowed the profit on sale of DEPB on the ground that the proceeds were not derived from manufacturing activity. - Held that - Once this issue has been decided by ld. CIT(A) in favour of the Revenue Department, then there was no legal requirement to raise this issue by the Revenue Department. It appears that this ground was inadvertently raised before us. Otherwise also, while deciding the ground No.12 in Assessment Year 1999-2000 in Revenue's appeal, we have decided the question of DEPB sales against the assessee. - Decided against revenue.

Summary

Issues Involved:
1. Reduction of amount of profits eligible for deduction u/s 80HHC from book profits u/s 115JA.
2. Reduction of amount of profits derived by eligible industrial undertaking referred in s. 80IB from book profits u/s 115JA.
3. Deduction of Lease Equalisation Charge from Book Profits u/s 115JA.
4. Treatment of Exchange Rate Fluctuation as miscellaneous income forming part of total turnover for deduction u/s 80HHC.
5. Inclusion of Sale of scrap in total turnover for deduction u/s 80HHC.
6. Reduction of unrealised export proceeds from export turnover for deduction u/s 80HHC.
7. Considering the loss on Trading Exports for working out the deduction u/s 80HHC.
8. Disallowance of deduction u/s 80IB in respect of sale of DEPB.
9. Reduction of Exchange rate difference in computing the profits of the new industrial undertaking u/s 80IB.
10. Disallowance of share issue expenses u/s 35D.
11. Set Off brought forward losses of erstwhile Gujarat Lyka Organics Ltd.
12. Interest payment to the Dadhas.
13. Unaccounted sale of spent solvents.
14. Compulsory depreciation allowance.
15. Inclusion of sales-tax & excise duty as part of total turnover for 80HHC purpose.
16. Inclusion of insurance claim as part of total turnover for 80HHC purpose.
17. Consideration of gross interest for computing 'Profit of the Business' for 80HHC purpose.
18. Consideration of gross lease rent for computing 'Profit of the Business' for 80HHC purpose.
19. Consideration of operational charges recovered for computing 'Profit of the Business' for 80HHC purpose.
20. Adjustment of trading export profit for 80HHC purpose.
21. Reduction of deduction under section 80IA.

Issue-wise Detailed Analysis:

1. Reduction of amount of profits eligible for deduction u/s 80HHC from book profits u/s 115JA:
The assessee's calculation of book profit u/s 115JA was challenged by the Assessing Officer, who reduced the 80HHC deduction. This was upheld by the First Appellate Authority. However, the Tribunal, following Supreme Court decisions in Ajanta Pharma Ltd. and Bhari Information Tech.Sys.P.Ltd., held that the deduction u/s 80HHC should be based on adjusted book profits u/s 115JA, not taxable profits. Consequently, the AO was directed to re-compute the taxable profit for book profit computation u/s 115JA.

2. Reduction of amount of profits derived by eligible industrial undertaking referred in s. 80IB from book profits u/s 115JA:
The AO curtailed the 80IA deduction, which was affirmed by the First Appellate Authority. The Tribunal restored the issue back to the CIT(A) for re-examination, consistent with the decision for AY 1998-99.

3. Deduction of Lease Equalisation Charge from Book Profits u/s 115JA:
The AO added back lease equalization charges to book profit u/s 115JA, considering them as reserves. The First Appellate Authority upheld this view. The Tribunal, referencing decisions in TVS Finance & Services Ltd. and GE Capital Transportation Financial Services Ltd., reversed the Revenue Authorities' findings, directing the allowance of the claim.

4. Treatment of Exchange Rate Fluctuation as miscellaneous income forming part of total turnover for deduction u/s 80HHC:
The AO included exchange rate difference in total turnover, reducing 80HHC deduction. The Tribunal, following the Gujarat High Court decision in Alps Chemicals Pvt Ltd., held that exchange rate fluctuation gains should be treated as part of export turnover, allowing the assessee's claim.

5. Inclusion of Sale of scrap in total turnover for deduction u/s 80HHC:
The AO included scrap sales in total turnover, reducing 80HHC deduction. The Tribunal, following the Supreme Court decision in Punjab Stainless Ltd., directed re-computation of turnover excluding scrap sales.

6. Reduction of unrealised export proceeds from export turnover for deduction u/s 80HHC:
The AO reduced unrealized export proceeds from export turnover. The Tribunal noted that the assessee did not contest this ground for AY 1999-2000 and dismissed the ground for the current year as not pressed.

7. Considering the loss on Trading Exports for working out the deduction u/s 80HHC:
The AO clubbed losses on trading exports with profits on manufacturing exports for 80HHC deduction. The First Appellate Authority and the Tribunal, following the Supreme Court decision in Ipca Laboratories Ltd., upheld this approach, dismissing the assessee's ground.

8. Disallowance of deduction u/s 80IB in respect of sale of DEPB:
The AO excluded DEPB sale profits from 80IA deduction, affirmed by the First Appellate Authority. The Tribunal, referencing the Supreme Court decision in Liberty India, dismissed the assessee's ground.

9. Reduction of Exchange rate difference in computing the profits of the new industrial undertaking u/s 80IB:
The Tribunal restored the issue back to the CIT(A) for re-examination, consistent with the decision on exchange rate difference in 80HHC computation.

10. Disallowance of share issue expenses u/s 35D:
The AO disallowed share issue expenses, confirmed by the First Appellate Authority. The Tribunal restored the issue back to the AO for de novo consideration, examining whether the expenses were capital or revenue in nature.

11. Set Off brought forward losses of erstwhile Gujarat Lyka Organics Ltd.:
The assessee did not press this ground, and it was dismissed.

12. Interest payment to the Dadhas:
The AO disallowed interest payment to Dadhas, following past history. The First Appellate Authority deleted the addition, consistent with past decisions. The Tribunal affirmed this deletion, dismissing the Revenue's ground.

13. Unaccounted sale of spent solvents:
The AO added unaccounted sale of spent solvents, following past history. The First Appellate Authority deleted the addition. The Tribunal, noting the lack of evidence and following past decisions, affirmed the deletion, dismissing the Revenue's ground.

14. Compulsory depreciation allowance:
The AO added depreciation for Silvasa Unit, which was reversed by the First Appellate Authority. The Tribunal, referencing Gujarat High Court decisions in the assessee's own case and Sakun Polymers Ltd., held that depreciation cannot be foisted upon the assessee, dismissing the Revenue's ground.

15. Inclusion of sales-tax & excise duty as part of total turnover for 80HHC purpose:
The AO included sales-tax and excise duty in total turnover. The First Appellate Authority excluded these amounts. The Tribunal, following the Supreme Court decision in Laxmi Machine Works, affirmed the exclusion, dismissing the Revenue's ground.

16. Inclusion of insurance claim as part of total turnover for 80HHC purpose:
The AO included insurance claim in total turnover. The First Appellate Authority excluded it. The Tribunal restored the issue back to the AO to examine the nature of the receipt, allowing the Revenue's ground for statistical purposes.

17. Consideration of gross interest for computing 'Profit of the Business' for 80HHC purpose:
The AO included gross interest receipts in business profits. The First Appellate Authority included net interest. The Tribunal, following Supreme Court decisions in ACG Associated Capsules Pvt. Ltd. and Topman Exports, directed to compute 80HHC deduction based on net interest, dismissing the Revenue's ground.

18. Consideration of gross lease rent for computing 'Profit of the Business' for 80HHC purpose:
The AO included gross lease rental income in business profits. The First Appellate Authority included net lease rental income. The Tribunal, following Supreme Court decisions, directed to compute 80HHC deduction based on net lease rental income, dismissing the Revenue's ground.

19. Consideration of operational charges recovered for computing 'Profit of the Business' for 80HHC purpose:
The AO included operational charges in business profits. The First Appellate Authority excluded them. The Tribunal, following Supreme Court decisions, directed to compute 80HHC deduction based on net operational charges, dismissing the Revenue's ground.

20. Adjustment of trading export profit for 80HHC purpose:
The AO adjusted trading export loss with manufacturing export profit for 80HHC deduction. The First Appellate Authority confirmed this. The Tribunal upheld this approach, dismissing the Revenue's ground.

21. Reduction of deduction under section 80IA:
The AO disallowed profit on sale of DEPB for 80IA deduction, affirmed by the First Appellate Authority. The Tribunal noted that the ground was redundant as the CIT(A) had not granted relief to the assessee, dismissing the Revenue's ground.

Conclusion:
The appeals of both the assessee and the Revenue were partly allowed, with specific grounds allowed or dismissed based on detailed legal precedents and past decisions.