2015 (5) TMI 604 - AT - Income Tax

Reduction of amount of profits eligible for deduction u/s 80HHC from the book profits u/s 115JB - Minimum Alternate Tax (MAT) - After reading the cited decisions viz. Ajanta Pharma Ltd. (2010 (9) TMI 8 - SUPREME COURT ) and Bhari Information Tech.Sys.P.Ltd. (2011 (10) TMI 19 - Supreme Court of India) in the background of the facts of this case we are of the view that the decision of Syncome Formulations (I) Ltd. 2007 (3) TMI 288 - ITAT BOMBAY-H has been approved by the Hon ble Supreme Court in the case of Bhari Information Tech.Sys.P.Ltd.(supra) wherein held that the deduction u/s.80HHE in the case of Export of Computer Software has got to be worked out on the basis of adjusted book profits u/s.115JA of the Act and not on the basis computed under the regular provisions of law applicable to the computation of profits and gains of business. Further an observation was made by the Hon ble Court that once the law itself declares that the adjusted book profit is amenable for further deductions on specified grounds in a case where section 80HHC/80HHE of the Act is operations it becomes clear that computation for the deduction under those sections need to be worked out on the basis of adjusted book profit. In the case of Syncome Formulations (I) Ltd. (supra) came to the conclusion that deduction claimed by the assessee u/s.80HHC has to be worked out on the basis of adjusted book profit u/s.115JA and not on the basis of profits computed under regular provisions of law applicable to computation of profits and gains of business. The view taken by the Special Bench was accordingly affirmed and the Special Leave Petition filed by the Revenue Department was dismissed. 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 set aside the impugned judgment of the High Court and restore the judgment of the Tribunal. Accordingly the civil appeal of the assessee is allowed with no order as to costs. - Thus 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. Addition of expenses to the book profits calculated u/s.115JB - Held that - Revenue Authorities were first of all required to ascertain the nature of expenditure and thereupon decide whether required to be added back in the calculation of book profit u/s.115JB or not. Although it is a settled position of law that for the purpose of the calculation of book profit the same is required to be increased by certain amounts as prescribed under Explanation (1) of Section 115JB. But side by side the book profit is required to be calculated as per the accounting policies and accounting standards described under Companies Act 1956. The law has clearly prescribed that the book profit means the net profit as shown in the P 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 allowance of depreciation - CIT(A) deleted the addition - Held that - Depreciation not claimed by the assessee could not be deducted despite the introduction of the blockassets concept. We hereby hold 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 and excise duty in the total turnover for the purpose of deduction under section 80HHC - Held that - As relying on an order of 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) and dismiss this ground of the Revenue. - Decided against revenue. Include scrap sales in the total turnover for the purpose of deduction under section 80HHC - Held that - In the past where the Assessee was in Appeal we have taken a view following Punjab Stainless Steel (2014 (5) TMI 238 - SUPREME COURT) that the profit generated from the sale of scrap would not be included in the total turnover . On the same lines we hereby uphold the view taken by learned CIT(A) and reject this ground of the Revenue. - Decided against revenue. Gross interest for computing Profit of the Business for the purpose of deduction under section 80HHC - Held that - ACG Associated Capsules Pvt. Ltd. reported in (2012 (2) TMI 101 - SUPREME COURT OF INDIA ) and Topman Exports reported in (2012 (2) TMI 100 - SUPREME COURT OF INDIA) and thereupon arrived 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. Sale of DEPB license is in favour the Revenue following Liberty India 2009 (8) TMI 63 - SUPREME COURT hence the issue raised by the Revenue is decided against the Assessee.

Summary

Issues Involved:
1. Reduction of profits eligible for deduction under Section 80HHC from book profits under Section 115JB.
2. Addition of expenses to book profits calculated under Section 115JB.
3. Deduction of brought forward business loss or unabsorbed depreciation under Section 115JB.
4. Inclusion of exchange rate fluctuation in total turnover for deduction under Section 80HHC.
5. Inclusion of scrap sales in total turnover for deduction under Section 80HHC.
6. Reduction of unrealized export proceeds from export turnover for deduction under Section 80HHC.
7. Disallowance of deduction under Section 80IB in respect of sale of DEPB.
8. Reduction of exchange rate difference in computing profits under Section 80IB.
9. Disallowance of expenses for increase in share capital.
10. Set off of brought forward MAT credit after levy of surcharge.
11. Calculation of interest under Section 234B.
12. Addition on account of interest to Dadhas.
13. Addition on account of unaccounted sale of solvents.
14. Compulsory allowance of depreciation.
15. Inclusion of sales tax and excise duty in total turnover for deduction under Section 80HHC.
16. Inclusion of gross interest for computing "Profit of the Business" for deduction under Section 80HHC.
17. Inclusion of gross lease rent for computing "Profit of the Business" for deduction under Section 80HHC.
18. Reduction/deduction under Section 80IB.

Detailed Analysis:

1. Reduction of Profits Eligible for Deduction under Section 80HHC from Book Profits under Section 115JB:
The Tribunal held that the deduction under Section 80HHC should be computed based on adjusted book profits under Section 115JA and not on taxable profits. This was in line with the decisions in Ajanta Pharma Ltd. and Bhari Information Tech.Sys.P.Ltd. The AO was directed to re-compute the taxable profit accordingly.

2. Addition of Expenses to Book Profits Calculated under Section 115JB:
The AO added back an amount of Rs. 7,73,732/- to the book profits, which was not included by the Assessee. The Tribunal restored the issue to the AO to ascertain the nature of the expenditure and decide if it should be added back to the book profits as per the accounting standards under the Companies Act, 1956.

3. Deduction of Brought Forward Business Loss or Unabsorbed Depreciation under Section 115JB:
The AO disallowed the deduction of Rs. 3,39,12,399/- from the book profits, stating that after the merger, there was no brought forward loss or unabsorbed depreciation. The Tribunal upheld the AO's decision, noting that the Assessee had substantial reserves and the claim was not valid.

4. Inclusion of Exchange Rate Fluctuation in Total Turnover for Deduction under Section 80HHC:
The Tribunal held that exchange rate fluctuation gains should be included in the export turnover for computing the deduction under Section 80HHC, following the precedent set by the Gujarat High Court in CIT vs. Alps Chemicals Pvt Ltd.

5. Inclusion of Scrap Sales in Total Turnover for Deduction under Section 80HHC:
The Tribunal directed to recompute 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.

6. Reduction of Unrealized Export Proceeds from Export Turnover for Deduction under Section 80HHC:
The Tribunal directed the AO to apply the provisions of Section 155(13) and allow the deduction in the year the convertible foreign exchange is realized, following the legislative intent to grant relief for genuine exporters.

7. Disallowance of Deduction under Section 80IB in Respect of Sale of DEPB:
The Tribunal followed the Supreme Court decision in Liberty India and held that DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purpose of deduction under Section 80IB. The ground was dismissed.

8. Reduction of Exchange Rate Difference in Computing Profits under Section 80IB:
The issue was restored to the CIT(A) for a fresh decision, as it was not adjudicated earlier. The Tribunal emphasized the need for natural justice and proper hearing.

9. Disallowance of Expenses for Increase in Share Capital:
The Tribunal restored the issue to the AO to examine whether the expenses were revenue or capital in nature and decide accordingly, following the precedent set in previous years.

10. Set Off of Brought Forward MAT Credit After Levy of Surcharge:
The Tribunal directed the AO to grant relief as per the Supreme Court decision in CIT Vs. Tulsyan Nec Ltd., which held that MAT credit should be set off against assessed tax before calculating interest under Section 234B.

11. Calculation of Interest under Section 234B:
The Tribunal directed the AO to charge interest under Section 234B after taking into account the set-off of MAT credit, following the Supreme Court decision in CIT Vs. Tulsyan Nec Ltd.

12. Addition on Account of Interest to Dadhas:
The Tribunal dismissed the Revenue's ground, following the consistent view taken in previous years that the business decision of not charging interest was justified by commercial expediency.

13. Addition on Account of Unaccounted Sale of Solvents:
The Tribunal dismissed the Revenue's ground, noting that the addition was based on presumption and lacked evidence, consistent with the decision in previous years.

14. Compulsory Allowance of Depreciation:
The Tribunal held that depreciation cannot be enforced upon the Assessee for the assessment year under consideration, following the Gujarat High Court decision in Assessee's own case.

15. Inclusion of Sales Tax and Excise Duty in Total Turnover for Deduction under Section 80HHC:
The Tribunal dismissed the Revenue's ground, following the Supreme Court decision in Laxmi Machine Works, which held that sales tax and excise duty are indirect taxes and do not form part of the total turnover.

16. Inclusion of Gross Interest for Computing "Profit of the Business" for Deduction under Section 80HHC:
The Tribunal held that 90% of the net interest should be excluded from the profits of the business for the purpose of deduction under Section 80HHC, following the Supreme Court decisions in ACG Associated Capsules Pvt. Ltd. and Topman Exports.

17. Inclusion of Gross Lease Rent for Computing "Profit of the Business" for Deduction under Section 80HHC:
The Tribunal held that net lease rental income should be considered for the purpose of deduction under Section 80HHC, following the Supreme Court decisions in ACG Associated Capsules Pvt. Ltd. and Topman Exports.

18. Reduction/Deduction under Section 80IB:
The Tribunal noted that the issue on the sale of DEPB license was in favor of the Revenue, following the Supreme Court decision in Liberty India. The ground was allowed in favor of the Revenue.

Conclusion:
The Tribunal partly allowed both the Assessee's and the Revenue's appeals, addressing each issue based on the precedents and legal principles established by higher courts. The detailed analysis provided clarity on the application of various provisions of the Income Tax Act, ensuring consistency and fairness in the adjudication process.