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2015 (11) TMI 1139 - HC - Income TaxDeduction under Section 10B - ITAT not accepting the Assessee s plea in regard to customer claims freight subsidy and interest on fixed deposit receipts even while it accepted the Assessee s case as regards deemed export drawback qualifying for exemption - Held that - Considering the contention of the Assessee as regards customer claims was that it had received the claim of Rs. 28, 27, 224 from a customer for cancelling the export order. Later on the cancelled order was completed and goods were exported to another customer. The sum received as claim from the customer was non-severable from the income of the business of the undertaking. The Court fails to appreciate as to how the ITAT could have held that this transaction did not arise from the business of the export of goods. Even as regards freight subsidy the Assessee s contention was that it had received the subsidy in respect of the business carried on and the said subsidy was part of the profit of the business of the undertaking. If the ITAT was prepared to consider the deemed export draw back as eligible for deduction then there was no justification for excluding the freight subsidy. Even as regards the interest on FDR the Court has been shown a note of the balance sheet of the Assessee which clearly states that fixed deposit receipts (including accrued interest) valuing Rs. 15, 05, 875 are under lien with Bank of India for facilitating the letter of credit and bank guarantee facilities. In terms of the ratio of the decisions of this Court both in Hritnik Exports (2015 (10) TMI 1009 - DELHI HIGH COURT) and Universal Precision Screws (2015 (10) TMI 951 - DELHI HIGH COURT) the interest earned on such FDR ought to qualify for deduction under Section 10B of the Act. - Decided in favour of the Assessee.
Issues Involved:
1. Exemption of Rs. 28,27,224 on account of customer claim. 2. Exemption of Rs. 29,24,405 on account of freight subsidy. 3. Exemption of Rs. 43,287 on account of interest on Fixed Deposit Receipts (FDRs). Issue-wise Detailed Analysis: 1. Exemption of Rs. 28,27,224 on account of customer claim: The Assessee, a private limited company engaged in manufacturing and exporting home furnishings, claimed a deduction for Rs. 28,27,224 received as a customer claim for a canceled export order. The order was later completed and exported to another customer. The Assessing Officer (AO) excluded this amount from the eligible income under Section 10B(4) of the Income Tax Act, asserting that it did not fall within the expression 'profit derived' from the export of articles. The Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) upheld this view. However, the High Court found that the customer claim was non-severable from the income of the business of the undertaking and should be considered as arising from the business of exporting goods. Thus, the ITAT's decision to exclude this amount was set aside. 2. Exemption of Rs. 29,24,405 on account of freight subsidy: The Assessee received a freight subsidy as part of its business operations and claimed it as eligible for deduction under Section 10B. The AO, CIT(A), and ITAT excluded this amount from the eligible income, arguing it did not directly relate to the export of articles. The High Court, referencing previous decisions, noted that if deemed export drawback was considered eligible for deduction, there was no justification for excluding the freight subsidy. The freight subsidy, being part of the profit of the business of the undertaking, should qualify for deduction under Section 10B. Consequently, the ITAT's decision to exclude this amount was overturned. 3. Exemption of Rs. 43,287 on account of interest on Fixed Deposit Receipts (FDRs): The Assessee claimed a deduction for interest earned on FDRs made for business purposes, which were under lien with the bank for facilitating letter of credit and bank guarantee facilities. The AO, CIT(A), and ITAT excluded this amount from the eligible income, stating it did not fall within the profits derived from the export of articles. The High Court referred to the Karnataka High Court's decision in CIT v. Motorola India Electronics Pvt. Ltd. and its own decisions in CIT v. Hritnik Exports Pvt. Ltd. and Principal Commissioner of Income Tax v. Universal Precision Screws, which held that interest on FDRs, if linked to the business activities, should form part of the 'profits of the business of the undertaking' for the purposes of Section 10B(4). The Court found that the interest earned on FDRs in this case was indeed connected to the business activities and should be eligible for deduction. Therefore, the ITAT's decision to exclude this amount was also set aside. Conclusion: The High Court allowed the appeal in favor of the Assessee, setting aside the ITAT's decision to exclude the amounts related to customer claims, freight subsidy, and interest on FDRs from the eligible income for deduction under Section 10B of the Income Tax Act. The Court emphasized that the entire profits of the business should be considered when computing eligible deductions, and once an income forms part of the business of the eligible undertaking, it cannot be excluded from the eligible profits for the purpose of computing deductions under Section 10B.
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