2018 (11) TMI 53 - HC - Income Tax

Computation of deduction u/s 80HHC - Exchange fluctuation, provision written back, should be treated as income derived out of business for computation - Tribunal holding not 90% of Exchange Fluctuation, provision written back, should not be deducted from the business profits under explanation (baa) - Held that - The assessee had explained to the AO that the difference in value was due to exchange fluctuation, which has been accounted separately in profit & loss account and the value adopted by it is based on actual realisation of foreign exchange. With regard to sale of scrap, the assessee contended that the scrap, which was sold forms an integral part of the revenue generated from the industrial undertaking, since the same is derived from operational activity of the undertaking. After examining the factual position, the CIT(A) accepted the case of the assessee and duly supported its finding by referring to the decisions on the point. Thus, in the facts and circumstances of the case, we are of the considered view that no substantial question of law arises for consideration in these appeals and the decision in the case of Alfa Laval India Ltd. 2003 (9) TMI 43 - BOMBAY HIGH COURT would squarely apply to the facts and circumstances of this case. As relevant to take note of the decision of the High Court of Himachala Pradesh in Purewal & Associate Ltd., 2016 (1) TMI 809 - HIMACHAL PRADESH HIGH COURT wherein the Court considered the object of Section 80HHC which was to grant an incentive to earners of foreign exchange and therefore, held that it has to be essentially considered with reference to that object. In paragraph 22 of the judgment, the Court noticed Section 41(1) and pointed out that it creates a legal fiction and can be extended for the purpose allowing from profits of business as referred to in Section 80HHC of the Act. We hold that there is no substantial questions of law arising for consideration in these appeals and the decision purely revolves around the factual matrix and it is not a case of decision on mixed questions of fact and law. Thus, we are not inclined to interfere with the order passed by the Tribunal confirming the order passed by the CIT(A). - Decided against revenue.

Summary

Issues Involved:
1. Treatment of exchange fluctuation and provision written back as income derived from business for computation of deduction under Section 80HHC.
2. Deduction of 90% of exchange fluctuation and provision written back from business profits under Explanation (baa) to Section 80HHC.
3. Inclusion of sales tax refund in business profits for the purpose of Section 80HHC.

Issue-wise Detailed Analysis:

1. Treatment of Exchange Fluctuation and Provision Written Back:

The Tribunal held that exchange fluctuation and provision written back should be treated as income derived from business for the computation of deduction under Section 80HHC. The Tribunal concurred with the CIT(A) and followed the decision of the Delhi Bench in Smt. Sujata Grover vs. DCIT, which stated that the exclusion of 90% of receipts from foreign exchange fluctuations is not justified. The provision written back was considered integral to the undertaking and could not be treated as 'other income' to attract Explanation (baa) to Section 80HHC, supported by the decision in CIT vs. Bangalore Clothing Company.

2. Deduction of 90% of Exchange Fluctuation and Provision Written Back:

The Tribunal held that 90% of exchange fluctuation and provision written back should not be deducted from business profits under Explanation (baa). The Tribunal found that these items were part of business profits and not independent income. The decision of the Hon'ble Supreme Court in Commissioner of Income Tax vs. K. Ravindranathan Nair was considered, but it was distinguished on the grounds that the Supreme Court dealt with independent income like processing charges, which was not analogous to the present case.

3. Inclusion of Sales Tax Refund:

The Tribunal held that sales tax refund is akin to trading receipts arising from the assessee's business activities and forms part of business profits. The Tribunal agreed with the CIT(A) that sales tax refund has a nexus with the business of the assessee and cannot be excluded from the profit of the business for calculating eligible deduction under Section 80HHC. The Tribunal's decision was supported by the High Court of Bombay in Alfa Laval India Ltd., which held that sales tax set off and other refunds computed under 'profits and gains of business or profession' should not be excluded from business profits while computing deduction under Section 80HHC.

Conclusion:

The High Court dismissed the Revenue's appeals, holding that no substantial question of law arose for consideration. The decisions of the Tribunal and CIT(A) were upheld, confirming that exchange fluctuation, provision written back, and sales tax refund should be included in business profits for the purpose of Section 80HHC and not subject to Explanation (baa).