2004 (11) TMI 286 - AT - Income Tax

Deduction u/s 10A on income from sale of export quota - interest earned from margin money - Free Trade Zone - Whether the interest income forms part of the profit of the industrial undertaking or not - HELD THAT - We have no hesitation in holding that it does and hence is eligible to deduction u/s 10A of the Act. Since we are accepting the main contention of the assessee the alternative contention of claiming deduction u/s 80HHC is not dealt with. Thus the only ground raised in the departmental appeal is rejected and hence the appeal stands disallowed. Income earned on sale of export quota - Admittedly the assessee before us is not claiming deduction u/s 80HHC in respect of profits and other income on which it has availed the benefit of section 10A. It is claiming deduction u/s 80HHC on the income earned on sale of export quota on which benefit of section 10A has been denied to it and which denial the assessee has not seriously challenged. The deduction is being claimed on the ground that grant of export quota is akin to the incentives mentioned in clauses (iiia) (iiib) and (iiic) of section 28 and hence proviso to section 80HHC(3) will apply to it. Section 10A is a territorial benefit available to industrial undertakings set up in specified free trade or export zones. It is a special benefit not available to units located outside the specified zones. However if the assessee feels that the general tax concessions which are available to the industries located in the rest of the country are more advantageous the above sub-section gives an option to the assessee not to avail of the benefit u/s 10A and instead may avail of the benefit of other general tax concessions for any of the relevant assessment years. The profits of the business computed at Rs. 2, 28, 347 are not computed in accordance with any of the clause (a) (b) or (c) of section 80HHC(3). Of course clauses (b) and (c) are not applicable because the assessee is neither a 100 per cent trader exporter nor a mixed exporter. But the profits of the business are not which are envisaged under clause (a). What we have to ascertain as per clause (a) is export profit. However as per the above computation the export profits are already taken out. The business of Rs. 97, 64, 554 is arrived at after carving out export income to avail the benefit under section 10A. Hence there is no question of carving out further export profits as per clause (a). The amount of Rs. 2, 28, 347 is not export profit to which further incentive income as per the proviso to section 80HHC(3) can be added. In short the machinery to compute deduction u/s 80HHC(3) fails and no deduction under the said provision can be granted to the assessee. Lastly the argument of the learned counsel that since the prohibitory clause (iii) of sub-section (4) of section 10A does not make mention of section 80HHC deduction thereunder is allowable is also devoid of merit. The said clause provides that when benefit u/s 10A is availed of the assessee shall not then be entitled to deduction u/s 80HH 80HHA 80-I 80-IA and 80J of the Act. If one takes a look at these provisions they all pertain to industrial undertakings. Therefore to ensure that no assessee claims any benefit over and above the benefit u/s 10A in respect of the same industrial undertaking the said provision is enacted. The reason for not mentioning section 80HHC is that deduction u/s 80HHC is otherwise also not available to the units claiming exemption u/s 10A and hence what is obvious and clear need not be provided for. Thus in the ultimate analysis the assessee is not entitled to deduction u/s 80HHC either in law or on facts on the income earned from sale of export quota. In the result the appeal of the department as well as of the assessee are dismissed.

Issues Involved:
1. Deduction u/s 10A on income from sale of export quota.
2. Deduction u/s 10A on interest earned from margin money.
3. Deduction u/s 80HHC on income from sale of export quota.
4. Levy of interest u/s 234B and 234C.

Summary:

1. Deduction u/s 10A on Income from Sale of Export Quota:
The assessee, a 100% Export Oriented Unit, claimed deduction u/s 10A on income from the sale of export quota. The Assessing Officer denied this deduction, stating that the quota itself did not form an article or thing to be exported and its sale in the domestic market changed the character of the income. The CIT(A) upheld this view, denying the deduction due to the lack of direct nexus between the sale proceeds of export quota and the industrial undertaking. The Tribunal agreed with the CIT(A), referencing the Supreme Court decision in CIT v. Sterling Foods, and rejected the assessee's claim for deduction u/s 10A on the sale of export quota.

2. Deduction u/s 10A on Interest Earned from Margin Money:
The assessee claimed deduction u/s 10A on interest earned from margin money deposited with the bank. The CIT(A) allowed this deduction, noting a direct nexus between the interest income and the business of the industrial undertaking. The Tribunal upheld this decision, emphasizing that the fixed deposit was a precondition for running the industrial undertaking, making the interest income eligible for deduction u/s 10A.

3. Deduction u/s 80HHC on Income from Sale of Export Quota:
The assessee alternatively claimed deduction u/s 80HHC on the income from the sale of export quota. The CIT(A) rejected this claim, stating there was no actual export of goods or things through the sale of export quota. The Tribunal also rejected this claim, noting that the profits of the business computed for deduction u/s 80HHC were not in accordance with the provisions of section 80HHC(3). The Tribunal highlighted that the machinery to compute deduction u/s 80HHC(3) fails, and no deduction under this provision can be granted to the assessee.

4. Levy of Interest u/s 234B and 234C:
The Tribunal noted that consequential relief may be granted to the assessee regarding the levy of interest u/s 234B and 234C.

Conclusion:
Both the department's and the assessee's appeals were dismissed. The Tribunal upheld the CIT(A)'s decisions on the denial of deduction u/s 10A on the sale of export quota and the allowance of deduction u/s 10A on interest earned from margin money. The Tribunal also rejected the assessee's claim for deduction u/s 80HHC on the income from the sale of export quota.

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