2009 (7) TMI 900 - AT - Income Tax

Summary

Issues Involved:
1. Deleting the disallowance of foreign exchange fluctuation loss.
2. Deleting the addition under section 14A of the Act.
3. Inclusion of excise duty in total turnover for deduction under section 80HHC.
4. Exclusion of turnover of unit exempted under section 10A from total turnover for deduction under section 80HHC.
5. Excluding 100% interest income, commission, and rent while computing deduction under section 80HHC.
6. Allocation of expenses to the section 10A unit.

Issue-wise Detailed Analysis:

1. Deleting the Disallowance of Foreign Exchange Fluctuation Loss:
The assessee restated the values of debtors and import invoices due to foreign exchange fluctuation as of 31-3-2004, resulting in a decrease in the value of debtors and an enhancement of import invoices. The Assessing Officer disallowed the claim, treating it as unascertained liabilities/notional losses. On appeal, the CIT(A) allowed the claim, following the ITAT decision in Oil & Natural Gas Corpn. Ltd. v. Dy. CIT. The Tribunal upheld this decision, citing the Supreme Court's ruling in CIT v. Woodward Governor India (P.) Ltd., which held that losses due to foreign exchange fluctuation as of the balance sheet date are allowable under section 37(1) of the Act. The Assessing Officer was directed to delete the addition.

2. Deleting the Addition under Section 14A of the Act:
The Assessing Officer disallowed 20% of the dividend income, arguing that the assessee had not provided evidence to show no expenses were incurred in earning the dividend income. The CIT(A) deleted the addition, noting that the Assessing Officer failed to prove a nexus between the expenses and the income. The Tribunal set aside the matter to the Assessing Officer, instructing to re-examine the claim in light of the ITAT Special Bench decision in ITO v. Daga Capital Management (P.) Ltd., and to compute the disallowance as per Rule 8D of the Income-tax Rules, 1962.

3. Inclusion of Excise Duty in Total Turnover for Deduction under Section 80HHC:
The Assessing Officer included excise duty and customs supervision charges in the total turnover while computing the deduction under section 80HHC. The CIT(A) deleted the addition, following his decision for the previous year. The Tribunal upheld this, referencing the Supreme Court's decision in CIT v. Lakshmi Machine Works, which held that excise duty and sales tax do not constitute turnover and should not be included in total turnover for section 80HHC purposes.

4. Exclusion of Turnover of Unit Exempted under Section 10A from Total Turnover for Deduction under Section 80HHC:
The Assessing Officer included the turnover of the exempted unit in the total turnover for computing the deduction under section 80HHC. The CIT(A) directed the exclusion of the exempted unit's turnover, agreeing with the assessee that the turnover of a unit exempt under section 10A should not be included. The Tribunal, however, restored the Assessing Officer's order, noting interlacing of funds and common management between the units and the absence of specific provisions in sections 80HHC or 10A to exclude such turnover.

5. Excluding 100% Interest Income, Commission, and Rent while Computing Deduction under Section 80HHC:
The Assessing Officer excluded interest, commission, and rent while computing the deduction under section 80HHC. The CIT(A) allowed relief based on ITAT's decision for an earlier year. The Tribunal set aside the issue to the Assessing Officer, instructing to examine the nature of interest income in light of the Delhi High Court decision in CIT v. Shri Ram Honda Power Equip. The Assessing Officer was directed to verify whether the commission and rental income are assessable as business income or under 'other sources' and to adjust the deduction computation accordingly.

6. Allocation of Expenses to the Section 10A Unit:
The Assessing Officer allocated common expenses between the 10A unit and the non-10A unit based on their turnover ratio, resulting in a reduction of the 10A unit's profit. The CIT(A) upheld this allocation. The Tribunal found no infirmity in this method, noting the absence of evidence from the assessee to demonstrate the allocation was unjustified and upheld the CIT(A)'s decision.

Conclusion:
The appeal by the Revenue was partly allowed, and the cross-objection by the assessee was dismissed.