2012 (10) TMI 53 - AT - Income Tax

Deduction u/s 80HHC in relation to Foreign exchange fluctuation AO made reduction of entire fluctuation gain for the purpose of calculating deduction u/s 80HHC - AO considered such income as income from Other Sources and not derived from export business Held that - Following the decision of ITAT in case of Sujata Grover (2001 (11) TMI 232) and in the case of Priyanka Gems (2004 (12) TMI 288) have held that gains due to fluctuation in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds and it is the part of profits of business. Therefore, foreign exchange fluctuation/gains arose only from export invoice value and are directly relatable to export business of the assessee and the same cannot be excluded from the export turnover. Appeal decide in favour of assessee Deduction u/s 80HHC in relation to service rendered AO made reduction of 90% amount was liable to be deducted from the profits of business in terms of explanation u/s 80HHC, as it was in the nature of income from other sources - CIT (A) reducing 100% of income from the services rendered Held that - There is no discussion by the Assessing Officer and the CIT(A) with regard to the nature of transaction and the same has not been elaborately discussed either in the orders of the Assessing Officer or of the CIT(A). Case remand back to AO. Addition on account of provision for warranty Held that - Estimation should be on a reasonable basis as well as on a scientific basis and on the basis of past history of assessee, so that on the basis of certain information gathered in due course of time, so as to arrive at the correct percentage of the claim. Case remand back to the AO. Addition on account of Voluntary retirement scheme Assessee has taken over the another company - The attached liabilities have also been agreed to be taken over which resulted into absorption of 184 employees of the said erstwhile company AO treat it as capital expenditure CIT(A) delete the same Held that - It was held that when the payment is made for the purpose of retrenchment of workers, it was for the purpose of reducing the staff and bring about a reduction in wage bill as well. So, the expenditure incurred was for the purpose of business and also with a view to maintain good relationship with the labourer. Decision in favour of assessee. Depreciation on Plant and Machinery Held that - As the amount pertains to the difference of the gratuity fund transferred to the balance-sheet and the assessee wants to claim depreciation on this amount, then definitely, it is out of the purview of section 32 of I T Act, so no depreciation deserves to be allowed. AO has to examine the value of the asset in terms of the said agreement vis- -vis the value of the plant and machinery shown in the books of accounts for the year under consideration. Therefore case remand back to AO

Issues Involved:
1. Reduction of income from services rendered and gain on exchange fluctuations while computing profit for the purposes of Section 80HHC.
2. Deletion of addition on account of provision for warranty.
3. Deletion of additions related to Voluntary Retirement Scheme (VRS) expenses.
4. Claim of depreciation on plant and machinery.

Detailed Analysis:

I. ITA No.767/10 - AY 2000-01 - By the Assessee:
Reduction of Income from Services Rendered and Gain on Exchange Fluctuations:
The assessee contested the CIT(A)'s decision to reduce 100% of income from services rendered (Rs.3,40,44,255) and gain on exchange fluctuations (Rs.99,97,852) from the business profits for the purposes of Section 80HHC, treating them as 'income from Other Sources.' The CIT(A) justified this by stating that such income was not directly derived from export business. The Tribunal, however, held that gains due to exchange fluctuation are integral to export proceeds and should not be excluded from export turnover, referencing cases like Sujata Grover and Priyanka Gems. The issue of income from services rendered was remitted back to the AO for detailed examination to determine if it was integrally connected with export business.

II. ITA No.769/10 - AY 2000-01 - By the Revenue:
1. Addition on Account of Provision for Warranty:
The Revenue challenged the deletion of Rs.34,38,502 being provision for warranty. The Tribunal referred to the Pune Bench's decision in the assessee's own case for earlier years, directing the AO to verify the basis of computation for the provision of warranty and to take appropriate action based on detailed evidence provided by the assessee.

2. Addition of VRS Expenses:
The Revenue contested the deletion of Rs.7,41,13,368 (VRS 1998) and Rs.3,38,80,000 (VRS 2000). The Tribunal upheld the CIT(A)'s decision, referencing the Pune Bench's findings that such expenses were revenue in nature and allowable, considering them necessary for business rationalization and maintaining good labor relations.

3. Claim of Depreciation on Plant and Machinery:
The Revenue disputed the claim of Rs.8,09,578 as depreciation on plant and machinery. The Tribunal remitted the issue back to the AO for fresh consideration, emphasizing the need to examine the details of the transaction and the basis of the depreciation claim, consistent with the Pune Bench's approach in the assessee's own case.

III. ITA No.770/10 - AY 2002-03 - By the Revenue:
1. Deletion of Addition of VRS Expenses:
The Tribunal affirmed that the issues regarding the deletion of Rs.6,68,08,261 related to VRS expenses had been addressed in the AY 2000-01 appeal, and the findings applied similarly for AY 2002-03.

2. Claim of Depreciation on Plant and Machinery:
The Tribunal's decision on the claim of Rs.4,55,388 as depreciation on plant and machinery for AY 2002-03 mirrored the approach taken for AY 2000-01, remitting the issue back to the AO for detailed examination.

Conclusion:
- The assessee's appeal (ITA No.767/10) was partly allowed, with the issue of income from services rendered remitted back to the AO.
- The Revenue's appeals (ITA Nos.769 & 770/10) were partly allowed for statistical purposes, with several issues remitted back to the AO for fresh consideration.

(Order pronounced in the open court on 13.7.2012)

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