2015 (5) TMI 604 - AT - Income Tax

Reduction of amount of profits eligible for deduction u/s 80HHC from the book profits u/s 115JB - Minimum Alternate Tax (MAT) - After reading the cited decisions viz. Ajanta Pharma Ltd. (2010 (9) TMI 8 - SUPREME COURT ) and Bhari Information Tech.Sys.P.Ltd. (2011 (10) TMI 19 - Supreme Court of India) in the background of the facts of this case we are of the view that the decision of Syncome Formulations (I) Ltd. 2007 (3) TMI 288 - ITAT BOMBAY-H has been approved by the Hon ble Supreme Court in the case of Bhari Information Tech.Sys.P.Ltd.(supra) wherein held that the deduction u/s.80HHE in the case of Export of Computer Software has got to be worked out on the basis of adjusted book profits u/s.115JA of the Act and not on the basis computed under the regular provisions of law applicable to the computation of profits and gains of business. Further, an observation was made by the Hon ble Court that once the law itself declares that the adjusted book profit is amenable for further deductions on specified grounds in a case where section 80HHC/80HHE of the Act is operations, it becomes clear that computation for the deduction under those sections need to be worked out on the basis of adjusted book profit. In the case of Syncome Formulations (I) Ltd. (supra) came to the conclusion that deduction claimed by the assessee u/s.80HHC has to be worked out on the basis of adjusted book profit u/s.115JA and not on the basis of profits computed under regular provisions of law applicable to computation of profits and gains of business. The view taken by the Special Bench was accordingly affirmed and the Special Leave Petition filed by the Revenue Department was dismissed. If the dichotomy between eligibility of profit and deductibility of profit is not kept in mind then s. 115JB will cease to be a self-contained code. In s. 115JB, as in s. 115JA, it has been clearly stated that the relief will be computed under s. 80HHC(3)/(3A), subject to the conditions under sub-cls. (4) and (4A) of that section. The conditions are only that the relief should be certified by the chartered accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in cl. (iv) of Explanation to s. 115JB subject to the conditions specified in sub-cls. (4) and (4A) of that section to obliterate the difference between eligibility and deductibility of profits as contended on behalf of the Department. Thus set aside the impugned judgment of the High Court and restore the judgment of the Tribunal. Accordingly, the civil appeal of the assessee is allowed with no order as to costs. - Thus AO is required to re-compute the taxable profit for the purpose of computation of book profit u/s.115JA of the Act in the light of the guide lines laid down by the Hon Courts as cited above - Decided in favour of assessee. Addition of expenses to the book profits calculated u/s.115JB - Held that - Revenue Authorities were first of all required to ascertain the nature of expenditure and thereupon decide whether required to be added back in the calculation of book profit u/s.115JB or not. Although, it is a settled position of law that for the purpose of the calculation of book profit the same is required to be increased by certain amounts as prescribed under Explanation (1) of Section 115JB. But side by side the book profit is required to be calculated as per the accounting policies and accounting standards described under Companies Act, 1956. The law has clearly prescribed that the book profit means the net profit as shown in the P&L Account which is to be computed as per the accounting policies and the accounting standards prescribed under the Act. Therefore, the calculation of the book profit depends upon the net profit as per P&L Account norms laid down in the accounting standards. Since, the AO has not examined this aspect on these lines we deem it proper to restore this ground back to the file of the AO to be decided denovo - Decided in favour of assessee for statistical purposes. Deduction u/s.115JB(2)(iii) - brought forward business loss of unabsorbed depreciation of Pradeep Drug Company Limited - Held that - due to the substantial reserves available at the time of merger it was decided by the amalgamating company and the amalgamated company not to set off such losses or depreciation. Further, the position is that as per Explanation 1(iii) of Section 115JB the book profit is to be reduced by the amount of loss brought forward or unabsorbed depreciation but the provision of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation as Nil . The Assessee has not controverted this fact as noted by the AO that after the amalgamation there was Nil amount of brought forward loss and unabsorbed depreciation. Due to this reason, we are of the view that the Assessee has made a wrong claim which was rightly rejected by the AO. Resultantly, we find no force in this ground of the Assessee, hence dismissed. - Decided against assessee. Inclusion of Exchange Rate Fluctuation in total amount for the purpose of deduction u/s.80HHC - Held that - This issue is directly covered in favour of the assessee by an order of CIT vs, Alps Chemicals Pvt Ltd 2014 (10) TMI 251 - GUJARAT HIGH COURT wherein discussed decisions namely Sterling Foods (1999 (4) TMI 1 - SUPREME Court ) wherein the legal proposition was that the source of the income was the export and earned the said income merely on account of fluctuation in foreign exchange. Also cited a decision of Shah Originals (2010 (4) TMI 216 - BOMBAY HIGH COURT ) wherein as well held that an exporter had an option to keep certain percentage of export receipts in EEFC a/c. The assessee received higher amount in Indian rupees on such amount due to fluctuation in the foreign exchange rate. Conscious of the fact that the assessee had received the proceeds of the export transaction and gained due to fluctuation the court held that such gain cannot only be said to have been derived from export business but the fluctuation gain arose subsequent to receiving the sale consideration hence part of the export sales. The gain was not due to delayed realization of export proceeds - Decided in favour of assessee. Inclusion of Sale of scrap in total turnover for the purpose of deduction u/s 80HHC - Held that - Intention behind enactment of section 80HHC of the Act is to encourage export to earn Foreign Exchange. It was finally concluded that the proceeds generated from the sale of scrap would not be included in the total turnover . See Punjab Stainless Ltd. (2014 (5) TMI 238 - SUPREME COURT)- Decided in favour of assessee. Reduction of unrealised export proceeds from export turnover for the purpose of deduction u/s 80HHC - Held that - There should not be controversy in respect of allowability of the claim. At the most the controversy could be in respect of the year in which the remittance has been realized and remitted in India. As rightly mentioned by the Assessee in one of the reply to the AO that the provision of Section 115(13) are introduced in the statue with the intention to grant relief to all those exporters who have genuinely applied for the extension of time to the competent authority, i.e., RBI. This provision of IT Act thus prescribes that the claim of deduction is admissible in the year in which the convertible foreign exchange has been brought in and accounted in the books of accounts. We, therefore, direct the AO to apply the provisions of Section 155(13) of IT Act and after examining the record pertaining to the year in which the convertible foreign exchange was remitted the deduction should be allowed. - Decided in favour of assessee for statistical purposes. Disallowance of deduction u/s.80IB in respect of sale of DEPB - Held that - Respectfully following the decision of Liberty India (2009 (8) TMI 63 - SUPREME COURT), wherein it was held that Duty Drawback receipts and DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purpose of deduction U/s 80I / 80IA / 80IB. It was commented by S.C. that Sec. 80IB provides for the allowing of deduction in respect of profits and gains derived from the eligible business we hereby dismiss this ground of the assessee - Decided against assessee. Reduction of Exchange rate difference in computing the profits of the new industrial undertaking u/s.80IB - Held that - As informed that the learned CIT(A) has mistakenly not adjudicated this ground pertaining to exchange rate itself. In a situation when the First Appellate Authority has not given an opinion on this issue it is not possible for us to decide that issue because the order in Appeal before us is the order of First Appellate Authority. Therefore in the interest of natural justice, we hereby restore this ground back to him to be decided as per law, needless to say, after providing an adequate opportunity of hearing to both the sides - Decided in favour of assessee for statistical purposes. Disallowance of expenses for increase in share capital - Held that - Sec 35D would apply only in respect of expenditure which is otherwise not allowable under the law being a capital expenditure. This section subscribed or listed certain types of capital expenditure which can be amortised. But if those are not capital expenditure then the view is that after examining the nature and genuineness of the expenditure the same can be considered as Revenue Expenditure. So the outcome of the above discussion is that the provision of amortisation is not intended to supersede any other provision of the income tax act under which such expenditure is otherwise admissible as a deduction. Under the fitness of circumstances it is therefore required to restore this issue back to A.O. to examine both the aspects i.e. Revenue Expenditure or Capital Expenditure and then decide the question of disallowance. - Decided in favour for statistical purposes. Set Off of Brought Forward MAT Credit u/s.115JAA after levy of surcharge - Calculation of Interest u/s.234B. - Held that - As relying on order of CIT Vs. Tulsyan Nec Ltd, 2010 (12) TMI 23 - Supreme Court of India wherein it was held that MAT credit is admissible in terms of Section 115 JAA to be set off against the assessed tax before calculation interest u/s.234 etc. Since, the law laid down has no controversy hence following the decision of Hon ble Supreme Court the AO is hereby directed to grant relief as per law.- Decided in favour for statistical purposes. Disallowance of interest to Dadhas - CIT(A) deleted the addition - Held that - Since in the past a consistent view had been taken that once the Revenue had accepted the business decision of appointment of the said firms then in the same breath could not question the assessee s other decision taken in the ordinary course of business. We therefore follow the view already taken by the respected coordinate benches and affirm the decision of CIT(A), hence this ground of the Revenue is dismissed. - Decided against revenue. Unaccounted sale of solvents - CIT(A) deleted the addition - Held that - Since the year under consideration is also the post search period and in the financial year under consideration the Assessing Officer has simply presumed that the assessee might have sold the spent solvents; therefore, following the past history of the case, we hereby hold that the addition merely based upon the presumption; hence, rightly deleted by ld. CIT(A). - Decided against revenue. Compulsory allowance of depreciation - CIT(A) deleted the addition - Held that - Depreciation not claimed by the assessee could not be deducted despite the introduction of the blockassets concept. We hereby hold that for the year under consideration, which is before the amendment took place, the depreciation cannot be foisted upon the assessee. Therefore, this ground of the Revenue is hereby dismissed - Decided against revenue. Inclusion of sales tax and excise duty in the total turnover for the purpose of deduction under section 80HHC - Held that - As relying on an order of Laxmi Machine Works 2007 (4) TMI 202 - SUPREME Court for the legal proposition that Excise Duty & Sales Tax are indirect taxes so do not involve any element of Turnover . Respectfully following this precedent we hereby affirm the findings of CIT(A) and dismiss this ground of the Revenue. - Decided against revenue. Include scrap sales in the total turnover for the purpose of deduction under section 80HHC - Held that - In the past where the Assessee was in Appeal we have taken a view following Punjab Stainless Steel, (2014 (5) TMI 238 - SUPREME COURT) that the profit generated from the sale of scrap would not be included in the total turnover . On the same lines, we hereby uphold the view taken by learned CIT(A) and reject this ground of the Revenue. - Decided against revenue. Gross interest for computing Profit of the Business for the purpose of deduction under section 80HHC - Held that - ACG Associated Capsules Pvt. Ltd., reported in (2012 (2) TMI 101 - SUPREME COURT OF INDIA ) and Topman Exports, reported in (2012 (2) TMI 100 - SUPREME COURT OF INDIA) and thereupon arrived at the conclusion that 90% of the net interest which had been included in the profits of the business was required to be deducted as per Explanation (baa) of section 80HHC. On the same line, we hereby direct to compute the 80HHC deduction - Decided against revenue. Sale of DEPB license is in favour the Revenue following Liberty India, 2009 (8) TMI 63 - SUPREME COURT hence the issue raised by the Revenue is decided against the Assessee.

Summary

Issues Involved:
1. Reduction of profits eligible for deduction under Section 80HHC from book profits under Section 115JB.
2. Addition of expenses to book profits calculated under Section 115JB.
3. Deduction of brought forward business loss or unabsorbed depreciation under Section 115JB.
4. Inclusion of exchange rate fluctuation in total turnover for deduction under Section 80HHC.
5. Inclusion of scrap sales in total turnover for deduction under Section 80HHC.
6. Reduction of unrealized export proceeds from export turnover for deduction under Section 80HHC.
7. Disallowance of deduction under Section 80IB in respect of sale of DEPB.
8. Reduction of exchange rate difference in computing profits under Section 80IB.
9. Disallowance of expenses for increase in share capital.
10. Set off of brought forward MAT credit after levy of surcharge.
11. Calculation of interest under Section 234B.
12. Addition on account of interest to Dadhas.
13. Addition on account of unaccounted sale of solvents.
14. Compulsory allowance of depreciation.
15. Inclusion of sales tax and excise duty in total turnover for deduction under Section 80HHC.
16. Inclusion of gross interest for computing "Profit of the Business" for deduction under Section 80HHC.
17. Inclusion of gross lease rent for computing "Profit of the Business" for deduction under Section 80HHC.
18. Reduction/deduction under Section 80IB.

Detailed Analysis:

1. Reduction of Profits Eligible for Deduction under Section 80HHC from Book Profits under Section 115JB:
The Tribunal held that the deduction under Section 80HHC should be computed based on adjusted book profits under Section 115JA and not on taxable profits. This was in line with the decisions in Ajanta Pharma Ltd. and Bhari Information Tech.Sys.P.Ltd. The AO was directed to re-compute the taxable profit accordingly.

2. Addition of Expenses to Book Profits Calculated under Section 115JB:
The AO added back an amount of Rs. 7,73,732/- to the book profits, which was not included by the Assessee. The Tribunal restored the issue to the AO to ascertain the nature of the expenditure and decide if it should be added back to the book profits as per the accounting standards under the Companies Act, 1956.

3. Deduction of Brought Forward Business Loss or Unabsorbed Depreciation under Section 115JB:
The AO disallowed the deduction of Rs. 3,39,12,399/- from the book profits, stating that after the merger, there was no brought forward loss or unabsorbed depreciation. The Tribunal upheld the AO's decision, noting that the Assessee had substantial reserves and the claim was not valid.

4. Inclusion of Exchange Rate Fluctuation in Total Turnover for Deduction under Section 80HHC:
The Tribunal held that exchange rate fluctuation gains should be included in the export turnover for computing the deduction under Section 80HHC, following the precedent set by the Gujarat High Court in CIT vs. Alps Chemicals Pvt Ltd.

5. Inclusion of Scrap Sales in Total Turnover for Deduction under Section 80HHC:
The Tribunal directed to recompute the turnover after excluding the sale amount of scrap, following the Supreme Court decision in Punjab Stainless Ltd., which held that proceeds from the sale of scrap should not be included in the total turnover.

6. Reduction of Unrealized Export Proceeds from Export Turnover for Deduction under Section 80HHC:
The Tribunal directed the AO to apply the provisions of Section 155(13) and allow the deduction in the year the convertible foreign exchange is realized, following the legislative intent to grant relief for genuine exporters.

7. Disallowance of Deduction under Section 80IB in Respect of Sale of DEPB:
The Tribunal followed the Supreme Court decision in Liberty India and held that DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purpose of deduction under Section 80IB. The ground was dismissed.

8. Reduction of Exchange Rate Difference in Computing Profits under Section 80IB:
The issue was restored to the CIT(A) for a fresh decision, as it was not adjudicated earlier. The Tribunal emphasized the need for natural justice and proper hearing.

9. Disallowance of Expenses for Increase in Share Capital:
The Tribunal restored the issue to the AO to examine whether the expenses were revenue or capital in nature and decide accordingly, following the precedent set in previous years.

10. Set Off of Brought Forward MAT Credit After Levy of Surcharge:
The Tribunal directed the AO to grant relief as per the Supreme Court decision in CIT Vs. Tulsyan Nec Ltd., which held that MAT credit should be set off against assessed tax before calculating interest under Section 234B.

11. Calculation of Interest under Section 234B:
The Tribunal directed the AO to charge interest under Section 234B after taking into account the set-off of MAT credit, following the Supreme Court decision in CIT Vs. Tulsyan Nec Ltd.

12. Addition on Account of Interest to Dadhas:
The Tribunal dismissed the Revenue's ground, following the consistent view taken in previous years that the business decision of not charging interest was justified by commercial expediency.

13. Addition on Account of Unaccounted Sale of Solvents:
The Tribunal dismissed the Revenue's ground, noting that the addition was based on presumption and lacked evidence, consistent with the decision in previous years.

14. Compulsory Allowance of Depreciation:
The Tribunal held that depreciation cannot be enforced upon the Assessee for the assessment year under consideration, following the Gujarat High Court decision in Assessee's own case.

15. Inclusion of Sales Tax and Excise Duty in Total Turnover for Deduction under Section 80HHC:
The Tribunal dismissed the Revenue's ground, following the Supreme Court decision in Laxmi Machine Works, which held that sales tax and excise duty are indirect taxes and do not form part of the total turnover.

16. Inclusion of Gross Interest for Computing "Profit of the Business" for Deduction under Section 80HHC:
The Tribunal held that 90% of the net interest should be excluded from the profits of the business for the purpose of deduction under Section 80HHC, following the Supreme Court decisions in ACG Associated Capsules Pvt. Ltd. and Topman Exports.

17. Inclusion of Gross Lease Rent for Computing "Profit of the Business" for Deduction under Section 80HHC:
The Tribunal held that net lease rental income should be considered for the purpose of deduction under Section 80HHC, following the Supreme Court decisions in ACG Associated Capsules Pvt. Ltd. and Topman Exports.

18. Reduction/Deduction under Section 80IB:
The Tribunal noted that the issue on the sale of DEPB license was in favor of the Revenue, following the Supreme Court decision in Liberty India. The ground was allowed in favor of the Revenue.

Conclusion:
The Tribunal partly allowed both the Assessee's and the Revenue's appeals, addressing each issue based on the precedents and legal principles established by higher courts. The detailed analysis provided clarity on the application of various provisions of the Income Tax Act, ensuring consistency and fairness in the adjudication process.