2015 (10) TMI 951 - HC - Income Tax

Computation of Deduction under Section 10B (1) - CIT (A) and AO treating the scrap amount as part of the domestic turnover - Assessee is engaged in the manufacture and export of Fasteners a 100 per cent export oriented unit - ITAT allowed assessee claim - Held that - ITAT correctly held that in terms of the judgment of the Supreme Court in CIT v. Punjab Stainless Steel Industries (2014 (5) TMI 238 - SUPREME COURT) sale of scrap is not includable in the total turnover since the Assessee was not engaged in the business of scrap. Consequently the impugned orders of the CIT (A) and the AO treating the scrap amount as part of the domestic turnover was set aside.- Decided against revenue. Exchange rate fluctuation the ITAT referred to the decision of the Bombay High Court in CIT v. Gem Plus Jewellery India Ltd. (2010 (6) TMI 65 - BOMBAY HIGH COURT ) which held that foreign exchange fluctuations realized within the stipulated period forms part of the sale proceeds and is directly related to the export activates. It was accordingly held that this should be treated as income derived from export activities. Since the provisions of Section 10A and 10B are more or less similar the ITAT rightly held that for the purposes of Section 10B the foreign exchange fluctuation has to be considered as part of the export turnover.- Decided against revenue. Interest on the FDRs - whether the interest on the FDRs could form part of the profits of the business of the undertaking ? - Held that - In the present case the Assessee has stated that the interest on FDRs was received on margin kept in the bank for utilization of letter of credit and bank guarantee limits . In those circumstances the decision of the ITAT that such interest bears the requisite characteristic of business income and has nexus to the business activities of the Assessee cannot be faulted. In other words interest earned on the FDRs would form part of the profits of the business of the undertaking for the purposes of computation of the profits derived from export by applying formula under Section 10B(4) of the Act. - Decided against revenue.

Summary

Issues: Appeal against ITAT order on deduction under Section 10B for AY 2009-10 - Inclusion of scrap sales, exchange rate difference, and interest on FDRs in income calculation.

Analysis:
1. The appellant, an export-oriented unit engaged in manufacturing fasteners, filed a return for AY 2009-10 claiming deduction under Section 10B. The AO included scrap sales, exchange rate difference, and interest on FDRs in the income calculation.

2. The AO held that only profits directly related to EOU activities are exempt under Section 10B. He excluded interest from FDRs and included exchange rate difference in domestic sales. Scrap sales were treated as part of domestic turnover, impacting the deduction under Section 10B.

3. The CIT(A) concurred with the AO's computation. However, the ITAT, citing a Supreme Court judgment, ruled that scrap sales should not be included in total turnover. It referred to a Bombay High Court decision on exchange rate fluctuations, considering them part of export proceeds. The ITAT also referred to a Madras High Court decision supporting this view.

4. The Court found no error in the ITAT's decision on scrap sales and exchange rate fluctuations, aligning with legal precedents. It declined to frame a question on this issue.

5. Regarding interest on FDRs, the ITAT applied Section 10B(4) formula to determine export profits. Citing a Karnataka High Court decision, it held that interest from FDRs should be considered in computing eligible deduction under Section 10B.

6. The Assessee argued that FDR interest was related to business activities, forming part of business profits. The Court agreed, stating that such interest qualifies as business income and should be included in the profits derived from export, as per the Section 10B(4) formula.

7. Consequently, the Court dismissed the appeal, finding no substantial question of law on any aspect.