2016 (5) TMI 953 - AT - Income Tax

Deduction u/s. 80IB - whether the other income consist of freight export received, interest, DEPB received and foreign fluctuation are definitely derived from the Industrial undertaking on which assessee is eligible for deduction U/s. 80IB? - Held that - In respect of interest received while considering the factual matrix of the case the assessee has not proved the direct nexus with the eligible activity, hence we hereby affirm the finding of learned CIT(Appeals) and dismiss this part of the ground. For DEPB received our attention has been dawn on a decision of Hon ble Bombay High Court pronounced in the case of CIT vs. Rachana Udhyog 2010 (1) TMI 38 - BOMBAY HIGH COURT wherein it was held that the law declared by the Hon ble Supreme Court in the case of Liberty India 2009 (8) TMI 63 - SUPREME COURT the deduction u/s 80IB in respect of duty draw back is not entitled for claim of deduction u/s 80IB. Respectfully following this decision, this part of the ground is dismissed. For foreign exchange fluctuation this issue is to be decided in favour of the assessee following that very decision of Bombay High Court pronounced in the case of Rachana Udyog (supra) wherein it was observed that when the sale proceeds of goods exported are received in India in convertible foreign exchange the rupee equivalent of the sale proceed is liable to vary, consequent upon the fluctuation in the rate of foreign exchange. The Court has, therefore, held that the exchange rate fluctuation was directly related to the export of goods, hence eligible for deduction u/s 80IB Deduction U/s. 10B - Held that - DEPB while calculating deduction u/s 10B stood covered in favour of the assessee Foreign exchange fluctuation gain is intimately connected to the export business. As a result, this part of the ground is allowed in favour of the assessee. Miscellaneous income - in the absence of any evidence on record that such type of alleged income had any bearing with the business income of the undertaking therefore, the Revenue authorities were justified in not granting deduction u/s 10B on this income. Even if it was related to the cenvat credit, as alleged by the assessee, the same is required to be adjusted against the excise duty payment. Otherwise also a Cess cannot form a part of the business profit of an undertaking. Distribution of Head Office expenses in the ratio of turnover thereby restricting the claim of the Assessee U/s. 80IB and 10B - Held that - Director s remuneration was debited to an amount of ₹ 54 lakhs in Excel Controlinkage Pvt. Ltd. and ₹ 4,80,000/- debited to G-Three-M Technologies but no amount at all was debited to Vaav Engineers Products Pvt. Ltd. Directors are responsible to look after the business activity of all the three units, therefore, their remuneration is required to be allocated as per the turnover of the three units. As a result, this part of the contention of the assessee is rejected. For travelling expenses of Directors to foreign country, the unit which is in export business is required to share the burden of travelling expenses. In respect of that unit only the travelling expenses (foreign) is required to be allocated on the basis of the turnover. However, in respect of the other unit, no such allocation is required. The reason behind this view is that the facts of the case have revealed that Unit Vaav had participated in an exhibition at Amsterdam, therefore allocation is justifiable. However, in the Unit G-Three-M only regular sales; as per past years, have been executed for which no travelling was claimed to have been undertaken. We, therefore, hold that allocation is required in Unit Excel and Unit Vaav. In support we place reliance on the judgment of Zandu Pharmaceuticals (2012 (9) TMI 620 - BOMBAY HIGH COURT ). As a consequence this part of the ground is partly allowed. Rest of the expenditure such as staff training, recruitment, pollution control, miscellaneous expenses have rightly been debited to the account of Excel Controlinkage Pvt. Ltd. being the head office. We direct not to reallocate these expenses to the other units. Non calculation of deduction u/s 10B of the I.T. Act sub section 7A - according to which the learned authorities are bound by law to allowed the deduction in case of amalgamation of the companies and the authorities has no right to recalculate the deduction u/s 10B sub section 7A. - Held that - Reason for dismissing this ground is that there is no mandate u/s 10B(7A) to grant deduction u/s 10B without looking into the merits of the claim. This sub section (7A) only provides that where an undertaking is amalgamated then the provisions of section 10B shall as far as may be, applied to the resulting amalgamated company. It is clearly prescribed that the provisions would apply as it is to the resulting company as if the amalgamation had not taken place. Even in section 80IB(12), the Statute had drafted the same language. This is not a case that the Revenue Department had not granted claim u/s 10B or u/s 80IB on the ground of amalgamation taken place. There was no such objection of the AO that due to the amalgamation the amalgamated company should not get the benefit of those deductions. Rather as seen from the above foregoing discussion, it is very much evident that the merits of the deduct ions were duly deliberated upon by the AO and only re-captured the quantum of deduction. It appears that the provisions of the Act have not been correctly interpreted. Therefore, the additional ground raised is not as per law that the Revenue Authorities are bound by law to allow the claim of deduction u/s.10B or u/s.80IB without considering the merits or demerits as well as the correctness of the claim.

Summary

Issues Involved:
1. Deduction under Section 80IB
2. Deduction under Section 10B
3. Apportionment of Head Office expenses
4. Additional ground regarding calculation of deductions under Sections 10B(7A) and 80IB(12)

Issue-wise Detailed Analysis:

1. Deduction under Section 80IB:
The assessee claimed a deduction of ?8,52,865 under Section 80IB, which was restricted to ?6,089 by the AO. The AO excluded certain incomes such as freight export received, interest received, DEPB received, and foreign exchange fluctuation, stating they were not derived from the industrial undertaking. The CIT(A) upheld this decision, citing the Liberty India and Sterling Foods judgments, which required a direct nexus between the income and the industrial undertaking.

Freight Export Received:
The assessee did not press this part of the ground, and hence, it was dismissed.

Interest Received:
The interest earned on income tax refund, fixed deposits, water charges deposits, delayed collection, and bank guarantee was considered not directly related to the industrial undertaking. The ITAT upheld the CIT(A)'s decision, dismissing this part of the ground.

DEPB Received:
The DEPB received during the course of export was also not considered as derived from the industrial undertaking. The ITAT followed the Bombay High Court's decision in CIT vs. Rachana Udhyog and dismissed this part of the ground.

Foreign Exchange Fluctuation:
The ITAT allowed this part of the ground, citing the Bombay High Court's decision in Rachana Udyog, which held that foreign exchange fluctuation gains are directly related to export activities and hence eligible for deduction under Section 80IB.

2. Deduction under Section 10B:
The assessee claimed a deduction of ?33,52,127 under Section 10B, which was restricted to ?11,13,460 by the AO. The AO excluded incomes such as freight export received, interest received, DEPB received, foreign exchange fluctuation, and miscellaneous income.

Freight Export Received:
The assessee withdrew this part of the ground, and it was dismissed.

Interest Received:
The ITAT dismissed this part of the ground, maintaining that the interest on fixed deposits had no direct nexus with the industrial undertaking.

DEPB Received:
The ITAT allowed this part of the ground, following the Special Bench decision in Maral Overseas Ltd. and the Delhi High Court's approval in Hritnik Export Pvt. Ltd., which held that DEPB is part of business income and eligible for deduction under Section 10B.

Foreign Exchange Fluctuation:
The ITAT allowed this part of the ground, citing the Bombay High Court's decision in Badridas Gauridu (P) Ltd., which held that foreign exchange fluctuation gains are intimately connected to the export business.

Miscellaneous Income:
The ITAT dismissed this part of the ground, stating that there was no evidence to show that the miscellaneous income had any bearing on the business income of the undertaking.

3. Apportionment of Head Office Expenses:
The AO reallocated certain expenses based on the turnover of each unit, which reduced the eligible profit for deductions under Sections 80IB and 10B. The CIT(A) upheld this apportionment.

Director's Remuneration:
The ITAT upheld the apportionment of Director's remuneration based on the turnover of the three units, as Directors are responsible for all units.

Travelling Expenses:
The ITAT held that travelling expenses related to export activities should be allocated to the relevant units. For Unit Vaav, which participated in an exhibition, the allocation was justified, but no allocation was required for Unit G-Three-M, which had no such expenses.

Other Expenses:
The ITAT directed that other expenses such as staff training and recruitment should not be reallocated and should remain debited to the head office.

4. Additional Ground Regarding Calculation of Deductions:
The assessee raised an additional ground claiming that deductions under Sections 10B(7A) and 80IB(12) should be allowed without recalculating the quantum. The ITAT dismissed this ground, stating that these provisions do not mandate granting deductions without considering the merits of the claim.

Conclusion:
The appeal was partly allowed, with certain parts of the grounds being dismissed and others being allowed in favor of the assessee. The order was pronounced in the Open Court on March 31, 2016.