2016 (9) TMI 398 - AT - Income Tax

Claim u/s. 10B - Held that - Reversion of excess provisions and Exchange gain - Admittedly the foreign exchange gain arisen out of the import of rawmaterials or export of finished goods and not interest from external commercial borrowings. The issue regarding taxability of gain or deduction of loss arising on account of fluctuation in rate of foreign exchange has been subject matter of the decision in the case of CIT v. Woodward Governor India P Ltd. 2007 (4) TMI 118 - DELHI HIGH COURT and also the Hon ble Supreme Court 2009 (4) TMI 4 - SUPREME COURT . In terms of the above said judgments the effect of exchange difference in the case of revenue item has to be taken into account in the P&L a/c. As the foreign exchange fluctuation in the case of the assessee relates to import of raw material and export of finished goods the same cannot be excluded and have to be taken in to account while computing deduction under section 10B of the Act. Accordingly, the ld. CIT(A) directed the Assessing Officer to amend the order. With regard to scrap sale, export entitlements, discount received, fixed charges recovery, the ld. CIT(A) has directed the Assessing Officer to amend the order by including all the above receipts while computing deduction under section 10B of the Act. Reversion of excess provisions if it is allowed as deduction in earlier assessment year while computing the business income of the assessee and consequently reversing the same in the assessment year under consideration, it has to be considered as part of the business profit and thereby the assessee is entitled for deduction under section 10B of the Act. Hence, the Assessing officer is directed to verify whether the original provision was allowed as deduction in earlier assessment years and decide the issue afresh accordingly after hearing to the assessee. Thus, the ground raised by the Revenue is allowed for statistical purposes.

Issues Involved:
1. Deduction under section 10B of the Income-tax Act, 1961.
2. Inclusion of various "Other income" in the profits of business for computing the deduction under section 10B.
3. Direct nexus of export incentives with the business of the assessee.

Issue-wise Detailed Analysis:

1. Deduction under section 10B of the Income-tax Act, 1961:
The appeal by the Revenue contests the order of the Commissioner of Income Tax (Appeals) [CIT(A)] allowing the assessee's claim under section 10B of the Income-tax Act, 1961. The assessee, engaged in manufacturing metallic tips for pens, claimed a deduction under section 10B for various incomes aggregating to ?3,32,46,741/- from the profits of the business. The Assessing Officer (AO) had disallowed these claims, but the CIT(A) allowed them, leading to the Revenue’s appeal.

2. Inclusion of various "Other income" in the profits of business for computing the deduction under section 10B:
The AO had excluded several items of income from the profits of the business for the purpose of deduction under section 10B, including reversion of excess provisions, sale of scrap, export entitlements, discount received, fixed charges recovery, and exchange gain. The CIT(A) directed the AO to include these incomes while computing the deduction.

- Reversion of Excess Provisions and Exchange Gain:
The CIT(A) included the reversion of excess provisions (?99,32,474/-) and exchange gain (?1,72,21,329/-) in the profits of the business. The CIT(A) relied on judicial precedents, including the decision in DCIT v. Wipro Ltd., which held that foreign exchange fluctuation gains related to exports should be included in the profits of the undertaking for deduction purposes. The Tribunal upheld this view, noting that the foreign exchange gain arose from the import of raw materials and export of finished goods, thus bearing a direct nexus with the business.

- Sale of Scrap:
The CIT(A) observed that the sale of scrap (?33,48,471/-) was directly related to the production process of manufacturing metallic ballpoint pen tips. Therefore, the profits from the sale of scrap were included in the profits of the business for deduction under section 10B.

- Export Entitlements, Discount Received, and Fixed Charges Recovery:
The CIT(A) included export entitlements (?8,88,380/-), discount received (?9,41,087/-), and fixed charges recovery (?9,15,000/-) in the profits of the business. The CIT(A) reasoned that these incomes had a direct nexus with the business activities and should be included for deduction purposes. The Tribunal agreed, citing judicial precedents that supported the inclusion of such incomes in the profits of the business.

3. Direct nexus of export incentives with the business of the assessee:
The Tribunal emphasized that to qualify for deduction under section 10B, the income must be derived from the export activities of the undertaking. The Tribunal referred to the Supreme Court's decision in Liberty India v. CIT, which clarified that the term "derived from" is narrower than "attributable to," indicating that the income must have a direct nexus with the business activities.

- Judicial Precedents:
The Tribunal cited several judicial precedents, including the Karnataka High Court in CIT v. Motorola India Electronics (P.) Ltd., which supported the inclusion of various incomes derived from business activities in the profits for deduction purposes. The Tribunal also referred to decisions from other benches, including the Mumbai and Hyderabad benches, which had similar findings regarding receipts from scrap sales, export entitlements, and other incomes.

Conclusion:
The Tribunal upheld the CIT(A)'s order, directing the AO to include various incomes in the profits of the business for computing the deduction under section 10B, except for the reversion of excess provisions. The AO was directed to verify if the original provision was allowed as a deduction in earlier assessment years and decide accordingly. The appeal by the Revenue was partly allowed for statistical purposes.

Order Pronouncement:
The order was pronounced on the 29th of July, 2016, at Chennai.

← Previous Next →