2018 (9) TMI 711 - AT - Income Tax

Foreign exchange fluctuation eligibility for deduction u/s 80IC - Held that - The issue is now squarely covered in favour of the assessee by the decision of CIT Vs. Priyanka Gems 2014 (3) TMI 938 - GUJARAT HIGH COURT and CIT Vs. Metrochem Industries Ltd. 2016 (7) TMI 1374 - GUJARAT HIGH COURT . Both these decisions have considered the decision of the Hon ble Supreme Court in Liberty India Vs. CIT 2009 (8) TMI 63 - SUPREME COURT . No infirmity in the order of the ld CIT(A) in holding that foreign exchange gain is income derived from industrial undertaking and is eligible for deduction u/s 80IC of the Act. Ground No 1 is dismissed. Customer advances written back as income derived from industrial undertaking - deduction u/s 80IC - Held that - The customer advances are in the nature of advances against the various orders. When such jobs are cancelled by the customer the assessee recovers the cost of material and consumable supply to the customer from the advance received and shows it as advances written back. Therefore, this partakes the character of sale and hence is income derived from industrial undertaking. The ld CIT(A) has also given these reasons for deciding the issue in favour of the assessee. DR could not show us any reason that why above sum cannot be income derived from industrial undertaking. No infirmity in the order of the ld CIT(A) in holding that customer advances written back is income derived from the industrial undertaking as it has direct nexus with it, hence, eligible for deduction u/s 80IC Sundry balances of provisions written back as income derived from industrial undertaking and eligible for deduction u/s 80IC - Held that - CIT(A)correctly decided the issue in favour of the assessee. As the provision made was considered as reduction in eligible profit its reversal should be considered as income of undertaking. Miscellaneous receipt received by the assessee is not income derived from industrial undertaking and therefore, same is not eligible for deduction u/s 80IC - Held that - We have already decided this issue in appeal of the assessee for AY 2010-11 in this order. Therefore, following the same reasoning we hold that miscellaneous income of the assessee is not eligible for deduction u/s 80IC of the Act, accordingly, appeal of the assessee is dismissed.

Issues Involved:
1. Eligibility of foreign exchange fluctuation for deduction under Section 80IC.
2. Eligibility of customer advances written back for deduction under Section 80IC.
3. Eligibility of sundry balances of provisions written back for deduction under Section 80IC.
4. Eligibility of miscellaneous receipts recovered from customers for deduction under Section 80IC.
5. Applicability of CBDT Circular No. 3/2018 regarding the monetary limits for filing appeals.

Issue-wise Detailed Analysis:

1. Eligibility of Foreign Exchange Fluctuation for Deduction under Section 80IC:
The revenue challenged the eligibility of foreign exchange fluctuation amounting to ?2,85,59,697/- for deduction under Section 80IC, citing the Supreme Court decision in Liberty India Vs. CIT. The Departmental Representative argued that such income is not derived from the industrial undertaking. However, the assessee's representative cited the Karnataka High Court decision in CIT Vs. Nobel Software Development India Pvt. Ltd and the assessee’s own case for AY 2008-09, where such income was considered eligible for deduction. The Tribunal found the issue in favor of the assessee, referencing CIT Vs. Priyanka Gems and CIT Vs. Metrochem Industries Ltd, which considered the Supreme Court decision in Liberty India. The Tribunal upheld that foreign exchange gain is income derived from the industrial undertaking and eligible for deduction under Section 80IC. Consequently, Ground No. 1 was dismissed.

2. Eligibility of Customer Advances Written Back for Deduction under Section 80IC:
The revenue contended that customer advances written back should not be considered as income derived from the industrial undertaking. The Departmental Representative supported the Assessing Officer's view, while the assessee's representative relied on the CIT(A)’s order. The Tribunal noted that customer advances are advances against orders, and when jobs are canceled, the cost of materials and consumables is recovered from the advance, characterizing it as a sale. Thus, it has a direct nexus with the industrial undertaking. The Tribunal found no infirmity in the CIT(A)’s order and upheld that customer advances written back are eligible for deduction under Section 80IC. Ground No. 2 was dismissed.

3. Eligibility of Sundry Balances of Provisions Written Back for Deduction under Section 80IC:
The revenue argued against the eligibility of sundry balances of provisions written back amounting to ?30,74,769/- for deduction under Section 80IC. The assessee contended that these amounts were initially debited as business expenditure, reducing the income in the previous year, and their reversal should swell the profit of the industrial undertaking. The Tribunal agreed with the CIT(A) that the provision's reversal should be considered as income of the undertaking, thus eligible for deduction under Section 80IC. Ground No. 3 was dismissed.

4. Eligibility of Miscellaneous Receipts Recovered from Customers for Deduction under Section 80IC:
The assessee appealed against the CIT(A)’s decision that miscellaneous receipts recovered from customers on account of business expenses and related costs are not eligible for deduction under Section 80IC. The Tribunal upheld the CIT(A)'s decision, noting that such miscellaneous recoveries are an independent source of income beyond the first degree of nexus with the industrial undertaking. Consequently, the ITA No. 315/Del/2015 filed by the assessee was dismissed.

5. Applicability of CBDT Circular No. 3/2018 Regarding Monetary Limits for Filing Appeals:
For AY 2011-12, the revenue challenged the CIT(A)’s decision on customer advances written back. However, the tax effect involved was ?4,78,249/-, below the ?20 lakhs threshold set by CBDT Circular No. 3/2018. Both parties acknowledged that the circular applied, and the Tribunal dismissed the revenue’s appeal as non-maintainable due to the low tax effect. Consequently, the cross objection filed by the assessee was also dismissed.

Conclusion:
The Tribunal disposed of all six appeals, maintaining the CIT(A)’s decisions favoring the assessee on foreign exchange fluctuation, customer advances written back, and sundry balances of provisions written back for deduction under Section 80IC. However, it upheld the CIT(A)’s decision against the eligibility of miscellaneous receipts for such deduction. Appeals with tax effects below ?20 lakhs were dismissed based on CBDT Circular No. 3/2018. The order was pronounced in the open court on 11/09/2018.

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