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2018 (11) TMI 209 - AT - Income TaxDetermination of profits of the assessee company under s.10B - AO artificially computing the non-existent interest costs - whether an arrangement of business transacted between the assessee and its Directors/shareholders can be inferred whereby the assessee earned more than ordinary profits as contemplated under s. 10B(7) r.w.s. 80IA(10)? - Held that - A mere diversion of funds in the form of interest free lending by shareholders to its company do not partake the character of a business transaction. We are alive to the fact that while alleging arrangement , the AO has narrated circumstances like withdrawal of interest free funds immediately on the completion of eligible period for availing benefit under s.10B of the Act. No doubt, such circumstances bring some disquiet. However, such circumstances cannot be regarded as overwhelming for the purposes of grave allegation of arrangement contemplated under s. 80IA(10) of the Act. Revenue has mis-directed itself in law as well as on facts in artificially computing the non-existent interest costs and thus denying the deduction under s.10B eligible to the assessee. The action of the Revenue is wholly unsustainable in law and deserves to be set aside and cancelled. While doing so, we also note that similar issue had cropped up in the case of Gilvert Ispat 2011 (5) TMI 962 - ITAT CHANDIGARH also which was answered in favour of the assessee. Consequently, the order of the CIT(A) on the aforesaid issue is set aside and the AO is directed to exclude the aforesaid adjustment for the purposes of determination of profits of the assessee company under s.10B of the Act. Disallowance on account of reduction in profit eligible for deduction under s.10B - AO has excluded an amount towards freight and insurance expenses from the export turnover but was not made from total turnover - Held that - Apart from the several judicial precedents, the controversy is settled in favour of the assessee also by CBDT Circular No.4/2018 dated 14.08.2018. As per the CBDT circular, the expenditure incurred of such nature are required to be excluded from both export turnover as well as total turnover while computing deduction admissible under s.10A of the Act. In parity, we do not see any error in the order of the CIT(A). Currency Conversion Income - Reduction in profit eligible for deduction u/s 10B in respect of currency rate difference income due to foreign currency rate fluctuation - Held that - As decided in M/S MOTOROLA INDIA ELECTRONICS PVT LTD 2014 (1) TMI 1235 - KARNATAKA HIGH COURT interest income earned from inter-corporate loans and deposits lying in EEFC Accounts are eligible for deduction u/s.10B for the reason that as per the amended section 10B(4), the profit derived from export means profit of the business of the undertaking and not just the profits and gains from export of articles. Since the export profits kept in the EEFC account relate to the business of the undertaking on which the appellant is claiming exemption u/s.10B we hereby direct the A.O to delete the reduction of deduction u/s.10B. Disallowance u/s 14A r.w.r. 8D - disallowance towards proportionate Rule 8D(2)(ii) and towards administrative expenditure presumed to be attributable for earning tax free income under s.8D(2)(iii) - Held that - Disallowance computed by the AO under Rule8D is partly justified to the extent of proportionate interest amounting to ₹ 1,23,435/- in view of availability of interest free funds in excess of corresponding investments yielding tax free income. Therefore, the action of the CIT(A) to this extent is approved. However, the disallowance of ₹ 1,88,372/- in terms of Rule 8D(2)(iii) could not have been assailed by the CIT(A) in view of the statutory presumption available to the AO under the Rule. In the absence of any assertion made on behalf of the assessee to controvert the disallowance, we reverse the action of the CIT(A) to this extent and endorse the action of the AO. Therefore, the disallowance made by the AO to the extent of ₹ 1,88,372/- is sustained. - Decided in favour of assessee in part.
Issues Involved:
1. Legality of re-assessment proceedings under Section 147 of the Income Tax Act. 2. Re-working of exemption claimed under Section 10B by artificially reducing profits. 3. Exclusion of freight and insurance expenses from export turnover but not from total turnover. 4. Deduction of export proceeds realized late under Section 10B. 5. Reduction of profits eligible for deduction under Section 10B due to notional interest. 6. Eligibility of currency conversion income for deduction under Section 10B. 7. Disallowance under Section 14A of the Act. Issue-wise Detailed Analysis: 1. Legality of Re-assessment Proceedings under Section 147: The assessee challenged the re-assessment proceedings under Section 147, claiming they were illegal and without authority. The Tribunal did not find it necessary to adjudicate on this legal ground, as the substantive issue on merits was decided in favor of the assessee. 2. Re-working of Exemption Claimed under Section 10B: The assessee argued against the re-working of the exemption claimed under Section 10B by reducing profits by ?41,54,153, referencing provisions of Section 10B(7) r.w.s. 80IA(10). The Revenue contended that interest-free funds provided by Directors/shareholders artificially inflated the profits. The Tribunal found that the funds were provided before the deduction period and were the Directors/shareholders' own funds. It ruled that charging interest on these funds did not fall within 'business transacted' as per Section 80IA(10). The Tribunal set aside the Revenue's action, directing the AO to exclude the adjustment for determining profits under Section 10B. 3. Exclusion of Freight and Insurance Expenses: The Revenue's appeal challenged the exclusion of ?1,51,68,756 towards freight and insurance from export turnover but not from total turnover. The CIT(A) directed that if these expenses are excluded from export turnover, they must also be excluded from total turnover. The Tribunal upheld this view, citing CBDT Circular No.4/2018, which supports this method of computation. 4. Deduction of Export Proceeds Realized Late: The assessee's appeal for AY 2011-12 included a ground regarding the eligibility of deduction for export proceeds realized late. The Tribunal found the issue covered under Section 155(11A) and directed the AO to examine the factual aspects while determining the quantum of relief. 5. Reduction of Profits Eligible for Deduction due to Notional Interest: For AY 2011-12, the Tribunal addressed the artificial reduction of profits under Section 10B due to notional interest on interest-free funds. It reiterated its decision from AY 2008-09, ruling that the Revenue's action was unsustainable in law. 6. Eligibility of Currency Conversion Income: The Revenue's appeal for AY 2011-12 included a ground on the reduction of deduction under Section 10B by ?1,83,21,375 for currency conversion income. The Tribunal upheld the CIT(A)'s decision, which relied on the Karnataka High Court's ruling in CIT vs. Motorola India Electronics Pvt. Ltd., stating that such income is eligible for deduction under Section 10B as it relates to the business of the undertaking. 7. Disallowance under Section 14A: The Revenue's appeal also challenged the deletion of ?3,12,111 disallowed under Section 14A. The Tribunal partly upheld the CIT(A)'s decision, approving the deletion of ?1,23,439 towards proportionate interest but reversing the deletion of ?1,88,672 towards administrative expenses, thus sustaining the AO's disallowance to this extent. Combined Result: - The assessee's appeals for both AYs 2008-09 and 2011-12 were allowed. - The Revenue's appeal for AY 2008-09 was dismissed. - The Revenue's appeal for AY 2011-12 was partly allowed.
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