2023 (1) TMI 376 - HC - Income Tax

Deduction u/s 80IC - deduction on foreign exchange gain - as argued Foreign Exchange Fluctuation Scheme was earned by the assessee on the import in the course of the business and purchase price of the product was reduced due to the rate fluctuations, as is settled, the same is to be held as having direct nexus with the business activity of the assessee undertaking and, thus, would be eligible for deduction under section 80IC - HELD THAT - The issue is covered by the decision of this Court rendered in the case of ALPS Chemicals (P.) Ltd. 2014 (10) TMI 251 - GUJARAT HIGH COURT as held that the exchange fluctuation was not on account of a delayed realization of export proceeds. The deposit of the receipts in the EEFC account and the exchange fluctuation which has arisen therefrom cannot be regarded as being part of the profits derived by the assessee from the export of goods or merchandise - Appeal is allowed in part to the extent Tribunal s decision relates to Section 80IA. Deduction on exports benefits u/s.80IC - AO disallowed the claim holding that the excess duty refund did not represent the income with first degree of nexus with the manufacturing profits - HELD THAT - As in the case of Meghalaya Steels Ltd 2016 (3) TMI 375 - SUPREME COURT has given a categorical finding that whenever the assessee received transport subsidy, interest subsidy, power subsidy, insurance subsidy which are reimbursement of manufacturing cost incurred by the assessee, the deduction of the said subsidies are allowed under sections 80IB and 80IC. Therefore, it held that CIT(A) was not wrong when it granted 80IC deduction to the assessee in respect of its export benefit representing refund of excise duty paid u/s 80IC - It held, therefore, that the assessee is eligible for deduction on export benefit on account of the refund of excise duty. There does not appear to be any error in understanding the ratio laid down by the Apex Court in the case of Meghalaya Steels Ltd (supra). Both the CIT(Appeals) and the Tribunal have rightly followed the decisions of Dharam Pal Prem Chand 2008 (11) TMI 231 - DELHI HIGH COURT as well as Meghalaya Steels Ltd (supra) which held that the subsidies, which had been received would be income from other sources. Deduction on scrap value u/s.80IC - AO held that the scrap income does not represent income with first decree of nexus manufacturing profit - HELD THAT - The decision of Harjivandas Juthabhai Zaveri and another 1999 (12) TMI 5 - GUJARAT HIGH COURT when taken into consideration, it endorses the view of the assessee and has held against the Revenue If the assessee was not engaged in industrial activities, there was no question of empty barrels or bardans. Instead of manufacturing if the assessee was doing tranding activities, i.e., deal in in raw material, and if the assessee had sold the material on retain basis and earned amount by sale of bardans, then obviously this section will not apply. In view of what we have stated hereinabove, we find that there is no merit in the appeal, and the appeal stands dismissed.

Summary

Issues Involved:

1. Deletion of disallowance of deduction on foreign exchange gain under section 80IC of the Income Tax Act.
2. Deletion of disallowance of deduction on export benefits under section 80IC of the Income Tax Act.
3. Deletion of disallowance of deduction on scrap value under section 80IC of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Deduction on Foreign Exchange Gain under Section 80IC:

The Revenue challenged the ITAT's decision to delete the disallowance of Rs. 1,32,64,686/- on foreign exchange gain. The Assessing Officer had disallowed this amount, arguing that the foreign exchange gain did not have an immediate and direct nexus with the manufacturing activity and thus was not eligible for deduction under section 80IC. The CIT(Appeals) reversed this decision, stating that the foreign exchange fluctuation was directly linked to the business activity, as it reduced the purchase price of the product. The Tribunal upheld the CIT(Appeals)'s decision, citing previous cases where foreign exchange gains were deemed eligible for deduction under section 80IC. The High Court referenced its earlier decision in Commissioner of Income-tax vs. ALPS Chemicals (P.) Ltd., which supported the view that foreign exchange fluctuations related to business transactions are directly linked to the business activity and thus eligible for deduction under section 80IC. Consequently, the High Court found no reason to interfere with the Tribunal's decision.

2. Deletion of Disallowance of Deduction on Export Benefits under Section 80IC:

The Revenue also contested the ITAT's decision to delete the disallowance of Rs. 35,59,463/- on export benefits. The Assessing Officer had disallowed this amount, arguing that the excise duty refund did not have a first-degree nexus with the manufacturing profits. The CIT(Appeals) disagreed, stating that the excise duty refund was directly linked to the manufacturing activity, as it reduced the cost of production. The Tribunal upheld the CIT(Appeals)'s decision, referencing the Supreme Court's decision in Commissioner of Income-tax vs. Meghalaya Steels Ltd., which held that subsidies reimbursed for manufacturing costs are directly linked to the business activity and thus eligible for deduction under sections 80IB and 80IC. The High Court agreed with the Tribunal's decision, stating that the excise duty refund had a direct nexus with the manufacturing activity and was thus eligible for deduction under section 80IC.

3. Deletion of Disallowance of Deduction on Scrap Value under Section 80IC:

The Revenue further challenged the ITAT's decision to delete the disallowance of Rs. 14,26,979/- on scrap value. The Assessing Officer had disallowed this amount, arguing that the scrap income did not have a first-degree nexus with the manufacturing profits. The CIT(Appeals) reversed this decision, citing the Delhi High Court's decision in CIT vs. Sadhu Forgings Ltd., which held that income from scrap generated during the manufacturing process is directly linked to the business activity and thus eligible for deduction under section 80IC. The Tribunal upheld the CIT(Appeals)'s decision, referencing the case of Deputy Commissioner of Income-tax vs. Harjivandas Juthabhai Zaveri, which supported the view that income from the sale of scrap is directly connected with the manufacturing activities and thus eligible for deduction under section 80IC. The High Court found no reason to interfere with the Tribunal's decision.

Conclusion:

The High Court dismissed the appeal, concluding that no substantial question of law arose for consideration. The decisions of the CIT(Appeals) and the Tribunal were upheld, confirming that the deductions on foreign exchange gain, export benefits, and scrap value under section 80IC were valid.