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TMI Blog2011 (1) TMI 1305X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that sales of scrap formed part of total turnover for computing the deduction u/s. 80HHC. [4] On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the reduction of unrealized export turnover of ₹ 42,82,432/- out of total export turnover for computing the deduction, inspite of the fact that appellant had duly filed an application for extension of time with the jurisdictional Commissioner of Income Tax and the same was not rejected by the Commissioner of Income Tax. [5] On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the computation carried out by the Assessing Officer of the amount deductible u/s. 80HHC for the purpose of computation of book profits under explanation to sec. 115JA (1) on the basis of taxable profits as per Income Tax Act, 1961 and not as per Book Profits as claimed by the Appellant. [6] On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not deciding the ground of the Appellant relating to the computation carried out by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of export trading profits for the purpose deduction u/s 80HHC. [9] On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. [10] It is therefore, prayed that the order of the Ld GIT (A) may be set- aside and that of the order of the Assessing Officer be restored to the above extent. 2. Adverting first to ground no.1 in the appeal of the assessee, facts, in brief, as per relevant orders are that return declaring income of ₹ 2,42,77,000/- in terms of provisions of sec.115JA of the Income-tax Act, 1961 [hereinafter referred to as the Act ] filed on 30-11-1998 by the assessee, manufacturing pharmaceuticals, was processed on 7.5.1999 u/s 143(1)(a) of the Act. Subsequently, the assessee filed a revised return on 26.5.1999 ,claiming weighted deduction u/s 35(2AB) of the Act .This return was also revised on 8.3.2000 , withdrawing weighted deduction on some of the items of expenditure. These revised returns were not processed by the Assessing officer[AO in short] on the ground that these were filed after processing the original return on 7.5.1999. Since the AO ignored revised returns, the assessee pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of sec.139(5) of the Act if any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. In the instant case, indisputably, the assessee filed return u/s 139(1) of the Act on 30.11.1998 and thereafter submitted revised return on 26.5.1999 ,claiming weighted deduction u/s 35(2AB) of the Act .This return was again revised on 8.3.2000. Both these returns have been filed before the expiry of one year from the end of the relevant assessment year on 31.3.2000 and before the completion of the assessment. Apparently, these revised returns could not be ignored and rightly so, the AO based computation of income on the basis of second revised return on the penultimate page of the assessment order and has also considered the claim of the assessee for weighted deduction u/s 35(2AB) of the Act, for which two revised returns were filed. In the light of these facts, the ld. CIT(A) co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded that the receipts on account of exchange rate fluctuation could not form part of the export turnover since the 'business profits' for the purpose of section 80 HHC do not include such receipts. Accordingly, relying on the decisions reported in 243 ITR 192 (Ker.), 245 ITR 54 (Mum), 245 ITR 849 (Mum), 71 TTJ 792 (Mum) and 67 ITD 347 (Coch) , the ld. CIT(A) concluded that the receipt on accumulation of foreign exchange kept in the EEFC Account was akin to interest receipt on the deposits kept in this account, which was not eligible for deduction u/s 80HHC of the Act. Therefore, the ld. CIT(A) upheld the findings of the AO ,holding that the receipts of ₹ 23,51,802/- on account of exchange rate fluctuation on EEFC Account formed part of total turnover for computing the deduction u/s 80HHC of Act. 9. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee reiterated their submissions before the lower authorities while the ld. DR supported the findings of the ld. CIT(A). 10. W e have heard both the parties and gone through the facts of the case. Indisputably, the exchange fluctuating gain ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its derived by the assessee from the export of goods or merchandise. Since the fluctuation in that case was not on account of the sale proceeds or for that matter on account of a delayed realization of the sale proceeds and instead, the fluctuation had arisen in the deposits maintained by the assessee in the EEFC Account in convertible foreign exchange after the completion of the export transaction, the Hon'ble High Court concluded that this would not form part of business income and profits of the business while computing deduction u/s 80HHC of the Act. In the instant case , the expenses debited in profit and loss account revealed that the assessee reduced the miscellaneous expenses by an amount of ₹ 23,51,002/- attributable to exchange rate difference and accordingly, the AO treated the amount as part of total turnover. Admittedly, the amount of exchange rate fluctuation in the EEFC was part of other income. There is nothing to suggest that the amount has any relation to the turnover or the export turnover as defined in the relevant provisions of sec. 80HHC of the Act. The turnover means the value of goods purchased/sold in the course of carrying on of the business. Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard both the parties and gone through the facts of the case. W e find that a co-ordinate Bench in the aforecited decision in Claas India Ltd.(supra) while adjudicating a similar issue held that the scrap, generated and which is sold ,only goes to reduce the cost of material consumed in the manufacturing process and therefore, the same cannot be considered as part of turnover of the business carried on by the assessee. Similar view had been adopted by Chandigarh Bench 'SMC' in the case of ITO vs. Jagraon Exports (2002) 124 Taxman 220 (Chd)(Mag). Following this decision, the Delhi Bench directed the AO to exclude the amount realized on sale of scrap from the total turnover adopted for computing deduction under s. 80HHC of the Act. 14.1. Hon'ble Madras High Court in the case of CIT vs. Ashok Leyland Ltd.,297 ITR 107(Mad.) while following their own decisions in CIT v. Madras Motors Ltd./M.M. Forgings Ltd. [2002] 257 ITR 60 (Mad) and CIT v. N.S.C. Shoes [2002] 258 ITR 749 (Mad) upheld the findings of the ITAT that since the metallic scrap churned out in the process of the assessee's manufacturing activities did not form part of the trading goods or stock-in-trade of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of deduction u/s 80HHC of the Act for the purpose of sec. 115JA of the Act. 19. We have heard both the parties and gone through the facts of the case as also the decisions relied upon. We find that while adjudicating the claim for deduction u/s 80HHC of the Act for determining the book profits u/s 115JA of the Act ,the Mumbai Special Bench of ITAT in the case of DCIT vs. Syncome Formulations (I) Ltd.,106 ITD 193 held that the deduction under section 80HHC in a case of MAT assessment is to be worked out on the basis of the adjusted book profits and not on the basis of the profit computed under the regular provisions of law applicable to the computation of profit and gains of business or profession. However, subsequently, Hon'ble Bombay High Court in their aforesaid decision in CIT Vs. Ajanta Pharma Ltd.,223 CTR(Bom.)441 overruled the decision in the case of Syncome Formulations (I) Ltd.(supra). On further appeal by the assessee, Hon'ble Apex Court in the case Ajanta Pharma Ltd. vs. CIT, 327 ITR 305(SC) while referring to the relevant provisions of sec. 115JB and sec. 80HHC of the Act upheld the view taken by the Special Bench in the case of Syncome Formulations (I) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year in respect of which deduction is to be allowed and credited to the reserve account to be utilized for the business purpose. Section 80HHC(1) concerns eligibility whereas Section 80HHC(3) concerns computation of the quantum of deduction/tax relief. At one point of time prior to the Finance Act, 2000, exporters were allowed 100% deduction in respect of profits derived from export of goods. However, that has now been reduced in a phase-wise manner under Section 80HHC(1B). It may be noted that all assessable entities are not eligible for deduction under Section 80HHC. Similarly, only eligible goods are entitled to such special deduction under Section 80HHC(1). A bare reading of Section 80AB shows that computation of deduction is geared to the amount of income, but Section 80HHC(3), which refers to quantification of deduction is geared to the exports turnover and not to the income. On the other hand, Section 115JB refers to levy of MAT on the deemed income. The above discussion is only to show that Sections 80HHC and 115JB operate in different spheres. Thus, two essential conditions for invoking Section 80HHC(1) are that assessee must be in the business of export and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecomes clear that the amount of profits eligible for deduction under Section 80HHC, computed under clause (a) or clause (b) or clause (c) of sub-section (3) or sub-section (3A), as the case may be, is subject to the conditions specified in that Section. According to the Department, the assessee herein is trying to read the various provisions of Section 80HHC in isolation whereas as per clause (iv) of Explanation to Section 115JB, it is clear that book profit shall be reduced by the amount of profits eligible for deduction under Section 80HHC as computed under clause(a) or clause(b) or clause(c) of subsection (3) or sub-section (3A), as the case may be, of that Section and subject to the conditions specified in that Section, thereby meaning that the deduction allowable would be only to the extent of deduction computed in accordance with the provisions of Section 80HHC. Thus, according to the Department, both eligibility as well as deductibility of the profit have got to be considered together for working out the deduction as mentioned in clause (iv) of Explanation to Section 115JB.We find no merit in this argument. If the dichotomy between eligibility of profit and deductibil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und no. 5 in the appeal of the assessee is allowed. 20. Ground no.6 in the appeal of the assessee relates to non- adjudication of the ground in the appeal of the assessee before the ld. CIT(A) for deduction u/s 80IA of the Act while determining book profits in terms of clause (v) of the explanation below the extant sec. 115JA(2) of the Act. The AO while computing book profits in terms of provisions of sec. 115JA of the Act allowed deduction u/s 80IA the Act, on the eligible profits of the industrial undertaking computed under the normal provisions as against the claim of the assessee for computation of such deduction on the basis of book profits. The ld. AR argued that their ground before the ld. CIT(A) was not adjudicated. Accordingly, the ld. CIT(A) may be directed. 21. Ground no.7 in the appeal of the assesse relates to reduction of an amount of ₹ 5,35,035/-,allocated towards exchange rate difference out of miscellaneous expenses while working out deduction u/s 80IA of the Act from the profits of Silvassa unit. The ld. AR argued that their ground no.15.1(c) before the ld. CIT(A) was not adjudicated. Accordingly, the ld. CIT(A) may be directed. 22. After hearing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that since the expenses in question pertain to pre operative period of the new unit at Silvasa, the AO was justified in not allowing the claim of the assessee. In fact, an independent unit has been set up by the assessee company on newly acquired plot numbers 20 and 21 at Silvasa and as such the decisions relied upon by the Ld. Authorized Representative in this regard are not applicable to the facts in the assessee's case, the commercial production of the newly set up unit has not started in the year under appeal. Dismissing a special leave petition in the case of CIT vs. SPONGE IRON INDIA LTD. (1993), 204 ITR (St.) 11-12, tHE Hon'ble supreme court has held that expenses Incurred prior to commencement of business are not deductible. The Assessing Officer's action in disallowing the expenses of ₹ 9,61,248/- is therefore considered to be in order and the addition sustained. 26. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). the ld. AR on behalf of the assessee while relying upon decisions in Essar Steel Ltd. vs. DCIT, 97 ITD 125 (Ahd.),CIT vs. Rane(Madras) Ltd.,293 ITR 459(Mad.), CIT vs. Usha Iron Ferro Metal Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r concluding so. No such finding is evident from the impugned orders nor there is any material before us to conclude so. Whether or not the establishment of a new unit constituted expansion or extension of the existing business can be evident from the analysis of facts and figures of the various units and the products proposed to be manufactured in the new unit and those manufactured in the existing units. In the absence of any material before us, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issue of claim for the aforesaid expenses in accordance with law in the light of various judicial pronouncements including the aforecited decisions, after allowing sufficient opportunity to both the parties . Needless to say that while redeciding the appeal, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act and bringing out clearly as to whether or not the establishment of a new unit constituted expansion or extension of the existing business and that there was inter-connection and inter-lacing of the business in the proposed unit wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in the following terms: I have considered the submission made by the Ld. AR and have gone through the Assessment order made by the AO. I have also considered the legal position In this regard. I find that the appellant has a case to succeed. I have come across a recent decision of the Hon. ITAT B Bench, Mumbaf In the case of NEHA TRANSMISSIONS PVT. LTD. vs. ITO in ITA no. 4877/MUM/1999 DATED 6.7.2001. The Issue before the Hon. ITAT was whether claim for depreciation was optional. The assessment year involved was assessment year 1996-97. Before the Tribunal, the revenue justified the orders of the lower authorities and contended that after the concept of block of assets was introduced, Section 34 (1) has been deleted and the MAHENDRA MILLS case on which reliance was placed by the assessee, was for the AY prior to the said amendment. Further, as held by the Hon. Supreme Court In the case of MOTHER INDIA REFRIGERATION PVT. LTD., the claim of depreciation was a charge on the profits of the assessee. Therefore, deductions u/s. 80 IA has to be allowed on the correct profit worked out as per the Act i.e. after allowing depreciation. Reliance was also placed on the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee supported the order of the ld. CIT(A) and submitted that the issue is covered in favour of the assessee by the decision dated 6-03-2000 of the ITAT Ahmedabad Bench-C in the assessee's own case for AYs 1995-96 1996-97 in ITA nos.2355/Ahd/1998 1261/Ahd./1999. Inter alia, the ld. AR while relying upon decisions reported in CIT vs. Kerala Electric Lamp W orks Ltd.,261 ITR 721 (Ker) and Morepen Laboratories Ltd. vs. JCIT, 95 TTJ 404(Chandigarh) as also decision dated 22.2.2010 of the Bangalore Bench in the case of ACIT vs. JSW Steel Ltd. in ITA no.848/Bang./2009 for the AY 1999-2000 contended that the ld. CIT(A) separately adjudicated the issue of disallowance of depreciation raised by the assessee in ground nos. 3 15.1(b) of their appeal. The Revenue is in appeal before the ITAT only against the issue decided in their ground no.3 before the ld. CIT(A). The ld. AR vehemently argued that the scope of the appeal can not be enlarged by raising a plea on the issue adjudicated by the ld. CIT(A) in their ground no.15.1(b) before the ld. CIT(A). Since the Revenue did not raise a separate ground for the purpose, the ld. AR argued that plea on behalf of the Revenue can not be en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to depreciation @ 25%, installed in the industrial undertaking at Silvasa and have not separately disputed the reiterated findings of the ld. CIT(A) while considering claim for deduction u/s 80IA of the Act. Simply because the ld. CIT(A) recorded his findings at two different places in the impugned order while considering two separate grounds viz. ground nos. 3 15.1(b) raised by the assessee before the ld. CIT(A), does not imply that the Revenue can not raise a common ground. In fact, while adjudicating ground no.15.1(b), the ld. CIT(A) merely reiterated his findings on the issue raised in ground no.3. W e do not find any infirmity or illegality if the Revenue has raised only one ground relating to disallowance of depreciation of ₹ 80,13,177 u/s 32 of the Act ,especially when the said claim of depreciation was only in respect of plant and machinery installed in the industrial undertaking at Silvasa, the eligible profits of which alone entitled the assessee to deduction u/s 80IA of the Act. W e are of the opinion the ground no.1 raised by the Revenue before us is wide enough to consider the plea of the ld. DR regarding issue of allowance of depreciation on the plant and mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by the Department. The only restriction is that the plea entertained and the directions given by the Tribunal shall be in respect to the subject-matter of the appeal. Even though the issue before us has been adjudicated by the lower authorities and the ld. DR merely pointed out the relevant facts in the context of ground raised before us, assuming the plea raised by the Departmental Representative is new, even then the same has to be accepted in the light view taken by the Hon'ble Apex Court on the powers of the Tribunal in Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232 (SC). A similar view was taken in N.P. Saraswathi Ammal Ors. vs. CIT (1982) 138 ITR 19 (Mad), CIT vs. Indian Express (Madurai) (P) Ltd. (1983) 33 CTR (Mad) 314 , CIT vs. A.C. Paul (1983), 142 ITR 811 (Mad), CIT vs. Ice Suppliers Corporation (1967) 64 ITR 195 (Pune) and ACIT vs. Amarnath Reddy (Chennai) (TM) (2010) 132 TTJ (Chennai) (TM) 377. 32.2 Now coming to the merit of the issue raised in the aforesaid ground . Though the ld. AR relied upon a number of decisions, in none of these decisions the issue of option to claim depreciation was examined in the context of deduction u/s 80IA of the Act, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance. This is because Chapter VI-A is an independent code by itself for computing these special types of deductions. In other words, one must first calculate the gross total income from which one must deduct a percentage of incomes contemplated by Chapter VI-A. That such special incomes were required to be computed as per the provisions of the Act, viz., s. 29 to s. 43A, which included s. 32(2). Therefore, one cannot exclude depreciation allowance while computing profits derived from a newly established undertaking for computing deductions under Chapter VI-A. 32.5 In the case of CIT v. Gannon Dunkerley and Co. Ltd. [1995] 216 ITR 708 the Hon'ble Bombay High Court was dealing with the issue whether to exclude unabsorbed depreciation and unabsorbed rebate while computing the total income. The Hon'ble High Court held as under: Therefore while ascertaining the profits and gains attributable to a priority industry which forms a part of such total income necessary deductions required under the Income-tax Act have to be made including deduction for depreciation. In the present case, it is only the depreciation in the current year which is being deducted and we do not se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation allowable under section 32 of the Act, even though the assessee has computed the total income under Chapter IV by disclaiming the current depreciation. 32.7 Hon'ble Rajasthan High Court in Vijay Industries v. CIT [2004] 270 ITR 175 dealing with the very same issue of whether a newly established undertaking while claiming special deduction under section 80HH and where depreciation ought to be claimed under section 32 or not, has held that the depreciation under section 32 will have to be first taken in to account, before granting deduction under Chapter VI-A. 32.8 Hon'ble Gujarat High Court in CIT v. Cadila Chemicals P. Ltd. [2003] 259 ITR 692 in no uncertain terms held that when any deduction under Chapter VI-A is claimed, then while computing the total income the depreciation will have to be deducted before making any deduction under section 80HH of the said Act. The relevant observations of the Hon'ble jurisdictional High Court are as under: Coming to question No. 2, the learned counsel for the Revenue relies on the decision of this court in Paushak Ltd. v. CIT [1994] 210 ITR 535, wherein this court relied on the decision of the apex court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, the AO rejected this submission on the ground that the notification was not retrospectively applicable. 34. On appeal, on the basis of a clarification dated 13.8.2001 issued by the prescribed authority, the learned CIT(A) allowed the claim of the assessee in the following terms:- I find that the approval of the secretary, DSIR, I.e. the prescribed authority for In-house R D enabling the assessee company to claim weighted deduction u/s. 35(2 AB) is in order. The AO therefore does not appear to be correct in arriving of the adverse conclusion on the basis of facts that the appellant made application to Secretary DSIR late i.e. after the conclusion of the FY and that the original order of the prescribed authority did not mention the applicability of the provision of law for the AY in question. What the provisions of section 35 (2AB)(1) inter alia ,require is in house research and development as approved by the prescribed authority and the prescribed authority for this purpose is Secretary, Department of Scientific and Industrial Research, Government of India, it Is immaterial as to how the application has been processed and satisfaction arrived at by the Secre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -2000. Inter alia, it was pointed out by the assessee that they had mentioned the period under consideration in their application. Since the prescribed authority clarified vide their letter dated 13.8.2001 that approval was equally applicable for the year under consideration, the learned CIT(A) allowed the claim of the assessee. Thus, the facts on record reveal that all the conditions of grant of deduction under s. 35(2AB) of the Act are satisfied. In these circumstances, especially when the Revenue have not brought to our notice any material so as to enable us to take a different view in the matter, we do not find any reason to interfere with the findings of the learned CIT(A) holding that the assessee is entitled to deduction u/s 35(2AB) of the Act. This view of ours is supported by the decision of the ITAT in the case of Claris Life-sciences Ltd.(supra). In view of the foregoing, ground no.2 in the appeal of the Revenue is dismissed. 37. Ground No.3 in the appeal of the Revenue relates to exclusion of insurance receipts from the total turnover for the purpose of deduction u/s 80HHC of the Act. The AO included an amount of ₹ 17.0 lacs on account of insurance claim in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction u/s 80HHC of the Act. 42. On appeal, the learned CIT(A) directed to exclude sales tax and excise duty from the total turnover while relying upon decisions in the case of Sudarshan Chemicals Industries Ltd., 163 CTR (Bom) 596, 245 ITR 769 and Dy. CIT vs. Asher Textiles LTD., (2001) 73 TTJ 727(Madras). 43. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the order of the AO in the light of provisions of sec. 145A of the Act while the ld. AR on behalf of the assessee relied upon the order of the AO in view of judgment of the Hon'ble Supreme Court in the case of CIT vs. Lakshmi Machine Works 290 ITR 667 (SC). 44. We have heard both the parties and gone through the facts of the case. We are not inclined to accept the plea of the ld. DR that the provisions of sec. 145A were applicable to the concept of total turnover even while determining the deduction u/s 80HHC of the Act, in view of the following observations of the Hon'ble Apex Court in the case of Laxmi Machine Works(supra), wherein it was held as under: .........We have to read the words total turnover in section 80HHC as part of the formula w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under the Excess Profits Tax Act, it existed in the Business Profits Tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of turnover , excise duty and sales tax also cannot form part of the turnover . Similarly, interest emanates from exports and yet interest does not involve an element of turnover. The object of the Legislature in enacting section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, turnover was the requirement. Commission, rent, interest, etc. did not involve any turnover. Therefore, 90 per cent. of such commission, interest etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in section 80HHC(3) for the simple reason that they did not emanate from the export turnover , much less any turnover. Even if the assessee was an exclusive dealer in exports, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rking out total turnover for the purpose of deduction u/s 80HHC of the Act. 44.3. In view of aforesaid decision of the Hon'ble Supreme Court, we are of the opinion that the ld. CIT(A) was justified in directing the AO to exclude excise duty sales tax while working out total turnover for the purpose of deduction u/s 80HHC of the Act. Thus, ground no.4 in the appeal of the Revenue is dismissed.. 45 Ground no.5 in the appeal of the Revenue relates to exclusion of 90% of the net interest income from the profits of the business while computing deduction u/s 80HHC of the Act. The AO noticed that the assessee reduced only 90% of the net interest income of ₹ 1,60,06,899/- while determining the 'profits of the business' in terms of explanation (baa) to sec. 80HHC of the Act while the gross receipts of interest amounted to ₹ 12,66,88,979/-. To a query by the AO, the assessee replied vide its letter dated 21-03-2001 that the company received gross interest of ₹ 12,66,88,979/- and netted off the interest payment of ₹ 11,06,82,080/- against the interest earned and reduced 90% of net interest earned from the profits of the business eligible for deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction u/s 80HHC of the Act . The AO while determining profits of the business for the purpose of deduction u/s 80HHC of the Act reduced 90% of the gross operational charges as against the claim of the assessee that the entire amount was business income and therefore, nothing was deductible. 48. On appeal, the learned CIT(A) while following his own decision dated 10.10.2000 for the AY 1997-98 directed the AO to consider the net interest income and net lease income for reducing 90% of the same to arrive at profits of the business for computing deduction under section 80HHC of the Act. As regards operational charges , the ld. CIT(A) concluded that entire amount was business income and therefore, nothing was deductible. 49. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR while relying upon their submissions before the ld. CIT(A) as also decision in Shri Ram Honda Power Equipment, 289 ITR 485(Del.) supported the findings of the ld. CIT(A).On the other hand, the ld. DR supported the order of the AO.. 50. W e have heard both the parties and gone through the facts of the case. W e find that though initially the ld. CIT(A) in hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation states that 90 per cent. of the incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits have to be deducted from business profits computed in terms of sections 28 to 44D. In other words, receipts constituting independent income having no nexus with exports were required to be deducted from business profits under clause (baa). Hon'ble Supreme Court further observed that a bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent charges, etc., formed part of the gross total income being business profits. But for the purpose of working out of formula and in order to avoid distortion in arriving at the export profits clause (baa) stood inserted to say that although incentive profits and independent incomes constituted part of the gross total income, these had to be excluded from gross total income because such receipts had no nexus with the export turnover. Hon'ble Apex Court further held that processing charges, which are part of gross total income, form an item of independent income like rent, commission, brokerage, etc., and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reason for this court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula. ....................................................................................... Before concluding we state that the nature of every receipt needs to be ascertained in order to find out whether the said receipt forms part of/or that it has an attribute of an export turnover. When an indirect tax is collected by the taxpayer on behalf of the Government the tax recovered is for the Government. It may be an income in the conceptual sense or even under the Income-tax Act but while working out the formula under section 80HHC(3) of the Income-tax Act and while applying the four variables one has to ascertain whether the receipt has an attribute of export turnover. 50.2 Hon'ble Gujarat High Court in the case of Alembic Chemical Works Ltd. vs. DCIT [ 266 ITR 47](Guj) in the context of explanation (baa) have held that (d) Whether the Tribunal was right in law in holding that for the purpose of computation of deduction under section 80HHC, 90 per cent. of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acceptance and fails. 50.3 In view of the aforesaid judgment of the Apex Court in the case of K. Ravindranathan Nair(supra) , it is evident that any independent income which is not derived from the export activities in terms of section 80HHC(2) of the Act but is otherwise assessed as business income , 90% of such receipts have to be reduced from the profits of the business in terms of explanation (baa) to sec. 80HHC of the Act. 50.4 Moreover, Hon'ble Punjab and Haryana High Court in the case of Liberty Footwear Company Vs. CIT, 283 ITR 398,held that 90 per cent of receipts from rent and hire charges be excluded from the profits of business as computed under the head Profits and gains of business or profession. 50.5 Hon'ble Bombay High Court in the case of CIT Vs S.G.Jhaveri consultancy Ltd., 245 ITR 854 held that labour charges and service charges can not be included in the business profits for the purpose of deduction u/s 80HHC of the Act, as these items do not have any linkage with the export activities. In CIT Vs. Deodhar Electro Design (P) Ltd.,300 ITR 103(Bom.), Hon'ble High Court held that receipts by way of development service charges would not be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and so long as the admitted case of the company is that the income derived is only on account of the peculiar situation arising from the time schedule for repayment of the loans, it cannot be stated that the income yielded by the deposits or investments was received in the course of the company's business so as to be treated as a business profit 50.82 We find that in Urban Stanislaus Co. [2003] 263 ITR 10 (Ker) where the assessee had contended that as a condition for obtaining a loan from the bank, 29 per cent. of the sale receipts had to be deposited by way of security;it was claimed that the interest earned on such deposit was business income for the purpose of section 80HHC. This was negatived by the Hon'ble Kerala High Court by observing that: the assessee can claim deduction in respect of the profits derived from the export of goods only when it is established that the income is solely related to the export. The obvious intention behind the provision in section 80HHC is to promote exports. However, the income earned by way of interest from fixed deposit is not an income from exports. Thus, it was rightly taken into account as income from other sources . 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Radiators Distributors,296 ITR 440(Guj) relying ,inter alia, on the decision of the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 held that receipts on account of interest on deposits is not required to be considered for deduction u/s 80HHC of the Act. Hon'ble High Court held in following terms: Identical question came to be considered by the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 and the question, which was posed for consideration before the apex court was whether the interest on deposits with the Tamil Nadu Electricity Board should be treated as income derived by the industrial undertaking for the purpose of section 80HH or not, and the hon'ble Supreme Court has observed that section 80HH of the Income-tax Act grants deduction in respect of profits and gains derived from an industrial undertaking and the words derived from in section 80HH of the Income-tax Act, 1961, must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking. The Supreme Court held that interest derived by the industrial undertaking of the assessee on deposits made w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aracter of interest. Be it an interest from the customer on delayed payment of dues. 50.9 Recently, Hon'ble Bombay High Court in their decision dated 8.4.2010 in ITA no. 2186 of 2009 in the case of M/s Dresser Rand India Pvt. Ltd. while following the aforesaid decision of Hon'ble Apex Court in the case of K. Ravindranathan Nair(supra) and distinguishing the decision in Bangalore Clothing(supra) concluded that recovery of freight, insurance and packing receipts, sales tax refund and service income, being independent incomes, 90% of these receipts have to be reduced from the business profits in terms of explanation (baa) to sec. 80HHC of the Act. 50.10. As regards netting off, in a recent decision dated 18/19/3/2010 ,the Hon'ble Bombay High Court in the case of CIT Vs. Asian Star Co. Ltd. in ITA no. 200 of 2009 ,observed that explanation (baa) to s. 80HHC requires that ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature have to be reduced from the profits. The reason why items like brokerage etc have to be excluded is because they do not possess any nexus with export turnover and their inclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islate upon. Parliament having legislated, it would not be open to the Court to deviate from the provisions which have been enacted in Section 80HHC. 51.. As already mentioned above , since the ld. CIT(A) did not record his specific findings as to how the aforesaid receipts have any nexus or relation with the export business of the assessee and were not independent incomes nor did the ld. CIT(A) had the benefit of aforesaid decisions including that of the Hon'ble Apex Court in the case of K. Ravindranathan Nair(supra) or of Hon'ble Bombay High Court in Asian Star Co. Ltd. (supra) Dresser Rand India Pvt. Ltd. (supra) , we ,accordingly, vacate the findings of the ld. CIT(A) and restore the issues raised in ground nos. 5 to 7 in the appeal of the Revenue, to his file with the directions to ascertain as to whether or not the aforesaid receipts on account of interest, lease rental income and operational charges were independent income or were in any manner related to export activities of the assessee and thereafter, adjudicate the matter in accordance with law after allowing sufficient opportunity to the assessee in the light of various judicial pronouncements, including t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,62,300 53.1 While referring to explanation (d) to Section 80 HHC (3) of the Act, the assessee contended that no other expenses were attributing to the trading exports made by the assessee. In the light of these submissions, the ld. CIT(A) concluded as under: I have considered the submissions made on behalf of the appellant and have gone through the facts of the case, There Is no denial of the fact that the assessee company, In addition to export of manufacturing goods has also undertaken export of trading goods. However, the Assessing officer does not appear to be correct in stating that the assessee has arbitrarily allocated the direct expenses of overseas export promotion between export manufacturing activity and export trading activity. The details maintained in this regard show that the export promotion expenses are directly identifiable and attributable to different products / markets. The assessee has furnished precise details of the direct expenses attributable to certain products' turnover including that of overseas sales promotion expenses which are identified and deducted. The AO has also not cited any reason for adopting ..... X X X X Extracts X X X X X X X X Extracts X X X X
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