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TMI Blog2015 (4) TMI 473X X X X Extracts X X X X X X X X Extracts X X X X ..... was in the business of manufacturing and trading of pharmaceutical products. The pharmaceutical products have also been exported. In respect of the above grounds, the Assessing Officer has noted that while calculating the book profit u/s 115JA, the assessee has reduced an amount of Rs. 10,05,31,321/- as 80HHC deduction. The Assessing Officer has objected the calculation of the assessee. According to the Assessing Officer, the said issue has already been decided by the ld. CIT(A) in assessee's own case for AY 1999-2000; hence, the deduction u/s 80HHC was curtailed to Rs. 5,72,08,084/- for the purpose of calculation of profit u/s 115JA. 1.2 The First Appellate Authority has repeated the earlier decision and affirmed the action of the Assessing Officer. 1.3 Heard both the sides. This issue has already been decided by us while deciding the appeal for Assessment Year 1999-2000 bearing ITA No.3047/Ahd/2002 by ITAT "D" Bench, Ahmedabad, wherein we have held as under:- "1.3 Having heard the submissions of both the sides and after reading the cited decisions viz. Ajanta Pharma Ltd. 327 ITR 305 (S.C.) and Bhari Information Tech.Sys.P.Ltd. 340 ITR 593 ( S.C.) in the background of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions under sub-cls. (4) and (4A) of that section. The conditions are only that the relief should be certified by the chartered accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in cl. (iv) of Explanation to s. 115JB [subject to the conditions specified in sub-cls. (4) and (4A) of that section] to obliterate the difference between "eligibility" and "deductibility" of profits as contended on behalf of the Department. 11. For the above reasons, we set aside the impugned judgment of the High Court and restore the judgment of the Tribunal. Accordingly, the civil appeal of the assessee is allowed with no order as to costs." 1.4. Therefore, respectfully following the above precedents, we hereby hold that the AO is required to re-compute the taxable profit for the purpose of computation of book profit u/s.115JA of the Act in the light of the guide lines laid down by the Hon Courts as cited above. Thus, ground raised by the assessee is, therefore, allowed. 1.4 On the same lines, this ground of the assessee is allowed; however, the Assessing Officer is required to re-compute the taxable profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit u/s 115JA. The assessee's explanation was that the equalization charges were reduced from the gross lease rental. The lease equalization charges were stated to be created to ensure that in case of a lease, only the fair income is accounted as income of the lesser. The annual lease equalization charges represented the recovery of the fair value of the leased asset over the leased term. So this said charges were calculated by deducting the income for the period. The lease equalization account is transferred every year to the profit and loss account and disclosed separately as a deduction. However, the Assessing Officer was not in agreement and held that while working the total business income as per Chapter IV, the assessee has itself added back the lease equalization charges in the computation of income, but it has not done so while calculating the book profit u/s 115JA. According to the Assessing Officer, Section 115JA prescribes that the book profit means the net profit as shown in the profit and loss account which is to be increased by any reserves by whatever name called. In the opinion of the Assessing Officer, the lease equalization charges were nothing but reserves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an amount transferred to reserves as envisaged in Explanation (b) to Section 115JA(2). It was held that any adjustment made by the Assessing Officer by adding the amount of lease equalization charges while computing the book profit was unjustified. Likewise, in the case of TVS Finance & Services Ltd (supra), the Hon'ble Madras High Court has opined that the lease equalization charges over the period of lease is equal to the difference between the quantum of principal recovered and the residual value. The provision was made as per ICAI guidelines note, therefore, same is not contingent in nature. It was held that the lease equalization charges is not to be included in computing book profit u/s 115JA of the Income-tax Act. Since this legal issue now stood resolved in favour of the assessee; therefore, respectfully following these decisions, we hereby reverse the findings of the Revenue Authorities and direct to allow the claim. This ground of the assessee is hereby allowed. 4. Ground No. 4 is reproduced below: "4. Re: Treatment of Exchange Rate Fluctuation of Rs. 11,72,828/- as miscellaneous income forming part of total turnover for the purpose of deduction u/s 80HHC. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not due to delayed realization of export proceeds. The issue was decided in favour of the assessee. Respectfully following the above cited precedents we hereby hold that the assessee is entitled to the claimed deduction. Ground allowed." 4.3 Following the above decision, we hereby hold that the issue is covered by few orders of the Hon'ble High Courts cited supra; therefore, the assessee is entitled for the deduction. This ground of the assessee is allowed. 5. Ground No. 5 is reproduced below: "5. Re: Inclusion of Sale of scrap of Rs. 47,14,326/- in total turnover for the purpose of deduction u/s 80HHC. 5.1 The scrap sales of Rs. 47,14,326/- should not be considered to form part of total turnover for computing the deduction u/s 80HHC." 5.1 On perusal of P&L account, it was noted by the Assessing Officer that the assessee had included a receipt of Rs. 47,14,326/- on account of sale of scrap generated from business. According to the Assessing Officer, the receipts on sale of scrap was earned in direct exercise of the business, therefore, to be treated as part of the total turnover. Following the earlier decision, the sale of scrap was included in the total turnover w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be reduced from the export turnover for the purpose of computing the deduction u/s 80HHC. 6.2 Without prejudice to the above, the export realised till the date of completion of the assessment should be considered as export turnover for the purpose of computing the deduction u/s 80HHC. 6.3 Without prejudice to the above, the direct and indirect costs relatable to the unrealised trading export proceeds should be reduced while computing the trading export profits." 6.1 On perusal of Form No.10CCAC, it was noted by the Assessing Officer that the assessee-company had applied for extension of time for bringing the convertible foreign exchange of Rs. 71,09,340/-. The assessee was asked to show-cause as to why this amount should not be reduced while calculating the deduction u/s 80HHC (2)(a) of the Income-tax Act. The Assessing Officer was of the view that the assessee should have brought the sale proceeds in convertible foreign exchange within the period of six months from the end of the previous year or the period as may be allowed. It was also noted that the RBI, the competent authority, had not granted extension of time. With the result, the unrealized amount of Rs. 71,09,340/- w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be treated as profits derived by the new industrial undertaking for the computing the deduction u/s 80IB." 8.1 It was observed by the Assessing Officer that the assessee has shown DEPB sale in Silvasa Unit. A book profit of Rs. 5,79,600/- was taken into account u/s 80IA of the said unit. The said amount was reduced by the Assessing Officer while computing the profit for the purpose of deduction u/s 80IA. The action of the Assessing Officer was confirmed by the ld. CIT(A). Now, the issue has been decided by us in Assessment Year 1999-2000 in assessee's own case while deciding Revenue's ground No.5 in paragraph 15.3 - the relevant portion is reproduced below:- "15.3 With this back ground, we heard both the sides. We are not in agreement with the view taken by Ld. CIT(A), primarily because of the reason that now this issue is well settled by the Hon'ble S.C. in the case of Liberty India 317 ITR 218 wherein it was held that Duty Drawback receipts and DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purpose of deduction U/s 80I / 80IA / 80IB. It was commented by S.C. that Sec. 80IB provides for the allowing of deduction in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - as amortization of share issue expenses u/s 35D of the Income-tax Act. Following the past history, the same was disallowed. The First Appellate Authority has confirmed the disallowance. 10.2 This issue has already been dealt with by us in Assessment Year 1999-2000, wherein vide paragraph Nos. 10.3 to 10.5, we have referred the issue back to the file of the Assessing Officer with certain directions. The relevant portion is reproduced below:- "10.3 Heard both the sides at some length. Sec. 35 D grants a deduction in respect of expenditure which may otherwise be disallowable on the ground that it is a 'capital expenditure' or is incurred prior to the setting up of the business, but in instalments in number of assessment years. This can also be interpreted, and naturally so, that an expenditure which is otherwise allowable as revenue expenditure cannot be brought within the purview of this section. Certain fine distinction had been made by Honble courts in respect of the Sub-sections of this section 35D, such as, that the fees paid for registration of the amendment of the memorandum of association for enhancement of authorised capital is held to be covered by sec. 35D (2) ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to examine both the aspects i.e. Revenue Expenditure or Capital Expenditure and then decide the question of disallowance. Resultantly this ground is restored back for denovo adjudication hence to be treated as allowed for statistical purpose only." 10.3 Since this issue has been restored back for de novo consideration, hence this ground may be treated as allowed for statistical purpose only. 11. Ground No. 11 is reproduced below: "11. Re: Set Off brought forward losses of erstwhile Gujarat Lyka Organics Ltd. 11.1 The set off of brought business loss and unabsorbed depreciation of erstwhile Gujarat Lyka Organics Ltd should be upheld as claimed and computed by the Appellant." 11.1 From the side of the appellant, ld. Authorized Representative has expressed not to press this ground; hence, dismissed being not pressed. 12. In the result, the assessee's appeal is partly allowed. B. Revenue's Appeal (ITA No. 1622/Ahd/2003) 13. Ground No. 1 is reproduced below: "1. The Learned CIT(Appeals) erred in law and on facts in granting relief of Rs. 18,17,251/- being interest payment to the Dadhas." 13.1 The assessee was asked to explain as to why the interest payment to Dadhas no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as the sole distributor of SPIL the action of the Assessee in appointing the said firms as its distributor for the southern regions, at the behest of SPIL would be governed by business expediency. The Assessee has also demonstrated by documentary evidence before the lower authorities that the distribution had in fact happened through the said firms. The said firms had the necessary trade and other registrations for carrying on the said activity. The Assessing Officer has also acknowledged that there was savings in turnover tax in the state of TamilNadu as a result of the appointment by the said firms. The Assessing Officer having accepted in part the business benefit of the appointment of the said firms, as distributors cannot in the same breadth question the other part Even otherwise, it is seen that the Assessing Officer has considered trade advances given by the Assessee to the individual members of the Dadha family as advances in the ordinary course of business. Thus, even if the advances were given in the guise of a trade advance, the same would still be considered as for the purpose of business. Further we noted that the decision of the Supreme Court in the case of S.A. Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugned addition did not survive on account of lack of evidence then how such presumption could be approved for the post search period. The reasoning appears to be convincing especially when no contrary material is available on record form the side of the Revenue. This ground of the Revenue is therefore dismissed." 14.3 Since the year under consideration is also the post search period and in the financial year under consideration the Assessing Officer has simply presumed that the assessee might have sold the spent solvents; therefore, following the past history of the case, we hereby hold that the addition merely based upon the presumption; hence, rightly deleted by ld. CIT(A). This ground of the Revenue is, therefore, dismissed. 15. Ground No. 3 is reproduced below: "3. The ld. CIT(A) has erred in law and on facts in deleting the compulsory depreciation allowance of Rs. 1,72,02,764/-." 15.1 On perusal of depreciation chart, it was found by the Assessing Officer that the assessee had not claimed depreciation in respect of plant and machineries of Silvasa Unit. The assessee was otherwise eligible for depreciation @25%. The Assessing Officer was aware of the fact that in the past t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o not involve any element of 'Turnover'. Respectfully following this precedent we hereby affirm the findings of CIT(A) and dismiss this ground of the Revenue." 16.2 Respectfully following the above decision, we hereby affirm the findings in the order of the ld. CIT(A) and dismiss this ground of the Revenue. 7. Ground No. 5 is reproduced below: "5. The ld. CIT(A) has erred in law and on facts in deleting the inclusion of insurance claim as part of total turnover for 80HHC purpose." 17.1 On perusal of profit and loss account, it was observed by the Assessing Officer that under the head "Income" the assessee has included a receipt of Rs. 35,70,361/- on account of insurance claim. According to Assessing Officer, the receipt in question was also part of the total turnover; hence, for the purpose of computation of deduction u/s 80HHC, the same was included in the total turnover. Being aggrieved, the matter was carried before the First Appellate Authority. 17.2 The First Appellate Authority has combined this issue of inclusion of insurance claim in the total turnover with the issue of scrap sales and by following the decision of his predecessor of the earlier year, he has dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it must be a receipt of a nature similar to brokerage, commission, interest, rent or charges. Therefore the claim on account of insurance for the stock-in-trade did not constitute a receipt of a similar nature within the meaning of Explanation (baa) and was therefore not liable to be reduced to the extent of ninety per cent. " 17.4 Another order of Hon'ble Kerala High Court has been cited namely CIT vs. Kar Mobiles Ltd, [2011] 333 ITR 478 (Ker); wherein it was observed that insurance receipts prima facie fall under the Explanation clause. If the claim received is on account of loss of goods which form part of the total turnover then it has to be treated as business profit and the corresponding turnover will form part of the total turnover in the computation of export profit for deduction. 17.5 Considering the above judgments, we are of the view that the whole exercise of sub-section (3) of section 80HHC is to determine the proportionate profit attributable to export business. The Section provides for a formula to determine the export profit by dividing the business profits by total turnover and by multiplying the same with export turnover. Obviously, the formula will work out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the profits and gains of the business. Therefore, it was the net interest income. According to the assessee, it was not in respect of gross income exclusion. However, the Assessing Officer was not convinced and held that the total interest receipts as credited in the profit and loss account are to be reduced from the profits of the business for the purpose of calculating the 80HHC deduction. 18.2 When the matter was carried before the First Appellate Authority, ld. CIT(A) has followed the decision already taken in the past years and the Assessing Officer was directed to give the proper benefit. 18.3 After hearing both the sides, we have noted that while deciding ground No.8 of the Revenue Department, we have followed ACG Associated Capsules Pvt. Ltd., reported in 343 ITR 89(SC) and Topman Exports, reported in 342 ITR 49 (SC); and thereupon arrived at the conclusion that 90% of the net interest which had been included in the profits of the business was required to be deducted as per Explanation (baa) of section 80HHC. On the same line, we hereby direct to compute the 80HHC deduction. Therefore, this ground of the Revenue is hereby dismissed. 19. Ground No. 7 is reproduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ismiss this ground of the Revenue. 21. Ground No.9 is reproduced below: "9. The ld. CIT(A) has erred in law and on facts in deleting the adjustment of trading export profit for 80HHC purpose." 21.1 The Assessing Officer has asked the assessee to explain why the loss on export of trading goods not to be adjusted while calculating the deduction u/s 80HHC of the Income-tax Act. It was found by the Assessing Officer that there was a loss on the export of trading goods, whereas the assessee earned profit on export of manufactured goods. While calculating the deduction u/s 80HHC, the assessee has treated the loss at Rs. Nil. According to the Assessing Officer, as per Section 80HHC(3), if the assessee is engaged in export of trading goods and manufactured goods, then the business result of both such activities were required to be clubbed. The Assessing Officer has quoted Ipca Laboratories, 251 ITR 401 (Bom) and held that the net result should be taken for the purpose of claiming the deduction u/s 80HHC. Accordingly, the Assessing Officer has recomputed the calculation of section 80HHC. 21.2 When the matter was carried before the First Appellate Authority, ld. CIT(A) has followed the d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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