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TMI Blog2017 (3) TMI 1173X X X X Extracts X X X X X X X X Extracts X X X X ..... pra. - Decided in favour of assessee for statistical purposes. Disallowance u/s 14A - Held that:- No disallowance under Rule 8D(2)(ii) of the Rules towards proportionate interest is warranted in the instant case.In respect of disallowance made towards administrative expenses under Rule 8D(2)(iii) of the Rules, we hold that the co-ordinate bench of this tribunal in the case of REI Agro Ltd [2013 (9) TMI 156 - ITAT KOLKATA] had held that only dividend bearing investments should be taken into account for the purpose of working out the disallowance under Rule 8D(2)(iii) of the Rules. We direct the ld AO accordingly. Hence the Ground raised by the assessee partly allowed for statistical purposes. Disallowing the expenditure invoking Explanation to Section 37(1) - Held that:- We find that the issue under dispute had emanated from the sales tax assessment. The appeal against the levy of penalty had been preferred by the assessee dealer before the appellate authority under Sales tax act and the same is pending disposal. Hence, in these circumstances, we deem it fit and appropriate, to set aside this issue to the file of the ld AO, to decide the disallowance of expenditure, based on the out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y with effect from April 1, 2006. The VAT paid by the appellant as part of the purchase price of the commodity and deposited by the seller with the Government did not have the character of tax since no tax was in fact leviable. In such circumstances, the appellant was not entitled to refund on account of VAT paid on raw materials. The appellant had to return the sum to the Government and made a provision for the same treating it as an ascertained liability. The refund which the appellant was obliged to return cannot be treated as any sum payable by the appellant by way of tax within the meaning of clause (a) of section 43B of the Act. In opinion, the appellant has correctly reversed the provision in the next year consequent to issue of notification dated August 29, 2008 and offered the amount for taxation in the assessment year 2009-10. X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 / 2008 dated 8.9.2008 had held as under:- "The petition was called on for hearing today. Upon hearing counsel the court made the following Order. Issue Notice. In the meantime, there shall be stay of the impugned judgement, until further orders." Later the Hon'ble Supreme Court in Special Leave to Appeal (Civil) No(s). CC 22889 / 2008 dated 8.5.2009 had held as under:- "The petition was called on for hearing today. Upon hearing counsel the court made the following Order Delay condoned. Leave granted. Pending hearing and final disposal of the Civil appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the department to recover that amount in case Civil Appeal of the department is allowed. We further make it clear that the assessee would, during the pendency of this Civil Appeal , pay tax as if Section 43B(f) is on the statute book but at the same time it would be entitled to make a claim in its returns." Hence from the aforesaid Supreme Court judgement, it could be inferred that the Hon'ble Supreme Court had not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stments in debt funds of the mutual fund for ₹ 4,60,00,000/- out of surplus funds and dividend income was earned from such mutual funds. He reiterated the findings of the ld AO and sustained the disallowance made u/s 14A of the Act. Aggrieved, the assessee is in appeal before us on the following ground:- "1. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in not deleting the disallowance of ₹ 2,66,665/- treated by Ld. DCIT as expenses attributable to earning dividend income and did not hold that no expenses have been incurred to earn the said income." 3.3. The ld AR argued that all the investments were very old and were made in the earlier years and the borrowed funds were not utilized for making investments. Hence no disallowance should be made under Rule 8D(2)(ii) of the Rules. With regard to application of Rule 8D(2)(iii) of the Rules, he prayed that only dividend bearing investments should be taken into account for which purpose, he placed reliance on the decision of the co-ordinate bench of this tribunal in the case of REI Agro Ltd vs DCIT reported in 36 CCH 360 (Kol). In response to this, the ld DR placed reliance on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount. The ld AO sought to disallow the same by invoking provisions of Explanation to Section 37(1) of the Act on the plea that the same was paid for infraction of law. The ld AO also observed that the penalty sum of ₹ 2,45,835/- was also reflected in the tax audit report vide Column 17(e)(iii) of Form 3CD. In response the assessee replied that it had procured LDO/FO/LPG etc as consumables at concessional rate on the strength of Form No. 26 and 40 prescribed under Sales Tax Act. However, the sales tax authorities held that it is neither raw material nor processing material and consumables and raised a demand of ₹ 7.16 lacs which included penalty of ₹ 2.46 lacs against which assessee preferred an appeal before the appellate authority. The said appeal is still pending. The assessee contended that the penalty is not for violation of any law and the same is an expenditure incurred wholly and exclusively for the purpose of business. The ld AO however held the same to be penal in nature and disallowed in the assessment. The ld CITA upheld the action of the ld AO. Aggrieved, the assessee had preferred cross objection before us on the following ground:- "That on the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the first appellate authority under Sales Tax Act. The assessee is directed to expedite the sales tax appeal at the earliest and inform the outcome of the same to the ld AO for his expeditious disposal of this set aside proceeding. Accordingly, the cross objection of the assessee is allowed for statistical purposes. ITA No. 752/Kol/2014 - Revenue Appeal 5. The first issue to be decided in this appeal is as to whether the ld CITA was justified in allowing exemption u/s 10B of the Act in respect of other income of the assessee to the tune of ₹ 18,20,101/- in the facts and circumstances of the case. 5.1. The brief facts of this issue is that the assessee is having a100% Export Oriented Unit (EOU) at Viramgam and had claimed exemption u/s 10B of the Act in respect of profits of the business of the said undertaking in the return. The said profits admittedly includes the following incomes which in the opinion of the ld AO was not derived from export of articles as per section 10B of the Act :- Rent from staff quarters 5,712 Insurance claims realized 36,390 Excess liabilities no longer required 8 Miscellaneous income & receipts (including Duty Drawback of ₹ 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame only represents recovery of rent from staff quarters in respect of the quarters let out by the assessee on the rented premises. In other words, the assessee pays rent for the total premises including staff quarters and recovers the rent from staff for their quarters accommodation. Hence it is effectively recovery of expenditure and not any income for assessee. In respect of insurance claims received, the same was received for damages for goods pertaining to 100% EOU and hence is the income of the 100% EOU. In respect of duty drawback, the ld AO concedes the fact that the same belongs to the category of ancillary profits of the 100% EOU and having said so, that also would only add to the profits of the business of the undertaking and hence is eligible for exemption u/s 10B in terms of section 10B(4) of the Act. He further stated that the decision of Hon'ble Apex Court in Liberty India case supra and other decisions relied upon by the ld AO were all rendered in the context of deductions under sections 80HH / 80HHC / 80IA / 80IB etc and hence the same cannot be used for section 10B where the language of the statute is covered and exemption is to be reckoned as per computation mech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resaid section, it is very clear as rightly pointed out by the ld AR that section 10B(1) of the Act starts with the expression 'subject to the provisions of this section'--------. The provisions of section 10B(4) of the Act which stipulates the computation mechanism clearly states that the entire profits of the business of the eligible undertaking should be taken into account for computing the amount eligible for section 10B of the Act. We also find that the Hon'ble Jurisdictional High Court in assessee's own case vide its order dated 30.6.2016 supra had held this issue in favour of the assessee. The question raised before the court is as below:- "(a) Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal erred in law in directing the Assessing Officer to treat the interest income of ₹ 28,74,473/- as part of the profits of business of the 100% E. O. U. eligible for deduction under Section 10B of the Income Tax Act, 1961 and compute deduction accordingly without appreciating the fact that the said interest income was not profit from the business but accrued on fixed deposit kept by the assessee in bank?" "A bare reading of sub-section (1) sugg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, as such, no scope for any controversy that part of the money was earned from interest and not from export. This question came up before the Karnataka High Court and was answered in the case of CIT vs. Motorola India Electronics (P.) Ltd. reported in [2014] 46 Taxmann.com 167 (Karnataka) as follows : "In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest 6 received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking. There is a direct nexus between this income and the income of the business of the undertaking. Though it does not partake the character of a profits and gains from the sale of an article, it is the income which is derived from the consideration realized by export of artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the business of the undertaking". We 8 further find that the Tribunal in the case of Cheviot Co. Ltd. for assessment years 2003-04 and 2004-05, relied upon by the assessee, has dealt with similar issue. In those cases, the difference between the provisions of sections 10B and 80HH was noted and after considering the judgments of the Hon'ble Supreme Court in Sterling Foods (supra) and in P.R.Prabhakar versus CIT (284 ITR 548 (SC) ) approving the Special Bench decision of the Tribunal in International Research Park Laboratories Limited versus Assistant C.I.T. (212 ITR (AT) 1 (SB) ), it was held that the profits of the business of the undertaking would include its entire business income. Keeping in view the above decision and the decision of the Tribunal, we are of the considered opinion that the assessee has to succeed. The Assessing Officer is directed to treat the interest of ₹ 28,74,473/- as part of the profits of the business of the 100% EOU eligible for deduction under section 10B and compute the deduction accordingly. The Assessing Officer should deduct the sum of ₹ 8,01,30,294/- (Rs. 7,72,54,821/- + ₹ 28,74,473/-) and not only ₹ 7,72,54,821/- from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of Ahmedabad Tribunal in the case of Aswani Industries vs DCIT in ITA No. 140/Ahd/2013 dated 31.5.2013 wherein the very same issue was held in favour of the assessee. Aggrieved, the revenue is in appeal before us on the following ground:- "2. That is the facts and in law of the case the Id. CIT(A) erred in allowing the additional depreciation of Plant & Machinery as the said depreciation u/s. 32(i)(iia) is not allowable depreciation." 6.2. The ld DR vehemently relied on the order of the ld AO and drew the attention of the bench to second proviso to section 32(1) of the Act wherein clause (iia) is also included. He further argued that the amendment brought in the statute with effect from 1.4.2016 by introduction of third proviso thereon should have only prospective application. In response to this, the ld AR placed reliance on the co-ordinate bench decision of this tribunal in assessee's own case for the Asst Year 2007-08 in ITA No. 1364/Kol/2013 dated 8.7.2016 in support of his arguments. 6.3. We have heard the rival submissions. We find that the issue under dispute is squarely covered by the decision of the co-ordinate bench of this tribunal supra wherein it was held a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wise the very purpose of insertion of clause (iia) would be defeated because it provides for 20 per cent. deduction which shall be allowed. It has been consistently held by this court, as well as the apex court, that the beneficial legislation, as in the present case, should be given liberal interpretation so as to benefit the assessee. In this case, the intention of the legislation is absolutely clear, that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to only half of the same being granted in one assessment year, if certain condition was not fulfilled. But, that, in our considered view, would not restrain the assessee from claiming the balance of the benefit in the subsequent assessment year. The Tribunal, in our view, has rightly held, that additional depreciation allowed under section 32(1)(iia) of the Act is a one-time benefit to encourage industrialisation, and the provisions related it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting the additional allowance. We are in full agreement with such observations made by the Tribunal." 8. Heard both parties and perused the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowed by the ld AO , the assessee replied that the assessee is engaged in manufacturing / trading of Guar products and its major revenues are derived from exports. The total export turnover during the year was ₹ 236.57 crores out of total turnover of ₹ 336.44 crores. In order to hedge its exchange risk, the assessee entered into foreign exchange forward contracts with banks for its export bills. It was submitted that The Institute of Chartered Accountants of India (ICAI) had made an announcement on 29.3.2008 with regard to accounting for such derivative contracts. It was stated that in view of prudence, an entity was required to provide for losses in respect of all outstanding derivative contracts at the balance sheet date by marking them to market. It was stated that the said clarificatory announcement applied to financial statements for the period ending 31.3.2008 and thereafter. It was stated that in view of the said announcement by ICAI and following the principle of prudence on which the mercantile system of accounting is based, in respect of the forward contracts outstanding as on 31.3.2008, the assessee determined the loss of ₹ 82,32,966/- with refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 23.3.2010 wherein it has been mentioned that mark to market loss where sale or settlement has actually not taken place, the said loss would be notional and contingent in nature and cannot be allowed as deduction. Accordingly he prayed that the order of the ld AO be restored. 7.4. In response to this, the ld AR argued that out of the total turnover of the assessee to the tune of ₹ 336.44 crores , the assessee had derived export turnover of ₹ 236.57 crores. Hence it could be evident that the assessee is exposed to huge risk arising due to exchange fluctuation. Hence in order to hedge the said risk, the assessee had entered into forward contracts with banks for its export bills, which was carried on during the course of its business. He argued that the reliance on Instruction No. 3/2010 dated 23.3.2010 is clearly misplaced in as much as it talks about losses arising to an assessee on account of trading in forex derivatives. Admittedly the assessee had not dealt in trading in forex derivatives. Hence the said Instruction No. 3/2010 cannot be made applicable to the instant case. He placed reliance on the following decisions in support of his arguments :- (a) Delhi Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther holds that at no point of time did Revenue challenge the assertion of the Respondent assessee that the activity of entering into forward contract was in the regular course of its business only to safe guard against the loss on account of foreign exchange variation. Even before the Tribunal, we find that there was no submission recorded on behalf of the Revenue that the Respondent assessee should be called upon to explain the nature of its transactions. Thus, the submission now being made is without any foundation as the stand of the assessee on facts was never disputed. So far as the reliance on Accounting Standard-l l is concerned, it would not by itself determine whether the activity was a part of the Respondent-assessee's regular business transaction or it was a speculative transaction. On present facts, it was never the Revenue's contention that the transaction was speculative but only disallowed on the ground that it was notional. Lastly, the reliance placed on the decision in S. vinodkumar Diamonds (P) Ltd. (supra) in the Revenue's favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the context of the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t date of the previous year was deductible. The said order of the Tribunal was upheld by the Hon'ble High Court. On further appeal by the department, the Hon'ble Supreme Court held that the loss suffered by the assessee is on revenue account towards foreign exchange difference as on the date of balance sheet and is an item of expenditure deductible u/s 37(1). It further observed than an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period. From the judgment of the Hon'ble Supreme Court it can be clearly deduced that unrealized loss due to foreign exchange fluctuation in foreign currency transactions on revenue item as on the last the accounting year is deductible." 7.5.2. We also find that the co-ordinate bench of Delhi Tribunal supra had rendered a decision in favour of the assessee on an identical issue after considering the Instruction No. 3/2010 wherein it was held that :- "8. Coming to the corporate additions i.e. disallowance of loss, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und of VAT on those raw materials. Subsequently vide Notification No. F012(15)FD/Tax/2008/85 dated 25.2.2008 issued by Govt of Rajasthan, Finance Department, VAT was exempted with retrospective effect. The company was therefore liable to refund the VAT and as such necessary provision was made in the accounts for the year which was not meant for any statutory liability and not covered under the provisions of section 43B of the Act. Subsequently the Govt of Rajasthan has withdrawn this notification and this provision has also been reversed in the subsequent year and included in the total income. The ld AO however concluded that the provision made by the assessee was not an ascertained liability. The ld AO also observed that the refund was not credited by the assessee in its profit and loss account and the debit to the profit and loss account would be justified only if there is a corresponding credit of refund received in the profit and loss account. Hence he concluded that the same is in the nature of statutory liability and disallowed u/s 43B of the Act as the same was not paid by the assessee. 8.2. The ld CITA deleted the addition appreciating the contentions of the assessee and a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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