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TMI Blog2016 (7) TMI 1374X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned orders, the Tribunal held in favour of the assessee by confirming the order of the Commissioner of Income-tax (Appeals). 2. At the time of admitting present appeals, the following questions of law were framed for our consideration : Tax Appeal No. 1085 of 2008 "A. Whether the Appellate Tribunal is right in law and on facts in holding that foreign exchange fluctuation and duty drawback is an income derived from industrial undertaking, eligible for deduction under sections 80-I and 80-IA of the Act and thereby directing the Assessing Officer to consider the claim of the assessee upon necessary material to be placed on record by the assessee ? B. Whether the Appellate Tribunal ought not to have appreciated that foreign exchange fluctuation and duty drawback cannot be stated to be derived from industrial undertaking and, therefore, not eligible for deduction under sections 80-I and 80-IA of the Act ? C. Whether the Appellate Tribunal is right in law and on facts in reversing the order of the Commissioner of Income-tax (Appeals) and holding that discount/kasar can be stated to be derived from industrial undertaking, therefore, eligible for deduction under sections 80-I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the Appellate Tribunal is right in law and on facts in confirming the order passed by the Commissioner of Income-tax (Appeals) deleting the disallowance of Rs. 91,46,637 made in respect of contribution for effluent treatment plant ? D. Whether the Appellate Tribunal ought not to have appreciated that the amount of Rs. 91,46,637 incurred towards contribution for common effluent treatment plant was in the nature of penalty and, therefore, not allowable under section 37 of the Act and, in the alternative, was a capital outlay and, therefore also, not allowable under section 37 of the Act ? E. Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the Commissioner of Income-tax (Appeals) directing that only the net interest income should be excluded from eligible profit for the purpose of computation of deduction under sections 80-I and 80-IA of the Act ? F. Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the Commissioner of Income-tax (Appeals) deleting the disallowance of Rs. 2,64,051 being depreciation on new project at Baroda ? G. Whether the Appellate Tribunal is right in law and on f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 89 (SC). So far as issue with regard to rebate on job work charges is concerned, it is submitted that since the concerned company could not carry out the job work of the desired quality, the assessee claimed discount/rebate as there was no liability of payment on the assessee. So far as refund of excise duty is concerned, it is submitted that allowance of excise duty is subject to the provisions of section 43B of the Act and the Appellate Tribunal has not given any finding in respect of the provisions of section 43B of the Act. He further submitted that so far as issue regarding refund of excise duty is concerned, the same is wrongly allowed in favour of the assessee. It is also submitted that so far as laboratory sample testing charges and discount, vatav, kasar, etc., and sales tax set off is concerned, the same is wrongly framed and the same is covered by the earlier decision reported in CIT v. Meghalaya Steels Ltd. reported in [2016] 383 ITR 217 (SC) and ADCI Dye Chem P. Ltd. v. Deputy CIT reported in [2015] 370 ITR 408 (Guj). 5. Learned counsel for the respondent supported the impugned orders and submitted that the Tribunal has not committed any error while passing the imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head 'Profits and gains of business or profession', ninety per cent. of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to section 80HHC. In other words, ninety per cent. of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the asses see as computed under the head 'Profits and gains of business or profession', is to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining the profits of the business." In view of such decision, question No. 3 raised by the Revenue gets automatically answered since the amounts referred to in the said question are to be excluded for the purpose of deduction under section 80HHC of the Act. Learned counsel for the Revenue vehemently contended that the ratio of the decision in the case of ACG Associated Capsules Pvt. Ltd. (supra) cannot be applied to a situation where the exclusion from the claim of deduction relates to section 80H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being excluded form the claim of deduction, not the gross profit but the net thereof, that is the gross profit minus the expenditure incurred for earning such profit should be excluded. That is precisely how this court in the case of Rajoo Engineers (supra) viewed the situation. That is how the Delhi High Court in the case of Essel Shyam Communication (supra) held refer ring to the decision in the case of ACG Associated Capsules Pvt. Ltd. (supra). It is true that in the case of Bloom Decor Ltd., a question was suggested by the assessee which may have some bearing on the controversy on hand. However, the entire focus of the order of the court was regarding applicability of the decision of the Supreme Court in the case of Topman Exports (supra) and not on the question of net ting. In any case, therein, the decision in the case of ACG Associated Capsules Pvt. Ltd. was not noticed.' In so far as question Nos. 2, 5, 7 and 12 are concerned, it is an undisputed position that the issues are covered by a decision of this court in the case of Deputy CIT v. Harjivandas Juthabhai Zaveri [2002] 258 ITR 785 (Guj) in which the court upheld the decision of the Tribunal granting benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. It was on this ground, the Tribunal held that the business in question is continuation of the existing business and not a new business. In this context, the decision relied on by the authorities below of this court in the case of Alembic Glass Indus tries Ltd. (supra) laid down tests for ascertaining whether a business was part of existing business or the assessee was starting a new unit. It was held that merely because the unit was coming to a distant point by itself would not mean that it was a new business. If the facts as recorded by the Commissioner of Income-tax (Appeals) and the Tribunal can be said to have achieved finality, it would emerge that the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called 'lab' for its captive consumption for the purpose of existing of existing manufacturing business. It is no doubt that the assessee is engaged in the business of manufacture of soap and the soda ash and 'lab' so produced is used by way of captive consumption. When such facts viewed in light of the findings of the Commissioner of Income-tax ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l) and the actual location of the industrial unit in the remote area, so that the industry could become competitive and economically viable.' (Paras 14 and 15) The decision in Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC) ; [1997] 7 SCC 764, dealt with subsidy received from the State Government in the form of refund of sales tax paid on raw materials, machinery, and finished goods ; subsidy on power consumed by the industry ; and exemption from water rate. It was held that such subsidies were treated as assistance given for the purpose of carrying on the business of the assessee. We do not find it necessary to further encumber this judgment with the judgments which Shri Ganesh cited on the netting principle. We find it unnecessary to further substantiate the reasoning in our judgment based on the said principle. A Delhi High Court judgment was also cited before us being CIT v. Dharam Pal Prem Chand Ltd. [2009] 317 ITR 353 (Delhi) from which an SLP preferred in the Supreme Court was dismissed. This judgment also concerned itself with section 80-IB of the Act, in which it was held that refund of excise duty should not be excluded in arriving at the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits ; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India.' Explanation (baa) extracted above states that 'profits of the business' means the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced by the receipts of the nature mentioned in clauses (1) and (2) of Explanation (baa). Thus, profits of the business of an assessee will have to be first computed under the head 'Profits and gains of business or profession' in accordance with provisions of sections 28 to 44D of the Act. In the computation of such profits of business, all receipts of income which are chargeable as profits and gains of business under section 28 of the Act will have to be included. Similarly, in computation of such profits of business, different expenses which are allowable under sections 30 to 44D have to be allowed as expenses. After including such r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dividends an amount equal to' a certain percentage of the income mentioned in this section. The Constitution Bench held that the court must construe section 80M on its own language and arrive at its true interpretation according to the plain natural meaning of the words used by the Legislature and so construed the words 'such income by way of dividends' in sub-section (1) of section 80M must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. Similarly, Explanation (baa) has to be construed on its own language and as per the plain natural meaning of the words used in Explanation (baa), the words 'receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits' will not only refer to the nature of receipts but also the quantum of receipts included in the profits of the business as computed under the head 'Profits and gains of business or profession' referred to in the first part of Explanation (baa). Accordingly, if any quantum of any receipt of the nature mentioned in clause (1) of Explanation (baa) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied on a decision of this court in CIT v. K. Ravindranathan Nair [2007] 295 ITR 228 (SC) in which the issue raised before this court was entirely different from the issue raised in this case. In that case, the assessee owned a factory in which he processed cashew nuts grown in his farm and he exported the cashew nuts as an exporter. At the same time, the assessee processed cashew nuts which were supplied to him by exporters on job work basis and he collected processing charges for the same. He, however, did not include such processing charges collected on job work basis in his total turnover for the purpose of computing the deduction under section 80HHC(3) of the Act and as a result this turnover of collection charges was left out in the computation of profits and gains of business of the assessee and as a result ninety per cent. of the profits of the assessee arising out of the receipt of processing charges was not deducted under clauses (1) of Explanation (baa) to section 80HHC. This court held that the processing charges was included in the gross total income from cashew business and hence in terms of Explanation (baa), ninety per cent. of the gross total income arising from pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I. T. A. No. 541 of 2006. The facts of this case very briefly are that Bharat Rasayan Limited (for short 'the assessee') filed a return of Income-tax claiming a deduction of Rs. 72,76,405 under section 80HHC of the Act. In the assessment order, the Assessing Officer held that ninety per cent. of the gross interest has to be excluded from the profits of the business of the assessee under Explanation (baa) to section 80HHC of the Act and deducted ninety per cent. of the gross interest of Rs. 50,26,284 from the profits of the business of the assessee. The assessee preferred an appeal contending that only ninety per cent. of the net interest should have been deducted from the profits of the business of the assessee under Explanation (baa) to section 80HHC, but the Commissioner of Income-tax (Appeals) rejected this contention of the assessee. Aggrieved, the assessee filed an appeal before the Income- tax Appellate Tribunal (for short 'the Tribunal') and the Tribunal allowed the appeal of the assessee and held that the assessee was entitled to deduct the expenses from the interest received and only ninety per cent. of the net amount of interest could be excluded under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal is right in law and on facts in holding that the amount of Rs. 51 lakhs paid by the assessee towards contribution to common effluent treatment plant was an allowable revenue deduction. ?' So far as the issue raised in question No. 1 is concerned, the same is covered by the decision of the apex court in the case of CIT v. Lakshmi Machine Works [2007] 290 ITR 667 (SC), in favour of the asses see. So far as the issue raised in second question is concerned, the same has been considered by this court and the Tribunal has discussed the issue as under : '7. As regards the third ground, the Assessing Officer noted that this is a recurring issue and following his order in assessment year 1996-97, he disallowed the claim of the assessee for the contribution of Rs. 50,00,000 to Odhav Common Effluent Treatment Plant and Rs. 1 lakh to Naroda Environment Project. The Commissioner of Income-tax (Appeals) allowed the claim of the assessee by observing in paragraph 7.3 of his order as under : "3. I have considered the facts and the submissions made on behalf of the appellant. It is seen that this issue has already been decided by me in favour of the appellant, while deciding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge cannot be divested from the export business of the assessee. As noted, once export is made, due to variety of reasons, the remission of the export sale consideration may not be made immediately. Under the accounting principles, therefore, the assessee, on the basis of accrual, would record sale consideration at the prevailing exchange rate on the quoted price for the exported goods in the foreign currency rates. If during the same year of the export, the remission is also made, the difference in the rate recorded in the accounts of the assessee and that eventually received by way of remission either positive or negative, would be duly adjusted. May be the accounting standards require that the same may be recorded in separate foreign exchange fluctuation account. Nevertheless any deviation either positive or negative must have direct relation to the export actually made. Payment would be due to the assessee on account of the factum of export. Current price of the goods so exported would also be pre-decided in the foreign exchange currency. The exact remittance in Indian rupees would depend on the precise exchange rate at the time when the amount is remitted. This fluctuation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) of clause (baa) is any other receipt of a nature similar to the brokerage, commission, interest, rent or charges. The receipt by way of foreign exchange fluctuation not being similar to any of these receipts mentioned above, application of clause (baa) must be excluded. Sub-rule (1) of rule 115 only provides for adopting the rate of exchange for calculation of value of rupee of any income accruing or arising in case of an assessee and provides that the same shall be telegraphic transfer of buying rate of such currency on the specified date. The term specified date has been defined in Explanation 2 to the said sub-rule (1). Rule 115 of the Income-tax Rules, 1962 thus has application for a specific purpose and has no bearing while judging whether foreign exchange rate fluctuation gain can form part of the deduction under section 80HHC of the Act. In case of CIT v. Chowgule and Co. Ltd. reported in [1996] 218 ITR 384 (SC), the court held that rule 115 does not lay down that all foreign currencies received by the assessee will be converted into Indian rupees only on the last date of the accounting period. Rule only fixed the rate of conversion of foreign currency. If there is no fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be eligible for deduction under section 80HHC of the Act. In case of Liberty India v. CIT reported in [2009] 317 ITR 218 (SC), the question examined by the Supreme Court was whether duty draw back receipts and duty exemption pass book benefits form part of the net profit of eligible industrial undertaking for the purpose of deduction under section 80-I, 80-IA or 80-IB of the Act. In this context, it was held that the words 'derived from' has narrower connotation as compared to the words 'attributable to' by using the expression 'derived from.' Parliament intended to cover sources not beyond the first degree. In case of CIT v. Sterling Foods reported in [1999] 237 ITR 579 (SC), the court held that the facts were that the assessee was engaged in the processing of prawns and sea food and exporting it. In the process the assessee earned import entitlements granted by the Government of India under the Export Promotion Scheme. The assessee could use such import entitlements itself or sell the same to others. The assessee sold such entitlements and earned income and included such income for relief under section 80HHC of the Act. The court held that such income ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC account. The exchange fluctuation that arises, it must be emphasized, is after the export transaction is complete and payment has been received by the exporter. Upon the completion of the export transaction, what the seller does with the proceeds, upon repatriation, is a matter of his option. The exchange fluctuation in the EEFC account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression "derived" by the assessee in sub-section (1) of section 80HHC. Both the Assessing Officer and the Commissioner of Income-tax (Appeals) have made a distinction, which merits emphasis. The exchange fluctuation, as both those authorities noted, arose subsequent to the transaction of export. In other words, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Liberty India v. CIT reported in [2009] 317 ITR 218 (SC), wherein it is observed as under (page 233) : "Continuing our analysis of section 80-IA/80-IB it may be mentioned that sub-section (13) of section 80-IB provides for applicability of the provisions of sub-section (5) and sub-sections (7) to (12) of section 80-IA, so far as may be, applicable to the eligible business under section 80-IB. Therefore, at the outset, we stated that one needs to read sections 80-I, 80-IA and 80-IB as having a common Scheme. On perusal of sub-section (5) of section 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly ; such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub-section (5) of section 80-IA, which are also required to be read into section 80-IB. [See section 80-IB(13)]. We may reiterate that sections 80-I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f drawback to be determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported. Basically, the source of duty draw back receipt lies in section 75 of the Customs Act and section 37 of the Central Excise Act. Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Schemes framed by the Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression 'profits derived from industrial undertaking' in section 80-IB. Since reliance was placed on behalf of the assessees on AS-2 we need to analyse the said Standard. 20. AS-2 deals with Valuation of Inventories. Inventories are assets held for sale in the course of business ; in the production for such sale or in form of materials or supplies to be consumed in the production. 'Inventory' should be valued at the lower of cost and net realizable value (NRV). The cost of 'inventory' should comprise all cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the respective parties at length. The question which is posed for consideration of this court is whether the learned Tribunal was right in law in confirming that appellant was not entitled to deduction under section 80-IA of the Income-tax Act, 1961 in respect of Central Excise Duty set off and sales tax set off ? At the outset, it is required to be noted that the aforesaid issue is squarely covered against the assessee in view of the decision of the hon'ble Supreme Court in the case of Liberty India v. CIT [2009] 317 ITR 218 (SC) as well as in the case of Sterling Foods (supra). It is required to be noted that with respect to export incentive under the scheme of DEPB, it is held by the hon'ble Supreme Court in the case of Liberty India (supra) that in respect of DEPB and duty drawback the assessee is not entitled to deduction under section 80-IB of the Act. In the facts and circumstances of the case and so observed by the learned Tribunal, the assessee must claim the Central Excise Duty set off to be in the nature of duty drawback linked with export profit while claiming deduction under section 80HHC of the Act. Therefore, it is rightly observed by the Tribunal that for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r such impost is found to be of a composite nature, i.e., partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature. In that case this court has approved the judgment of the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113 (AP) where the court was dealing with the deduction of the amount paid by way of damage under section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. It was held that the said amount comprises both the element of penal levy as well as compensatory payment and that it will be for the authority under the Act to decide with reference to the provisions of the Employees' Provident Funds Act, 1952 and the reasons given in the order imposing and quantifying the damage to determine what proportion should be treated as penal and what proportion as compensatory and that the entire sum can neither be considered as mere penalty nor as mere interest." 16. So far as issue with regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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