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TMI Blog2009 (8) TMI 1255X X X X Extracts X X X X X X X X Extracts X X X X ..... ses to the tune of ₹ 1,31,880/-. The action of the Learned CIT(A) is contrary to the facts and law and deserves to be deleted. 4 On appreciation of the facts and circumstances of the case and law, the Learned CIT(A) has erred in confirming the action of the Learned AO in disallowing contributions to the tune of ₹ 880/- to PF/ESI. The action of the Learned CIT(A) is contrary to the facts and law and deserves to be deleted. 5 On appreciation of the facts and circumstances of the case and law, the Learned CIT(A) has erred in upholding the action of the Learned AO in not considering the export benefit receivable to the tune of ₹ 3,95,05,367/- as income from business for the purpose of computing deduction u/s 80HHC. The action of the Learned CIT(A) is contrary to the facts and law and deserves to be deleted. 6 On appreciation of the facts and circumstances of the case and law, the Learned CIT(A) has erred in confirming the action of the Learned AO in not considering interest income to the tune of ₹ 6,04,462/- as income business for the purpose of computing deduction u/s 80HHC. The action of the Learned CIT(A) is contrary to the facts and law and deserves to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition on account of Misc. expenses amounting to ₹ 14,628/- without appreciating the fact that no complete set of details with the supporting evidences were filed by the assessee-company despite sufficient time given to it as also assessee-company failed to justify its claim that the expenses were incurred wholly for the business purposes. 7 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition on account of Advance written off amounting to ₹ 7,47,181/- without appreciating the fact that no complete set of details with the supporting evidences were filed by the assessee-company despite sufficient time given to it. The assessee-company failed to substantiate its claim with regard to purpose for giving the advances i.e. whether for business purpose or otherwise, actions taken for recovering the advances etc. 7.1 The learned CIT(A) has erred in granting relief to the assesseecompany relying upon the decision of Hon'ble Gujarat High Court in the case of CIT v Girish Bhagwat Prasad [256 ITR 772], as the said jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact that the sales-tax and excise duty is part of the total turnover as held by the learned CIT(A)-I, Surat in the case of sister concern of the assessee-company viz. M/s Bilag Industries P Ltd. - AY 2000-01, relying upon the decision of the ITAT, Ahmedabad in the case of Gujarat Fluro Chemicals Ltd. [2006] 76 TTJ (Ahd) 313. 11 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in allowing the appeal of the assessee-company to include the following items while calculating the profits of the business for deduction u/s 80HH: 1) Exchange Gain ₹ 40,33,509/- 2) Cash discount ₹ 05,04,556/- 3) Misc. Income ₹ 00,51,676/- 11.1 The learned CIT(A) has granted relief to the assessee-company without appreciating the fact that where the item of income has no nexus to the exports made by the assessee, then same is to be excluded both from the total turnover as well as from the profits of the business as held by the following courts: 1) Tanna Exports [Mumbai Tribunal] 2) Nathani Steels [57 ITD 584] [Mumbai Tribunal] 3) CIT v Sterling Foods [237 ITR 579] [SC] 11.2 The learned CIT(A) has granted relief to the assessee-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the form of refrigerator to the main staff members to boost their productivity and secure their loyalty. This type of expenditure is normally incurred by almost all companies, so as to increase the productivity of their employees. A refrigerator is required to enable them to have an organized lifestyle with convenience, which will enhance their work efficiency. The learned DR, on the other hand, supported the order of the CIT(A). 3.3 We have carefully considered the rival submissions and perused the material on record along with the order of the tax authorities below. In our opinion, the expenditure so incurred by the assessee cannot be regarded to be the staff welfare expenditure. The plea of the assessee is that the assessee has given the refrigerator to the staff on auspicious occasion. It is not the plea of the assessee that the refrigerator has been given to the staff for the purpose of business. Under section 37(1) only the expenditure which has been incurred wholly and exclusively for the purpose of business, if it is not a capital expenditure or a personal expenditure, can be allowed. The refrigerator has been given by the assessee voluntarily on the auspicious occasion wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07) 289 ITR 475 (Delhi). This is an admitted fact that in this case the interest income amounting to ₹ 6,04,462/- has been assessed by the AO as business income, not the income from other sources. The Hon'ble High Court in the case of CIT v Shri Ram Honda Power Equip (2007) 289 ITR 475 (Delhi) has clearly laid down that the word "interest" in clause (baa) of the Explanation connotes "net interest" and not "gross interest" and, therefore, we accordingly direct the AO to exclude 90% of the net interest and not of the gross profit provided the assessee proves that the assessee has incurred the expenditure for the purpose of earning of such interest. We accordingly set aside the order of the CIT(A) and restore it to the file of the AO to re-compute the deduction u/s 80HHC by excluding 90% of the net interest provided the assessee proves that the assessee has incurred the expenditure for earning of this interest of ₹ 4,04,562/-. Accordingly, this ground is allowed for statistical purpose. 8 Ground No.7 in the assessee's appeal relating to not granting deduction u/s 80HHC was not pressed by the learned AR at the time of hearing. Therefore, the same stands dismissed, as not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the nexus is only incidental. I do not agree with the learned counsel that deduction u/s 80IB is available on the export benefit receivable. The case of Pratibha Syntext Ltd. (supra) is entirely on different issue and the appellant can not derive support from that case. In the case of United Phosphorus Ltd. (supra), the finding has been re-produced by the learned counsel but he could not bring to my notice, the facts of the case on the basis on which the above decision was rendered by the Ahmedabad Tribunal. It could not be proved by him that the facts of case are identical to that of the case of the appellant and therefore, appellant can not derive support from the decision in the case of United Phosphorus Ltd. Relying on the decision of the Hon'ble Supreme Court in the case of CIT v Sterling Foods (supra), I have given a finding in the case of Hindustan Inks & Resins Ltd. for the Asstt. Year 2000-01 vide appellate order 24-2-2004, that export benefit receivable is not entitled for deduction u/s 80IB of the Act. Since, the facts are exactly similar, therefore, relying on the above referred decision of the Hon'ble Supreme Court, it is held that the deduction u/s 80IB wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther hand, supported the order of the CIT(A) and relied on the decision of the Hon'ble Supreme Court in the case of Sterling Foods (supra). 12 We have carefully considered the rival submissions and, perused the material on record along with the order of the tax authorities below. We have also gone through the case law as has been cited before us. The issue before us is whether the income from export incentive in the form of DEPB will be eligible for deduction u/s 80IB or not during the assessment year under consideration. 13 Section 80IA was inserted by the Finance Act (No.2), 1991 w.e.f. 1-4-2000 and later on amended by the Finance Act, 1992, 1993,1994, 1995, 1996, 1997, Income-tax (Amendment) Act, 1998 and Finance (No.2) Act, 1998. Later on section 80IA was substituted by the Finance Act, 1999 with effect from 1-42000 by section 80IA and 80IB. 14 After the substitution of section 80IA into section 80IA and 80IB, the language of sections 80IA and 80IB has been changed. The earlier section 80IA reads as under:- "Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking…. To which this section ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof." From the said language it is apparent that if the profits and gains is derived from the eligible industrial undertaking, only then it can be entitled for the deduction u/s 80HH. While interpreting the language of section 80HH, the Hon'ble Supreme Court has held as under:- "We do not think that the source of the export entitlements can be said to be the industrial undertaking of the assessee. The source of the export entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words "derived from" a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea foods by reason of such export, the export promotion scheme applies. Thereunder, the assessee is entitled to export entitlem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made under section 61 by the proper officer, a drawback should be allowed for duties of customs chargeable under this Act on any imported material of a class or description used in the manufacture of such goods, the Central Government may, by notification in the Official Gazette direct that drawback shall be allowed in respect of such goods in accordance with, and subject to, the rules made under sub-section (2)." Similar provisions are there in section 36 of the Central Excise Act, 1944. 18 The object of the duty drawback scheme is to reimburse exporters for 19 tariffs paid on the imported raw materials and intermediates and Central Excise duties paid on domestically produced inputs which enter into export production. Customs duties and excise duties on inputs raise the cost of production in industries and thereby affect the competitiveness of exports. Therefore, exporters need to be assisted for neutralizing the escalation in their costs attributable to such customs and excise duties. Duty drawback is, therefore, intended to reduce the cost of production. Hence, duty drawback is an integral part of the pricing of the goods and, therefore, part of the cost of production of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich ₹ 7,32,904/- was shown by the assessee under the head "Income from other sources. It is only the balance amounting to ₹ 6,04,462/-was shown by the assessee as business income. The AO did not allow the deduction u/s 80IB. When the matter went before the CIT(A), the CIT(A) confirmed the order of the AO. 20 The learned AR before us contended that the interest was basically received from the bank on the margin money, FD which was kept for opening L/Cs, loan given to the employees and on a H/C but no break-up was given before us. In our opinion, this issue is no more res integra in view of the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v CIT [2003] 262 ITR 278 (SC), in which the Hon'ble Supreme Court while interpreting the words "derived from" denied the deduction in respect of interest earned on the deposits made with the Electricity Board, by observing as under:- "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. Although electricity may be required for the purposes of the industrial undertakin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellate order of my predecessor and the above discussion, the disallowances are deleted." 23.2 We have carefully considered the rival submissions and, perused the material on record along with the order of the tax authorities below. We noted that the expenditure has been incurred to build up and strengthen the contacts with the customers, which increased sales and profits and, therefore, in our opinion, the CIT(A) has rightly observed that the AO has to justify that it has not been incurred wholly and exclusively for the business purposes, which is absent in the order of the AO. We, therefore, do not find any infirmity in the order of the CIT(A) and accordingly we confirm the order of the CIT(A) in this regard. Thus, this ground taken by the Revenue stands dismissed. 24.1 Ground No.5 relates to the disallowance of ₹ 7,32,290/- out of foreign travel expenses. The AO disallowed the foreign travel expenses on the ground that the assessee has not given justification in respect of various visits to foreign countries and part of days stayed by different persons is not used for the business purpose of the assessee-company. When the matter went before the CIT(A), the CIT(A) delet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses and for the sake of convenience, disallowed 1/5th of ₹ 73,140/-. After carefully considering the rival submissions of both the parties, we agree with the view of the CIT(A) that the addition has been made by the AO on the basis of presumptions that such expenses were incurred for non-business purposes. We find that these expenses were posted in the books of accounts under the head miscellaneous expenses as is evident from the copy of accounts. We accordingly do not find any infirmity in the order of the CIT(A) in this regard and confirm the order of the CIT(A). Thus, this ground raised by the Revenue stands dismissed. 26.1 Ground No.7 relates to deletion of the addition on account of Advance written off amounting to ₹ 7,47,181/-. The facts are that the assessee has paid this sum as an advances for supply of materials / services. The company could not avail the services and it was not possible to recover the advances back . Accordingly the said advances were written off. The AO made the addition on the ground that the assessee-company failed to substantiate its claim with regard to purpose for giving the advances i.e. whether for business purpose or otherwise. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been came into existence on account of these expenses. The CIT(A)-I, Surat has also held registration expenses as revenue in nature in the appellant's case for the AY 200001 vide para-8 of his appellate order dtd. 23.4.2003. The expenditure of ₹ 10,000/- paid to the Company Secretary for complying with the procedure for transferring the registered office of the company from Selvass to Vapi, is certainly a part of revenue expenditure. Considering the appellate order of my predecessor and the above discussion, the addition of ₹ 35,000/- does not deserve to be upheld. The same is hereby deleted." 27.2 We have carefully considered the rival submissions and, perused the material on record along with the order of the tax authorities below. We find that before us also the learned DR could not bring any material on record on the basis of which a different view from that of the CIT(A), can be taken. We agree with the view taken by the CIT(A) and do not find any infirmity in the order of the CIT(A). We accordingly confirm the order of the CIT(A) on this point. Thus, this ground taken by the Revenue stands dismissed. 28.1 Ground No.9 relates to deletion of the addition of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Courts. The AO has made a separate basis for repetitive addition. 22 I would like to refer to the finding given by the CIT(A) in the case of Umedica Laboratories Pvt. Ltd. for the AY 2000-01 which is as under: "Thus, in view of the past history of the case and after going through the appellate orders for the AYs 1996-97, 98-99 and also directions of the Tribunal as spelt out in the order dtd.9.11.2000 for the AY 1996-97, I see no reason as to why the claim of the appellant regarding nontaxability of refund on excise duty should not be accepted. The factual position for the AY 2000-01 in respect of this issue is the same as in the earlier years including the AY 1996-97 and AY 1998-99. For the reasons discussed in my appellate orders for the AY 199697 dtd. 20-10-2002, the addition made of ₹ 88,67,803/- in respect of excise refund is held as not taxable for the year under consideration and this addition is accordingly deleted." 23 Following the same finding as referred to above, such additions were also deleted by me in the aforesaid case vide para 4 of the appellate order dtd. 5.4.2004 in Appeal No. CIT(A)/VLS/242/03-04 for the AY 2001-02. 24 Considering the facts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the 'profit of business' for deduction u/s 80HHC: [a] Interest received ₹ 13,37,366/- [b] Export benefit ₹ 3,05,05,367/- [c] Gain exchange rate diff. ₹ 40,33,509/- [d] Misc. Income Cash Discount (Income) ₹ 504556/- Misc. Income ₹ 51676 --------------- ₹ 5,56,232/- -------------------- Total ₹ 4,54,32,473/- ============= The AO held that out of the above 90% of the export benefit of ₹ 3,95,05,367/- is required to be excluded from profit of the business for the purpose of deduction u/s 80HHC, which the assessee company excluded in its return of income. Balance amounting to ₹ 59,27,106/- [4,54,32,473 - 3,95,05,367] is to be treated as other income and90% of the same is required to be reduced from the profit of the business for the purpose of deduction u/s 80HHC. The AO observed that the assessee company has excluded only 90% of ₹ 19,99,943/- for the purpose of calculation of deduction u/s 80HHC. Hence balance of other income of ₹ 39,27,163/- [59,27,106 - 19,99,943] is not related to export business and is required to be excluded in view of the specific mention of the word "charges" in sub cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m business" while computing the profit for the purpose of computation of deduction u/s 80HHC. But we restore this issue to the file of the AO only for the purpose of verification whether Exchange Rate Gain received is within six months or permitted period as per the provisions of section 80HHC(2). If this gain represents the consideration received within the permissible period u/s 80HHC(2), the assessee will be entitled for the deduction otherwise the deduction will be limited only in respect of the Exchange Rate Difference received within the permissible time. 32 Coming to the issue relating to the Discount from the suppliers, we noted that the sum of ₹ 5,04,556/- consists of two items, ₹ 4,75,924/- Discount received from the suppliers and ₹ 28,500/- rental income. 90% rental income is to be specifically excluded under Explanation (baa) while computing the profit of the assessee for the purpose of computation of deduction u/s 80HHC from the profits and gains of business or profession and we accordingly confirm the action of the AO of excluding 90% of rental income of ₹ 28,500/- from the profit under the head "Income from business" while computing business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ually received the sale proceeds. The source of this gain is the sale proceeds and is therefore part of the business income derived from the eligible undertaking. It cannot be said that the Exchange Gain so received is not derived from the eligible business of the assessee. 36 So far as the Discount received from the customers is concerned, the discount has been received by the assessee on the purchase of raw material. The assessee has shown this discount as its income separately in the P&L Account otherwise even as per the accounting principle this discount have to be reduced from the raw material consumed. This in turn will increase the business profit of the assessee. The assessee cannot be penalized merely due to the defects of the auditor's accountant who have wrongly credited the discount in the P&L Account separately although it is inextricably connected with the purchase of raw material and integral part of the cost of production. This discount therefore is derived from the eligible business and liable for deduction u/s 80IB. 37 Similar is the situation in respect of Insurance claim. As the assessee has received the Insurance claim on the damage of raw material, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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