TMI Blog2016 (7) TMI 1374X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 80HHC for determining the profits of the business. Matter remanded back to A.O. to work out the deductions – Decided in favor of assessee Allowance of job work charges confirmed. Refund of excise duty - Held that:- The same is covered in favour of the assessee in view of the decision of the apex court in the case of CIT v. Lakshmi Machine Works [2007 (4) TMI 202 - SUPREME Court]. Accordingly, the issue is answered in favour of the assessee and against the Revenue. Expenditure on effluent treatment plant - allowable business expenditure - Held that:- A similar issue has come up before the Gujarat High Court in the case of Alembic Glass Industries Ltd. [1975 (11) TMI 42 - GUJARAT High Court] wherein it was held that the assessee being member of federation of Gujarat Mills and Industries, contribute a sum of ₹ 5,000 for construction of a building and auditorium and the amount was held to be an allowable deduction. In addition to coming to the conclusion that there was commonality of business it was further held that the expenditure was in connection with the expansion of the existing business. In view of the aforesaid decision of the Gujarat High Court, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... averi And G. R. Udhwani, JJ. For the Appellant : Mauna M. Bhatt For the Respondent : Hardisk V. Vora JUDGMENT K. S. Jhaveri, J. 1. All these appeals are preferred against different judgments. Tax Appeal No. 1085 of 2008 is preferred against the order dated March 30, 2007 of the Income-tax Appellate Tribunal, Ahmedabad Bench A , Ahmedabad (for short, the Tribunal ) in I. T. A. No. 1373/Ahd/2000 for the assessment year 1996-97. Tax Appeal No. 676 of 2008 is preferred against the order dated March 30, 2007 of the Tribunal in I. T. A. No. 1484/Ahd/2000 for the assessment year 1997-98. Tax Appeal No. 1086 of 2008 is preferred against the order dated March 30, 2007 of the Tribunal in I. T. A. No. 1524/Ahd/2000 for the assessment year 1996-97, while Tax Appeal No. 1812 of 2008 is preferred against the order dated March 30, 2007 of the Tribunal in I. T. A. No. 1483/Ahd/2000 for the assessment year 1994-95. By way of the impugned 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 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment plant ? D. Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the Commissioner of Income-tax (Appeals) allowing deduction under section 80HHC of the Act on (a) laboratory sample testing receipts, (b) foreign exchange fluctuations, (c) discount, kasar and incidental charges, (d) sales tax set off, (e) insurance premium and (f) sundry balances written off ? Tax Appeal No. 1086 of 2008 A. 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 ₹ 97,23,550 made in respect of amount paid to farmers on account of damage/penalty in view of the decision of this hon'ble court in pollution matters ? B. Whether the Appellate Tribunal ought not to have appreciated that the amount of ₹ 97,23,550 paid to the farmers was on account of penalty for infringement of law and, therefore, not allowable under section 37 of the Act ? C. 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 ₹ 91 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Commissioner of Income-tax (Appeals) directing the Assessing Officer not to exclude receipt on account of laboratory sample testing, sales tax set off/refund and dis count, vatav/kasar, from the profit within the meaning of Explanation (baa) to section 80HHC of the Act ? 3. Since common issues are involved in all these appeals, they are taken up for hearing together and are being disposed of by this common order. 4. So far as issue with regard to vatav, kasar, discount and sales tax set-off under section 80-I is concerned, learned counsel for the appellant submitted that the Commissioner of Income-tax (Appeals) had held that this income cannot be said to be derived from industrial undertaking. However, the Appellate Tribunal has reversed the findings of the Commissioner of Income-tax (Appeals) and allowed the claim of the assessee. He further submitted that so far as the issue with regard to netting of interest is concerned, the same will be now governed by the decision of the apex court in the case of ACG Associated Capsules Pvt. Ltd v. CIT [2012] 343 ITR 89 (SC). So far as issue with regard to rebate on job work charges is concerned, it is submitted that since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in the case of ACG Associated Capsules Pvt. Ltd v. CIT [2012] 343 ITR 89 (SC). The Supreme Court held that for the purpose of section 80HHC of the Act, it is not the entire amount received by the assessee on sale of DEPB credit, but the sale value of less the face value of the DEPB that will represent profit on transfer of DEPB credit by the assessee. Heavy reliance was placed in the case of Topman Exports v. CIT [2012] 342 ITR 49 (SC). Extending such logic, it was further held that even other amounts, such as, interest or rent when are to be excluded for the purpose of Explanation (baa) to section 80HHC of the Act. Ninety per cent. of not the gross rent or gross interest, but the net thereof shall have be excluded. It was observed as under : If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as expense in accordance with sections 30 to 44D of the Act and is not to be included in the profits of the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , relying on the decision of the Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. (supra), exclusion was approved for deduction under section 80-IA of the Act. Having heard the learned counsel for the parties, we see no reason to entertain this tax appeal. The Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. (supra) has already laid down the foundation for the logic for excluding the net profit and not the gross profit from the claim of deduction when it is found that the source of income does not qualify for such deduction under section 80HHC of the Act. It is true that section 80HHC represents vastly different scheme of deduction and also provides for complex formula for deriving for the eligible profit for deduction under different situations depending on whether the exporter is also engaged in the local business or not. However, this distinction would not be material in so far as central question of exclusion of certain profit from the activity which is not eligible for deduction under sections 80HH and 80-I are concerned. The logic being when the profit is being excluded form the claim of deduction, not the gross profit but the net thereof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stioned the assessee on these expenses and deleted the same on two grounds, firstly that the interest was paid by way pre- operative expenditure and secondly the assessee had capitalized such expenditure. The assessee carried the matter in appeal. The Commissioner of Income-tax (Appeals) relying on a decision of this court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj) held in favour of the assessee. In addition to coming to the conclusion that there was commonality of business it was further held that the expenditure was in connection with the expansion of the existing business. On such ground, the expenditure was held allow able. It is this order of the Commissioner of Income-tax (Appeal) which the Tribunal upheld in the impugned judgment. Having heard the learned counsel for the parties and having perused the documents on record, we notice that Commissioner of Income-tax (Appeals) and the Tribunal concurrently came to the conclusion that there was inter-connection, inter-lacing and inter- dependence of the management, financial and administrative control of various units of Nirma Limited. It was on this ground, the Tribunal held that the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;The object of the Transport Subsidy Scheme is not augmentation of revenue, by levy and collection of tax or duty. The object of the Scheme is to improve trade and commerce between the remote parts of the country with other parts, so as to bring about economic development of remote backward regions. This was sought to be achieved by the Scheme, by making it feasible and attractive to industrial entrepreneurs to start and run industries in remote parts, by giving them a level playing field so that they could compete with their counterparts in central (non-remote) areas. The huge transportation cost for getting the raw materials to the industrial unit and finished goods to the existing market outside the state, was making it unviable for industries in remote parts of the country to compete with industries in central areas. Therefore, industrial units in remote areas were extended the benefit of subsidized transportation. For industrial units in Assam and other northeastern States, the benefit was given in the form of a subsidy in respect of a percentage of the cost of transportation between a point in central area (Siliguri in West Bengal) and the actual location of the industr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivable against exports schemes are included as being income under the head 'Profits and gains of business or profession', it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head 'Profits and gains of business or profession', and not under the head Income from other sources . 7.1 In view of above observations, this issue is answered in favour of the assessee and against the Department. 8. So far as the issue with regard to netting of interest is concerned, the same will be now governed by the decision of the apex court in the case of ACG Associated Capsules Pvt. Ltd v. CIT reported in [2012] 343 ITR 89 (SC), wherein it is observed as under (page 96) : Before we deal with the contentions of learned counsel for the parties, we may extract Explanation (baa) to section 80HHC of the Act. 'Explanation-For the purposes of this section,-. . . (baa) 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- (1) ninety per cent. of any sum referred to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head 'Profits and gains of business or profession', ninety per cent. of such quantum of receipts cannot be reduced under clause (1) of Explanation (baa) from the profits of the business. In other words, only ninety per cent. of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the profits of the asses see for determining 'profits of the business' of the assessee under Explanation (baa) to section 80HHC. For this interpretation of Explanation (baa) to section 80HHC of the Act, we rely on the judgment of the Constitution Bench of this court in Distributors (Baroda) (P.) Ltd. v. Union of India (supra). Section 80M of the Act provided for deduction in respect of certain inter corporate dividends and it provided in sub-section (1) of section 80M that 'where the gross total income of an assessee being a company includes any income by way of dividends received by it from a domestic company, 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 income by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining the profits of the business. The view that we have taken of Explanation (baa) to section 80HHC is also the view of the Delhi High Court in CIT v. Shri Ram Honda Power Equip (supra) and the Tribunal in the present case has followed the judgment of the Delhi High Court. On appeal being filed by the Revenue against the order of the Tribunal, the High Court has set aside the order of the Tribunal and directed the Assessing Officer to dispose of the issue in accordance with the judgment of the Bom bay High Court in CIT v. Asian Star Co. Ltd. (supra). We must, thus, examine whether reasons given by the High Court in its judgment in CIT v. Asian Star Co. Ltd. (supra) were correct in law. On a perusal of the judgment of the High Court in CIT v. Asian Star Co. Ltd. (supra), we find that the reason which weighed with the High Court for taking a different view, is that rent, commission, interest and brokerage do not possess any nexus with export turnover and, therefore, the inclusion of such items in the profits of the business would result in a distortion of the figure of export profits. The High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred such expenditure in earning the profits and to avoid a distorted figure of export profits, ninety per cent. of the receipts like brokerage, commission, interest, rent, charges are sought to be excluded from the profits of the business. In our considered opinion, it was not necessary to refer to the explanatory Memorandum when the language of Explanation (baa) to section 80HHC was clear that only ninety per cent. of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such pro fits computed under the head 'Profits and gains of business' of an assessee could be deducted under clause (1) of Explanation (baa) and not ninety per cent. of the quantum of any of the aforesaid receipts which are allowed as expenses and therefore not included in the pro fits of business of the assessee. In the result, we allow the appeal and set aside the impugned order of the High Court and remand the matter to the Assessing Officer to work out the deductions from rent and interest in accordance with this judgment. No costs. Civil Appeal No. 4534 of 2008 This is an appeal against the order dated January 19, 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and against the Department. 9. So far as issue with regard to rebate on job work charges is concerned, the amount is paid by the assessee, therefore, the Tribunal is right in law and on facts in confirming the order passed by the Commissioner of Income-tax (Appeals) deleting the disallowance of job work charges. Accordingly, the issue is answered in favour of the assessee and against the Revenue. 10. So far as issue regarding refund of excise duty is concerned, the same is covered in favour of the assessee in view of the decision of the apex court in the case of CIT v. Lakshmi Machine Works [2007] 290 ITR 667 (SC). Accordingly, the issue is answered in favour of the assessee and against the Revenue. 11. So far as question with regard to common effluent treatment plant is concerned, the same is covered by the decision of this court in Tax Appeal No. 1392 of 2006, wherein it is held as under : The following questions are proposed for admission of this appeal : '(A) Whether the Appellate Tribunal is right in law and on facts in holding that sales tax and excise duty are not to be treated as part of turnover for the purpose of computation of deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 for construction of a building and auditorium and the amount was held to be an allowable deduction. In view of the aforesaid decision of the Gujarat High Court, we are of the opinion that the contribution made by the assessee is an allow able deduction and the Commissioner of Income-tax (Appeals) was justified in allowing the same.' Considering the above facts, we see no merits in the appeal. The appeal stands dismissed at the admission stage. 11.1 In view of above observations, this issue is answered in favour of the assessee and against the Department. 12. So far as the issue with regard to foreign exchange fluctuation under section 80-IA is concerned, the same will be now governed by the decision of this court in the case of CIT v. Priyanka Gems reported in [2014] 367 ITR 575 (Guj), wherein it is observed as under (page 589) : Under the circumstances, we have no hesitation in upholding the view of the Tribunal. Quite apart, the issue is substantially covered by the decision of the CIT v. Amba Impex (supra). Consistent and at times independent trend of the judicial pronouncements of courts across the country need not be disturbed. Even independently, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee export was not made, would not in any manner change the situation. The assessee being engaged in the business of export and having made the export, mere fact of the remittance being made after 31st of March of the year when export was made, would not change the situation in so far as, relation of such income to the assessees export business is concerned. Clause (baa) of the Explanation to section 80HHC provides for exclusion of certain incomes for computation of export profit under section 80HHC. Sub-clause (1) of clause (baa) thereof pertains to 90 per cent. of the sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in such profits. The term 'foreign exchange difference' is not specified in any of the categories specifically mentioned in the said clause. The Revenue, however, contended that the same must be included by necessary implication as part of other receipts. The Legislature, however, has used the term any other receipt of similar nature. This expression similar nature would have considerable bearing on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded by the Revenue that such facts arise and that, therefore, the Explanation would apply. Second aspect is that even in such a case what is to be adopted for the purpose of value of goods or merchandise is that declared in the shipping bill or bill of export referred to in sub-section (1) of section 50 of the Customs Act. Here the term used is value of goods or merchandise and such value of goods or merchandise can as well be the price agreed to between the parties and indicated in foreign currency terms. Having so adopted the value of goods as indicated in the export documents, what the assessee may actually receive in terms of Indian currency, would depend on the time of remission and the precise foreign exchange rate of the foreign currency at that point of time. We would now refer to the decision cited by counsel for the Revenue. In case of Pandian Chemicals Ltd. v. CIT reported in [2003] 262 ITR 278 (SC) ; the question arose whether interest derived by the industrial undertaking from the deposit made with the Electricity Board for supply of electricity for running the industrial undertaking can be said to have been derived from its business. It was in this con text held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the fact that the assessee had received the entire proceeds of the export transaction and thereafter, gained due to the foreign fluctuation on the account kept by the assessee in the EEFC Account, the court held that such gain cannot be said to have been derived from the assessees export business. Thus the significant and distinguishing feature of this case is that the assessee had received the entire proceeds of the export sale. The foreign exchange fluctuation gain arose subsequent to the assessee receiving the sale consideration. It was in this background, the court held and observed as under (page 24 of 327 ITR) : 'The assessee admittedly in the present case received the entire proceeds of the export transaction. The Reserve Bank of India, has granted of facility to certain categories of exporters to maintain a certain proportion of the export proceeds in an EEFC account. The proceeds of the account are to be utilized for bona fide payments by the account holder subject to the limits and the conditions prescribed. An assessee who is an exporter is not under an obligation of law to maintain the export proceeds in the EEFC account but, this is a facility which is made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tin Mehta for the Revenue, however, con tended that the foreign exchange fluctuation gain may arise under various circumstances, not all of them may be covered under section 80HHC of the Act. Primarily, we do not see any distinction possible on the basis of different situations under which foreign exchange fluctuation may result. We are conscious that law permits hedging of foreign exchange fluctuation risk to an importer or an exporter. The exporter may, therefore, take steps as found commercially prudent to safeguard himself against drastic foreign exchange rate fluctuations and in the process may also limit the possibility of gain in case of favourable currency rate trends. Nevertheless, the resultant gain in foreign exchange rate would still be due to the export made by the assessee. In any case, no such facts are recorded by the Assessing Officer in any of these cases. We would, therefore, not entertain such speculative contention. In the result, the question is answered in favour of the assessees and against the Revenue. All tax appeals are dismissed. 12.1 In view of above observations, this issue is answered in favour of the assessee and against the Department. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components, etc. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from section 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under section 80-IB. They belong to the category of ancillary profits of such undertakings. The next question is - what is duty drawback ? section 75 of the Customs Act, 1962 and section 37 of the Central Excise Act, 1944 empower Government of India to provide for repayment of customs and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the inputs consumed and the inventory of inputs should be valued on the basis of purchase cost net of specified duty on inputs (i.e. duty recoverable from the Department at a later stage) arising on account of rebates, duty drawback, DEPB benefit, etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets, etc. Therefore, we are of the view that duty drawback, DEPB benefits, rebates, etc., cannot be credited against the cost of manufacture of goods debited in the profit and loss account for purposes of section 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking . . . In the circumstances, we hold that duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of section 80-I/80-IA/80-IB of the 1961 Act. The appeals are, accordingly, dismissed with no order as to costs. 13.1 In view of above observations, this issue is answered in favour of the assessee and against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partment and against the assessee. 15. So far as issue with regard to deleting the disallowance of ₹ 97,23,550 made in respect of amount paid to farmers on account of damage/penalty is concerned, we may refer to Swadeshi Cotton Mills Co. Ltd. v. CIT reported in [1998] 233 ITR 199 (SC), wherein it is observed as under (page 201) : In Prakash Cotton Mills Pvt. Ltd. [1993] 201 ITR 684 (SC) this court has considered the question whether the interest paid for delayed payment of sales tax under the Bombay Sales tax Act, 1959 and damage paid for delayed payment of contribution under the Employees' State Insurances Act were permissible deduction under section 37(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). This court has held that whenever any statutory impost paid by an assessee by way of damage or penalty or interest, is claimed as an allowable expenditure under section 37(1) of the Act, the assessing authority is required to examine the scheme of the pro visions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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