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2018 (11) TMI 209 - AT - Income TaxDetermination of profits of the assessee company under s.10B - AO artificially computing the non-existent interest costs - whether an ‘arrangement’ of business transacted between the assessee and its Directors/shareholders can be inferred whereby the assessee earned more than ordinary profits as contemplated under s. 10B(7) r.w.s. 80IA(10)? - Held that:- A mere diversion of funds in the form of interest free lending by shareholders to its company do not partake the character of a business transaction. We are alive to the fact that while alleging ‘arrangement’, the AO has narrated circumstances like withdrawal of interest free funds immediately on the completion of eligible period for availing benefit under s.10B of the Act. No doubt, such circumstances bring some disquiet. However, such circumstances cannot be regarded as overwhelming for the purposes of grave allegation of arrangement contemplated under s. 80IA(10) of the Act. Revenue has mis-directed itself in law as well as on facts in artificially computing the non-existent interest costs and thus denying the deduction under s.10B eligible to the assessee. The action of the Revenue is wholly unsustainable in law and deserves to be set aside and cancelled. While doing so, we also note that similar issue had cropped up in the case of Gilvert Ispat [2011 (5) TMI 962 - ITAT CHANDIGARH] also which was answered in favour of the assessee. Consequently, the order of the CIT(A) on the aforesaid issue is set aside and the AO is directed to exclude the aforesaid adjustment for the purposes of determination of profits of the assessee company under s.10B of the Act. Disallowance on account of reduction in profit eligible for deduction under s.10B - AO has excluded an amount towards freight and insurance expenses from the ‘export turnover’ but was not made from ‘total turnover’ - Held that:- Apart from the several judicial precedents, the controversy is settled in favour of the assessee also by CBDT Circular No.4/2018 dated 14.08.2018. As per the CBDT circular, the expenditure incurred of such nature are required to be excluded from both ‘export turnover’ as well as ‘total turnover’ while computing deduction admissible under s.10A of the Act. In parity, we do not see any error in the order of the CIT(A). Currency Conversion Income - Reduction in profit eligible for deduction u/s 10B in respect of currency rate difference income due to foreign currency rate fluctuation - Held that:- As decided in M/S MOTOROLA INDIA ELECTRONICS PVT LTD [2014 (1) TMI 1235 - KARNATAKA HIGH COURT] interest income earned from inter-corporate loans and deposits lying in EEFC Accounts are eligible for deduction u/s.10B for the reason that as per the amended section 10B(4), the profit derived from export means profit of the business of the undertaking and not just the profits and gains from export of articles. Since the export profits kept in the EEFC account relate to the business of the undertaking on which the appellant is claiming exemption u/s.10B we hereby direct the A.O to delete the reduction of deduction u/s.10B. Disallowance u/s 14A r.w.r. 8D - disallowance towards proportionate Rule 8D(2)(ii) and towards administrative expenditure presumed to be attributable for earning tax free income under s.8D(2)(iii) - Held that:- Disallowance computed by the AO under Rule8D is partly justified to the extent of proportionate interest amounting to ₹ 1,23,435/- in view of availability of interest free funds in excess of corresponding investments yielding tax free income. Therefore, the action of the CIT(A) to this extent is approved. However, the disallowance of ₹ 1,88,372/- in terms of Rule 8D(2)(iii) could not have been assailed by the CIT(A) in view of the statutory presumption available to the AO under the Rule. In the absence of any assertion made on behalf of the assessee to controvert the disallowance, we reverse the action of the CIT(A) to this extent and endorse the action of the AO. Therefore, the disallowance made by the AO to the extent of ₹ 1,88,372/- is sustained. - Decided in favour of assessee in part.
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