TMI Blog2014 (3) TMI 327X X X X Extracts X X X X X X X X Extracts X X X X ..... t income to be part of total turnover or not Held that:- The interest income is to be considered as business income subject to application of Explanation (baa) to section 80HHC thus, the AO is directed to recompute deduction u/s 80HHC of the Act Decided in favour of Assessee. Computation of deduction u/s 80HHC of the Act conversion charges - Held that:- The decision in ACIT Vs. Bio-tech Medicals, Hyderabad [2008 (3) TMI 365 - ITAT HYDERABAD-B ] followed - conversion charges to be considered as derived from the industrial undertaking of the assessee - processing charges received by the assessee being an independent income, 90% had to be reduced from this income but the same being an important component of business profits, had to be included in the total turnover as per the formula given in 80HHC of the Act thus, the AO is directed to consider the conversion charges as an independent income and exclude 90% thereof from the gross total income in terms of Explanation (baa) to section 80HHC of the Act, so as to arrive at business profits Decided partly in favour of Assessee. Exchange fluctuation If it is received in the end of the FY corresponding to the sales effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the thus, the order of the CIT(A) set aside Decided in favour of Assessee. Disallowance of interest Advance paid Held that:- The decision in S.A. Builders Ltd. Vs. CIT(A) and Another, [2006 (12) TMI 82 - SUPREME COURT ] as long as the interest free loans are given to sister concerns as a measure of commercial expediency, disallowance cannot be resorted only on the ground that the loans have been utilized by the sister concerns for its business purposes - What is to be actually seen is commercial expediency of having advanced the loans and it is immaterial whether or not the loans so advanced is used for the purposes of the business of the assessee or for the purposes of business of the assessee's sister concerns thus, the order of the CIT(A) set aside Decided in favour of Assessee. Disallowance of interest Held that:- The investments made by the assessee are not for the purpose of the assessee's business thus, lower authorities have justified in disallowing the interest on the investments made by the assessee the order of the CIT(A) upheld Decided against Assessee. Disallowance of deduction u/s 80 HHC of the Act DEPB benefits Held that:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein it was held that interest income to be treated as business income of the assessee and eligible for deduction u/s 80HHC subject to verification of the AO whether the same was earned in respect of TDRS kept in the bank as margin money towards bank guarantee by placing reliance on the judgment of the Hon'ble Supreme Court in the case of CIT Vs. K. Ravindranathan Nair, 295 ITR 228. Further, he relied on the following judgments: 1. CIT Vs. Producin Pvt. Ltd., 322 ITR 270 2. CIT Vs. K Co., 88 DTR (Del.) 166. 3. Lalsons Enterprises Vs. DCIT, 89 ITD 25 (Del.)(SB) 4. On the other hand, the learned DR submitted that interest income to be considered as 'income from other sources' being interest on TDRs as there was no documentary evidence filed by the assessee to establish that the deposit was made out of export earnings. He relied on the judgment of the Hon'ble Supreme Court in the case of Pandian Chemicals, 262 ITR 278. 5. We have heard both the parties and perused the record. In our opinion, if the interest income is earned from the TDR/FDR deposits kept as margin money towards bank guarantee in the course of export business, the same is to be consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing charges received by the assessee being an independent income, 90% thereof had to be reduced from this income but the same being an important component of business profits, had to be included in the total turnover as per the formula given in 80HHC of the Act. Accordingly, we direct the AO to consider the conversion charges as an independent income and exclude 90% thereof from the gross total income in terms of Explanation (baa) to section 80HHC of the Act, so as to arrive at business profits. This ground is partly allowed. 10.1 As regards Exchange fluctuation, if it is received in the end of the FY corresponding to the sales effected during the FY on export of exports, it should be considered as business income of the assessee, which is an integral part of the export and it cannot be separated from the export proceeds simply on the ground that increase in the rate subsequent to sale but prior to realization as held by the Special Bench of Tribunal, Bombay in the case of ACIT Vs. Prakash I. Shah, 115 ITD 167 (Bom.)(SB). Therefore, it should be considered part of the total turnover of the assessee. This ground is allowed. 10.2 As regards insurance claim received by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovides that he received Rs. 2.00 lakh towards consultation services provided in establishing CGMP System at factory unit at Kazipally for period November, 2000 to November, 2001. Out of total fees, Rs. 1 lakh was received in FY relevant to AY 2001-02 and for the AY under consideration only Rs. 1 lakhs is relevant and being so, 1 lakhs is allowed. 14. We have heard both the parties and perused the material on record. Though the claim of Rs. 2.00 lakh is relevant to AY under consideration, however, bill issued by Sri Ganesh from M/s Q Pharma Consulting India shows that only Rs. 1 lakh is relating to AY under consideration and balance Rs. 1 lakh not deductible during the year consideration. The CIT(A) allowed the amount relevant to AY under consideration and being so, we do not find any infirmity in the order of the CIT(A) and the same is confirmed. This ground is dismissed. 15. Another common ground raised by the assessee in all its appeals under consideration is that the CIT(A) having held that the Modvat Credit was rightly deducted by the assessee from the raw material consumption account erred in holding that it was a business receipt u/s 28(iiib) of the IT Act for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idy, incentive and rebate. The rebate is nothing but an incentive given by the Government of India under a scheme framed in the Rule 12 of Central Excise Rules, 1944 and Rule 18 of Central Excise Rule, 2001 by issuing notification w.e.f. 01/07/2001. 17.1 The CIT(A) noted that in case of ACIT Vs. Pratibha Syntex Ltd., reported in 63 TTJ (Ahm.) pg. 409, the Hon'ble Ahmedabad Bench held that total benefit derived by an assessee on duty free imports will form part of the profit by business u/s 28(iiib) of the Act. The Tribunal found that u/s 28(iiib) of the Act, the expression used was 'cash assistance' received by an assessee by whatever name called and the expression 'whatever name' called was held to include any duty benefit derived by an assessee on duty free imports. The CIT(A) observed that in the present case also, the excise rebate is given by the Government of India on a scheme of helping the exporter to compete in the competitive market for export of goods and it is only provided to those exporters who export their goods after payment of excise duty. 17.2 The CIT(A) further noted that the Hon'ble ITAT Delhi Bench 'G in case of Hero Honda Mot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Modvat credits returned from the excise duty payments on exports and it was later on refunded and, therefore, it is neither an incentive nor a rebate and the central excise duty what has paid by the assessee and there being so, there is no question of excluding 90% receipts by invoking Explanation (baa) to section 80HHC of the . Accordingly, we reverse the findings of the CIT(A) and allow this ground of appeal. 20. A common ground raised by the assessee in ITA No. 355/Hyd/2007 for AY 2002-03 and ITA No. 1145/Hyd/08 for AY 2004- 05 is with regard to disallowance of interest relating to the amount advanced to M/s Nextage Broadband Ltd. 21. According to the assessee an amount of Rs. 59.60 lakhs was invested as share advance with M/s Nextage Broad Band Ltd., Chennai on two occasions, i.e., on 29/12/2000, an amount of Rs. 49.60 lakhs was deposited and on 15/05/2001 an amount of Rs. 10 lakhs. According to the assessee, borrowed fund was not utilized to advance this amount and, therefore, there is no nexus between borrowed funds and the advances, hence, there cannot be any disallowance of interest on this count. 22. According to the learned DR, the assessee is paying interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of business. Accordingly, the CIT(A) computed the disallowance at 12% on the amount of investment, which was worked out at Rs. 1,35,980/- as against Rs. 2,96,110/- made by the AO for AY 2002-03. Similar is the position in AY 2004-05. 27. The learned AR submitted that the assessee made investment in SMS International Ltd. at Rs. 21,22,206/-, which has not declared any dividend. Further Rs. 2,75,380/-, which made investment in shares of M/s Jeedimetla Effluent Treatment Ltd. and M/s Pattan Cheru Effluent Treatment Ltd. to take membership in those companies so as to send residuals and wastage solvents as it is mandatory for the assessee to send the residual and wastage solvents to the above two organsations for treatment purposes. He further submitted that the investment of Rs. 70,000/- in the form of NSC's bonds to give as security in sales tax department and other government department. Being so, there cannot be any disallowance in this regard. 28. The learned DR, on the other hand, relied on the orders of the Revenue authorities. 29. We have heard both the parties and perused the record. We are of the view that the investments made by the assessee are not f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise Rules is chargeable to Income tax u/s.28(iiib )/28(iiic). 33.1 In the remand report, the Assessing Officer mentioned circular no.572 dated 3.8.1990 which is applicable with retrospective effect 1.4.1962. As per para 27.2 of the circular, the incentive given to the exporters by way of profit on sale of import entitlement licenses, CCS and draw back of duty are revenue receipts and hence liable to tax as per new clauses (iiia, iiib and iiic) of Sec.28 of the LT. Act under the head profit and gains of business . 33.2. He also referred order of the CIT(A)-IV, Hyderabad on the similar issue in case of Srini Pharmaceutical Ltd. for assessment year 2002-03 in order dated 25.11.2005 in ITA No. 123/ACIT-3(2)/CIT(A)- IV/2005-06, held that rule 12(3) contemplates rebate of duty in respect of excisable materials at par with duty draw back, which are mutually exclusive to each other in the sense that when the export avail of duty draw back on the said duty, it can not avail of rebate there on. The very treatment of Central Excise of the excise rebate in its rules proves that rebate is an export incentive similar to be duty draw back under the LT. Act. 33.3 In response to enhanceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervation: If all Export Benefits have to be brought under this clause there was no requirement for the legislature to have sub clauses (iiia) or (iiic). In view of the above, if rebate is covered under clause (iiib) so would draw back and there would have been no need for clause (iiic) and it is an axiom that parliament does not pass laws for nothing. What was sought to be taxed u/s.28(iiib) was cash compensatory support and other assistance and not rebate I refund. (9) Thus, it can be deduced from above that what the appellant received back from the central Excise Department is neither a cash assistance as specified u/s.28(iiib) nor a duty drawback. This is merely a reimbursement of central excise duty paid by the appellant by exercising the option available to him under Rule 18 of Central Excise Rules, 2001. (10) The Hon'ble Commissioner made a reference to the decision of M/s. Pratibha Syntex Ltd., reported in 106 Taxman, pg.32. This case is totally distinguishable from the facts of the appellants case as explained hereunder:- In case of Pratibha Syntex Ltd. the subject matter is not refund of the duty paid on export. In the said case the assessee was lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofession . In section-2, sub-sec.24 clause (vb) was inserted which meant that the word income included any sum chargeable to income tax under clause (iiib) of Sec.28 . 33.7 The CIT(A) observed that in the present case, the appellant while working out deduction u/s.80HHC has not excluded 90% excise rebate being cash assistance in terms of Explanation (baa) to Sec.80HHC, though indirectly it has considered as an income by reducing cost of raw material. In para no.13.02, I have hold that no separate addition is required to be made as excise rebate has already been considered indirectly in the P L a/c. However, for the purpose of determining deduction u/s.80HHC, in terms of Explanation (baa) to Sec.80HHC, 90% of export incentive has to be excluded. 33.8 Considering the above facts, the CIT(A) issued an enhancement notice u/s.251 (2) on 15.12.2006. In response, the appellant submitted the above reply. The method adopted by the appellant for working out deduction in not excluding 90% of excise rebate from the profit of the business in terms of Explanation (baa) to Sec.80HHC in view of reduction of raw material cost is not acceptable as correct one in view of decision of the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, the export incentives would have to be included in the profits of the business for computing the deduction uls.80HHC. These export Incentives have also been included in the definition of income contained in Sec.2(24) of the Income Tax Act The amendments to Sec28 as well as to Sec 2(24) of the Income Tax Act have been made with retrospective effect from the dates from which these incentives were made available to the exporters Thus. CCS has been included in income and in the list of incomes chargeable to tax under the head Profits and gains of business or profession with effect from 1.4.1967. The duty drawback has been so included with effect from 1 4 1972 The profits on sale of import entitlement licenses have been included with effect from 1.4.1962, the date from which the Income Tax Act. 1961, came into force. The Department's view all along has been that these export incentives are revenue receipts and hence taxable. The amendments made in this regard by the Finance Act 1990, are therefore, clarificatory in nature and have been made to put an end to litigation which might arise regarding the taxability of these incentives . 33.9 The CIT(A) noted that fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income u/s 80HHC of the Act. Accordingly, this ground of assessee is allowed. 35. A common ground raised by the assessee in ITA No. 355/H/07 for AY 2002-03, ITA No. 554/H/07 for AY 2003-04 and ITA No. 1145/Hyd/08 for AY 2004-05 is that the CIT(A) while enhancing the disallowance claim of deduction u/s 80 HHC amounted to Rs. 76,68,283/- by holding that: i) The appellant was not entitled for deduction under the 3 rd proviso to section 80 HHC in relation to DEPB benefit of Rs. 2,31,71,352/- for AY 2002-03 and Rs. 1,14,74,893/- for AY 2004-05. ii) The deduction under 80HHC (IIIA) of IT Act at negative figure of Rs. 3,22,79,307/- for AY 2002-03. iii) The deduction under First provisio read with Fifth Proviso to section 80 HHC(3) of the IT Act at a loss of Rs. 1,91,36,639/- for AY 2002-03. iv) The appellant is not entitled to any further deduction under the first proviso to section 80 HHC(3) for AY 2002-03. v) The computation of loss at Rs. 2,10,87,917/- for the purpose of deduction under 3 rd proviso of the section 80 HHC(3) of the Act for AY 2002-03. 36. We refer to the facts in AY 2002-03. As regards the DEPB benefit of Rs. 2,31,71,352/- for purpose of deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.2,40,98,206/- including sale tax of Page 28 of 35 Rs.9,26,854/- and shown in the details of sales for the financial year 2001-02 relevant to assessment year 2002-03. Though, the appellant had mentioned that it was having option to choose either the duty draw back or the duty entitlement pass book scheme as provided for in Chapter '4 of the Exim Policy. 2002-07, but no documentary evidence to prove its contentions is produced before the under- singed. It is therefore, held that first condition mentioned in the 3 r d Provision of Sec.80HHC(3) is not satisfied. 36.4. The CIT(A) noted that in respect of Second condition. it is stated that the rate of DEPB was 22% and rate of custom duty on import was 30% to 35% in the financial year 2001-02 in the appellant case is found to be not correct. On perusal of bill of entry for home consumption of the raw material, it is found that though. the basic custom duty was levyable at rate of 30% to 35% on value of raw material but the appellant had not paid it by virtue of exemption However, it had paid only additional custom duty at rate of 16% of the value of raw material. It is further, on perusal of excise control declaration (GR) For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y us in ITA No. 553/H/07 for AY 2001-02 and ITA No. 554/H/07 for AY 2003-04 (supra) vide para 10.1. Following the conclusions drawn therein this ground of appeal is allowed. 41. As regards the ground raised in ITA No. 1145/H/08 for AY 2004- 05 against the action of the CIT(A) in confirming deduction u/s 80HHC at Rs. 39,66,231/- as against Rs. 47,58,556/- as claimed by the assessee, since we have directed the Assessing Officer to recompute the deduction u/s 80HHC in earlier grounds, this ground is also remitted to the file of Assessing Officer to recompute the deduction u/s 80HHC. This ground is allowed for statistical purposes. 42. In ITA No. 554/H/07 for AY 2003-04, the assessee raised a ground that the CIT(A) erred in deducting the profits of the business subjected to deduction u/s 80IB while computing the profits of the business eligible for deduction u/s 80HHC is totally contrary to the provisions of the Act. 43. We have heard both the parties and perused the record. We find that the issue is covered in favour of the assessee by following judgments: 1. Associated Capsules Pvt. Ltd. Vs. DCIT, 332 ITR 423 (Bom.) 2. CIT Vs. Milipore India Pvt. Ltd., 219 ITR 219 (Kar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY 2002-03 being ITA No. 396/Hyd/07. In the assessment order the Assessing Officer mentioned that the assessee had advanced an amount of Rs. 59,60,000/- to M/s Nextage Broad Brand Ltd., Chennai as share advance and Rs. 1.40 crores to M/s Direct Finance Investments Ltd. as deposit and no interest on such advances were charged. He further, mentioned that the assessee had incurred huge interest liability of Rs. 4.20 crores and debited to the P L A/c during the year. The assessee owed an amount of Rs. 14.17 crores to SBI as working capital loan at the end of the accounting year on 31/03/2002. He further observed that the assessee had advanced money not for business purpose and therefore, the interest attributable @ 12% on pro-rata basis is not allowable. Follow few case laws, the Assessing Officer disallowed interest of Rs. 23,95,200/- and added back to the total income of the assessee. 51. Before the CIT(A), the AR of the assessee submitted that the assessee advanced Rs. 2.00 crores as corporate deposit on 28/02/1995, out of which the creditor paid Rs. 60 lakhs and balance of Rs. 1.40 crore is shown outstanding in the balance sheet as on 31/03/2002. It was further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee and the same was established before the lower authorities. He drew our attention to pages 135 to 137 of the paper book to submit that the assessee is having huge resources and the company has earned net profit from the which the assessee has made the investments. 54. After hearing both the parties and perusing the record, we are of the view that the disallowance of interest is not warranted when the assessee is having enough funds in the form of reserve funds and net profit. The CIT(A) has taken correct view in deciding the issue in favour of the assessee, therefore, we are inclined to confirm the order of the CIT(A) on this count and dismiss the ground raised by the revenue in this regard. 55. The revenue has raised the following ground in ITA No. 1107 and 1747/H/2008 for AY 2004-05 and 2005-06 respectively: The CIT(A) erred in not appreciating the legislative intention in inserting the provisions of section 145A. The learned CIT(A) should have sustained the addition on account of excise duty on closing stock as the provision created towards excise duty payable on closing stock of finished goods in only a contingent liability and not an ascertained liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time. 57. Before the CIT(A), the AR of the assessee submitted that the cost of manufacturing is the minimum price when there are profits as the finished goods are being valued at cost or market price whichever is lower. He, therefore, claimed that even if the goods are destroyed or damaged, their liability for payment of excise duty will not change as opined by the Assessing Officer. The AR averred that the statutory adjustment u/s 145A is not restricted to finished goods alone but those also extend to the total inventory. 58. After considering the submissions of the assessee, the CIT(A) directed the Assessing Officer is directed to allow deduction in respect of excise duty payments u/s 43B, if paid within the due date of filing of return after verification of such payments by observing as under: I have gone through the submissions of the appellant. It is seen that an identical issue had been decided in the appellant's appeal for asst. year 2004-05. In the said order a reference to the decision of my predecessor on this issue in the case of M/s. Sri Krishna Pharmaceuticals Ltd. was also made, which is in favour of the appellant. On going through the above, as also th ..... 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