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Riviera Home Furnishing Versus Addl. Commissioner of Income Tax, Range 15

Deduction under Section 10B - ITAT not accepting the Assessee’s plea in regard to ‘customer claims’ ‘freight subsidy’ and ‘interest on fixed deposit receipts’ even while it accepted the Assessee’s case as regards ‘deemed export drawback’ qualifying for exemption - Held that:- Considering the contention of the Assessee as regards customer claims was that it had received the claim of ₹ 28,27,224 from a customer for cancelling the export order. Later on the cancelled order was completed and g .....

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ss of the undertaking. If the ITAT was prepared to consider the deemed export draw back as eligible for deduction then there was no justification for excluding the freight subsidy.

Even as regards the interest on FDR, the Court has been shown a note of the balance sheet of the Assessee which clearly states that “fixed deposit receipts (including accrued interest) valuing ₹ 15,05,875 are under lien with Bank of India for facilitating the letter of credit and bank guarantee facil .....

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k Manchanda, Senior Standing counsel ORDER S. Muralidhar, J. 1. The present appeal by the Appellant Assessee under Section 260A of the Income Tax Act ( Act ) is directed against the impugned order dated 27th February 2015 passed by the Income Tax Appellate Tribunal ( ITAT ) in ITA No.1191/Del/2012 for the Assessment Year ( AY ) 2008-09. 2. Admit. 3. The following questions of law are framed for consideration: (i) Whether in the facts and circumstances of the case, ITAT is correct in law in not a .....

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deduction. (iii) Whether in the facts and circumstances of the case, ITAT is correct in law in not allowing the exemption of ₹ 43,287/-, on account of interest on FDR, ignoring the express provision of section 10B (4) of the Act, whereby profit of business of the undertaking are eligible for deduction. 4. The Assessee is a private limited company engaged in the business of manufacture and sale of home furnishings such as rugs, bath mats, blankets etc. The Assessee set up a 100% Export Orie .....

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s ₹ 28,27,224/- (c) Freight Subsidy ₹ 29,24,405/- (d) Interest on Fixed Deposit Receipts (FDRs) made for business purposes: ₹ 43,287/-. 5. The return of the Assessee was picked up for scrutiny and notice under Section 143(2) was issued. The Assessing Officer ( AO ) by order dated 3rd December 2010 excluded the above receipts from the computation of eligible income under Section 10B (4) of the Act. The AO was of the view that the above receipts did not fall within the expression .....

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ems, viz., customer claims, freight subsidy and interest on FDRs made for business purposes, the ITAT concurred with the view of the AO and the CIT (A). This is how the Assessee is in appeal before this Court. 8. This Court has heard the arguments of Mr. Ved Jain, learned counsel for the Assessee and Mr. Ashok Manchanda, Senior standing counsel for the Revenue. 9. The question as to what can constitute as profits and gains derived by a 100% EOU from the export of articles and computer software c .....

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n the EEFC account as well as interest earned on inter-corporate loans given to sister concerns out of the funds of the undertaking. There was a restriction on the Assessee in that case from making pre-payment of its external commercial borrowings ( ECB ). It could repay only to the extent of 10% of the outstanding loan in a year. This made the Assessee temporarily park the balance funds as deposits or with various sister concerns as inter corporate deposits until the date of repayment. The Asse .....

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by the ITAT. The ITAT noticed that unlike Section 80 HHC, where there was an express exclusion of the interest earned from the profits of business of undertaking , there was no similar provision as far as Sections 10A and 10B were concerned. 10. In CIT v. Motorola India Electronics Pvt. Ltd. (supra) reference was made to the decision of the Supreme Court in Pandian Chemicals Ltd. v. Commissioner of Income Tax (2003) 262 ITR 278 which dealt with Section 80HH and Liberty India v. Commissioner of I .....

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merely the profits and gains from the export of articles but also the income from the business of the undertaking . Specific to the question of interest earned by the EOU on the FDRs placed by it and interest earned from the loans given to sister concerns, it was held that although it did not partake the character of profit and gains from the sale of an article it is income which is derived from the consideration realized by export of articles. 11. The decision of the Karnataka High Court in CI .....

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of the ITAT in Maral Overseas Ltd. v. ACIT (decision dated 20th March 2012) on the interpretation of Section 10B (4) of the Act as under: 79. Thus, sub-section (4) of section 10B stipulated that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, not-with-standing the fact that sub-section (1) of section 10B refers the profits and gains as are derived by a 100% EOU, yet the manner of .....

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rofits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction u/s 10B is similar to the provisions of section 80HHC inasmuch as both the sections mandates determination of eligible profits as per the formula contained therein. The only difference is that section 80HHC contains a further .....

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sessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. As per the computation made by the Assessing Officer himself, there is no dispute that both these incomes have been treated by the Assessing Officer as business income. The CBDT Circular No. 564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained the scope and ambit of section 80HHC and the mode of determination of profits derived by an assessee from the export of goo .....

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I.T.A.T. in the preceding years, after considering the decision in the case of Liberty India held that provisions of section 10B are different from the provisions of section 80IA wherein no formula has been laid down for computing the eligible business profit. 12. Recently, in a decision dated 6th October 2015 in ITA NO. 392 of 2015 (Principal Commissioner of Income Tax v. Universal Precision Screws), this Court had occasion to again consider whether interest earned on fixed deposits kept by an .....

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amount which bears to the profits of the business of the undertaking , the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. As noted by this Court in CIT v. Hritnik Exports Pvt. Ltd. (decision dated 13th November, 2014 in ITA No.219 & 239 of 2014), Section 10B (4) mandates the application of the formula for determining the profits derived from exports for the purposes .....

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ar.) which held that there was a direct nexus between the interest received from the FDRs created by a similarly placed Assessee from the amounts borrowed by it. The High Court approved the order of the ITAT in that case which held that the entire profits of the business of the undertaking should be taken into consideration while computing the eligible deduction under Section 10B of the Act by ITA 392/2015 applying the mandatory formula. 10. In the present case, the Assessee has stated that the .....

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pplying formula under Section 10B(4) of the Act 13. Mr. Ashok Manchanda, learned Senior standing counsel for the Revenue, urged that none of the earlier decisions of the High Courts have considered the effect of Sections 80I, 801A and 801B of the Act which occur in Chapter VIA of the Act. He referred in particular to Section 80A (4) of the Act, which reads as under: 4) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provi .....

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and gains of such undertaking or unit or enterprise or eligible business, as the case may be. 14. Mr. Manchanda s attempt was to show that Section 80A (4), which inter alia stated that any deduction allowable under Section 10B cannot in any case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be made it clear that a unit seeking deduction under Section 10B would be eligible to do so only in so far as such income was directly attributa .....

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e Revenue had challenge the aforementioned decisions of this Court, and of the ITAT in the present case to the extent it has allowed the plea of the Assessee as regards deemed export drawback , Mr. Manchanda stated that the Revenue ought to have challenged the above decisions as well as the impugned order of the ITAT in the present case and perhaps he would advise it to do so hereafter. He has also handed over a written note of submissions, reiterating the above submissions. 15. In the considere .....

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A, and the other provisions in Chapter VIA, are independent of Sections 10A and 10B of the Act. It appears that the object of Section 80A (4) was to ensure that a unit which has availed of the benefit under Section 10B will not be allowed to further claim relief under Section 80IA or 80IB read with Section 80A (4). The intention does not appear to be to deny relief under Section 10B (1) read with Section 10B (4) or to whittle down the ambit of those provisions as is sought to be suggested by Mr. .....

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al the observations of the Special Bench of the ITAT in Maral Overseas Ltd. (supra) that Section 10A/10B of the Act is a complete code providing the mechanism for computing the profits of the business eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. 16. This then brings us to the questions f .....

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