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2016 (12) TMI 451 - ITAT AHMEDABAD

2016 (12) TMI 451 - ITAT AHMEDABAD - TMI - Exemption u/s.10B - “profit derived from export of articles or things etc.” - Held that:- The assessee is eligible for deduction u/s.10B of the Act on miscellaneous items of income which are in the nature of “business income” attributable to exports of articles or things, etc. As a corollary, we find that receipts towards “sales tax refund” and amount of “sundry balance written off” are in the nature of business income in the earlier year and the Assess .....

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ature of “income from other sources” in the instant case. Therefore, order of the CIT(A) to this extent cannot be said to be erroneous in the facts of the case. It would be pertinent to notice here that in the earlier AY 2007-08, the interest income has been accepted for the purpose of deduction u/s.10B of the Act purportedly on the premise that AO has mainly relied upon the decision of the Hon’ble Apex Court in the case of Liberty India (2009 (8) TMI 63 - SUPREME COURT ) which was distinguished .....

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f the insurance claim received holding the same to be akin to business income and rejected balance 25% of the insurance claim so received towards capital loss. Relevant facts are necessary to understand as to whether the impugned “insurance receipts” are in the name of “business income” or not. Therefore, it would be in the fitness of things to restore the issue back to the file of AO for ascertaining the relevant facts and determine the issue afresh in accordance law. Needless to say that AO sh .....

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ioner of Income-tax (Appeals), Gandhinagar [CIT(A) in short] dated 14/02/2013 passed for Assessment Year (AY)2008-09. 2. Briefly stated, the relevant facts are that the assessee-firm is a 100% Export Oriented Unit (EOU) and engaged in carrying on business of manufacturing and selling of printed circuit boards. During the assessment year in appeal, the assessee has claimed exemption u/s.10B of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). It was noticed by the Assessi .....

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es Tax Refund ₹ 91,150/- • Sale of Scrap Rs.16,88,437/- • Sundry balance written off Rs.30,72,912/- 2.1. The AO discrded the claim of deduction under S.10B of the Act on the various items of income noted above, The relevant paras of the order of the AO dealing with the various items is reproduced hereunder for ready reference: 3. Interest Income: On verification of P&L A/c of the assessee, it was observed that the assessee had shown interest income of ₹ 7,17,20/-. Vide .....

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ate that the assessee does not have any other undertaking and therefore all the surplus funds have been generated from EOU only. We Systems & Software Ltd. V. Assistant Commissioner of Income Tax, Range 8(1) SOT 230 (BOM) wherein the Tribunal while allowing deduction u/s.10B in respect of interest income observed as under: As regards the claim of deduction under section 10B on interest income, in the light of the fact that we have held that the assessee is entitled to relief under section 10 .....

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from computation f deduction for the purpose of section 10B. 3.2. The interest is not the business profits. The interest earned on surplus funds is income from other sources. It is neither derived from industrial undertaking nor even profits and gains of business. CIT vs. Menon Impex (P) Ltd. reported at 259 ITR 403 (MAD); Sham Tabrej Vanti, In RE reported at (2005) 273 ITR 299 (AAR); India Commet International Vs. ITO reported at (2008) 304 ITR 322 are relied upon and it is held that no deduct .....

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from other sources. 4.1. The assessee vide letter dtd. 21/11/20911 filed the written submission stated as under: Fire took place at the premise of the firm in October-2007 which resulted in damage of about ₹ 80 lacs however finely the insurance claim amount received from the insurance company was ₹ 8,87,424/- in this regard. The details and the documents in this regard were submitted before your good self vide submission dated 23rd August 2011. The refund is received by the assessee .....

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considered while computing deduction u/s.10B. Accordingly, the deduction claimed by the assessee is correct and no disallowance is required to be made in this regard. 4.2. The assessee s reply was carefully considered and found not to be acceptable as the Insurance Refund is not the profit of the business income. Further, the Section 10B deduction is only related to the profit of the business derived by hundred percent export oriented undertaking from the export of the articles or things, or com .....

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10B is disallowed and added back to the returned income. 5. Sales Tax Refund: On verification of profit and loss account, it was seen that the assessee has shown sales tax refund as amounting to ₹ 91,150/- as income from other sources and the same has been claimed as deduction u/s.10B of the Act. 5.1 The assessee vide letter dtd. 21/11/2011 filed the written submission sated as under: During the year under consideration, assessee received amount of ₹ 91,150/- on account of refund of .....

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iew of the fact that what is intended by the legislature to exempt u/s.10B is what forms part of the profits of the business of the undertaking u/s.10B(4) r.w.s.10B(1) of the Act. 5.2. The assessee s reply was carefully considered and found not to be acceptable. Sale Tax Refund is not a case of excess deposits of tax which is refunded. The decision of Honourable Supreme Court in the case of Liberty India (supra) is squarely applicable on facts. In Section 10B(4) also, the words of the under taki .....

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are for the period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking beings to manufacture or produce articles or things as the case may be. From the above definition it is very clear that that it should be related to the profits and gains derived from the 100% export oriented, while the sales tax refund is not the profit which is derived from the export oriented. The claim of deduction of sales tax refund u/s.10B is dis .....

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sources. 6.1. The assessee vide letter dtd. 21/11/2011 filed the written submission stated as under: During the year under consideration raw materials were purchased from one of the suppliers (Macdermind Singapore Pte Ltd.). However, due to the fact that the goods were note up to the expected level of quality, the assessee asked the supplier to reduce the prices. After negotiation, the supplier agreed to waive a part amounting to ₹ 30,72,912/- of the purchase price and the same was credite .....

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red by the assessee have to be considered and this amount of ₹ 3072,912/- is nothing but reduction in that cost incurred by the assessee towards purchase of raw material which is nothing but a pure business transaction carried out by the assessee. These balances are written off in the normal course of business and should be constructed as profit of business of the undertaking. Hence the question of excluding the same for calculating exemption u/s.10B should not arise. 6.2. The assessee s r .....

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ived by 100% export oriented undertaking from the export of article of things of computer software for a period f ten consecutive assessment year beginning with the assessment year relevant to previous year in which undertaking begins to manufacture or produce articles or things or computer software as the case may be shall be allowed from the total income of the assessee. This section applies to the undertaking if the sale proceeds of articles or things or computer software export outside India .....

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) sundry balance written off, (iii) Insurance refund, (iv) Sales Tax Refund and (v) Interest income are not eligible for the purposes of deduction under S.10b of the Act. The AO also observed that what is eligible for deduction under S.10B of the Act is Profit and Gains derived by a 100% EOU from the export of articles or things, etc. and not every income which may be attributable to its business but not derived by an undertaking from exports of articles or things, etc. The AO thus declined to a .....

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ce refund to the extent of 75% of the insurance receipt. The CIT(A) thus accordingly rejected the claim of exemption u/s.10B of the Act towards interest income of ₹ 7,17,270/-, sales tax refund of ₹ 91,00,150/-, sundry balance written off of ₹ 30,72,912/- and 25% of the insurance claim amounting to ₹ 7,21,856/-. 5. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal. 6. The various grounds raised in assessee s appeal in ITA No.1150/Ahd/2013 .....

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f the Act is defined u/s.10B(4) of the Act to mean profit of the business of the undertaking 2.1 Learned CIT(A) has erred in relying upon the decisions rendered by the judiciaries u/s.80I/80IB instead of decisions rendered u/s.80HHC whereas provisions of Section 10B is in pari material with provisions of Section 80HHC. 3. Learned CIT(A) has erred in holding against the Appellant solely relying upon the decision in case of Banyan Chemicals Ltd. 121 TTJ 751 (Ahd.) whereas the said decision does no .....

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of the Appellant), as part of profits & gains derived from EOU and consequently erred in not including the same in profits eligible for exemption u/s.10B of the Act. 4.1.Without prejudice to above, it is submitted that the Learned CIT(A) has erred in law and on facts in considering interest income as income from other sources under Chapter-IVF of the Act in place of income from business or profession under Chapter-IVD of the Act. 5. The learned CIT(A) has erred in law and on facts in not co .....

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that Appellant s undertaking, eligible for deduction u/s.10B, is the only business undertaking it has through which the business is carried out on by it. 6. The learned CIT(A) has erred in not allowing deduction u/s.10B of the Act in respect to 25% (Rs.7,21,856) of the insurance claim received by the Appellant in respect of the loss incurred due to fire in its factory premises. 6.1.The learned CIT(A) has erred in considering 25% of the total claim received from Insurance company is capital loss, .....

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income. 7. Likewise, the AO is also aggrieved by the partial relief granted by CIT(A) and has preferred an appeal against the reliefs in its ITA No.1444/Ahd/2013 for AY 2008-09 by way of following grounds:- 1. The learned CIT(Appeals) has erred in law and on facts in allowing deduction u/s.10B of the Act, on Scrap income of ₹ 16,88,437/- though the same was not derived from exports. 2. The learned CIT(Appeals) has erred in law and on facts in allowing deduction u/s.10B of the Act, towards .....

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further submitted that section 10B(1) provides that profits derived from exports of articles or things, etc. shall be eligible for deduction for the period of 10 consecutive years and the machinery for computation of deduction is provided by section 10B(4) of the Act. For the purpose of computation of deduction of profits and gains as derived by a 100% EOU from exports of articles or things, etc. section 10B(4) prescribes formula to determine the profits so derived from exports of articles or t .....

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ecision of Liberty India Pvt.Ltd. reported in 317 ITR 218(SC) is misplaced. The Ld.AR submitted that similar issues of disallowance of various claims towards various miscellaneous income for the purposes of section 10B arose in assessee s own case for AY 2007-08 where the appeal of the assessee was allowed. He therefore submitted that the CIT(A) was not justified in denying the relief claimed as per grounds of appeal and therefore order of the CIT(A) is to be set aside. The Ld.AR relied upon in .....

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and the case-laws cited. We find that the Coordinate Bench of the Tribunal has dealt with various grounds as per grounds of appeal and has decided the issues in favour of assessee. The relevant operative para of the order of the Coordinate Bench of the Tribunal in ITA No.2665 & 2720/Ahd/2011 relevant to AY 2007-08 in assessee s own case reads as under:- 10. We have heard the rival submissions and perused the material on record. The issue in the present case is about deduction u/s. 10B of the .....

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nal in the case of Maral Overseas Ltd. (supra) one of the question for consideration was as to whether the undertaking is eligible for deduction on export incentive received by it in terms of provisions of Section 10B(1) r.w.s. 10B(4) of the Act. The Hon ble Special Bench, after considering the decision of the Apex Court in the case of Liberty India (supra) held that provisions of Section 10B are different from the provisions of Section 80IA. The relevant portion of the decision reads as under:- .....

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f the business of the undertaking in the ratio of export turnover by the total turnover. Thus, even though sub-section (1) of section 10B refers to profits and gains as are derived by a 100% EOU, the manner of determining such eligible profits has been statutorily defined in sub-section (4) of that section. Both sub-sections (1) and (4) are to be read together while computing the eligible deduction u/s 10B of the Act. We cannot ignore sub-section (4) of section 10B which provides specific formul .....

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ub-section (4) of section 10B while computing the profits derived by the undertaking from the export. Thus, the decision of the Hon'ble Supreme Court is of no help to the revenue in determining the claim of deduction u/s 10B in respect of export incentives. 78. Section 10B sub-section (1) allows deduction in respect of profits and gains as are derived by a 100% EOU. Section 10B(4) lays down special formula for computing the profits derived by the undertaking from export. The formula is as un .....

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t the manner of determining such eligible profits has been statutorily defined in sub-section (4) of section 10B of the Act. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Sub-section (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be i .....

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tains a further mandate in terms of Explanation (baa) for exclusion of certain income from the "profits of the business" which is, however, conspicuous by its absence in section 10B. On the basis of the aforesaid distinction, sub-section (4) of 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 undert .....

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e export of goods. I.T.A.T., Special Bench in the case of International Research Park Laboratories v. ACIT, 212 ITR (AT) 1, after following the aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine the eligible deduction. The Hon'ble Supreme Court in the case of P.R. Prabhakar; 284 ITR 584 had approved the principle laid down in the Special Bench decision in International Reserarch Park Laboratories v. ACIT (supra). In the assessee' .....

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dated 13.11.2014) wherein Hon ble High Court dismissed the appeal of Revenue by holding as under:- By way of these appeals, the Revenue has challenged the orders passed by Income Tax Appellate Tribunal (Tribunal, for short) dated 11th September, 2013 and 24th October, 2013 relating to assessment years 2008-09 and 2009- 10, respectively. Tribunal has followed the decision of their Special Bench in the case of Maral Overseas Ltd. versus Additional Commissioner of Income Tax decided on 20th March, .....

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d by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, not-withstanding 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 determining such eligible profits has been statutorily defined in sub-section (4) of section 10B of the Act. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export t .....

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termining 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 mandate in terms of Explanation (baa) for exclusion of certain income from the profits of the business which is, however, conspicuous by its absence in section 10B. On the basis of the aforesaid distinction, sub-section (4) of section 10A/10 .....

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cer 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 goods. I.T.A.T., Special Bench in the case of International Research Park Laboratories v. ACIT, 212 ITR (AT) 1, after following the aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine the eligible deduction. Th .....

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of the above discussion, question no. 2 is answered in affirmative and in favour of the assessee. Accordingly, the assessee is eligible for claim of deduction on export incentive received by it in terms of provisions of section 10B( 1) read with section 10B(4) of the Act. The aforesaid view is in consonance with the decision of this Court dated 1st September, 2014 passed in ITA 438/2014, Commissioner of Income Tax-VII versus XLNC Fashions in which this court has held as under :- Deduction under .....

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he 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 . Sub-section (4), therefore, is the special provision which enables the assessee to compute the profits derived from the export of articles or things or computer software. We do not see any conflict between Sub- section (1) and Sub-section (4) to Section 10B, as Sub-section (1) states that deduction of such profits and gai .....

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other. In other words, the manner of computing profits derived from exports under Subsection (1), has to be determined as per the formula stipulated in Sub-Section (4), otherwise Sub-section (4) would become otise and irrelevant. The issue in question in this appeal which pertains to the Assessment Year 2009-10, relates to duty draw back in the form of DEPB benefits. As per Section 28, clause (iii-c), any duty of customs or excise repaid or repayable as drawback to a person against exports unde .....

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ack would not become eligible for deduction/exemption. The amount quantified as per the formula would be eligible and qualify for deduction/exemption. The position is somewhat akin or close to Section 80HHC of the Act, which also prescribes a formula for computation of deduction in respect of exports. In view of the aforesaid, we do not find any merit in the present appeal and the same is dismissed. Karnataka High Court in Commissioner of Income Tax, Central Circle versus Motorola India Electron .....

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m export of articles. But Sub-section (4) explains what is says that profits derived from export of articles or things or computer software shall be the account which bares to the profits of the business of the undertaking and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles is different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking includes the profits and .....

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cles but also the income from the business of the undertaking. In view of the aforesaid position, the appeals have to be dismissed. We order accordingly. 12. We thus find that the decision of Special Bench of Tribunal in the case of Maral Overseas (supra) wherein the ratio that once on 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, has be .....

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on the profits from subsidy, interest income, sale of scrap, sales tax refund and sundry balances written off. We thus set aside the order of ld. CIT(A). 14. In the result, the appeal of Assessee is allowed and that of Revenue is dismissed. 11. At the outset, we are inclined to agree with the contentions putforth on behalf of the assessee that the expression profits of business of the undertaking is wider than profits and gains derived by an undertaking . The reasons are not far to seek. We note .....

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rom the business . In other words, for determining the scope of section 10B(4), the reference to the expression derived from is not material. Hence, drawing parallel with the findings of the Coordinate Bench of the Tribunal, we hold that the assessee is eligible for deduction u/s.10B of the Act on miscellaneous items of income which are in the nature of business income attributable to exports of articles or things, etc. As a corollary, we find that receipts towards sales tax refund and amount of .....

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7,17,270/- cannot be termed as business income at the first place as discernible from the letter dated 21/11/2011 of the Assessee extracted by the AO in para-3.1 of the assessment order. In its own averment of Assessee, the interest income were derived from the deposits kept with the Bank out of surplus funds generated from the Undertaking. The surplus fund so generated is, thus, undoubtedly unrelated to business activities of Export undertaking. We fail to comprehend as to how interest income .....

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ndertaking. The interest income on Fixed Deposits derived from surplus money emanating from export activity cannot be said to be springing out of export business in any manner. It is the profits from business activities which can be termed as business income and not interest arising on deployment of such business income. Thus, for the purpose of computation of deduction of formula provided by section 10B(4) of the Act, the interest income cannot be included within the pale of business profits wh .....

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