TMI Blog2018 (11) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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). Cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in short), dated 11.01.2016 in both assessment years arising in the assessment orders dated 31.03.2014 29.03.2014 passed by the Assessing Officer (AO) under s. 143(3) r.w.s. 147 and under s.143(3) of the Income Tax Act, 1961 (the Act); respectively. 2. We first take up the cross appeals of the assessee and Revenue concerning AY 2008-09. ITA No. 719/Ahd/2016 - AY 2008-09 - Assessee s appeal 3. As per the grounds of appeal, the assessee has agitated the action of the CIT(A) on two grounds; firstly, the re-assessment proceedings under s.147 of the Act is marred with illegality and therefore, the action of the AO is without authority of law and secondly, re-working of exemption claimed under s.10B of the Act by artificially reducing the profits of the eligible profit by an amount of ₹ 41,54,153/- with reference to provisions of Section 10B(7) r.w.s. 80IA(10) of the Act. 4. When the matter was called for hearing, the learned AR for the assessee insisted that the action of the Revenue is neither sustainable on the jurisdictional point nor on merits of the addition. The learned AR simultaneously submitted that where the Tribunal is convinced with the substantive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be their own and were not borrowed by them to, in turn, provide interest free lending to the company. The learned AR submitted that 80IA(10) of the Act does not contemplate providing for expenses on notional basis which has not been incurred by the assessee company at all. The law does not oblige the assessee to incur expenses. The learned AR also pointed out that the issue is no longer res integra and covered by the decision of the co-ordinate bench of Tribunal in the case of ITO vs. Gilvert Ispat ITA No. 345/Chd/2011. 5. The learned DR, on the other hand, relied upon the observations made by the CIT(A) concluding the issue against the assessee. 6. We have carefully considered the rival submissions. The central issue involved in the captioned appeal is whether an arrangement of business transacted between the assesse 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) of the Act. An integral question would also arise as to whether the charge of interest on money lent by the Directors/shareholders can be said to be an activity falling within the scope of the expression busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. We thus find that the 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 of the Act 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 (supra) 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. 7. Resultantly, appeal of the assessee is allowed on merits on this score. 8. In view of the grievance of the assessee meted out as above, we do not seek to delineate on other grounds raised. 9. In the result, the appeal of the assessee is allowed. 10. We shall now advert to the Revenue s appeal ITA No.788/Ahd/2016. 11. The Revenue in its appeal has challenged the disallowance of ₹ 81,06,518/- made on account of reduction in profit eligible for deduction under s.10B of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld also be excluded in computing the total turnover in the denominator. Therefore, I disagree with the steps taken by the A.O in reducing the quantum of insurance and freight only from the export turnover and not from the total turnover, The appellant has relied on the judgments of Hon'ble High Court of Karnataka in the case of CIT vs Tata Elxi Ltd.349 ITR 98 and the ratio of ITAT Chennai in the case of ITO vs Sak Soft Ltd, 30 SOT 55 Chennai(S.B). Relying on the above referred judgments as well as the facts and circumstances of the case, the A.O is directed to exclude the quantum of insurance and freight amounting to ₹ 1,51,68,756/- also from the total turnover in order to come to the right quantum of deduction u/s.10B. Therefore, this ground of appeal is allowed. 13. With the assistance of the learned AR for the assessee, we find 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .s. 80IA of the Act. The eligible profits under s.10B of the Act is sought to be reduced towards notional interest on interest free funds. An identical issue has already been examined in the case of assessee concerning AY 2008-09 in the preceding paragraphs. In parity and for similarity of reasons, the action of the Revenue towards reducing the deduction eligible under s.10B of the Act is not sustainable in law in the absence of any perceptible arrangement contemplated under s.80IA(10) of the Act. 20. Ground Nos. 2 3 of the assessee s appeal are allowed. 21. In the result, the appeal of the assessee is allowed. 22. We shall now advert to the Revenue s appeal in ITA No.789/Ahd/2016 concerning AY 2011-12. 23. The substantive grounds of appeal raised by Revenue read as under: 1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of ₹ 1,83,21,375/- made on account of reduction in profit eligible for deduction u/s.10B of the Act. 2. The Ld. CIT(A) has erred in law and on facts by not appreciating that the gain derived on conversion of funds from EEFC account into Indian Rupee, account does not have any proximate or direct nexus with expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee requires fund then the fund is transferred from EEFC account to bank account maintained in Indian Rupee. And whatever profit/loss arises out of such conversion of funds from EEFC account into Indian Rupee account, such gain/loss is shown as income/loss under Currency Conversion Income account. The claim of the assessee on this sum is not proper. Hon'ble ITAT Chennai bench in the case of Astron Document Management (P) Ltd. 16 Taxmann.com 33 (2011) has held that:- Gains derived by an assessee on conversion of funds from EEFC account into Indian Rupee account, does not have any proximate or direct nexus with export transaction and, therefore, will not be eligible for deduction under section 706. 4.3.2 Reliance for this ratio is also placed on the order of Hon'ble ITAT in the case of Tricom India Ltd 36 SOT 302 (Mum) (2010). 4.3.3 In view of the above, the assessee's eligible exemption/deduction u/s 10B is required to be reduced by ₹ 7,83,27,375/-. 5.1 On this issue the appellant vide its submission dated 10/9/2015 submitted as under :- The ld AO also erred in law and on facts in reducing the deduction under section 10B of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount is eligible to deduction u/s 10B due to the fact that the Provisions after amendment in sub-section (4) of section 706 (reproduced above) the profit derived from export means profit of the business of the undertaking and hot the profits and gains from export of articles . The High Court has considered all the relevant judgments and clearly held that Similar provisions re not there in section 80HHC while s. 80HHB specifically excludes such income. Thus the above income being part of the profit of the business of the undertaking which fact is not disputed, the ld AO erred in excluding the same from the profit eligible for deduction u/s 10B. The said judgment of the Karnataka High Court is also followed by the jurisdictional Ahmedabad ITAT in the case of M/s Karp Mfg. Co vs Addl CIT ITA No: 374 766/Ahd/2011 Copy attached EXHIBIT-B. The jurisdictional Tribunal vide Para 11 of the Order has held that as per the said judgment of Karnataka High Court which has taken in to account all judgments on the point at issue it has held that, due to sub-section (4) of section 706, what is exempt is not merely profits and gains from export of goods but also the income from the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The said judgment of Karnataka High Court is also followed by jurisdictional ITAT Ahmedabad, in the case of M/s. Karp Manufacturing Co. vs Addl. CIT ITA .374 766/Ahd/2011. I agree with the views expressed by the appellant as well as the case laws relied upon by the appellant. 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 of the Act, I hereby direct the A.O to delete the reduction of deduction u/s.10B for ₹ 1,83,21,375/-. Thus, this ground of appeal is allowed. 27. We find that the action of the CIT(A) is well supported in law and does not call for any interference. The Revenue has not offered any cogent case for dislodging the order of the CIT(A). Thus, we decline to interfere. 28. In the result, Ground Nos. 1 2 of the Revenue s appeal are dismissed. 29. Ground Nos. 3 4 concern disallowance of ₹ 3,12,111/- under s.14A of the Act. The aforesaid disallowance comprises of disallowance of ₹ 1,23,439/- tow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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