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2018 (11) TMI 209

d 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 fa .....

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ion 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. - I.T.A. Nos. 719 & 720/Ahd/2016, I.T.A. Nos. 788 And 789/Ahd/2016 - 1-11-2018 - SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER AND SMT. MADHUMITA ROY, JUDICIAL MEMBER For The Revenue : Shri Mudi t Nagpal , Sr . D.R For The Assessee : Shri S. N. Soparkar & Shri Par in Shah, A.R. ORDER PER PRADIP KUMAR KEDIA - AM: The captioned cross appeals have been filed at the instance of the assessee and Revenue for A.Ys. 2008-09 & 2011-12 against the orders of the Commissioner of Income Tax (Appeals)-9, Ahmedabad ( CIT(A) 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 conc .....

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le by the Directors/shareholders to the company and assumed that to be an ordinary expenditure for the purposes of determination of ordinary profits in terms of Section 10B(7) r.w.s. 80IA(10) of the Act. The notional interest expenditure attributable to eligible unit amounting to ₹ 41,54,153/- was accordingly reduced from the deduction available to the assessee company and as a corollary, the taxable income of the assessee company was increased to this extent. In this background, the learned AR referred to the financial statement as annexed in the paper book and submitted that while the deduction under s.10B of the Act was claimed from AY 2007-08, the Directors/shareholders of the assessee company had provided interest free funds of similar type in the earlier financial years as well. The funds of the Directors/shareholders were also found to 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 learn .....

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Directors/shareholders to the assessee company cannot fall within the sweep of expression business transacted between them as contemplated under s.80IA(10) of the Act. The aforesaid expression impliedly indicates transaction in the course of business activity . 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. 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 .....

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uced the same quantum from the amount of total turnover. I do not agree with the approach of the A.O. If the quantum of cost of freight and insurance is being reduced from the export turnover, then it has to be reduced from the quantum of total turnover, The formula for computation of deduction U/S.10B is as follows :- Deduction u/s.10B = Profit of the business x Export turnover Total Turnover The formula helps in apportionment of profits on the basis of turnover. The export turnover would be a component or part or sub set of a denominator i.e. the total turnover. In such a scenario, if the quantum of export turnover as a part of total turnover has to be arrived at after excluding certain expenses, then the same should 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 abo .....

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the assessee, we find that the controversy is covered in favour of the assessee in terms of Section 155(11A) of the Act. Accordingly, the issue is decided in favour of the assessee on first principles. However, the factual aspects in this regard may be examined by the AO while determining the quantum of relief. The issue is accordingly set aside to the file of the AO for decision in the light of provisions of Section 155(11A) of the Act. 18. In the result, Ground No.1 of the assessee s appeal is allowed for statistical purposes. 19. Ground Nos. 2 & 3 concern artificial reduction of profit of eligible unit under s.10B with reference to provisions of Section 10B (7) r.w.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. .....

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ly. A careful perusal shows that the assessee has claimed 10B on Currency Conversion Income of ₹ 1,83,21,375/- in EOU unit also. On being asked to justify the claim on this sum u/s. 10B, the assessee could not furnish any cogent reason. The assessee submitted during the assessment proceedings that the assessee maintains two accounts. The entire export proceeds on realization are credited to EEFC account maintained in foreign currency itself. Any gain on such foreign currency fluctuation is accounted for under the head Foreign Currency Fluctuation Gain accounts. The assessee also submitted that whenever 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 no .....

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75/- pertained to such income of EOU Unit. The ld AO erred in observing that this sum is not eligible for deduction u/s 10B . Your appellant draws your honour's kind attention to the judgment of the Hon'ble Karnataka High Court in the case of CIT vs Motorola India Electronics P Ltd (2014) 225 Taxman 11 (Kar) Copy attached EXHIBIT-A . The Hon'ble High Court has considered the specific provisions of section 10B and sub-section 10B(4) and held that even interest income earned from intercorporate loans and deposits lying in EEFC account 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. Th .....

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n EEFC account relates to the business of undertaking. The appellant has relied on the ratio of Hon'ble Karnataka High Court in the case of CIT vs Motorola India Electronics Pvt. Ltd. (2014) 225 Taxman 11 (Kar). In the said ratio the Hon'ble High Court had considered these specific provisions of sec. 10B and sub-section 10B(4) and held that 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. 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/-. .....

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