2011-VIL-738-ITAT-AHM
Income Tax Appellate Tribunal AHMEDABAD
ITA no.363/Ahd/2002, ITA no.692/Ahd/2002
Date: 07.01.2011
SUN PHARMACEUTICAL INDUSTRIES LTD
Vs
DEPUTY COMMISSIONER OF INCOME-TAX
For the Appellant : Shri S N Soparkar & Shri Bandish Soparkar, ARs
For the Respondent : Shri Pravin Varma,DR
BENCH
Shri T K Sharma And Shri A N P Ahuja JJ.
JUDGMENT
A N Pahuja: These cross appeals filed against an order dated 03- 12-2001 of the ld. CIT(Appeals)-IV, Ahmedabad, raise the following grounds:-
ITA no.363/ Ahd/2002[Assessee] [1]
"On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) [hereinafter referred to as 'the learned CIT(A)'] erred in upholding the rejection of revised return by the Dy. Commissioner of Income Tax.
[2] On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that Exchange Rate Fluctuation/Difference in respect of balances under the Exchange Earners Foreign Currency Account (EEFC Account) is miscellaneous trading receipt forming part of 'total turnover' for the purpose of calculating the deduction u/s. 80HHC of the Act.
[3] On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that sales of scrap formed part of total turnover for computing the deduction u/s. 80HHC.
[4] On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the reduction of unrealized export turnover of Rs. 42,82,432/- out of total export turnover for computing the deduction, inspite of the fact that appellant had duly filed an application for extension of time with the jurisdictional Commissioner of Income Tax and the same was not rejected by the Commissioner of Income Tax.
[5] On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the computation carried out by the Assessing Officer of the amount deductible u/s. 80HHC for the purpose of computation of book profits under explanation to sec. 115JA (1) on the basis of taxable profits as per Income Tax Act, 1961 and not as per Book Profits as claimed by the Appellant.
[6] On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not deciding the ground of the Appellant relating to the computation carried out by the Assessing Officer of the amount deductible u/s. 80IA for the purpose of computation of book profits under explanation to sec. 115JA (1) on the basis of taxable profits as per Income Tax Act, 1961 and not as per Book Profits as claimed by the Appellant.
[7] On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not deciding on the ground of the Appellant relating to allocation of expenses to Silvassa unit eligible for deduction u/s 80IA on account of exchange rate difference reduced from Miscellaneous Expenses.
[8] On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the disallowance of revenue expenses of Rs. 9,61,284/- on the ground that these expenses were pre-operative expenses.
[9] The Appellant craves leave to add to, alter, amend or delete any ground of appeal.
ITA No.692/ Ahd/2002[Revenue]
[1] "The Ld. CIT(A) has erred in law and on facts in disallowing depreciation of Rs. 80,13,177/- as calculated u/s 32 of the I.T. Act.
The Ld. CIT(A) has erred in law and on facts in allowing weighted deduction u/s 35(2AB) at Rs. 2,22,19,455/- in respect of R&D expenses of Rs. 8,88,77,660/-.
[3] The Ld. CIT(A) has erred in law and on facts in directing to exclude the insurance claim from the total turnover for the purpose of calculation of deduction u/s 80HHC of the IT Act.
[4] The Ld. CIT(A) has erred in law and facts in directing to exclude sales tax and excise duty from the total turn over and re-compute the deduction u/s 80HHC of the IT Act.
[5] The Ld. CIT(A) has erred in law and facts in directing to re-compute the deduction u/s 80HHC taking the net interest income into consideration.
[6] The Ld. CIT(A) has erred in law and facts in directing that 90% of net lease rent should be reduced for computing profit of the business for the purpose of deduction u/s 80HHC of the IT Act.
[7] The Ld. CIT(A) has erred in law end on fact in treated the entire part of the operational charges recovered is nothing but the business income hence nothing is deductible from profits of the business for computing deduction u/s. 80HHC of the IT Act.
[8] The Ld. CIT(A) had erred in law and on fact in disallowing the bifurcation of total overseas promotional expenses in the ratio of turnover of trading export and manufacturing export and accordingly work out of export trading profits for the purpose deduction u/s 80HHC.
[9] On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.
[10] It is therefore, prayed that the order of the Ld» GIT (A) may be set-
aside and that of the order of the Assessing Officer be restored to the above extent."
2. Adverting first to ground no.1 in the appeal of the assessee, facts, in brief, as per relevant orders are that return declaring income of Rs. 2,42,77,000/- in terms of provisions of sec.115JA of the Income-tax Act, 1961 [hereinafter referred to as the "Act"] filed on 30-11-1998 by the assessee, manufacturing pharmaceuticals, was processed on 7.5.1999 u/s 143(1)(a) of the Act. Subsequently, the assessee filed a revised return on 26.5.1999 ,claiming weighted deduction u/s 35(2AB) of the Act .This return was also revised on 8.3.2000 , withdrawing weighted deduction on some of the items of expenditure. These revised returns were not processed by the Assessing officer[AO in short] on the ground that these were filed after processing the original return on 7.5.1999. Since the AO ignored revised returns, the assessee preferred appeal on this issue before the ld. CIT(A).The assessee contended in the appellate proceedings that in terms of provisions of section 139(5) of the Act, the assessee is entitled to file a revised return at any time before the completion of the assessment. Since the revised returns were filed on 26-05-1999 and 08-03-2000 i.e. before the end of 31-03- 2000, the first outer limit, the assessee pleaded that the assessment having been completed in March, 2001, the revised returns filed within the stipulated time, could not be ignored.
3. However, the ld. CIT(A) did not accept the aforesaid submissions on behalf of the assessee and concluded as under:-
"5 I have considered the submissions made by the ld. AR on behalf of the appellant and have gone through the facts on record. I find that the AO has considered the issue of weighted deduction of R&D expenses claimed u/s 35(2AB) in the revised returns in the assessment order u/s 143(3) dated 26-03-2001 which is subject matter of appeal. It is further seen that the appellant has filed a separate appeal against the AO's order u/s 154 rejecting the assessee's application for entertaining the revised returns. This appeal is being disposed off separately, the ground of appeal taken in the subject appeal is therefore rejected as there is no adverse impact on the appellant."
4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. AR on behalf of the assessee while referring to provisions of sub-sec. 1B of the sec. 143 of the Act and as also relying on the decision in the case of S. R Koshti vs. CIT, 276 ITR 165(Guj) contended that since returns were revised in order to correct the claim for weighted deduction u/s 35(2AB) of the Act within the time stipulated u/s 139(5) of the Act and the AO computed income only in terms of these revised returns, these could not be ignored. On the other hand, the ld. DR argued that in the event the ld. CIT(A) have allowed relief on an application filed u/s 154 of the Act, this ground becomes infructuous. To a query by the Bench, the ld. AR agreed to submit a copy of order passed by the ld. CIT(A) on their application u/s 154 of the Act. However, copy of the said order has not been placed before us until the writing of this order.
5. W e have heard both the parties and gone through the facts of the case. In terms of provisions of sec.139(5) of the Act if any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. In the instant case, indisputably, the assessee filed return u/s 139(1) of the Act on 30.11.1998 and thereafter submitted revised return on 26.5.1999 ,claiming weighted deduction u/s 35(2AB) of the Act .This return was again revised on 8.3.2000. Both these returns have been filed before the expiry of one year from the end of the relevant assessment year on 31.3.2000 and before the completion of the assessment. Apparently, these revised returns could not be ignored and rightly so, the AO based computation of income on the basis of second revised return on the penultimate page of the assessment order and has also considered the claim of the assessee for weighted deduction u/s 35(2AB) of the Act, for which two revised returns were filed. In the light of these facts, the ld. CIT(A) concluded that there was no adverse impact on the assessee. The ld. AR on behalf of the assessee also did not point out any adverse impact on the assessee when the computation itself was based on second revised return and claims made in the revised returns have been considered by the AO and the ld. CIT(A). In these circumstances, we are of the opinion that the issue of revised returns raised before us becomes purely academic and therefore, does not survive for adjudication. Accordingly, ground no.1 in the appeal of the assessee is dismissed on that score alone.
6. Ground no.2 in the appeal of the assessee relates to inclusion of the amount of exchange rate fluctuation/difference in respect of balances under the Exchange Earners Foreign Currency[EEFC] account from the total turnover while computing deduction u/s 80HHC of the Act. The AO noticed that the assessee-company reduced an amount of Rs. 23,51,002/- attributable to income on account of exchange rate difference from miscellaneous expenses, resulting in excess deduction u/s 80HHC and 80IA of the Act. Accordingly, the AO observed that this receipt being miscellaneous trading receipt would form part of total turnover of the business and 90% of same would be reduced while working eligible profits for deduction u/s 80HHC of the Act.
7. On appeal, the assessee contended that receipt attributable to exchange rate fluctuation was derived on the balances held in EEFC bank accounts in foreign exchange. 50% of the export proceeds were allowed by the Government / RBI to be kept in a separate foreign currency account designated as "Export Earners Foreign Currency" account at the choice of the exporter. When the export proceeds were received from customers and credited to EEFC account, it was recorded in the books of accounts at the then prevailing rate of exchange as on 31st March, when the annual accounts were drawn and the balance in EEFC was revalued at the exchange rate prevailing on 31st March. The difference arising on this account was exchange rate fluctuation and this was part of other income. It could not be treated as total turnover for the purpose of deduction u/s 80HHC of the Act. Alternatively, it was argued that if the amount was added to the total turnover then it has to form part of export turnover .
8. However, the ld. CIT(A) did not accept the contentions on behalf of the assessee and concluded that the receipts on account of exchange rate fluctuation could not form part of the export turnover since the 'business profits' for the purpose of section 80 HHC do not include such receipts. Accordingly, relying on the decisions reported in 243 ITR 192 (Ker.), 245 ITR 54 (Mum), 245 ITR 849 (Mum), 71 TTJ 792 (Mum) and 67 ITD 347 (Coch) , the ld. CIT(A) concluded that the receipt on accumulation of foreign exchange kept in the EEFC Account was akin to interest receipt on the deposits kept in this account, which was not eligible for deduction u/s 80HHC of the Act. Therefore, the ld. CIT(A) upheld the findings of the AO ,holding that the receipts of Rs. 23,51,802/- on account of exchange rate fluctuation on EEFC Account formed part of total turnover for computing the deduction u/s 80HHC of Act.
9. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee reiterated their submissions before the lower authorities while the ld. DR supported the findings of the ld. CIT(A).
10. W e have heard both the parties and gone through the facts of the case. Indisputably, the exchange fluctuating gain arose from the balance kept in the EEFC account. The Reserve Bank of India have granted a facility to few categories of exporters to maintain a certain proportion of the export proceeds in an EEFC Account. The proceeds of the account are to be utilized for bonafide payments by the account holder subject to the limits and the conditions prescribed. An assessee who is an exporter, is not under an obligation of law to maintain the export proceeds in the EEFC Account but this is a facility which is made available by the Reserve Bank. The transaction of export is complete in all respects upon the repatriation of the proceeds. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in the entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC Account. The exchange fluctuation that arises after the export transaction is complete and payment has been received by the exporter. Upon the completion of the export transaction, what the seller does with the proceeds, upon repatriation, is a matter of his option. Thus, the exchange fluctuation in the EEFC Account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression "derived" by the assessee in sub section (1) of Section 80HHC.W e find that Hon'ble Bombay High Court in their decision dated 22.4.2010 in the case of CIT vs. Shah Originals, in ITA no. 431 of 2008 while adjudicating a similar issue after analyzing the purpose of EEFC account, followed the view taken by the Hon'ble Apex Court in the case of Pandian Chemicals Limited v. Commissioner of Income Tax,129 Taxman 539(SC) & Commissioner of Income Tax v. K. Ravindranathan Nair,295 ITR 228(SC) in holding that the exchange fluctuation in the EEFC Account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression "derived" by the assessee in sub section (1) of section 80HHC of the Act. The exchange fluctuation arises subsequent to the transaction of export. Accordingly, the Hon'ble High Court concluded that the deposit of the receipts in the EEFC Account and the exchange fluctuation which has arisen therefrom cannot be regarded as being part of the profits derived by the assessee from the export of goods or merchandise. Since the fluctuation in that case was not on account of the sale proceeds or for that matter on account of a delayed realization of the sale proceeds and instead, the fluctuation had arisen in the deposits maintained by the assessee in the EEFC Account in convertible foreign exchange after the completion of the export transaction, the Hon'ble High Court concluded that this would not form part of business income and profits of the business while computing deduction u/s 80HHC of the Act. In the instant case , the expenses debited in profit and loss account revealed that the assessee reduced the miscellaneous expenses by an amount of Rs. 23,51,002/- attributable to exchange rate difference and accordingly, the AO treated the amount as part of total turnover. Admittedly, the amount of exchange rate fluctuation in the EEFC was part of other income. There is nothing to suggest that the amount has any relation to the turnover or the export turnover as defined in the relevant provisions of sec. 80HHC of the Act. The turnover means the value of goods purchased/sold in the course of carrying on of the business. Hon'ble Apex court held in CIT vs. Lakshmi Machine Works,290 ITR 667 that the words "total turnover" in the formula prescribed in sec. 80HHC of the Act can not be interpreted with reference to the definition of the word "turnover" in other laws like Central Sales Tax or as defined in accounting principles. The ld. CIT(A) observed in the instant case that amount is akin to interest. But interest does not have an element of turnover. The amount of exchange rate variation in the EEFC account is independent income and has no relation with exports. The assessee itself treated the amount as 'other income'. Therefore ,such independent income would not form part of total turnover. In the light of view taken by the Honble High Court in Shah Originals(supra) and no contrary decision having been brought to our notice on behalf of the Revenue, we are of the opinion that the amount of exchange rate variation in the balance lying in the EEFC account does not have any element of turnover and therefore, would not form part of total turnover as defined in explanation (ba) to sec. 80HHC of the Act. In view thereof, ground no.2 in the appeal of the assessee is allowed.
11. Ground no.3 in the appeal relates to sale of scrap as part of total turnover for the purpose of deduction u/s 80HHC of the Act. The AO noticed that the assessee included receipt of Rs. 19.71 lacs on account of sale of scrap generated from business under the head 'Other Income'. Though the assessee argued that these are not trading receipts and as such would not be considered as a part of turnover of business, the AO held that these receipts having been resulted from direct exercise of its business, would be part of total turnover of the business for the purpose of deduction u/s 80HHC of the Act.
12. On appeal, the learned CIT(A) upheld the findings of the AO, treating the receipts of Rs. 19,71,000/- on account of sale of scrap, as part of total turnover for computing the deduction u/s 80HHC of the Act.
13. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The learned AR on behalf of the assessee reiterated their submissions before the lower authorities while relying upon decision in the case of Claas India Ltd. vs. ACIT [2008] 119 TTJ 173 (Delhi).On the other hand, the ld. DR supported the findings of the ld. CIT(A).
14. W e have heard both the parties and gone through the facts of the case. W e find that a co-ordinate Bench in the aforecited decision in Claas India Ltd.(supra) while adjudicating a similar issue held that the scrap, generated and which is sold ,only goes to reduce the cost of material consumed in the manufacturing process and therefore, the same cannot be considered as part of turnover of the business carried on by the assessee. Similar view had been adopted by Chandigarh Bench 'SMC' in the case of ITO vs. Jagraon Exports (2002) 124 Taxman 220 (Chd)(Mag). Following this decision, the Delhi Bench directed the AO to exclude the amount realized on sale of scrap from the total turnover adopted for computing deduction under s. 80HHC of the Act.
14.1. Hon'ble Madras High Court in the case of CIT vs. Ashok Leyland Ltd.,297 ITR 107(Mad.) while following their own decisions in CIT v. Madras Motors Ltd./M.M. Forgings Ltd. [2002] 257 ITR 60 (Mad) and CIT v. N.S.C. Shoes [2002] 258 ITR 749 (Mad) upheld the findings of the ITAT that since the metallic scrap churned out in the process of the assessee's manufacturing activities did not form part of the trading goods or stock-in-trade of the assessee-company nor the assessee contemplated the export of scrap, as such, the scrap sales could not be taken as a part of turnover.
14.2 W e find that the business of assessee is manufacture and sale of pharmaceuticals. The scrap generated during the manufacturing process is sold as such. The assessee is not engaged in the business of sale of scrap. The turnover means the value of goods purchased/sold in the course of carrying of business. The scrap sold by the assessee, thus, does not have element of turnover in the instant case. In the light of view taken in the aforesaid decisions while no contrary decision has been brought to our notice on behalf of the Revenue, we have no hesitation in holding that the scrap sales could not be taken as a part of turnover for the purpose of deduction u/s 80HHC of the Act. Therefore, ground no.3 in the appeal of the assessee is allowed.
15. Ground no.4 in the appeal of the assessee relates to reduction of unrealized export turnover of Rs. 42,82,432/- out of the export turnover while computing deduction u/s 80HHC of the Act. At the time of hearing of the appeal, the ld. AR on behalf of the assessee did not press this ground. Accordingly, this ground is dismissed.
16. Ground no.5 in the appeal of the assessee relates to deduction u/s 80HHC of the Act for the purpose of computation of book profits in terms of clause (viii) of the explanation appended below the extant sec. 115JA(2) of the Act. The AO while computing book profits in terms of provisions of sec. 115JA of the Act allowed deduction u/s 80HHC of the Act, on the eligible export profits of the business computed under the normal provisions as against the claim of the assessee for computation of such deduction on the basis of book profits.
17. On appeal, the learned CIT(A) upheld the findings of the AO.
18. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee contended that the issue is now settled by the decision of the Hon'ble Apex Court in the case of Ajanta Pharma,327 ITR 305(SC) and by the Hon'ble Madras High Court in Bhari Information Technology System,328 ITR 380(Mad.).On the other hand, the ld. DR supported the findings of the ld. CIT(A) and contended that only taxable profits computed under the normal provisions have to be considered while determining amount of deduction u/s 80HHC of the Act for the purpose of sec. 115JA of the Act.
19. We have heard both the parties and gone through the facts of the case as also the decisions relied upon. We find that while adjudicating the claim for deduction u/s 80HHC of the Act for determining the book profits u/s 115JA of the Act ,the Mumbai Special Bench of ITAT in the case of DCIT vs. Syncome Formulations (I) Ltd.,106 ITD 193 held that the deduction under section 80HHC in a case of MAT assessment is to be worked out on the basis of the adjusted book profits and not on the basis of the profit computed under the regular provisions of law applicable to the computation of profit and gains of business or profession. However, subsequently, Hon'ble Bombay High Court in their aforesaid decision in CIT Vs. Ajanta Pharma Ltd.,223 CTR(Bom.)441 overruled the decision in the case of Syncome Formulations (I) Ltd.(supra). On further appeal by the assessee, Hon'ble Apex Court in the case Ajanta Pharma Ltd. vs. CIT, 327 ITR 305(SC) while referring to the relevant provisions of sec. 115JB and sec. 80HHC of the Act upheld the view taken by the Special Bench in the case of Syncome Formulations (I) Ltd.(supra) in the following terms:
" 7. In recent times, the number of zero-tax companies and companies paying marginal tax has grown, hence, vide the Finance (No.2) Act, 1996, levy of minimum tax on companies having "book profits" stood introduced. The scheme envisaged payment of minimum tax by deeming 30% of the book profits computed under the Companies Act, as taxable income, in a case where the total income as computed under the provisions of the 1961 Act, is less than 30% of the book profit. The word "book profit" has been defined in Section 115JA(2) read with the Explanation thereto to mean the net profit as shown in the Profit and Loss Account, as increased by the amount(s) mentioned in clauses (a) to (f), and as reduced by amount(s) covered by clauses (i) to (ix) of the Explanation. These may be called for the sake of brevity as "Upward and Downward Adjustments". From the above it is clear that Section 115JA is a self-contained Code and will apply notwithstanding any provisions in the 1961 Act. In this case, we are concerned with Downward Adjustment, particularly clause (viii) which refers to the amount(s) of profits eligible for deduction under Section 80HHC, computed under Section 80HHC(3) but subject to conditions specified in Sections 80HHC(4) and 80HHC(4A).
8. By the Finance Act, 2000, Section 115JB was inserted w.e.f. 1.4.2001 providing for levy of MAT on certain companies. Section 115JB, though structured differently, stood inserted to provide for payment of advance tax by MAT companies. Section 115JB is the successor section to Section 115JA. In essence, it is the same except that Section 115JA provided for MAT on companies, so far as it does not deem the book profit as total income. Under Section 115JB, however, clause (viii) of Section 115JA is re-numbered as clause
(iv). Section 115JB continues to remain a self-contained Code.
9. On the other hand, Section 80HHC(1) inter alia states that where an assessee, who is the Indian resident, is engaged in the business of exports out of India of any goods earns convertible foreign exchange then in computing the total income, a deduction of the profits derived from such exports would be admissible. Thus, Section 80HHC provides for tax incentives. Section 80HHC(1) at one point of time laid down that an amount equal to the amount of deduction claimed should be debited to the P&L Account of the previous year in respect of which deduction is to be allowed and credited to the reserve account to be utilized for the business purpose. Section 80HHC(1) concerns eligibility whereas Section 80HHC(3) concerns computation of the quantum of deduction/tax relief. At one point of time prior to the Finance Act, 2000, exporters were allowed 100% deduction in respect of profits derived from export of goods. However, that has now been reduced in a phase-wise manner under Section 80HHC(1B). It may be noted that all assessable entities are not eligible for deduction under Section 80HHC. Similarly, only eligible goods are entitled to such special deduction under Section 80HHC(1). A bare reading of Section 80AB shows that computation of deduction is geared to the amount of income, but Section 80HHC(3), which refers to quantification of deduction is geared to the exports turnover and not to the income. On the other hand, Section 115JB refers to levy of MAT on the deemed income. The above discussion is only to show that Sections 80HHC and 115JB operate in different spheres. Thus, two essential conditions for invoking Section 80HHC(1) are that assessee must be in the business of export and secondly that sale proceeds of such exports should be receivable in India in convertible foreign exchange. Hence, Section 80HHC(1) refers to "eligibility" whereas Section 80HHC(3) refers to computation of tax incentive. Coming to Section 80HHC(1B) it is clear that after Finance Act, 2000 w.e.f. assessment year 2001-02 exporters would not get 100% deduction in respect of profits derived from exports but that they would get deduction of 80% in the assessment year 2001-02, 70% in the assessment year 2002-03 and so on. Thus, Section 80HHC(1B) deals not with "eligibility" but with the "extent of deduction". As earlier stated, Section 115JB is a self-contained Code. It taxes deemed income. It begins with a non-obstante clause. Section 115JB refers to computation of "book profits" which have to be computed by making Upward and Downward adjustments. In the Downward Adjustment, vide clause (iv) it seeks to exclude "eligible" profits derived from exports. On the other hand, under Section 80HHC(1B) it is the extent of deduction which matters. The word "thereof" in each of the items under Section 80HHC(1B) is important. Thus, if an assessee earns Rs. 100 crores then for the assessment year 2001-02, the extent of deduction is 80% thereof and so on which means that the principle of proportionality is brought in to scale down the tax incentive in a phased manner. However, for the purposes of computation of book profits which computation is different from normal computation under the 1961 Act/computation under Chapter VIA, we need to keep in mind the Upward and Downward Adjustments and if so read it becomes clear that clause (iv) covers full export profits of 100% as "eligible profits" and that the same cannot be reduced to 80% by relying on Section 80HHC(1B). Thus, for computing "book profits" the Downward Adjustment, in the above example, would be Rs. 100 crores and not Rs. 90 crores. The idea being to exclude "export profits" from computation of book profits under Section 115JB which imposes MAT on deemed income. The above reasoning also gets support from the Memorandum of Explanation to the Finance Bill, 2000.
10. One of the contentions raised on behalf of the Department was that if clause
(iv) of Explanation to Section 115JB is read in entirety including the last line thereof (which reads as "subject to the conditions specified in that section"), it becomes clear that the amount of profits eligible for deduction under Section 80HHC, computed under clause (a) or clause (b) or clause (c) of sub-section (3) or sub-section (3A), as the case may be, is subject to the conditions specified in that Section. According to the Department, the assessee herein is trying to read the various provisions of Section 80HHC in isolation whereas as per clause (iv) of Explanation to Section 115JB, it is clear that book profit shall be reduced by the amount of profits eligible for deduction under Section 80HHC as computed under clause(a) or clause(b) or clause(c) of subsection (3) or sub-section (3A), as the case may be, of that Section and subject to the conditions specified in that Section, thereby meaning that the deduction allowable would be only to the extent of deduction computed in accordance with the provisions of Section 80HHC. Thus, according to the Department, both "eligibility" as well as "deductibility" of the profit have got to be considered together for working out the deduction as mentioned in clause (iv) of Explanation to Section 115JB.We find no merit in this argument. If the dichotomy between "eligibility" of profit and "deductibility" of profit is not kept in mind then Section 115JB will cease to be a self-contained code. In Section 115JB,as in Section 115JA, it has been clearly stated that the relief will be computed under Section 80HHC(3)/(3A), subject to the conditions under sub-clauses (4) and (4A) of that Section. The conditions are only that the relief should be certified by the Chartered Accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in clause (iv) of Explanation to Section 115JB (subject to the conditions specified in sub-clauses (4) and (4A) of that Section) to obliterate the difference between "eligibility" and "deductibility" of profits as contended on behalf of the Department."
19.1 Before this, in the case of CIT Vs. Rajnikant Schnelder & Associates P Ltd.,302 ITR 22(Mad), the Hon'ble Madras High Court held that the AO was not entitled to alter the profit and loss account prepared by the assessee under the provisions of the Companies Act while arriving at book profits u/s 115JA of the Act and the book profits so arrived at should be the basis for taxation and computation u/s 80HHC should be limited to the case of profits of eligible category only. This decision has been reiterated in CIT Vs. SPEL Semiconductor Ltd.,323 ITR 488(Mad.), when it was held that the deduction u/s 80HHC of the Act in an assessment u/s 115JA is to be worked out on the basis of adjusted book profits and not on the basis of the profit computed under the regular provisions of law applicable to the computation of profits and gains of business or profession. An SLP filed by the Revenue against this decision has been dismissed as reported in 320 ITR(St.)21. Following the decision in Rajnikant Schnelder & Associates P Ltd.(supra) ,similar view was taken in Bhari Information Technology System,328 ITR 380(Mad.).
19.2 In the light of view taken by the Hon'ble Apex Court in their aforesaid decision in Ajanta Pharma Ltd.(supra) as also by the Hon'ble Mdras High Court, we have no alternative but to vacate the findings of the ld. CIT(A) and direct the AO to allow deduction u/s 80HHC of the Act on the basis of adjusted book profits and not on the basis of the profit computed under the regular provisions of law applicable to the computation of profits and gains of business or profession. Therefore, ground no. 5 in the appeal of the assessee is allowed.
20. Ground no.6 in the appeal of the assessee relates to non- adjudication of the ground in the appeal of the assessee before the ld. CIT(A) for deduction u/s 80IA of the Act while determining book profits in terms of clause (v) of the explanation below the extant sec. 115JA(2) of the Act. The AO while computing book profits in terms of provisions of sec. 115JA of the Act allowed deduction u/s 80IA the Act, on the eligible profits of the industrial undertaking computed under the normal provisions as against the claim of the assessee for computation of such deduction on the basis of book profits. The ld. AR argued that their ground before the ld. CIT(A) was not adjudicated. Accordingly, the ld. CIT(A) may be directed.
21. Ground no.7 in the appeal of the assesse relates to reduction of an amount of Rs. 5,35,035/-,allocated towards exchange rate difference out of miscellaneous expenses while working out deduction u/s 80IA of the Act from the profits of Silvassa unit. The ld. AR argued that their ground no.15.1(c) before the ld. CIT(A) was not adjudicated. Accordingly, the ld. CIT(A) may be directed.
22. After hearing the ld. AR, we find that while adjudicating issues raised in ground nos. 14 & 15 of the appeal, the ld. CIT(A) did not decide the issues relevant to deduction u/s 80IA of the Act, now raised before us. Consequently, ld. CIT(A) is directed to adjudicate these issues after allowing sufficient opportunity to both the parties. W ith these directions , ground nos. 6 & 7 are disposed of.
23. Ground no.8 relates to disallowance of expenses of Rs. 9,61,284/- The AO noticed that the following expenses were attributed to the new unit being set up on plot no. 21, Silvasa, wherein commercial production had not commenced.
|
Nature of expenses |
Amount (Rs.) |
|
Lease rent - plant and machinery |
2,12,207/- |
|
Boiler and furnace oil expenses |
28,020/- |
|
Insurance |
49,390/- |
|
Repairs |
1,32,433/- |
|
Other repairs |
2,66,444/- |
|
Miscellaneous expenses |
1,09,693/- |
|
Other welfare expenses |
41,258/- |
|
Printing and stationery |
21,666/- |
|
Travelling |
64,900/- |
|
Professional charges |
10,200/- |
|
Licence and fees |
23,173/- |
|
Consumable stores |
1,900/- |
|
Total |
9,61,284/- |
The AO disallowed the aforesaid expenses , being pre-operative.
24. On appeal, the assessee claimed that unit no. 2 at Silvassa. in the process of setting up was part of the overall pharmaceutical business of the assessee and there was interdependence, interlacing, unity of control and oneness with regard to various units/divisions of the assessee company.
Accorddingly, relying upon decisions in CIT VS. Hindustan Machine Tools Ltd.,. 175 ITR 212, CIT VS. Indian Telephone Industries Ltd., 175 ITR 215 and. CIT VS. Hindustan Machine Tools Ltd. (no. 2) 175 ITR 216, the assessee claimed the aforesaid expenses u/s. 37(1) of the Act.
25. However, the ld. CIT(A) did not accept the aforesaid submissions on behalf of the assessee and concluded as under:
"After considering the facts and circumstances of the case, I find that since the expenses in question pertain to pre operative period of the new unit at Silvasa, the AO was justified in not allowing the claim of the assessee. In fact, an independent unit has been set up by the assessee company on newly acquired plot numbers 20 and 21 at Silvasa and as such the decisions relied upon by the Ld. Authorized Representative in this regard are not applicable to the facts in the assessee's case, the commercial production of the newly set up unit has not started in the year under appeal. Dismissing a special leave petition in the case of CIT vs. SPONGE IRON INDIA LTD. (1993), 204 ITR (St.) 11-12, tHE Hon'ble supreme court has held that expenses Incurred prior to commencement of business are not deductible. The Assessing Officer's action in disallowing the expenses of Rs. 9,61,248/- is therefore considered to be in order and the addition sustained."
26. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). the ld. AR on behalf of the assessee while relying upon decisions in Essar Steel Ltd. vs. DCIT, 97 ITD 125™(Ahd.),CIT vs. Rane(Madras) Ltd.,293 ITR 459(Mad.), CIT vs. Usha Iron & Ferro Metal Corporation Ltd.,296 ITR 140(Del.) and decision dated 10.8.2010 of the Hon'ble Madras High Court in CIT vs. Sakthi Sugars Ltd. in ITA no.411 of 2004 contended that the assessee was in the process of expansion of business and therefore, the entire expenditure was allowable.
27. The ld. DR, on the other hand, supported the orders of the authorities below.
28. W e have heard both the parties and gone through the facts of the case as also the decisions relied upon before us by the ld. AR on behalf of the assessee. We find that the AO disallowed the claim for the said expenses on the ground that the expenses related to a new unit set up at plot no. 21 in Silvasa , which had not commenced commercial production. There is not even a whisper in the order as to whether or not the said unit being set up was expansion of the existing business or that there was complete inter- connection and inter-lacing of the said unit with business carried on in the existing units. On appeal, the assessee contended ,inter alia, that said unit was part of the overall pharmaceutical business of the assessee and that there was interdependence, inter lacing, unity of control and oneness with regard to various divisions of the assessee. However, the ld. CIT(A) upheld the findings of the AO holding that an independent unit was being set up by the assessee on the newly acquired plot nos.20 & 21at Silvasa. There is no such finding on the plea of the assessee that the business proposed to be carried on in the new unit was expansion of the existing business or that there was interdependence, inter lacing, unity of control and oneness with regard to various divisions of the assessee , as claimed by the assessee. Even before us no such material has been placed by the ld. AR on behalf of the assessee nor even the specific nature of business and products proposed to be manufactured in the said unit has been stated nor it is evident from the impugned orders. Apparently, complete facts are not evident from the impugned orders nor these have been placed before us on behalf of the assessee. We find that the Hon'ble Gujrat High Court in CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 held that complete inter-connection and inter-lacing of both the units is the test laid down for determining whether two lines of business constitute "same business". But then there should be material for concluding so. No such finding is evident from the impugned orders nor there is any material before us to conclude so. Whether or not the establishment of a new unit constituted expansion or extension of the existing business can be evident from the analysis of facts and figures of the various units and the products proposed to be manufactured in the new unit and those manufactured in the existing units. In the absence of any material before us, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issue of claim for the aforesaid expenses in accordance with law in the light of various judicial pronouncements including the aforecited decisions, after allowing sufficient opportunity to both the parties . Needless to say that while redeciding the appeal, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act and bringing out clearly as to whether or not the establishment of a new unit constituted expansion or extension of the existing business and that there was inter-connection and inter-lacing of the business in the proposed unit with that carried on in the existing units.. With these directions, ground no. 8 in the appeal filed by the assessee is disposed of.
ITA No.690/ Ahd/2002
29. Adverting now to ground no.1 in the appeal of the Revenue relateing to disallowance of depreciation as calculated u/s 32 of the Act,the AO noticed on perusal of computation and depreciation chart annexed with the return that the assessee company did not claim depreciation in respect of plant and machinery of its Silvassa unit. In respect of all the assets of other units and all other assets of Silvassa unit, depreciation had been claimed. The AO also observed that in the past the assessee had claimed depreciation on block of plant and machinery entitled to depreciation @ 100% but in 25% block, no depreciation was claimed. According to the AO, this action of the assessee was with a purpose to retain higher W DV on the assets, as unit at Silvassa enjoyed tax holiday u/s 80IA of the Act. This device allowed on one hand a higher deduction u/s 80IA of the Act and on another higher W DV would entitle the assessee to claim larger depreciation when the tax holiday period was over and the assessee has taxable income from this unit. The AO also noticed that in the earlier assessment years also, depreciation had been allowed to the assessee even though not claimed by it. However, the learned CIT(Appeals) and the ITAT held that depreciation can not be granted to the assessee company once it has not been claimed. Though the assessee relied upon a number of decisions viz. CIT Vs. Mahendra Mills 109 Taxman 225 (SC),CIT v. Shn Someshwar Sahakari Sahkar Karkhana Ltd.177 ITR 443 (Bom),CIT v. Dharampur Leather Co. Ltd 60 ITR 165 (SC), Beco Engineering Co. Ltd v. CIT 148 ITR 478 (P&H),IT v. Friends Corporation 180 ITR 334 (P & H),CIT v. Arun Textiles 192 ITR,700 (Guj) and CIT v. Andhra Cotton Mills Ltd. 228 ITR 30 (AP), the AO did not accept the submissions of the assessee while distinguishing the decisions of the ITAT for the AYs..1995-96 and 1996-97 in view of amended provisions of sec. 32(2)(iii)(b) of the Act and deletion of sec. 34 of the Act w.e.f 1.4.1988. Accordingly, the AO allowed depreciation of Rs. 80,13,777/- from the profits of the business as also while computing eligible profits for the purpose of deduction u/s 80IA and 80HHC of the Act.
30. On appeal, the ld. CIT(A) upheld the claim of the assessee in the following terms:
"I have considered the submission made by the Ld. AR and have gone through the Assessment order made by the AO. I have also considered the legal position In this regard. I find that the appellant has a case to succeed. I have come across a recent decision of the Hon. ITAT "B" Bench, Mumbaf In the case of NEHA TRANSMISSIONS PVT. LTD. vs. ITO in ITA no. 4877/MUM/1999 DATED 6.7.2001. The Issue before the Hon. ITAT was whether claim for depreciation was optional. The assessment year involved was assessment year 1996-97. Before the Tribunal, the revenue justified the orders of the lower authorities and contended that after the concept of block of assets was introduced, Section 34 (1) has been deleted and the MAHENDRA MILLS case on which reliance was placed by the assessee, was for the AY prior to the said amendment. Further, as held by the Hon. Supreme Court In the case of MOTHER INDIA REFRIGERATION PVT. LTD., the claim of depreciation was a charge on the profits of the assessee. Therefore, deductions u/s. 80 IA has to be allowed on the correct profit worked out as per the Act i.e. after allowing depreciation. Reliance was also placed on the Supreme Court's decision in the case of TUTICORIN ALKALI CHEM. & FERTILIZERS LTD. The ITAT held that the Apex Court in the case of MAHENDRA MILLS has clearly laid down that it was optional for the assessee to claim depreciation, it brushed aside the objection of the revenue on the ground that the claim for depreciation was allowable u/s 32(1) and not under section 34(1). Further It was noted that a similar view had been taken by Ahmedabad Bench of Tribunal in the case of CUJARAT STATE FERTILIZER CORPORATION. In view of the same, it was held that the assessee cannot be forced to claim the depreciation.
In yet another recent decision, the ITAT "A" Bench, Ahmedabad in the case of IMPORT METALIZERS vs. DY. CIT Reported in 2001, 73 TTJ 381 has held that the assessee has an option to claim the depreciation even after omission of sub section (1) of section 34 and introduction of block of assets system w.e.f, 1.4.88, the AO cannot grant depreciation without the necessary particulars / Information in respect of assets given by the assessee. The ITAT, In this case has followed the decisions of CIT vs. MAHENDRA MILLS 2000 243 ITR 56 (SO, BETA NEPTHOL (P) LTD. VS. DCIT (ITA NO. 1000/indore/92 dated 15.7.93) and the decision in the appellant's own case .As regards Assessing officer's observation that the FY 2001 providing for compulsory allowance of depreciation w.e.f. 1.4.2002 making the mandatory nature of section 32 abundantly clear, it may be clear that the amendment Itself is indicative of the legislative intent that it is effective from 01.04.2002 and not retrospectively.
In view of the above discussion, I hold that the AO was not Justified in compulsory allowance of depreciation to the extent of Rs. 80,13,777/-. The addition is deleted."
30.1 The ld. CIT(A) also directed the AO not to reduce the depreciation of Rs. 80,13,777/- while determining profits of the business eligible for deduction u/s 80IA of the Act.
31. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The learned DR supported the order of the AO while relying upon decision in Vahid Paper Converters & Ors. vs. ITO & Ors. (2006) 98 ITD165 (Ahd)(SB), the assessee having claimed deduction u/s 80IA of the Act in respect of eligible profits of the industrial undertaking of the assessee at Silvasa. On the other hand, the ld. AR on behalf of the assessee supported the order of the ld. CIT(A) and submitted that the issue is covered in favour of the assessee by the decision dated 6-03-2000 of the ITAT Ahmedabad Bench-C in the assessee's own case for AYs 1995-96 & 1996-97 in ITA nos.2355/Ahd/1998 & 1261/Ahd./1999. Inter alia, the ld. AR while relying upon decisions reported in CIT vs. Kerala Electric Lamp W orks Ltd.,261 ITR 721 (Ker) and Morepen Laboratories Ltd. vs. JCIT, 95 TTJ 404(Chandigarh) as also decision dated 22.2.2010 of the Bangalore Bench in the case of ACIT vs. JSW Steel Ltd. in ITA no.848/Bang./2009 for the AY 1999-2000 contended that the ld. CIT(A) separately adjudicated the issue of disallowance of depreciation raised by the assessee in ground nos. 3 & 15.1(b) of their appeal. The Revenue is in appeal before the ITAT only against the issue decided in their ground no.3 before the ld. CIT(A). The ld. AR vehemently argued that the scope of the appeal can not be enlarged by raising a plea on the issue adjudicated by the ld. CIT(A) in their ground no.15.1(b) before the ld. CIT(A). Since the Revenue did not raise a separate ground for the purpose, the ld. AR argued that plea on behalf of the Revenue can not be entertained. In his rejoinder, the ld. DR submitted that the ground raised by them is wide enough to cover the issue in respect of claim for depreciation against profits of the new industrial undertaking at Silvasa ,eligible for deduction u/s 80IA of the Act. The ld. DR argued that common ground having been taken, their plea for reliance on the said decision in Vahid Paper Converters & Ors (others)should be accepted. In any case new plea can always be raised on the subject matter of the appeal, the ld. DR added.
32. W e have heard both the parties and gone through the facts of the case. As is apparent from the facts of the case, the assessee did not claim any depreciation on the plant and machinery installed in their industrial undertaking at Silvasa even when depreciation was claimed in respect of all other assets in the unit as also on various assets including plant and machinery installed in the other units. The AO also noticed that the assessee in the earlier years indeed claimed depreciation on plant and machinery entitled to 100% depreciation but did not claim any depreciation on the plant and machinery entitled to depreciation @25%. The AO also noticed that the assessee claimed, inter alia, deduction u/s 80HHC & 80IA of the Act. The deduction u/s 80IA had been claimed from the eligible profits of the industrial undertaking at Silvasa alone. In view of amended provisions of the extant sec.32(2)(iii)(b) of the Act stipulating carry forward of unabsorbed depreciation up to 8 years and deletion of sec. 34 of the Act, the AO allowed depreciation of Rs. 80,13,777 while computing profits of the industrial undertaking@ 25 % on the plant machinery and accordingly, restricted deduction u/s 80HHC & 80IA of the Act. However, on appeal, the ld. CIT(A) while following the various decisions of the ITAT including that of the Ahmedabad Bench of Tribunal in the case of Gujrat State Fertilzer Corporation, relying upon decisions of the Hon'ble Apex Court in Mahendra Mills(supra) directed the AO not to thrust the depreciation on the assessee since the assessee had the option not to claim the depreciation even while claiming deduction u/s 80IA of the Act . The plea now raised before us by the ld. AR is that the Revenue have merely disputed the findings of the ld. CIT(A) regarding the option of the assessee in claiming depreciation on plant and machinery, entitled to depreciation @ 25%, installed in the industrial undertaking at Silvasa and have not separately disputed the reiterated findings of the ld. CIT(A) while considering claim for deduction u/s 80IA of the Act. Simply because the ld. CIT(A) recorded his findings at two different places in the impugned order while considering two separate grounds viz. ground nos. 3 & 15.1(b) raised by the assessee before the ld. CIT(A), does not imply that the Revenue can not raise a common ground. In fact, while adjudicating ground no.15.1(b), the ld. CIT(A) merely reiterated his findings on the issue raised in ground no.3. W e do not find any infirmity or illegality if the Revenue has raised only one ground relating to disallowance of depreciation of Rs. 80,13,177 u/s 32 of the Act ,especially when the said claim of depreciation was only in respect of plant and machinery installed in the industrial undertaking at Silvasa, the eligible profits of which alone entitled the assessee to deduction u/s 80IA of the Act. W e are of the opinion the ground no.1 raised by the Revenue before us is wide enough to consider the plea of the ld. DR regarding issue of allowance of depreciation on the plant and machinery against the profits of the industrial undertaking, entitled to deduction u/s 80IA of the Act .
32.1 Even otherwise the powers of the Tribunal stipulated in the provisions of sec. 254(1) in dealing with the appeals, are expressed in the widest possible terms. The word "thereon", mentioned therein of course, restricts the jurisdiction of the Tribunal to the subject- matter of the appeal. The words "pass such orders as the Tribunal thinks fit" include all the powers (except possibly the power of enhancement) which are conferred upon the CIT(A) by s. 251. The ground no.1 raised by the Revenue challenging the order of CIT(A) regarding disallowance of depreciation of Rs. 80,13,177/- u/s 32 of the Act is wide enough to permit the plea of the ld. DR that depreciation has to be allowed since the assessee, inter alia, claimed deduction u/s 80IA of the Act form the eligible profits of the industrial undertaking at Silvasa. W e are of the opinion that the plea put forth by the Revenue is well within the parameters of the grounds of appeal before the Tribunal [c.f.Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR "232 (SC)].
32.11 The Revenue is aggrieved by the findings of the ld. CIT(A) that the assessee has the option to claim depreciation and it can not be thrust upon the assessee. The subject-matter of the appeal before us is as to whether or not the depreciation u/s 32 of the Act on the plant and machinery installed in the industrial undertaking at Silvasa was allowable. The ld. DR pointed out that the assessee, inter alia, claimed deduction u/s 80IA of the Act out of the eligible profits of the said industrial undertaking even while not claiming depreciation. The reference to any other provision or fact shall not alter the subject-matter, viz., the allowability of depreciation. It is well settled that the Tribunal is not precluded from considering a point which arises out of the appeal merely because such point had not been raised or urged by either party at the earlier stage of the proceedings. In the instant case, the point was admittedly, raised before the lower authorities. Even in respect of a new plea, in Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232(SC), Hon'ble Apex Court held that this Tribunal has the jurisdiction and power to entertain a fresh plea and direct the lower authorities for reconsideration of the matter in view of the new plea taken by the Department. The only restriction is that the plea entertained and the directions given by the Tribunal shall be in respect to the subject-matter of the appeal. Even though the issue before us has been adjudicated by the lower authorities and the ld. DR merely pointed out the relevant facts in the context of ground raised before us, assuming the plea raised by the Departmental Representative is new, even then the same has to be accepted in the light view taken by the Hon'ble Apex Court on the powers of the Tribunal in Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232 (SC). A similar view was taken in N.P. Saraswathi Ammal & Ors. vs. CIT (1982) 138 ITR 19 (Mad), CIT vs. Indian Express (Madurai) (P) Ltd. (1983) 33 CTR (Mad) 314 , CIT vs. A.C. Paul (1983), 142 ITR 811 (Mad), CIT vs. Ice Suppliers Corporation (1967) 64 ITR 195 (Pune) and ACIT vs. Amarnath Reddy (Chennai) (TM) (2010) 132 TTJ (Chennai) (TM) 377.
32.2 Now coming to the merit of the issue raised in the aforesaid ground . Though the ld. AR relied upon a number of decisions, in none of these decisions the issue of option to claim depreciation was examined in the context of deduction u/s 80IA of the Act, as is in the instant case. In the case of CIT vs. Mahendra Mills, followed by the ITAT in the preceding assessment years, the apex Court had laid down that unless the assessee asks for depreciation allowance, the ITO cannot grant such depreciation allowance. Hon'ble Apex Court was basically dealing with only in the context of depreciation under section 32, and not in the context of benefits under Chapter VI-A of the said Act. In CIT vs. Kerala Electric Lamp Works Ltd. (2003), 261 ITR 721 (Ker) relevant to the AY 1989-90, it was held that Expln. 5 inserted by the Finance Act, 2001, would apply in relation to the asst. yr. 2002-03 and in subsequent years. This decision was followed in Morepen Laboratories Ltd.(supra) and JSW Steel Ltd.(supra). In none of the decisions relied upon by the ld. AR , the issue as to whether the depreciation which is though allowable but not claimed in the return for normal computation of income has to be allowed while computing the deductions under Chapter VI-A the Act, more particularly u/s 80IA of the Act was considered. Thus, reliance by the ld. AR on the aforesaid decisions is misplaced.
32.3 We find that the issue as to whether the depreciation which is though allowable but not claimed in the return for normal computation of income has to be allowed while computing the deductions under Chapter VI-A viz. sections 80HH, 80I-A, 80-IB, etc., of an industrial undertaking, was considered in Vahid Paper Converters & Ors. vs. ITO & Ors. (2006) 98 ITD 165(Ahd)(SB), when it was held that the depreciation, has to be allowed. Even before this decision Hon'ble Bombay High Court in Indian Rayon Corporation Ltd. v. CIT [2003] 261 ITR 98, after considering n the decision of the Hon'ble Supreme Court in the case of CIT Vs. Mahendra Mills (Supra) relied upon on behalf of the assessee held that if the assessee claims deduction under Chapter-VIA of the Act, then it is not open to assessee to disclaim depreciation allowance.
32.4. Recently, Hon'ble Delhi High Court in Dabur India Ltd. Vs. CIT,219 CTR152(Delhi) while adjudicating a similar issue concluded as under:
".......Profits and gains of a newly established undertaking, therefore, have got to be computed as per the provisions of s. 29 to s. 43A and if the assessee claims relief under Chapter VI-A of the Act, then it is not open to the assessee to disclaim depreciation allowance. This is because Chapter VI-A is an independent code by itself for computing these special types of deductions. In other words, one must first calculate the gross total income from which one must deduct a percentage of incomes contemplated by Chapter VI-A. That such special incomes were required to be computed as per the provisions of the Act, viz., s. 29 to s. 43A, which included s. 32(2). Therefore, one cannot exclude depreciation allowance while computing profits derived from a newly established undertaking for computing deductions under Chapter VI-A."
32.5 In the case of CIT v. Gannon Dunkerley and Co. Ltd. [1995] 216 ITR 708 the Hon'ble Bombay High Court was dealing with the issue whether to exclude unabsorbed depreciation and unabsorbed rebate while computing the total income. The Hon'ble High Court held as under:
"Therefore while ascertaining the profits and gains attributable to a priority industry which forms a part of such total income necessary deductions required under the Income-tax Act have to be made including deduction for depreciation. In the present case, it is only the depreciation in the current year which is being deducted and we do not see any provisions in section 80-I under which such depreciation requires to be added back to the profits and gains attributable to the priority industry for the purpose of calculating the eight per cent. deduction under that section."
32.6. Similarly Hon'ble Bombay High Court in Scoop Industries Pvt. Ltd. Vs. ITO,289 ITR 195(Bom.) , while following their earlier decision in the case of Indian Rayon Corporation Ltd.(supra) held that the assessee, if claiming deduction under Chapter VI-A as a "newly established undertaking", will have to claim depreciation first and thereafter only the total income can be computed so as to enable the said undertaking to claim the benefit as a "newly established undertaking" under Chapter VI-A. In another decision dated 16.10.2009 in the case of Plastiblends India Ltd. in ITA no.1282 of 2007, while adjudicating a similar issue, the Hon'ble Bombay High Court after analyzing various decisions summed up as under:
"47. Thus, the common thread passing through the above decisions of the Apex Court as well as the decisions of this Court including the decision in the case of Indian Rayon (supra) is that the deductions under Chapter VI-A are linked to profits and the profits for the purposes of deduction under Chapter VI-A have to be determined after considering all deductions allowable under the Act (except deductions allowable under Chapter VI-A). Therefore, whether the assessee has claimed current depreciation or not has no bearing in determining the quantum of deduction allowable under Section 80IA of the Act and once it is found that disclaiming depreciation is not in the interest of the assessee, the AO was justified in allowing current depreciation to the assessee.
48. For all the aforesaid reasons, we hold that the quantum of deduction under Section 80IA is not dependent upon the assessee claiming or not claiming depreciation, because, under Section 80IA the quantum of deduction has to be determined by computing total income from business after deducting all deductions allowable under Section 30 to 43D of the Act.
49. In the result, we answer the question referred to us set out at para 1 above in the affirmative, that is, for the purposes of deduction under Chapter VIA, the gross total income has to be computed inter alia by deducting the deductions allowable under section 30 to 43D of the Act, including depreciation allowable under section 32 of the Act, even though the assessee has computed the total income under Chapter IV by disclaiming the current depreciation."
32.7 Hon'ble Rajasthan High Court in Vijay Industries v. CIT [2004] 270 ITR 175 dealing with the very same issue of whether a "newly established undertaking" while claiming special deduction under section 80HH and where depreciation ought to be claimed under section 32 or not, has held that the depreciation under section 32 will have to be first taken in to account, before granting deduction under Chapter VI-A.
32.8 Hon'ble Gujarat High Court in CIT v. Cadila Chemicals P. Ltd. [2003] 259 ITR 692 in no uncertain terms held that when any deduction under Chapter VI-A is claimed, then while computing the total income the depreciation will have to be deducted before making any deduction under section 80HH of the said Act. The relevant observations of the Hon'ble jurisdictional High Court are as under:
"Coming to question No. 2, the learned counsel for the Revenue relies on the decision of this court in Paushak Ltd. v. CIT [1994] 210 ITR 535, wherein this court relied on the decision of the apex court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 and CIT v. Gautam Sarabhai [1981] 129 ITR 133 (Guj), holding that unabsorbed losses and unabsorbed depreciation have to be deducted before arriving at the figures that would be quantified for the purpose of deduction under section 80HH of the Income-tax Act, 1961. We may also add that with effect from April 1, 1989, Parliament inserted section 80AB laying down that where any deduction is required to be made or allowed under any section in Chapter VI-A under the heading "Deductions in respect of certain incomes", then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed under the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is includible in the gross total income meaning thereby depreciation will have to be deducted before making any deduction under section 80HH."
32.8 In the light of view taken in the aforesaid decisions by the Special Bench as also by the various High Courts including jurisdictional High Court, we have no alternative but to vacate the findings of the ld. CIT(A) and direct the AO to allow deduction under Chapter VIA of the Act only after allowing the depreciation of Rs. 80,13,777 under section 32 of the Act, which has not been claimed in the return of income. Therefore, ground no.1 in the appeal of the Revenue is allowed.
33. Ground no.2 in the appeal of the Revenue relates to weighted deduction u/s 32(2AB) in respect of R&D Expenses. The AO noticed that in the original return, the assessee claimed normal deduction of capital and revenue expenditure u/s 35(1) of the Act on account of research and development expenses However, in revised return, it claimed weighted deduction @ 125% u/s 35(2AB) of the Act. But, the AO rejected the claim only on the ground that the assessee's inhouse research facility was not approved u/s 35(2AB) of the Act, even when the assessee submitted a copy of the relevant order dated 07-01-2000 of the Secretary DSIR (the prescribed authority) valid until 31-03-2000. Inter alia, it was pointed out by the assessee that they had applied for approval on 12-04-1999 for the FY 1997- 98 . However, the AO rejected this submission on the ground that the notification was not retrospectively applicable.
34. On appeal, on the basis of a clarification dated 13.8.2001 issued by the prescribed authority, the learned CIT(A) allowed the claim of the assessee in the following terms:-
"I find that the approval of the secretary, DSIR, I.e. the prescribed authority for In-house R & D enabling the assessee company to claim weighted deduction u/s. 35(2 AB) is in order. The AO therefore does not appear to be correct in arriving of the adverse conclusion on the basis of facts that the appellant made application to Secretary DSIR late i.e. after the conclusion of the FY and that the original order of the prescribed authority did not mention the applicability of the provision of law for the AY in question. What the provisions of section 35 (2AB)(1) inter alia ,require is "in house research and development as approved by the prescribed authority" and the prescribed authority for this purpose is Secretary, Department of Scientific and Industrial Research, Government of India, it Is immaterial as to how the application has been processed and satisfaction arrived at by the Secretary, DSIR on the same as these are procedural details which are neither divulged nor of concern of the Assessing officer. The addition of Rs. 2,22,19,415/- is therefore deleted."
35. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The learned DR supported the order of the AO while contending that letter dated 13.8.2001 issued by the prescribed authority was not before the AO.On the other hand, the ld. AR supported the findings of the ld. CIT(A) while relying upon decision dated 22-12-2006 of the ITAT Ahmedabad Bench-C in the case of Claris Life-sciences Ltd. vs. ACIT in ITA no. 311/Ahd/2005 for AYs 2001-02 . The ld. AR added that only a clarification was issued by the prescribed authority.
36. W e have heard both the parties and gone through the facts of the case. The issue before us is in respect of claim u/s 35(2AB) of the Act. The conditions specified for grant of deduction under the said section are as under:
(a) The company must be engaged in the business of biotechnology or in the business of manufacture or production of drugs or pharmaceuticals, etc.;
(b) It should have incurred expenditure on scientific research (both revenue and capital but excluding expenditure in the nature of cost of any land and building) on in-house R&D facility;
(c) The in-house R&D facility must be approved by prescribed authority. The prescribed authority for the purposes of s. 35(2AB) has been notified as the Secretary, Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India (DSIR);
(d) The company should enter into an agreement with DSIR for co-operation in R&D facility and for the audit of the accounts maintained for that facility;
(e) The prescribed authority should submit its report in relation to approval of the said facility to the Director General in such form and within such time as may be prescribed.
36.1 There is no dispute about the other conditions stipulated above except as regards approval of the prescribed authority. Though the assessee submitted a copy of the desired approval, the AO objected to the same on the ground that approval was not applicable for the year under consideration. We find that in pursuance to an application filed by the assessee on 12-04-1999 , the prescribed authority granted necessary approval on 07-01-2000 until 31-03-2000. Inter alia, it was pointed out by the assessee that they had mentioned the period under consideration in their application. Since the prescribed authority clarified vide their letter dated 13.8.2001 that approval was equally applicable for the year under consideration, the learned CIT(A) allowed the claim of the assessee. Thus, the facts on record reveal that all the conditions of grant of deduction under s. 35(2AB) of the Act are satisfied. In these circumstances, especially when the Revenue have not brought to our notice any material so as to enable us to take a different view in the matter, we do not find any reason to interfere with the findings of the learned CIT(A) holding that the assessee is entitled to deduction u/s 35(2AB) of the Act. This view of ours is supported by the decision of the ITAT in the case of Claris Life-sciences Ltd.(supra). In view of the foregoing, ground no.2 in the appeal of the Revenue is dismissed.
37. Ground No.3 in the appeal of the Revenue relates to exclusion of insurance receipts from the total turnover for the purpose of deduction u/s 80HHC of the Act. The AO included an amount of Rs. 17.0 lacs on account of insurance claim in the total turnover while computing deduction u/s 80HHC of the Act.
38. On appeal, the learned CIT(A) relied on a decision of the ITAT, Mumbai Bench 'D' in the case of ITO vs. Fashion Sports (I) Pvt. Ltd., 78 ITD 41,wherein it was held that the Insurance claim received In respect of goods destroyed by fire had no close nexus with the export activity and one had to arrive at 'total turnover' and not the 'total receipts' of the business and not all items appearing in the profit and loss account could be properly described as total turnover of the business. Accordingly, the ld. CIT(A) directed to exclude the insurance claim from the total turnover.
39. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The learned DR relied on the order of the AO while the learned AR on behalf of the assessee supported the findings of the ld. CIT(A) while relying upon aforesaid decision reported in 78 ITD 41.
40. W e have heard both the parties and gone through the facts of the case. W e find that the business of assessee is manufacture and sale of pharmaceuticals. The assessee is not engaged in the business of insurance. The turnover means the value of goods purchased/sold in the course of carrying of business. The insurance claim received by the assessee by no stretch of imagination can be treated as turnover in the business of manufacture and sale of pharmaceuticals. The nature of the insurance monies being compensation for the loss, under a contract of indemnity, it is difficult to view it as anything resembling "turnover". . In view of detailed reasons given while adjudicating ground nos.2 &3 in the appeal of the assessee and in the light of view taken by a co-ordinate Bench in the case of Fashion Sports (I) Pvt. Ltd.(supra), we have no hesitation in holding that the insurance receipts could not be taken as a part of 'total turnover' for the purpose of deduction u/s 80HHC of the Act. Therefore, ground no.3 in the appeal of the Revenue is dismissed.
41. Ground no.4 in the appeal of the Revenue relates to exclusion of sales-tax and excise duty from the total turnover. Following the orders of the ld. CIT(A) for the AYs 1995-96 to 1997-98, the AO included an amount of Rs. 10,53,86,143/- towards sales tax and Rs. 22,46,07,008/- on account of excise duty in the total turnover for computing deduction u/s 80HHC of the Act.
42. On appeal, the learned CIT(A) directed to exclude sales tax and excise duty from the total turnover while relying upon decisions in the case of Sudarshan Chemicals Industries Ltd., 163 CTR (Bom) 596, 245 ITR 769 and Dy. CIT vs. Asher Textiles LTD., (2001) 73 TTJ 727(Madras).
43. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the order of the AO in the light of provisions of sec. 145A of the Act while the ld. AR on behalf of the assessee relied upon the order of the AO in view of judgment of the Hon'ble Supreme Court in the case of CIT vs. Lakshmi Machine Works 290 ITR 667 (SC).
44. We have heard both the parties and gone through the facts of the case. We are not inclined to accept the plea of the ld. DR that the provisions of sec. 145A were applicable to the concept of total turnover even while determining the deduction u/s 80HHC of the Act, in view of the following observations of the Hon'ble Apex Court in the case of Laxmi Machine Works(supra), wherein it was held as under:
".........We have to read the words "total turnover" in section 80HHC as part of the formula which sought to segregate the "export profits" from the "business profits". Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover + total turnover which constitutes section 80HHC concession (deduction). Income in the nature of "business profits" was, therefore, apportioned. The above formula fixed a ratio in which "business profits" under section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words "total turnover" but also to the words "export turnover", "total export turnover" and "business profits". That is the reason why we have quoted hereinabove extensively the illustration from the Direct Taxes (Income-tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words "total turnover" in the above formula with reference to the definition of the word "turnover" in other laws like Central Sales Tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under section 80HHC. They were not eligible even without the clarification introduced by the Legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the Income- tax Act, profits and gains were required to be computed with reference to the books of account of the assessee. However, as can be seen from the Income- tax Rules and from the above Form No. 10CCAC in the case of deduction under section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing section 80HHC deduction was "business profits" as computed under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the Legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under the Excess Profits Tax Act, it existed in the Business Profits Tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of "turnover", excise duty and sales tax also cannot form part of the "turnover". Similarly, "interest" emanates from exports and yet "interest" does not involve an element of turnover. The object of the Legislature in enacting section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, "turnover" was the requirement. Commission, rent, interest, etc. did not involve any turnover. Therefore, 90 per cent. of such commission, interest etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in section 80HHC(3) for the simple reason that they did not emanate from the" export turnover", much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the" turnover". Just as interest, commission etc. did not emanate from the "turnover", so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake of the character of turnover and" therefore, they were not includible in the "total turnover". The above discussion shows that income from rent, commission, etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No. 4409 of 2005, the above proposition has been accepted by the Assessing Officer, if so, then excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of "turnover" which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. The view which we have taken is in the light of the amendments made to section 80HHC from time to time."
44.1 Section 80HHC of the Income-tax Act, 1961 is a beneficial section and was intended to provide incentive to promote exports. The intention was to exempt profits relatable to exports. As observed by the Hon'ble Apex Court, one cannot interpret the words "total turnover" with reference to the definition of the word "turnover" in other laws like the Central sales tax or as defined in accounting principles. The words "total turnover" in section 80HHC have to be read as part of the formula which sought to segregate the "export profits" from the "business profits . Therefore, we are of the opinion that excise duty and sales tax cannot form part of the "total turnover" under section 80HHC(3) of the Act.
44.2 In the case of Sony India Pvt. Ltd. Vs. DCIT, in ITA no. 1181/Del/2005 dated 23/9/2008 for the AY 2001-02 ,ITAT Delhi Bench ,following the aforesaid decision of the Hon'ble Supreme Court directed to exclude excise duty while working out total turnover for the purpose of deduction u/s 80HHC of the Act.
44.3. In view of aforesaid decision of the Hon'ble Supreme Court, we are of the opinion that the ld. CIT(A) was justified in directing the AO to exclude excise duty & sales tax while working out total turnover for the purpose of deduction u/s 80HHC of the Act. Thus, ground no.4 in the appeal of the Revenue is dismissed..
45 Ground no.5 in the appeal of the Revenue relates to exclusion of 90% of the net interest income from the profits of the business while computing deduction u/s 80HHC of the Act. The AO noticed that the assessee reduced only 90% of the net interest income of Rs. 1,60,06,899/- while determining the 'profits of the business' in terms of explanation (baa) to sec. 80HHC of the Act while the gross receipts of interest amounted to Rs. 12,66,88,979/-. To a query by the AO, the assessee replied vide its letter dated 21-03-2001 that the company received gross interest of Rs. 12,66,88,979/- and netted off the interest payment of Rs. 11,06,82,080/- against the interest earned and reduced 90% of net interest earned from the "profits of the business" eligible for deduction under section 80HHC in terms of decision of Kerala High Court in CIT v. Dr. V. P. Gopinathan 229 ITR 801.It was further submitted that the pharma business and financing business of the assessee constituted one and the same business because of inter-connection, inter-lacing and unity of control. While relying upon decisions in Addl. CIT v. Ram Bahadur Thakur & Co. 116 ITR 698 (Pat),CIT v. Kothari Auto Parts Manufacturers P. Ltd. 109 ITR 333 (Bom),Maharaja Shri Umaid Mills Ltd. v. CIT 175 ITR 72 (Raj.) and Bansidar Pr. Ltd. v. CIT127 ITR 65 (Guj) , it was contended when two or more business carried on by the assessee constitute the "same business", the expenses in relation to one business are deductible from the income of other business or businesses . For computing deduction u/s 80HHC, the assessee submitted that items to be reduced from the "Profits of the business" eligible for deduction u/s 80HHC are net income and not gross income. In support, the assessee relied upon the judgments in Pink Star v. DCIT 72 ITD 137 (Mum Trib.) ,Mangalya Trade A Inv. Ltd. ITA 4697/M/97,Kantilal Chhotalal v. DCIT 68 ITD 395 (Bom. Trib.) and CIT v Dr. V. P. Gopinathan 90 Taxman 304 (Kerala). However, the AO did not accept the submissions of the assessee on the ground that the assessee failed to establish the nexus between the interest expenditure and the interest income by showing specific relation between earning of income with that of incurring of expenditure. Accordingly, the AO reduced 90% of the gross interest receipts from the profits of the business for the purpose of deduction u/s 80HHC of the Act.
46. Similarly ground no.6 in the appeal of Revenue relates to reduction of 90% of net lease rent for computing profits of the business for the purpose of deduction u/s 80HHC of the Act. The AO while determining profits of the business for the purpose of deduction u/s 80HHC of the Act reduced 90% of the gross lease rent of Rs. 3,11,18,382/- instead of net lease rent of Rs. 1,80,43,101/- on the ground that the assessee itself claimed that lease equalisation charges were not allowable by way of expenditure.
47. Likewise ground no.7 in the appeal of the Revenue relates to treating the entire part of the operational charges recovered as the business income and consequently no amount was reduced while determining the profits of the business for the purpose of deduction u/s 80HHC of the Act . The AO while determining profits of the business for the purpose of deduction u/s 80HHC of the Act reduced 90% of the gross operational charges as against the claim of the assessee that the entire amount was business income and therefore, nothing was deductible.
48. On appeal, the learned CIT(A) while following his own decision dated 10.10.2000 for the AY 1997-98 directed the AO to consider the net interest income and net lease income for reducing 90% of the same to arrive at profits of the business for computing deduction under section 80HHC of the Act. As regards operational charges , the ld. CIT(A) concluded that entire amount was business income and therefore, nothing was deductible.
49. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR while relying upon their submissions before the ld. CIT(A) as also decision in Shri Ram Honda Power Equipment, 289 ITR 485(Del.) supported the findings of the ld. CIT(A).On the other hand, the ld. DR supported the order of the AO..
50. W e have heard both the parties and gone through the facts of the case. W e find that though initially the ld. CIT(A) in his order dated 12.6.2000 for the AY 1997-98 directed the AO to verify the expenses directly incurred for earning the interest income, lease income and operational charges and thereafter, exclude 90% of net income while determining profits of the business for the purpose of deduction u/s 80HHC of the Act, in his order dated 10.10.2000 u/s154 of the Act, the ld. CIT(A) directed to exclude only 90% of the net interest income and lease income from the profits of the business while computing deduction u/s 80HHC of the Act. As regards operational charges, the ld. CIT(A) held that the entire being business income, nothing was deductible. On further appeal by the Revenue, the ITAT vide their order dated 18.8.2005 for the AY 1997- 98 restored the matter relating to interest and lease rental income to the file of the AO with a direction to decide the issue in the light of decision of the Special Bench in the case of Lalsons Enterprises vs.DCIT,89 ITD 25. Neither the ld. DR nor the ld. AR on behalf of the assessee placed before us the outcome of the said directions of the ITAT.
50.1. As is apparent from the impugned order of the ld. CIT(A), there is nothing to suggest that the said receipts on account of interest, lease rental income or operational charges have any nexus or relation with the exports made by the assessee . The ld. CIT(A) did not record his specific findings on the nature of these receipts or their relation with the exports business of the assessee . We find that in their decision on the interpretation of explanation (baa) to section 80HHC of the Act, Hon'ble Supreme Court in the case of CIT v. K. Ravindranathan Nair, 295 ITR 228(SC) held that the formula in section 80HHC(3) provided for a fraction of export turnover divided by the total turnover to be applied to business profits calculated after deducting 90 per cent of the sums mentioned in clause (baa) of the explanation. Profit incentives like rent, commission, brokerage charges, etc., though these formed part of the gross total income, had to be excluded as these were "independent incomes" which had no element of export turnover. All the four variables in the section are required to be kept in mind. If all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include the element of export turnover. Clause (baa) of the explanation states that 90 per cent. of the incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits have to be deducted from business profits computed in terms of sections 28 to 44D. In other words, receipts constituting independent income having no nexus with exports were required to be deducted from business profits under clause (baa). Hon'ble Supreme Court further observed that a bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent charges, etc., formed part of the gross total income being business profits. But for the purpose of working out of formula and in order to avoid distortion in arriving at the export profits clause (baa) stood inserted to say that although incentive profits and "independent incomes" constituted part of the gross total income, these had to be excluded from gross total income because such receipts had no nexus with the export turnover. Hon'ble Apex Court further held that processing charges, which are part of gross total income, form an item of independent income like rent, commission, brokerage, etc., and, therefore, 90 percent of the processing charges have also to be reduced from the gross total income to arrive at the business profits and, therefore, it has also to be included in the total turnover in the formula for arriving at the business profits in terms of the clause (baa) of the Explanation to section 80HHC(3). It was further held by the Hon'ble Supreme Court that "In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90 per cent. of the sums referred to in clause (baa) to the said Explanation. In the computation of deduction under section 80HHC all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of section 80HHC(3) secures profits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting clause (baa) to the said Explanation. The said clause stated that 90 per cent. of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits, had to be deducted from business profits computed in terms of sections 28 to 44D of the Income-tax Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from business profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges, etc., formed part of gross total income being business profits. But for the purposes of working out the formula and in order to avoid distortion of arriving at the export profits, clause (baa) stood inserted to say that although incentive profits and "independent incomes" constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the Income-tax Act and every income may not be attributable to exports. This was the reason for this court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula."
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"Before concluding we state that the nature of every receipt needs to be ascertained in order to find out whether the said receipt forms part of/or that it has an attribute of an export turnover. When an indirect tax is collected by the taxpayer on behalf of the Government the tax recovered is for the Government. It may be an income in the conceptual sense or even under the Income-tax Act but while working out the formula under section 80HHC(3) of the Income-tax Act and while applying the four variables one has to ascertain whether the receipt has an attribute of export turnover."
50.2 Hon'ble Gujarat High Court in the case of Alembic Chemical Works Ltd. vs. DCIT [ 266 ITR 47](Guj) in the context of explanation (baa) have held that "(d) Whether the Tribunal was right in law in holding that for the purpose of computation of deduction under section 80HHC, 90 per cent. of the income relatable to rent, computer charges, service charges, miscellaneous income and insurance claim was required to be deducted from the profits under Explanation (baa) to section 8OHHC(4A), ignoring use of the word 'or' between reference to clauses (iiia), (iiib) and (iiic) of section 28 in clause (1) of the said Explanation and other items above referred to, and further erred in reading the word 'or' as 'and' ?"
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IV. Deduction under section 80HHC of the Act
On a plain reading of the provision as it stands it is apparent that what the provision stipulates is that 'profits of the business' for the purpose of section 80HHC of the Act mean the profits of the business as computed under the head 'Profits and gains of business or profession'. While computing such profits under the head 'Profits and gains of business or profession' if any sum referred to in clause (iiia), (iiib) or (iiic) of section 28 of the Act has been included in such profits the same has to be reduced by 90 per cent. from the profits computed as aforesaid. Similarly if any receipt by way of brokerage, commission, interest, rent, charges, or any other receipt of a similar nature is included in such profits, i.e. profits of the business, such profits have to be reduced by the said figure, i.e., by 90 per cent. while computing (profits of the business) for the purpose of section 8OHHC of the Act. Therefore, once the sums or the receipts of the nature specified in sub- clause (1) of clause (baa) of the Explanation are included while computing the profits and gains of business then such sums or receipts are to be reduced to the extent of 90 per cent. from the profits of the business. Once the language employed by the provision is clear it is not necessary for the court to read anything into the said language nor go behind the language employed by the Legislature so as to ascertain the intention of the Legislature. This would become necessary only when the language employed by the statute is ambiguous in any manner. In the present case that cannot be termed to be the situation. Therefore, the ground raised on behalf of the appellant as regards the interpretation to be placed on clause (baa) of the Explanation to section 8OHHC of the Act does not merit acceptance and fails."
50.3 In view of the aforesaid judgment of the Apex Court in the case of K. Ravindranathan Nair(supra) , it is evident that any independent income which is not derived from the export activities in terms of section 80HHC(2) of the Act but is otherwise assessed as business income , 90% of such receipts have to be reduced from the profits of the business in terms of explanation (baa) to sec. 80HHC of the Act.
50.4 Moreover, Hon'ble Punjab and Haryana High Court in the case of Liberty Footwear Company Vs. CIT, 283 ITR 398,held that 90 per cent of receipts from rent and hire charges be excluded from the profits of business as computed under the head "Profits and gains of business or profession.
50.5 Hon'ble Bombay High Court in the case of CIT Vs S.G.Jhaveri consultancy Ltd., 245 ITR 854 held that labour charges and service charges can not be included in the business profits for the purpose of deduction u/s 80HHC of the Act, as these items do not have any linkage with the export activities. In CIT Vs. Deodhar Electro Design (P) Ltd.,300 ITR 103(Bom.), Hon'ble High Court held that receipts by way of development & service charges would not be entitled to the benefit u/s 80HHC(3) of the Act and it had to be computed based on 90% of their exclusion.
50.6 In Parry Agro Industries Vs. JCIT(Assessment),292 ITR 542 (Kerala), Hon'ble High Court held that , duty drawback, service charges receipts, etc., are miscellaneous income and these have no nexus with the assessee's business of export and therefore, such receipts should not be included for the purpose of deduction under section 80HHC of the Act .
50.7 Similarly, in KRM Marine Exports Ltd. Vs. ACIT,288 ITR 151(Mad),Hon'ble High Court held that that the service charges or the incentive received at 3.5 per cent. of the invoice value by the assessee cannot be considered as export turnover as it has not been received in convertible foreign exchange as required in the section. Hence that part of the sum is not eligible for the benefit granted under section 80HHC and reduction by 90 per cent. as provided under clause (baa) is correct.
50.8 As regards interest on deposits kept with the bank by way of margin money, from a bare perusal of provisions of sec. 80HHC of the Act, it is apparent that the income which is understood to be computed under this provision must have been derived by the assessee from the export of such goods or merchandise. There is nothingto suggest that the interest income was derived by export of goods or merchandise. A Division Bench of the Hon'ble Kerala High Court in Nanji Topanbhai and Co. v. Asst. CIT [2000] 243 ITR 192 was considering the question as to whether the interest earned on fixed deposit was income arising out of export or income from other sources. The Hon'ble High Court held (headnote):
"Under section 80HHC of the Income-tax Act, 1961, the assessee who is engaged in export business is allowed, in computing the total income, a deduction out of the income derived from the export of such goods. Unless the assessee is able to show that the income received by way of interest from the fixed deposit is derived from the export business, it will not be entitled to claim deduction under section 80HHC in respect of it".
50.81 In another judgment reported in CIT v. Cochin Refineries Ltd. [1985] 154 ITR 345, Hon'ble Kerala High Court held:
"Profits and gains are well understood to mean only the business income, and not any other income. So long as the company has no business of lending money, and so long as the admitted case of the company is that the income derived is only on account of the peculiar situation arising from the time schedule for repayment of the loans, it cannot be stated that the income yielded by the deposits or investments was received in the course of the company's business so as to be treated as a business profit"
50.82 We find that in Urban Stanislaus Co. [2003] 263 ITR 10 (Ker) where the assessee had contended that as a condition for obtaining a loan from the bank, 29 per cent. of the sale receipts had to be deposited by way of security;it was claimed that the interest earned on such deposit was business income for the purpose of section 80HHC. This was negatived by the Hon'ble Kerala High Court by observing that:
"the assessee can claim deduction in respect of the profits derived from the export of goods only when it is established that the income is solely related to the export. The obvious intention behind the provision in section 80HHC is to promote exports. However, the income earned by way of interest from fixed deposit is not an income from exports. Thus, it was rightly taken into account as income from other sources".
50.83 This decision has been affirmed by the Hon'ble Supreme Court by the dismissal of the special leave petition. In K. Ravindranathan Nair [2003] 262 ITR 669 (Ker), in dealing with a similar issue, the Hon'ble Kerala High Court held:
"The interest from short-term deposits received by the appellant is not the direct result of any export of any goods or merchandise. The fixed deposit was made only for the purpose of opening letters of credit and for getting other benefits which are necessary requirements to enable the appellant to make the export. From the above it is clear that the interest income received on the short-term deposits though it can be attributed to the export business cannot be treated as income which is derived from the export business. In the above circumstances, even assuming that the bank has insisted for making shortterm deposits for opening letters of credit and for other facilities, it cannot be said that the income is derived from the export business."
50.84 The above decision in K. Ravindranathan Nair [2003] 262 ITR 669 (Ker) has been affirmed by the Hon'ble Supreme Court by the dismissal of the special leave petition. To the same effect is the judgment of the same High Court in Southern Cashew Exporters v. Deputy CIT [2003] 130 Taxman 203 (Ker) which has been affirmed by the Hon'ble Supreme Court on account of the dismissal of the special leave petition. The resultant position is that on three occasions, the Hon'ble Supreme Court has affirmed the judgments of the Kerala High Court that has consistently held that interest earned on fixed deposits for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and, therefore has to necessarily be treated as income from other sources and not as business income. In CIT v. Sterling Foods [1999] 237 ITR 579 (SC) and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC), the Hon'ble Supreme Court reiterated the nexus theory and declined to treat such interest earned as business income. An assessee who is engaged in the business of exports and invests the surplus funds in fixed deposits will not be able to treat the interest earned thereon as business income since it does not bear any direct nexus with the export business of the assessee. Hon'ble jurisdictional High Court in the case of CIT Vs. Gaskets & Radiators Distributors,296 ITR 440(Guj) relying ,inter alia, on the decision of the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 held that receipts on account of interest on deposits is not required to be considered for deduction u/s 80HHC of the Act. Hon'ble High Court held in following terms:
"Identical question came to be considered by the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 and the question, which was posed for consideration before the apex court was whether the interest on deposits with the Tamil Nadu Electricity Board should be treated as income derived by the industrial undertaking for the purpose of section 80HH or not, and the hon'ble Supreme Court has observed that section 80HH of the Income-tax Act grants deduction in respect of profits and gains "derived from" an industrial undertaking and the words "derived from" in section 80HH of the Income-tax Act, 1961, must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking. The Supreme Court held that interest derived by the industrial undertaking of the assessee on deposits made with the Tamil Nadu Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the said deduction under section 80HH. In G.T.N. Textiles Ltd. v. Dy. CIT [2005] 279 ITR 72, the Kerala High Court held that interest on bank deposits was not profit derived from export of goods. The Kerala High Court has further held that the interest earned by the assessee on fixed deposits, commission received on sale of machinery, etc., were not business income and consequently the assessee was not entitled to computation of eligible deduction under section 80HHC of the Act by including those receipts under business income. Therefore, considering the aforesaid two decisions, we must hold that the Tribunal as well as the Commissioner of Income-tax (Appeals), both committed an error in treating the interest on deposits as "business income" and granting the assessee the deduction under section 80HHC of the Act."
50.85 In CIT Vs. Rakesh Rakheja ,166 Taxman 50(Delhi), Hon'ble High Court held that the income earned by the assessee from FDRs is required to be assessed as income from other sources. The said income is therefore outside the purview of section 80HHC of the Act and 100 per cent of the interest is required to be excluded from the profits of the business in terms of Explanation (baa) to section 80HHC of the Act.
50.86 In CIT Vs. Kraft Land India, 162 Taxman 123 (Del),Hon'ble Delhi High Court held that interest received on FDRs pledged for shipping loan/depository loan, was not business income and therefore, interest paid by the assessee could not be reduced from the interest received while calculating deduction u/s 80HHC read with explanation (baa) thereto.
50.87 In CIT Vs. Malwa Cotton Spinning Mills Ltd.,166 Taxman 457(Pb. & Haryana) ,Hon'ble High Court held that "6. Clause (baa), as referred to above, talks of procedures, as to how profits of business are to be computed. It provides that in case, incomes of the kind including interest are included in the profits of business, 90 per cent thereof shall be reduced therefrom. It does not make any distinction between the interest earned from source 'A' or source 'B'. Interest from wherever it is earned retains the character of interest. Be it an interest from the customer on delayed payment of dues."
50.9 Recently, Hon'ble Bombay High Court in their decision dated 8.4.2010 in ITA no. 2186 of 2009 in the case of M/s Dresser Rand India Pvt. Ltd. while following the aforesaid decision of Hon'ble Apex Court in the case of K. Ravindranathan Nair(supra) and distinguishing the decision in Bangalore Clothing(supra) concluded that recovery of freight, insurance and packing receipts, sales tax refund and service income, being independent incomes, 90% of these receipts have to be reduced from the business profits in terms of explanation (baa) to sec. 80HHC of the Act.
50.10. As regards netting off, in a recent decision dated 18/19/3/2010 ,the Hon'ble Bombay High Court in the case of CIT Vs. Asian Star Co. Ltd. in ITA no. 200 of 2009 ,observed that explanation (baa) to s. 80HHC requires that ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature have to be reduced from the profits. The reason why items like brokerage etc have to be excluded is because they do not possess any nexus with export turnover and their inclusion in profits would result in a distortion of the figure of export profits. However, as some expenditure might have been incurred in earning these incomes, an adhoc deduction of ten per cent from such income is allowed. It was further observed by the Hon'ble High Court that once Parliament has legislated both in regard to the nature of the exclusion and the extent of the exclusion, it would not be open to the Court to order otherwise by rewriting the legislative provision. The task of interpretation is to find out the true intent of a legislative provision and it is clearly not open to the Court to legislate by substituting a formula or provision other than what has been legislated by Parliament. It is not open to say that something more than the 10% statutorily provided should also be allowed. Hon'ble High Court further held that in Shri Ram Honda Power Equip, 289 ITR 475 the Hon'ble Delhi High Court has not adequately emphasized the entire rationale for confining the deduction only to the extent of ninety per cent of the excludible receipts and it cannot be followed.
As regards the judgment of the Special Bench in Lalsons Enterprises,relied on by the ITAT in the AY 1997-98, Hon'ble High Court held that "We are affirmatively of the view that in its discussion on the issue of netting, the Tribunal in its Special Bench decision in Lalsons has transgressed the limitations on the exercise of judicial power. The Tribunal has in effect, legislated by providing a deduction on the ground of expenses other than in the terms which have been allowed by Parliament. That is impermissible. In the present case, it is necessary to emphasize that the question before the Court relates to the deduction under Section 80HHC. An assessee may well be entitled to a deduction in respect of the expenditure laid out wholly and exclusively for the purpose of business in the computation of the profits and gains of business or profession. However, for the purposes of computing the deduction under Section 80HHC, the provisions which have been enacted by Parliament would have to be complied. A deduction in excess of what is mandated by Parliament cannot be allowed on the theory that it is an incentive provision intended to encourage export. The extent of the deduction and the conditions subject to which the deduction should be granted, are matters for Parliament to legislate upon. Parliament having legislated, it would not be open to the Court to deviate from the provisions which have been enacted in Section 80HHC."
51.. As already mentioned above , since the ld. CIT(A) did not record his specific findings as to how the aforesaid receipts have any nexus or relation with the export business of the assessee and were not independent incomes nor did the ld. CIT(A) had the benefit of aforesaid decisions including that of the Hon'ble Apex Court in the case of K. Ravindranathan Nair(supra) or of Hon'ble Bombay High Court in Asian Star Co. Ltd. (supra) & Dresser Rand India Pvt. Ltd. (supra) , we ,accordingly, vacate the findings of the ld. CIT(A) and restore the issues raised in ground nos. 5 to 7 in the appeal of the Revenue, to his file with the directions to ascertain as to whether or not the aforesaid receipts on account of interest, lease rental income and operational charges were independent income or were in any manner related to export activities of the assessee and thereafter, adjudicate the matter in accordance with law after allowing sufficient opportunity to the assessee in the light of various judicial pronouncements, including those referred to above. Inter alia, the ld. CIT(A) shall ascertain as to whether or not the amount transferred to lease equalization fund was expenditure incurred for earning the lease rent. With these directions, ground nos. 5 ,6 & 7 in the appeal of the Revenue are disposed of.
52. Ground no.8 in the appeal of the Revenue relates to disallowance of bifurcation of total overseas promotional expenses in the ratio of turnover of trading export and manufacturing export for computing export trading profits for the purpose of deduction u/s 80HHC of the Act. The AO noticed that the assessee company in addition to export of manufactured goods also undertook export of trading goods. However, while allocating direct expenses to trading exports it arbitrarily took overseas export promotion expenses of Rs. 3,62,300/- out of total overseas export promotion expenses of Rs. 64,40,891/-. Since the assessee did not provide any basis, the AO allocated the aforesaid expenses in the ration of turnover. The total export turnover of Rs. 36,15,56,150/-, included trading export turnover is Rs. 10,12,26,905/- and accordingly the expense of Rs. 64,40,891/- was apportioned .
53. On appeal, the assessee contended that the trading exports were of bulk drugs while the manufacturing exports pertained to various formulations. Since the nature of the products exported was totally different, the assessee identified direct export promotion expenses attributable to trading exports at Rs. 3,62.300/- as detailed hereunder:
|
No. |
Name of the Par ty |
Nature of Expenses |
Amount (Rs. ) |
|
1 |
Tax Man Waha Tony - HK |
Product promot ion expenses USD 4,000 |
1,40,000 |
|
2 |
G Daulat ram & Sons |
Product promot ion expenses USD 1,650 |
62,700 |
|
3 |
G Daulat ram & Sons |
Product promot ion expenses USD 500 |
19,000 |
|
4 |
G Daulat ram & Sons |
Product promot ion expenses USD 2,500 |
95,000 |
|
5 |
G Daulat ram & Sons |
Product promot ion expenses USD 1,200 |
45,600 |
|
|
|
|
3,62,300 |
53.1 While referring to explanation (d) to Section 80 HHC (3) of the Act, the assessee contended that no other expenses were attributing to the trading exports made by the assessee. In the light of these submissions, the ld. CIT(A) concluded as under:
" I have considered the submissions made on behalf of the appellant and have gone through the facts of the case, There Is no denial of the fact that the assessee company, In addition to export of manufacturing goods has also undertaken export of trading goods. However, the Assessing officer does not appear to be correct in stating that the assessee has arbitrarily allocated the direct expenses of overseas export promotion between export manufacturing activity and export trading activity. The details maintained in this regard show that the export promotion expenses are directly identifiable and attributable to different products / markets. The assessee has furnished precise details of the direct expenses attributable to certain products' turnover including that of overseas sales promotion expenses which are identified and deducted. The AO has also not cited any reason for adopting a different methodology for reapportioning the expenses. Therefore, the observation of the AO that actual bifurcation on the basis of identification is not possible does not appear to be factually correct. The AO is, therefore, directed not to make the said adjustment to trading export profits while giving effect to this order. Assessee's appeal on this ground succeeds."
54. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The learned DR while relying on the order of the AO submitted that details filed before the Ld. CIT(A) were not placed before the AO. On the other hand, the learned AR on behalf of the assessee pointed out that all the details were submitted to the AO and even then he allocated the expenses arbitrarily.
55 We have heard both the parties and gone through the facts of the case. We find that the ld. CIT(A) concluded on the basis of relevant details that the export promotion expenses were directly identifiable and attributable to different products and therefore, rejected the observation of the AO that actual bifurcation on the basis of identification was not possible. The Revenue have not placed before us any material controverting the aforesaid findings of facts recorded by the ld. CIT(A) in accepting the claim of the assessee that only an amount of Rs. 3,62,300/- out of export promotion expenses was attributable to trading exports. In the absence of any basis for taking a different view in the matter, we are not inclined to interfere. Therefore, ground no.8 in the appeal of the Revenue is dismissed.
56. Ground nos. 9 & 10 in the appeal of the Revenue, being mere prayer, do not require any separate adjudication while no additional ground having been raised in terms of residuary ground no.9 in the appeal of the assessee, all these grounds are dismissed.
57. In the result, both these appeals are partly allowed, but for statistical purposes.
Order pronounced in the court today on 7 -1-2011
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