2015 (2) TMI 102 - AT - Income Tax

Tribunal Rules on Assessee's Favor in Tax Appeal, Various Issues Decided

Universal Precision Screws Versus ACIT, Range-39, New Delhi

The Tribunal ruled in favor of the assessee on various issues, including considering foreign exchange difference as part of export turnover but excluded ... Deduction u/s 10B - Non consideration of foreign exchange difference as part of export turnover and total turnover - Held that:- Export proceeds simply on the ground that the rate has increased subsequent to sale but prior to realization. Eventually it has been held that the foreign exchange fluctuation gain is part of export turnover for purposes of section 80HHC of the Act. Since the connotation of ‘export turnover’ under section 10B is no different from that u/ss 10A or 80HHC of the Act, the meaning ascribed to export turnover will apply with full vigour in the context of section 10B as well. We, therefore, hold that such foreign exchange fluctuation difference has to be considered as part of ‘export turnover’. As the instant foreign exchange fluctuation difference forms part of the export turnover, the total turnover, in the denominator will also include the effect of foreign exchange fluctuation difference. We, therefore, sum up by holding that the amount of foreign exchange fluctuation difference should be included in the ‘export turnover’ and ‘total turnover’ and it should be excluded from the ‘domestic turnover’ as was done by the AO. - Decided against assessee. Treatment of scrap sale as domestic sale while computing deduction u/s 10B - Held that:- This issue is no more res integra in view of the judgment of the Hon’ble Supreme Court in the case of CIT vs. Punjab Stainless Steel Industries (2014 (5) TMI 238 - SUPREME COURT) in which it has been held that the sale of scrap is not includible in the ‘total turnover.’ As the assessee in question is engaged in the business of manufacturing and export of fasteners, the amount of sale of scrap cannot be included in the ‘total turnover’ or ‘domestic turnover’. Rather, it would go to reduce the cost of production. -- Decided against revenue. Treatment of interest income as ineligible for deduction u/s 10B - Held that:- Interest income having close nexus with the business activity of the assessee is assessable as income from business and, hence, eligible for the benefit u/s 10A and section 10B. Thus we hold that the assessee is entitled to deduction u/s10B of the Act in respect of the interest income earned on FDRs made for the purposes of keeping margin money or for availing any other credit facility from banks. The impugned order on the issue of deduction u/s 10B is set aside and the matter is sent back to the AO for computing deduction u/s 10B afresh in conformity with our above findings and conclusions.- Decided in favour of assessee for statistical purposes. Disallowance of interest u/s 24(b) - Held that:- Section 24(b) talks of allowing deduction for the interest payable by the assessee where property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital. The assessee has admittedly shown some income from let out property under the head ‘Income from house property.’ Once some term loan has been taken for acquiring or constructing, etc., the property, which fetched income under the head ‘Income from house property’, then, interest on such loan has to be allowed as deduction u/s 24(b) of the Act. The view point of the assessee to this extent is ergo accepted in principle. However, we are unable to calculate such amount of interest with precision. Under such circumstances, the impugned order is set aside on this score and the matter is sent back to the AO for verifying and ascertaining the amount of loan utilized for the building in respect of which rental income assessable under the head ‘Income from house property’ was earned and, accordingly, allowing deduction towards such interest u/s 24(b) of the Act.- Decided in favour of assessee for statistical purposes. Ad hoc disallowance of ₹ 1 lac. - Held that:- Undisputed fact that some of the expenses incurred by the assessee were backed only by the internal vouchers. This view point of the AO has not been controverted by the ld. AR. It is but natural that if some of the expenses are not properly substantiated with evidence, then disallowance to that extent is called for. Considering the totality of facts and circumstances prevailing in this case and taking a holistic view of the matter, we are of the considered opinion that the ends of justice would meet adequately if the disallowance is reduced to ₹ 50,000/-. - Decided partly in favour of assessee. Disallowance of ₹ 86,400/- on account of festival expenses - Held that:- The aspect of necessity considered by the AO is of no substance. The AO cannot step into the shoes of the businessman to decide as to whether a particular expenditure is necessary or not. Coming to the second aspect about the non-availability of bills, we find two invoices for ₹ 66,000/- and ₹ 20,400/- in respect of 110 pieces of pressure cookers and 120 pieces of gift bags,thus find no reason to make or sustain any disallowance in this regard. - Decided in favour of assessee. Ad hoc disallowance of expenses @ 10% on account of personal nature - Held that:- No reason to disturb the finding of the authorities below in making and sustaining the disallowance @ 10% of these expenses towards personal use. This disallowance, being reasonable, is upheld.- Decided in favour of revenue. Disallowance towards payment of contribution to ESI - late deposits - Held that:- here is no doubt on the fact that the employees’ share of ESI relating to the month of June, 2008 was deposited within the year though beyond the due date under the respective Act. The Hon’ble jurisdictional High Court in CIT vs. Aimil Ltd. & Others, 321 ITR 508 (Del), has held that if the employees’ share of contribution is paid before the due date of filing the return u/s 139(1) of the Act, then, no disallowance can be made. Disallowance deleted.- Decided in favour of assessee. Issues Involved:1. Consideration of foreign exchange difference as part of export turnover and total turnover.2. Treatment of scrap sale as domestic sale.3. Treatment of interest income as ineligible for deduction under section 10B.4. Deduction of interest under section 24(b).5. Ad hoc disallowance of Rs. 1 lakh.6. Disallowance of Rs. 86,400 on account of festival expenses.7. Ad hoc disallowance of expenses at 10% for personal use.8. Disallowance of Rs. 1,111 towards payment of contribution to ESI.Detailed Analysis:1. Consideration of Foreign Exchange Difference:The assessee claimed a deduction under section 10B by including a foreign exchange rate difference of Rs. 32,35,700/- as part of the export turnover. The Assessing Officer (AO) excluded this amount, considering it as part of domestic sales. The CIT(A) upheld the AO's decision. However, the Tribunal referenced the Bombay High Court's decision in CIT Vs. Gem Plus Jewellery India Ltd. and the Special Bench of the Tribunal in ACIT vs. Prakash I. Shah, which held that foreign exchange fluctuation gains are part of export turnover. Consequently, the Tribunal ruled that the foreign exchange fluctuation difference should be included in the export turnover and total turnover but excluded from domestic turnover.2. Treatment of Scrap Sale:The AO included the scrap sale amounting to Rs. 31,84,869/- in the domestic turnover while computing the deduction under section 10B, a decision upheld by the CIT(A). The Tribunal referred to the Supreme Court's judgment in CIT vs. Punjab Stainless Steel Industries, which held that scrap sales are not part of the total turnover for an assessee not engaged in the business of scrap. Thus, the Tribunal concluded that the scrap sale should not be included in the total turnover or domestic turnover but should reduce the cost of production.3. Treatment of Interest Income:The assessee received interest on FDRs amounting to Rs. 16,01,196/- and claimed it as eligible for deduction under section 10B. The AO treated this interest as income from other sources, a decision upheld by the CIT(A). The Tribunal, however, noted that sub-section (4) of section 10B provides a broader interpretation of 'profits derived from export,' allowing for business-related income. The Tribunal cited decisions in Livingstones Jewellery (P) Ltd. vs. DCIT and ACIT vs. Motorola India Electricals (P) Ltd., which supported the inclusion of interest income from FDRs for margin money as business income eligible for deduction under section 10B.4. Deduction of Interest under Section 24(b):The assessee claimed a deduction of Rs. 14,53,153/- as interest on a term loan under section 24(b). The AO and CIT(A) disallowed this deduction due to insufficient evidence that the loan was used for constructing let-out property. The Tribunal accepted the principle that interest on a loan used for property generating rental income should be deductible under section 24(b). The matter was remanded to the AO for verification and determination of the interest amount to be allowed.5. Ad Hoc Disallowance of Rs. 1 Lakh:The AO disallowed Rs. 1 lakh out of expenses claimed for Training, Miscellaneous expenses, Short/excess, and Garden maintenance due to insufficient external evidence, a decision upheld by the CIT(A). The Tribunal acknowledged the need for substantiation of expenses and reduced the disallowance to Rs. 50,000/-.6. Disallowance of Rs. 86,400 on Festival Expenses:The AO disallowed Rs. 86,400/- for festival expenses due to lack of necessity and proper bills, a decision upheld by the CIT(A). The Tribunal dismissed the necessity argument and found sufficient evidence for the expenses, thus allowing the deduction.7. Ad Hoc Disallowance of Expenses at 10% for Personal Use:The AO disallowed 10% of expenses for Entertainment, Conveyance, and Telephone, considering personal use, a decision upheld by the CIT(A). The Tribunal found the disallowance reasonable and upheld it.8. Disallowance of Rs. 1,111 towards Payment of Contribution to ESI:The AO disallowed Rs. 1,111 for late payment of employees' ESI share, a decision upheld by the CIT(A). The Tribunal referenced the jurisdictional High Court's decision in CIT vs. Aimil Ltd., which allows contributions paid before the due date of filing the return. Thus, the Tribunal allowed the deduction.Conclusion:The appeal was partly allowed, with specific issues remanded for further consideration and others decided in favor of the assessee. The order was pronounced in the open court on 07.01.2015.