Tax Tribunal grants Export Oriented Unit deduction appeal in income inclusion case.

The Tribunal allowed the Assessee's appeal, dismissing the Revenue's appeal. The Assessee, a 100% Export Oriented Unit (EOU) engaged in exporting printed circuit boards, was found eligible for deduction on profits from subsidy, interest income, sale of scrap, sales tax refund, and sundry balances written off. The Tribunal referenced the Special Bench decision in Maral Overseas Ltd. v. Additional CIT, holding that once income is part of the business of the eligible undertaking, it cannot be excluded from eligible profits for deduction under Section 10B.

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Issues Involved:

1. Deletion of addition on scrap income.
2. Inclusion of Government subsidy in profits eligible for exemption under Section 10B.
3. Treatment of interest income for exemption under Section 10B.
4. Consideration of sales tax refund and sundry balances written off for exemption under Section 10B.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Scrap Income:
The Revenue contested the deletion of the addition of Rs. 23,64,835/- on scrap income by the CIT(A). The CIT(A) ruled that the generation of scrap in the manufacturing process is derived from the unit and directly reduces the cost and increases the profits. The Gujarat High Court in DCIT vs. Harjivandas Juthabhai Zaveri, 258 ITR 785, held that scrap sale is a by-product of the industrial undertaking and should be included in the profits. Consequently, the addition on this account was deleted, and the ground of appeal was allowed.

2. Inclusion of Government Subsidy in Profits Eligible for Exemption under Section 10B:
The Assessee argued that the Government subsidy of Rs. 50,47,078/- should be included in the profits eligible for exemption under Section 10B. The CIT(A) disagreed, stating that the subsidy, although business income attributable to production, is not profit derived from the unit but a benefit from a third source. This view aligns with the Supreme Court's decision in Liberty India Ltd. vs. CIT, 183 Taxmann.com 349, which held that income from incentives is not operational income and thus not eligible for deduction under Section 10B. The corresponding grounds of appeal were dismissed.

3. Treatment of Interest Income for Exemption under Section 10B:
The Assessee contended that interest income of Rs. 3,56,813/- from deposits kept with banks out of surplus funds generated from the EOU should be considered part of profits derived from the EOU. The CIT(A) held that the interest earned on surplus funds is income from other sources, not business profits, and thus not eligible for deduction under Section 10B. This view was supported by case laws such as CIT vs. Menon Impex (P) Ltd, 259 ITR 403 (Mad) and others, which classify such interest as income from other sources.

4. Consideration of Sales Tax Refund and Sundry Balances Written Off for Exemption under Section 10B:
The Assessee argued that sales tax refund (Rs. 4,40,360) and sundry balances written off (Rs. 21,916) should be included in the profits eligible for exemption under Section 10B. The CIT(A) ruled that sundry balances written off are not related to manufacturing expenses and are deemed profits due to cessation of liability, thus not eligible for Section 10B exemption. As for the sales tax refund, it was considered similar to DEPB benefits and linked to exporter benefits, not excess tax deposit refunds. The Supreme Court's decision in Liberty India (supra) was applied, and the claim was disallowed.

Conclusion:
The Tribunal, after considering submissions and relevant case laws, found that the Assessee is a 100% EOU engaged solely in the export of printed circuit boards. The Tribunal referred to the Special Bench decision in Maral Overseas Ltd. vs. Additional CIT, which held that once an income forms part of the business of the eligible undertaking, it cannot be excluded from the eligible profits for computing deduction under Section 10B. This decision was upheld by the Delhi and Karnataka High Courts. Consequently, the Tribunal allowed the Assessee's appeal and dismissed the Revenue's appeal, ruling that the Assessee is eligible for deduction on profits from subsidy, interest income, sale of scrap, sales tax refund, and sundry balances written off.

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