2022 (6) TMI 1399 - AT - Income Tax

Tribunal Grants 100% Tax Deduction for Expansion & Expenditures

The Tribunal allowed the appeal of the assessee, granting 100% deduction under section 80IC of the Income Tax Act for substantial expansion, disallowing ... Deduction u/s 80IC - substantial expansion - period of deduction limited to 10 years - definition of “initial assessment year” as contained in section 80IC(8)(v) - 10th year of claim of tax holiday - HELD THAT:- Following the decision in case of Pr. CIT Vs. M/s Aarham Softronics [2019 (2) TMI 1285 - SUPREME COURT] where the undisputed facts are that the assessee has started its business activity on 11.7.2005 falling between the period 7th January, 2003 and 1st April, 2012 in State of Himachal Pradesh and has carried out substantial expansion in the financial year 2011-12 and the year under consideration being the 10th year of claim of tax holiday, it shall be eligible for claim of deduction @ 100% and not 25% of profits and gains from its business as held by the lower authorities. Therefore, respectfully following the decision of PCIT vs Aarham Softronics (supra) wherein as held that its earlier decision in case of Classic Binding Industries [2018 (8) TMI 1209 - SUPREME COURT] doesn’t lay down correct law, the findings of the CIT(A) are set-aside and the matter is decided in favour of the assessee and against the Revenue and the grounds of appeal of the assessee are thus allowed. Disallowance of claim of deduction u/s 80-IC on account of exchange rate fluctuation - as submitted by A/R that the difference in the foreign exchange rate is a part and parcel of income derived from eligible business and the same should be allowed - HELD THAT:- There is always a difference between the exchange rate at the time of booking of the invoices and the subsequent realization thereof at the time of receipt of payment and thus the exchange rate fluctuation is clearly flowing from the eligible business and, therefore eligible for deduction u/s 80-IC - As decided in case of DCIT vs. Ansysco [2016 (12) TMI 1764 - ITAT CHANDIGARH] wherein it was held that where the foreign exchange fluctuations relate to the export activity carried out by the assessee, the foreign exchange fluctuations is to be treated as trading receipts/receipts from manufacturing activity and which is eligible for claiming deduction u/s 80-IC - Assessee is eligible for claim of deduction u/s 80-IC in respect of foreign exchange fluctuations. Basis the invoices placed on record and following the Coordinate Bench decisions referred supra, the claim of the assessee is allowed. Disallowance of expenditure related to gifts, charity and donations - given the fact that the assessee was eligible for claim of deduction u/s 80-IC to the extent of 25%, the amount of disallowance was restricted to 75% - HELD THAT:- Where the claim of the assessee has been allowed @ 100% instead of 25% u/s 80IC, even where the whole of the expenses are disallowed on merits, the profits so enhanced and adjusted taking into consideration the disallowance will be eligible for 100% tax holiday and thus, the assessee shall be eligible for relief. In the result, the ground of appeal is allowed. Issues:1. Claim of deduction under section 80IC of the Income Tax Act, 1961.2. Disallowance of claim of deduction on account of exchange rate fluctuation.3. Disallowance of expenditure related to gifts, charity, and donations.Analysis:Issue 1: Claim of deduction under section 80ICThe appeal filed by the assessee challenged the order of the Learned Commissioner of Income Tax (Appeals) regarding the disallowance of deductions claimed under section 80IC of the Income Tax Act, 1961. The Assessing Officer restricted the claim of deduction to 25% instead of 100% as claimed by the appellant based on substantial expansion done during the financial year 2010-11. The dispute revolved around the interpretation of the term 'initial assessment year' and whether the benefit of substantial expansion was available only to pre-existing units operational before 07-01-2003. The Hon'ble Supreme Court's decision in PCIT vs. Aarham Softronics clarified that an entity carrying out substantial expansion within the specified period would be entitled to 100% deduction for the next five years. The Tribunal, following this legal proposition, allowed the appeal in favor of the assessee, granting 100% deduction for the impugned assessment year.Issue 2: Disallowance of claim of deduction on account of exchange rate fluctuationThe assessee challenged the disallowance of deduction on account of exchange rate fluctuation under section 80-IC. The contention was that the difference in foreign exchange rates was an integral part of income derived from eligible business activities and should be allowed as a deduction. The Tribunal, after considering the invoices submitted by the assessee and relying on previous decisions, allowed the claim of deduction related to foreign exchange fluctuations, emphasizing that such fluctuations were linked to the eligible business activities and hence eligible for deduction under section 80-IC.Issue 3: Disallowance of expenditure related to gifts, charity, and donationsThe assessee contested the disallowance of expenditure amounting to Rs. 6,53,907, which included expenses for gifts, charity, and donations. Despite the absence of a reply from the assessee during assessment proceedings, the disallowed expenses were restricted to 75% of the total amount due to the eligibility for a 25% deduction under section 80-IC. However, following the allowance of the claim at 100% instead of 25%, the Tribunal held that even if the expenses were fully disallowed on merits, the enhanced profits would still be eligible for a 100% tax holiday. Consequently, the ground of appeal was allowed in favor of the assessee.In conclusion, the Tribunal allowed the appeal of the assessee, pronouncing the order on 14.06.2022.