2021 (4) TMI 1017 - AT - Income Tax

Tribunal allows appeal for 2010-11, directs AO on Section 10B deduction. Remands issues for 2009-10, 2011-12.

M/s. Handy Waterbase India Pvt. Ltd. Versus The DCIT, Company Circle II (2), Chennai- 34.

The tribunal allowed the appeal for the assessment year 2010-11, directing the AO to allow the deduction under Section 10B. For the assessment years ... Disallowance of claim made u/s.10B - Whether appellant is carrying out manufacturing activity as defined u/s. 2(29BA)? - even if the activity does not fall within the meaning of the term 'manufacture', it would fall within the meaning of the term 'production' for the purposes claiming the deduction u/s.10B - HELD THAT:- Whether activities carried out by the assessee amounts to manufacture or production of goods or article or thing which qualifies for deduction u/s.10B of the Act is a highly debatable issue. If we go by the judicial precedents, various courts have held that even processing of frozen fish or marine products amounts to manufacture or production. Therefore, when an issue is debatable and if two views can be taken on the issue, then the AO cannot deny beneficial deduction allowed under Income Tax provisions to deny deductions by taken one of the view. This principle is supported by the decision of the Hon’ble Supreme Court in the case of Bajaj Tempo Ltd., vs. CIT [1992 (4) TMI 4 - SUPREME COURT] where it was held that A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. Since a provision intended for promoting economic growth has to be interpreted liberally the restriction on it too has to be construed so as to advance the objective of the section and not to frustrate it. Under clause (i) of sub-section (2) of section 15C formation of the undertaking by splitting up or reconstruction of an existing business by transfer to the undertaking of building, raw material or plant used in any previous business results in denial of the benefit contemplated under sub-section. In this case, on perusal of facts available on record, we find that there is no change in facts prevailing at the time when deduction was allowed to the assessee in the assessment year 2004-05 and in the assessment year 2009-10 when deduction was denied. Therefore, we are of the considered view that unless there is change in facts, the AO cannot take a different view for denying deduction claimed u/s.10B of the Act. Hence, we are of the considered view that the assessee is entitled for deduction u/s.10B of the Act in respect of profit derived from 100% export oriented undertakings and accordingly, direct the AO to allow benefit of deduction. Computation of deduction u /s 10B - exchange gain / loss fluctuation is part of export turnover or not? - HELD THAT:- No doubt, exchange fluctuation whether it is gain or loss is attributable to exports effected and ultimately goes to increase or reduce figure of export turnover recorded initially by the assessee in its books of accounts and hence, it is definitely part of export turnover which qualifies for deduction u/s.10B of the Act. But, the fact remains that whether gain or loss incurred by the assessee on account of exchange fluctuation is attributable to export effected by the assessee or not needs to be examined by the AO. Moreover, the ld.CIT(A) has not adjudicated the issue although the assessee has taken a specific ground challenging the findings of the AO. Therefore, we are of the considered view that the issue needs to go back to file of the ld.CIT(A) for reconsideration of the issue and hence, we set aside the issue to file of the ld.CIT(A) and direct him to reconsider the claim of the assessee in light of decision of ITAT, Chennai bench in the case of Changepond Technologies (P) Ltd. [2008 (2) TMI 486 - ITAT MADRAS-A] Deduction u/s.10B in respect of expenses disallowed and added back to total income - AO has denied deduction u/s.10B of the Act in respect of various additions made towards provision written back, disallowance of expenses u/s.37 of the Act and disallowance of expenses u/s.40A(7) of the Act - HELD THAT:- Whether enhanced profit on account of disallowance of expenses is eligible for deduction under deduction / exemption provisions of the Act is no longer res-integra. Various high courts have taken a consistent view that enhanced profit on account of disallowance of various expenses goes to increase business profit and to that extent would be eligible for deduction under deduction / exemption provisions of the Act. The Hon’ble High Court of Bombay in the case of CIT vs. Gem Plus Jewellery India Ltd., [2010 (6) TMI 65 - BOMBAY HIGH COURT] has considered an identical issue and held that enhanced profit on disallowance of expenses is eligible for deduction u/s.10B or 10A of the Act. The CBDT has accepted legal position and issued a Circular No.37/2016 dated 02.11.2016, where it was clarified that enhanced profit on account of disallowance of expenses is eligible for deduction under exemption / deduction provisions by various section of IT Act, 1961. Therefore, we are of the considered view that assessee is entitled for deduction towards enhanced profits. But, fact remains that the issue has not been adjudicated by the ld.CIT(A) and hence, the issue has been set aside to the file of the CIT(A) and direct him to reconsider the issue in light of our findings given herein above. Exclusion of expenses from export turnover and total turnover - HELD THAT:- We find that the issue of exclusion of expenses from export turnover and total turnover is squarely covered in favour of the assessee by decision of Hon’ble Supreme Court in the case of CIT vs. HCL Technologies Ltd.,[2018 (5) TMI 357 - SUPREME COURT] as held that export turnover is a numerator and also forms a constituent element of the denomination in as much as it forms part of the total turnover. Hence, the export over as numerator must have the same meaning as the export turnover which is a constituent element of the total turnover in the denominator and hence, needs to be excluded from total turnover. Therefore, we are of considered view that the AO is erred in not excluding expenses from total turnover for computing deduction u/s.10B of the Act. But, fact remains that the issue has not been considered by the ld.CIT(A) and hence, assessee has filed a petition u/s.154 of the Act and said petition is pending for adjudication. Therefore, the issue has been set aside to the file of the ld.CIT(A) and direct him to reconsider the issue in light of decision of Hon’ble Supreme Court in the case of CIT vs. HCL Technologies Ltd. Issues Involved:1. Eligibility for deduction under Section 10B of the Income Tax Act.2. Treatment of exchange gain/loss fluctuation as part of export turnover.3. Deduction under Section 10B for expenses disallowed and added back to total income.4. Exclusion of certain expenses from export turnover and total turnover.5. Disallowance of expenses under Section 40(a)(iii) of the Income Tax Act.6. Disallowance of expenditure under Section 14A read with Rule 8D of the Income Tax Rules, 1962.Detailed Analysis:1. Eligibility for Deduction under Section 10B:The primary issue was whether the assessee's activity of converting dead crab into pasteurized crab meat qualifies as 'manufacture' under Section 2(29BA) of the Income Tax Act, thereby making it eligible for deduction under Section 10B. The assessee argued that their process involves significant transformation, resulting in a new product with a different name, character, and use. The AO and CIT(A) denied the deduction, stating that the process did not meet the new definition of 'manufacture' introduced by the Finance Act, 2009.The tribunal, however, found that the assessee's activity did qualify as manufacturing, considering the extensive processes involved and the transformation into a distinct product. Additionally, the tribunal emphasized the principles of consistency and legitimate expectations, noting that the deduction had been allowed for seven years prior to the amendment. Therefore, the tribunal directed the AO to allow the deduction under Section 10B.2. Treatment of Exchange Gain/Loss Fluctuation:The issue was whether exchange fluctuation gains/losses should be considered part of export turnover. The AO had excluded these gains from business proceeds, treating them as income from other sources. The assessee contended that exchange fluctuations directly relate to export transactions and should be included in export turnover.The tribunal noted that the CIT(A) had not adjudicated this issue and remanded it back to the CIT(A) for reconsideration, directing them to evaluate the claim in light of relevant judicial precedents.3. Deduction for Expenses Disallowed and Added Back:The AO denied deductions under Section 10B for various expenses disallowed and added back to total income. The assessee argued that any disallowance increases business profits, and thus, the enhanced profit should be eligible for deduction under Section 10B, citing CBDT Circular No. 37/2016 and judicial precedents.The tribunal agreed with the assessee's argument but noted that the CIT(A) had not adjudicated this issue. Therefore, it remanded the issue back to the CIT(A) for reconsideration in light of the circular and judicial precedents.4. Exclusion of Certain Expenses from Export Turnover and Total Turnover:The AO excluded expenses such as freight, ECGC, container charges, insurance, and FDA & customs clearance from export turnover but not from total turnover. The assessee argued that for parity, these expenses should also be excluded from total turnover.The tribunal agreed with the assessee, citing the Supreme Court decision in CIT v. HCL Technologies Ltd., which mandates that expenses excluded from export turnover should also be excluded from total turnover. The issue was remanded back to the CIT(A) for reconsideration.5. Disallowance of Expenses under Section 40(a)(iii):The assessee did not press the ground challenging the disallowance of expenses under Section 40(a)(iii), and thus, the tribunal dismissed this ground as not pressed.6. Disallowance of Expenditure under Section 14A read with Rule 8D:Similarly, the assessee did not press the ground challenging the disallowance of expenses under Section 14A read with Rule 8D, leading the tribunal to dismiss this ground as not pressed.Conclusion:The tribunal allowed the appeal for the assessment year 2010-11, directing the AO to allow the deduction under Section 10B. For the assessment years 2009-10 and 2011-12, the tribunal remanded the issues regarding exchange gain/loss fluctuation, deduction for disallowed expenses, and exclusion of certain expenses from export turnover and total turnover back to the CIT(A) for reconsideration. The grounds related to Sections 40(a)(iii) and 14A were dismissed as not pressed.