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.

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 ... Deduction under section 10B - definition of 'manufacture' under section 2(29BA) - doctrine of legitimate expectation - doctrine of promissory estoppel - principle of consistency - exchange fluctuation as part of export turnover - enhanced profit on account of disallowance eligible for deduction - parity between numerator and denominator in turnover computationDeduction under section 10B - definition of 'manufacture' under section 2(29BA) - doctrine of legitimate expectation - doctrine of promissory estoppel - principle of consistency - Entitlement to deduction under section 10B for assessment year 2010-11 despite insertion of definition of 'manufacture' by Finance Act, 2009. - HELD THAT: - The Tribunal confined itself to whether the assessee is entitled to deduction under section 10B in the present facts. The assessee had established a 100% EOU and was granted deduction from AY 2004-05 to AY 2008-09; there was no change in the physical activities or facts when deduction was denied for the impugned year. Although the definition of 'manufacture' was inserted w.e.f. 01.04.2009, the Development Commissioner had approved the unit as a manufacturing EOU and the assessee was registered as a manufacturer under Central Excise; the product was treated as a distinct commodity under other statutes. The Tribunal applied the principles of legitimate expectation and promissory estoppel, holding that where a unit set up prior to the amendment has been allowed deduction and there is no change in facts, the benefit granted cannot be withdrawn merely by subsequent statutory clarification. The Tribunal also invoked the rule of consistency and noted that the issue is debatable with authorities taking differing views; where two views are possible, the taxpayer should not be deprived of a beneficial concession. On these grounds the Tribunal concluded that the AO could not deny the s.10B benefit and directed allowance of the deduction. [Paras 12, 13, 14, 15]Assessee entitled to deduction under section 10B for AY 2010-11; appeal allowed and AO directed to grant the deduction.Exchange fluctuation as part of export turnover - Whether exchange fluctuation gain/loss in EEFC account forms part of export turnover for computing deduction under section 10B (assessment years 2009-10 and 2011-12). - HELD THAT: - The Tribunal observed that exchange fluctuation attributable to exports ultimately increases or reduces the export turnover and therefore, prima facie, is part of export turnover qualifying for s.10B. However, whether the particular gains or losses in the assessee's case are attributable to exports requires factual examination which was not undertaken by the CIT(A). Since the CIT(A) had not adjudicated this ground, the Tribunal set aside the issue to the file of the CIT(A) for reconsideration in the light of relevant precedents. [Paras 16, 18]Issue remanded to the CIT(A) for fresh consideration of attribution of exchange fluctuation to exports.Enhanced profit on account of disallowance eligible for deduction - Whether enhanced profit resulting from disallowance of expenses is eligible for deduction under section 10B (assessment years 2009-10 and 2011-12). - HELD THAT: - The Tribunal noted that the question is no longer res integra: enhanced profits arising from disallowance of expenses go to increase business profit and, to that extent, are eligible for deduction under exemption provisions. The Tribunal referred to consistent High Court decisions and to CBDT Circular No.37/2016 confirming this position. As the CIT(A) had not adjudicated the issue, the Tribunal directed that the matter be reconsidered by the CIT(A) in light of the cited authorities and the circular. [Paras 21]Issue remanded to the CIT(A) to reconsider eligibility of enhanced profit for deduction under section 10B.Parity between numerator and denominator in turnover computation - deduction under section 10B - Whether expenses (freight, ECGC, container charges, insurance, FDA & customs clearance) excluded from export turnover must also be excluded from total turnover when computing deduction under section 10B (assessment years 2009-10 and 2011-12). - HELD THAT: - Relying on the principle that export turnover as numerator must have the same meaning as export turnover as a component of total turnover (denominator), the Tribunal held that expenses excluded from export turnover must, for parity, be excluded from total turnover. The Tribunal observed that the CIT(A) had not considered this point and therefore directed reconsideration by the CIT(A) in light of the Supreme Court authority referred to by the Tribunal. [Paras 24]Issue remanded to the CIT(A) for reconsideration with directions to apply the parity principle between numerator and denominator.Ground not pressed - Challenge to disallowance under section 40(a)(ia) (AY 2009-10) and disallowance under section 14A read with Rule 8D (AY 2011-12). - HELD THAT: - At the hearing the assessee expressly did not press these grounds. The Tribunal recorded that the grounds challenging these disallowances were not pressed by the assessee and accordingly need no adjudication. [Paras 25, 26]Grounds dismissed as not pressed.Final Conclusion: For AY 2010-11 the Tribunal allowed the assessee's appeal and directed the AO to grant deduction under section 10B, holding that a unit established and recognised as a manufacturing 100% EOU before the amendment could not be deprived of the concession in the absence of change in facts, applying principles of legitimate expectation, promissory estoppel and consistency. For AYs 2009-10 and 2011-12 several factual/legal issues (attribution of exchange fluctuation to export turnover, eligibility of enhanced profit arising from disallowances, and exclusion of certain expenses from total turnover) were set aside to the CIT(A) for fresh consideration; two grounds were dismissed as not pressed. 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.