2022 (7) TMI 1051 - AT - Income Tax

Tribunal Grants Deductions for Foreign Exchange & Scrap Income, Emphasizes Verification

The Tribunal allowed the appeal, granting deductions under Sections 10B and 80IA for foreign exchange fluctuation income and income from the sale of ... Allowability of foreign exchange fluctuation as business income/expense - deduction under 10B for profits derived from exports - deduction under 80IA for industrial undertaking - treatment of foreign exchange fluctuation under section 37(1) - treatment of sale of scrap as income intrinsic to manufacturing/export businessAllowability of foreign exchange fluctuation as business income/expense - deduction under 10B for profits derived from exports - deduction under 80IA for industrial undertaking - treatment of foreign exchange fluctuation under section 37(1) - Whether foreign exchange rate fluctuation (gain/loss) on foreign currency borrowings is attributable to export/business and allowable as deduction under section 10B and section 80IA (and as expenditure under section 37(1)). - HELD THAT: - The Tribunal followed the view of the jurisdictional High Court in the assessee's earlier case and authority relied upon that fluctuation in the rate of foreign exchange arising on export-related receipts retains its character as arising out of the export business and cannot be divested therefrom by mere timing of remittance. The Tribunal also noted supporting authority of the Madras High Court and of the Supreme Court that foreign exchange fluctuation recognised on mercantile basis is an item of expenditure allowable under section 37(1). Applying these precedents to the facts, and respectfully following those decisions, the Tribunal held that foreign exchange fluctuation incurred in relation to export/business is eligible for deduction under section 10B and, where applicable, under section 80IA, and is allowable as an expenditure under section 37(1). [Paras 8]Foreign exchange fluctuation is attributable to export/business and is allowable for deduction under section 10B and under section 80IA, being an expenditure under section 37(1).Treatment of sale of scrap as income intrinsic to manufacturing/export business - deduction under 10B for profits derived from exports - Whether income from sale of scrap generated from EOU manufacturing activity is eligible for exemption/deduction under section 10B. - HELD THAT: - On the material placed before it (ledger account, invoice showing quantity, buyer's TIN, transport details and VAT collection), the Tribunal found that the scrap arose from normal wear and tear in the assessee's manufacturing operations and that the Assessing Officer had not made adequate enquiries (such as verifying the buyer reflected on the invoice). The Tribunal concluded that, having regard to the documentary evidence and the nature of the business, the income from sale of scrap is intrinsic to the manufacturing/export activity and directed the Assessing Officer to allow the claim for deduction under section 10B. [Paras 8]Sale proceeds of scrap generated from manufacturing at the EOU are eligible for deduction under section 10B; the Assessing Officer is directed to allow the claim after verification already reflected in the record.Final Conclusion: The appeal is allowed: the Tribunal directed that (i) foreign exchange fluctuation relating to export/business be treated as allowable expenditure and eligible for deduction under section 10B and section 80IA, and (ii) income from sale of scrap generated from the EOU manufacturing activity be treated as intrinsic to export/business and the deduction under section 10B be granted, with the Assessing Officer directed to give effect accordingly. Issues Involved:1. Deduction under Section 10B for foreign exchange fluctuation on foreign currency loan.2. Deduction under Section 10B for income from the sale of scrap.3. Deduction under Section 80IA for foreign exchange fluctuation income from the Wind Mill Unit.Issue-wise Detailed Analysis:1. Deduction under Section 10B for foreign exchange fluctuation on foreign currency loan:The assessee claimed a deduction under Section 10B for foreign exchange fluctuation of Rs. 36,16,223/- on a foreign currency loan availed exclusively for the business of CPC Blue Division, a 100% Export Oriented Unit (EOU). The Assessing Officer (A.O.) denied this claim, asserting that the loan was taken for acquiring capital goods, thus not eligible for deduction under Section 10B. The CIT(A) upheld this disallowance. However, the Tribunal referred to the jurisdictional High Court's decision in the assessee's own case, which held that foreign exchange gains arising from export business are eligible for deduction under Section 10B. The Tribunal concluded that the fluctuation in exchange rates should be considered as arising from the export business and allowed the deduction under Section 10B.2. Deduction under Section 10B for income from the sale of scrap:The assessee claimed a deduction under Section 10B for Rs. 1,06,232/- from the sale of scrap generated from the EOU unit. The A.O. denied this claim, arguing that the scrap pertained to machinery and was not proven to be generated from manufacturing activities. The CIT(A) confirmed this disallowance. The Tribunal, however, reviewed the evidence, including the ledger account and invoice for the scrap sale, which indicated that the scrap was indeed generated from manufacturing activities. The Tribunal found that the A.O. had not made any effort to verify the buyer or the transaction details and thus directed the A.O. to grant the deduction under Section 10B for the sale of scrap.3. Deduction under Section 80IA for foreign exchange fluctuation income from the Wind Mill Unit:The assessee claimed a deduction under Section 80IA for Rs. 30,27,488/- being foreign exchange fluctuation income from the Wind Mill Unit. The A.O. and CIT(A) denied this claim without providing specific findings or justification. The Tribunal referred to the jurisdictional High Court's decision, which held that foreign exchange fluctuation income arising from export business is eligible for deduction. The Tribunal concluded that the foreign exchange fluctuation income from the Wind Mill Unit is an intrinsic part of the business income and thus allowed the deduction under Section 80IA.Conclusion:The Tribunal allowed the appeal filed by the assessee, granting deductions under Sections 10B and 80IA for foreign exchange fluctuation income and income from the sale of scrap. The Tribunal emphasized the need for proper verification and adherence to judicial precedents in deciding such matters. The order was pronounced in the open court on 22-07-2022.