2007 (10) TMI 313 - AT - Income Tax

Tribunal Partly Allows Appeals, Upholds Foreign Exchange Gains as Business Profits, Recognizes Deductions Eligibility.

Shah Originals. Versus Assistant Commissioner Of Income-Tax.

Shah Originals. Versus Assistant Commissioner Of Income-Tax. - TTJ 112, 754, [2008] 19 SOT 568 (MUM.) Issues Involved:1. Allowance of deduction under Section 80HHC of the Income Tax Act.2. Allowance of deduction under Section 80-IB of the Income Tax Act.Detailed Analysis:1. Allowance of Deduction under Section 80HHC:(i) Non-inclusion of Gain on Foreign Exchange Rate Fluctuation:The assessee's claim for inclusion of gain on foreign exchange rate fluctuation within profits and gains of business was upheld by the CIT(A) for the assessment year 2001-02 but denied for other years. The Tribunal accepted the contention of the assessee based on decisions from various coordinate Benches, allowing the appeals for the relevant years and dismissing the Department's appeal for 2001-02.(ii) Non-inclusion of Interest on EEFC Account and Bank FDRs:The Tribunal followed the Mumbai Bench's decision in M/s Fountainhead Exports, treating interest income from EEFC accounts as derived from business. The same treatment was extended to interest on FDRs kept for guarantee purposes, considering them closely linked to the export business. However, interest on ordinary FDRs was treated as income from other sources, as they represented surplus business money placement.(iii) Non-inclusion of Interest on Income-tax Refund:The Tribunal found no merit in treating interest on income-tax refunds as business income, affirming its treatment as income from other sources.(iv) Treatment of DEPB Credit:The Tribunal considered DEPB credit as directly arising from business operations, qualifying it as business income.2. Allowance of Deduction under Section 80-IB:Eligibility and Conditions:The assessee's claim for deduction under Section 80-IB was initially denied by the AO and upheld by the CIT(A). The Tribunal found that the assessee's industrial undertaking at Malvia Nagar, Jaipur, met all conditions under Section 80-IB, including being set up before the specified date, employing the required number of workers, and not being formed by splitting or reconstructing an existing business.Manufacturing Process and Job Work:The Tribunal rejected the AO's bifurcation of the manufacturing process into dyeing/printing and fabrication, considering it an integrated activity. Job work done under the assessee's supervision was accepted as part of the manufacturing process, aligning with liberal interpretations favoring industrial undertakings under Sections 80-I and 80-J.Employment of Workers:The Tribunal accepted that workers employed through contractors, working within the factory premises under the assessee's control, should be considered as the assessee's employees. This satisfied the condition of employing the requisite number of workers.Receipts and Income Consideration:- Duty Drawback: The Tribunal followed the Gujarat High Court's decision, treating duty drawback as derived from the industrial undertaking, eligible for deduction under Section 80-IB.- Foreign Exchange Fluctuation: It was considered an integral part of export proceeds, qualifying for deduction under Section 80-IB.- Sale of Import Licence: Following the Supreme Court's decision in Sterling Foods, profits from the sale of import entitlement were not considered derived from the industrial undertaking.- Interest Income: Ordinary interest income and interest on income-tax refunds were treated as income from other sources, not qualifying for deduction under Section 80-IB.- DEPB Scheme: The Tribunal treated profits from the DEPB Scheme akin to duty drawback, allowing deduction under Section 80-IB.Conclusion:The appeals filed by the assessee for the assessment years 2000-01, 2001-02, 2002-03, 2003-04, and 2004-05 were partly allowed, while the Department's appeal for 2001-02 was dismissed. The Tribunal's decision provided a comprehensive analysis, aligning with judicial precedents and liberal interpretations favoring industrial undertakings.