TaxTMI 
TaxTMI 
2015 (5) TMI 353
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....ithout prejudice, the CIT(Appeals) ought to have appreciated that forward contracts could not be booked unless and otherwise export contracts or export bills were submitted to the bankers and could be settled only by way of delivering export proceeds. 4. Without prejudice, the CIT(Appeals) ought to have appreciated that the requirement of Section 10B was not the income derived from export of goods or merchandise as concluded by the assessing officer and the same being contrary to the requirement of Section 10B, ought to have sustained the disallowance as made by the assessing officer. 7. Without prejudice, the CIT(Appeals) ought to have appreciated that for the assessment year 2005-06, the Tribunal in the Appellant's own case had not at all distinguished the order of the Mumbai Bench in the case of D.KishoreKumar & Co vs. DCIT reported in (2005) 2 SOT 769 and therefore the CIT(Appeals) ought to have followed the said order of the Mumbai Bench." 4. The issue that arises for consideration is as to whether receipts from forward contracts can be considered as profits derived from the business for the purpose of computing deduction u/s. 10B of the Income Tax Act, 1961 (Act)? Th....
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.... to other countries can book forward contracts. b) These contracts can be booked based on actual orders on hand or based on orders in pipeline or based on past performance c) These contracts will have to be delivered only by delivering export documents or export proceeds lying in EEFC accounts d) On the delivery date, if the exporter is unable to deliver export documents or dollars from its EEFC account, the banker will cancel the contract and whatever is the difference between the contract rate and prevailing rate on the date of cancellation will be either paid to or received from the exporter from the exporter as the case maybe. e) Cancellation of a contract due to non delivery of the contracted amount on the due date may result in profit or loss as per the spot rate on due date. 8. The Assessee pointed out that during the previous year it had booked forward Contracts only for a part of the export turnover which clearly indicated that the Assessee did not over book forward contracts in order to speculate. Whatever contracts booked were based on business requirements substantiated by actual exports performed. The Assessee placed reliance on the decision of the Hon'b....
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....ations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) to (d)..... shall not be deemed to be a speculative transaction. 11. It was first pointed out by the ld. counsel for the assessee that speculative transaction means a transaction in which a contract for the purchase or sale of any commodity is ultimately settled otherwise by actual delivery. According to him, the expression "commodity" used in section 43(5) of the Act does not include foreign exchange, which was subject matter of the forward contract in the present case. In this regard, our attention was drawn to the decision rendered by the ITAT Ahmedabad Bench in Adani Enterprises Ltd. v. ACIT [2015] 55 taxman.com 375 (Ahd-Trib). In the aforesaid case, the assessee was engaged in export, import and domestic trading of various commodities. The assessee borrowed money for the purpose of its business i.e., global trading various commodities. As per terms of borrowing of foreign currency working capital loan, the assessee had to enter into a currency swap arrangement. The assessee entered into currency swap transaction in respect of outstanding foreign currency....
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....the aforesaid decision, the Tribunal held as follows:- "In view of the above decision of the Hon'ble Gujarat High Court we are of the opinion that the decisions relied on by the revenue which are of various Tribunal Benches pale into insignificance. Judicial discipline requires us to follow judgment of High Court unless and until a contrary judgment of jurisdictional High Court is shows by the parties to the litigation. Even if there is a conflict of opinion between various High Courts, unless and until, there is a jurisdictional High Court decision, one way or the other, an assessee can rightly submit that the one in its favour should be followed. We are therefore, of the opinion that the assessee has to succeed in this appeal." 14. The Revenue had, before the Tribunal, placed reliance on the decision of Tribunal rendered in the case of K.M. Mohan & Co. Export Pvt. Ltd. (supra) for A.Y. 2005-06. 15. Besides the above, the ld. counsel for the assessee also placed reliance on the decision of the ITAT Mumbai Bench in the case of S. Vinodkumar Diamonds Pvt. Ltd. v. DCIT (supra). 16. The ld. DR, on the other hand, placed strong reliance on the decision rendered by the Tribu....
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....efore us. 19. It was also submitted by him that in all the cases cited by the ld. counsel for the assessee, there was nexus established between foreign exchange forward contracts and the export orders of the concerned assessee. According to him, in the present case, the assessee has not filed any documentary evidence to show nexus between exports made by it and foreign exchange forward contract. 20. The ld. AR, in his rejoinder, submitted that in the order of assessment, the AO has clearly recorded the fact that foreign currency forward contracts, although pertaining to assessee's own exports, cannot be treated as income derived from export of goods and merchandise. According to him, this finding of the AO is itself enough evidence that he had not disputed the fact that foreign exchange forward contracts was in relation to the exports made by the assessee. It was also pointed out by him that the expression "profits of the business" u/s. 10B means profits of the business of the undertaking which has a broader connotation. 21. We have given a very careful consideration to the rival submissions. The Assessee is engaged in the business of readymade garments. The Assessee reali....
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....actions independent of Assessee's business. The Tribunal also held that even though the transactions had been settled without delivery, the conditions of Section 43(5) of the Act describing speculative transaction, were clearly fulfilled, but the requirement of Expln.-2 to Sec.28 was not fulfilled in as much as it could not be concluded that the transactions were of such a nature as to constitute a business by itself. The Tribunal explained that profit on cancellation of forward contracts is generally revenue neutral because the question of profit on cancellation of forward contracts can only arise in a situation when the value of foreign currency is increasing vis-à-vis domestic currency, and when the foreign exchange value is so increasing, the ultimate payment made in foreign currency was not to go up, there would not have been gains on cancellation of contracts but then the actual costs, in terms of domestic currency that the assessee pays when he has to pay for imports in foreign currency does not also go up. 24. The revenue challenged the order of CIT(A) for AY 06-07 and the same was considered by the ITAT Bangalore in ITA No.113/Bang/09 for AY 05-06 by order dated ....
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....Speculative Income" but as regular "Business Income". 26. From the arguments advanced before us on the basis of several judicial pronouncements of various benches of ITAT, it becomes clear that there is an apparent conflict of judicial opinion on the question as to whether the gain on forward foreign exchange contracts is to be regarded as Income from speculative business. None of the decisions rendered are in the context of the question as to whether such gain can be said to be profits derived from the business of export on which deduction u/s.10B of the Act has to be allowed. 27. The decisions where it was held that gain on forward foreign exchange contracts is to be regarded as Income from business, which were cited on behalf of the Assessee are as follows: (i) ITA No.1320/Bang/2012 for AY 09-10 M/S.Hanuman Weaving Factory Vs. ACIT order dated 23.8.2013. In this decision the Tribunal distinguished the case of K.Mohan & Co. (Assessee's case for AY 06-07 by observing that the issue therein was as to whether gain on forward foreign exchange contracts is to be regarded as Income derived from the business of export eligible for deduction u/s.10B of the Act. The Tribunal ulti....
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....to be followed in the present AY also. As we have already observed, the AO has assessed the said gain as "Business Income" and therefore the decisions referred to above relied upon by the learned counsel for the Assessee are not relevant and helpful to the plea of the Assessee before us. In view of the above conclusions, we do not deem it necessary to elaborate on the arguments advanced by the learned counsel for the Assessee before us. 29. For the reasons given above, we dismiss ground No. 2 to 4 and ground No.7 raised by the Assessee before us. 30. Ground Nos. 5 & 6 raised by the assessee reads as follows:- "5. The CIT(Appeals) ought not to have upheld the inclusion of inter unit job work charges for arriving at the total turnover of the EOU. 6. The CIT(Appeals) failed to appreciate that the inter unit job work charges represented job works carried out by one EOU by utilizing the facility available with it to the other EOU." 31. As we have already seen the assessee is engaged in the manufacture of readymade garments for exports. The Assessee has two Export Oriented Units (EOUs) and other units which fall under Domestic Tariff Area (DTA). The manufacturing activity ....
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....f Section 10B which reads as follows:- "10B. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer, software for a period of ten consecutive assessment years beginning with the assessment year relevant to the pervious year in which the undertaking begins to manufacture or produce articles or things or computer, software, as the case may be, shall be allowed from the total income of the assessee: ......... ......... (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Explanation 2 (iii) "export turnover" means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance wi....
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....imed 9. Total turnover of the business 10. Total turnover of the undertaking 11. Total profits derived by the business 12. Total profits derived by the undertaking 13. Total export turnover 38. According to the AO, the Act envisages different Turnover for the business and the undertaking, and different profits for the business and the undertaking. The inter-units transfers will not be a part of the "Total Turnover" for the Assessee as a whole, but will definitely form a part of the Total Turnover for the undertaking. On considering business of the Unit/Undertaking independent of the Assessee, the inter-unit transfer acquires the character of sale. Hence, the same is includible as part of total turnover of the unit. The AO accordingly computed deduction u/s.10B of the Act by including inter-unit transfer as part of total turnover of the concerned unit which provided service to the other unit. 39. On appeal before the CIT(A), the assessee submitted that the word "turnover" is a commercial term and should be construed in the commercial sense and in accordance with the normal rules of accountancy. Accordingly, "turnover" means gross in-flow of cash receivables a....
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.... case here. 13. The receipt for doing job work from another EOU is nothing but its domestic turnover because the element of profit therefrom is not denied and only set off of job charges done for each other is claimed against each other. The A.R. probably treats "Sales" as a synonym of "turnover" and therefore pleads that none of EOUs can be considered as seller or buyer. Section 44AB of I.T.Act puts a coma in between the word "Sales" and "Turnover" to distinguish that both terms are distinct and have different connotations. Sales does not include goods returned, price discount etc., Turnover has a wider connotation. The word "or" interspersed between the words "turnover" and "gross receipts" in S-44AB of IT Act evinces that both can be used interchangeably and are synonymous. It includes all receipts even having no element of profit. Such is the interpretation of the term "Gross Receipts" by the Guidance Note issued by ICAAI reproduced below:- The term 'gross receipts" is also not defined in the Act. It will include all receipts whether in cash or in kind arising from carrying on of the business which will normally be assessable as business income under the Act. Broadly spea....
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.... and therefore the job work done by each of them has to be included in the total turnover of that concern only for computation of exemption u/s. 10B of IT Act. ........... I hold them includible in the turnover of respective EOUs even if both are owned by the same assessee. I hold that set-off is not liable to be given as per the provisions of Act because relief is to be computed qua undertaking and not company (vide supra)." 41. Aggrieved by the order of CIT(Appeals), the assessee has preferred the present appeal before the Tribunal. 42. The ld. counsel for the assessee drew our attention to the decision of Hon'ble Supreme Court in CIT v. Punjab Stainless Steel Industries, 364 ITR 144 (SC). In the aforesaid decision, the question whether the sale of scrap should form part of the total turnover while computing deduction u/s. 80HHC of the Act came up for consideration. The assessee in that case was a manufacturer and exporter of stainless steel utensils. In the process of manufacturing of stainless steel utensils, some part of the steel which cannot be used or reused for manufacturing utensils remains unused, which is treated as scrap. The assessee sells the scrap in the local....
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....e scrap which is either to be deducted from the cost of raw material or is to be shown separately under a different head. There is no reason not to accept the meaning of the term "turnover" given by a body of Accountants, having a statutory recognition. If all accountants, auditors, businessmen, manufacturers etc. are normally interpreting the term 'turnover' as sale proceeds of the commodity in which the business unit is dealing, there is no reason to take a different view." 43. According to the ld. counsel for the assessee, the inter-unit transfer between Unit-I & II in the present case would also be akin to sale of scrap. According to the ld. counsel for the assessee, the inter-unit transfers will only ultimately go to reduce the cost of sales of the assessee and need not be regarded as turnover of the unit providing inter-unit services. The ld. counsel for the assessee further drew our attention to the decision of the Special Bench ITAT in the case of ITO v. Sak Soft Ltd., 313 ITR (AT) 353 (Chn.). In the aforesaid decision, the question for consideration before the Special Bench was, as to the meaning of total turnover and export turnover for the purpose of computing dedu....
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....be called as turnover, there should be an element of income embedded in such receipt. When a receipt does not have an element of income embedded, then it cannot be called as turnover. According to him, the aforesaid decisions clearly lay down the proposition that inter-unit expenses incurred by one unit on behalf of the other unit cannot be considered as total turnover of the unit incurring the expenses in getting it reimbursed by the other unit. It was also pointed out by him that the unit providing services recognizes the expenses in the debit side of the profit & loss account and also recognizes the receipt on the credit side of the profit & loss account, thereby having NIL effect on the profits as per the profit & loss account. The unit receiving the services claims the expenses incurred by the other unit as expenses and thereby profits of the unit receiving the benefit of services provided by the other unit gets reduced to that extent. It was his submission that there is no attempt on the part of the assessee in either of the units to either decrease the total turnover or increase the profits of the business, thereby discharging the claim for deduction u/s. 10B of the Act. ....
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....ce 25,462 Total 29,07,056 48. According to the AO, the aforesaid expenditure was to be excluded from the export turnover in terms of cl. (iii) of Expln. 2 below the section and accordingly he excluded the same from the export turnover and arrived at the export turnover at Rs. 8,04,57,472 (i.e., Rs. 8,33,64,528 minus Rs. 29,07,056). He further reduced the export turnover by Rs. 8,25,125 but that was for the reason that the inward remittances were not proved. He thus arrived at the export turnover at Rs. 7,96,32,347. The AO thereafter computed the deduction under s. 10B by applying the following formula prescribed by s. 10B(4) :- Deduction under s. 10B = Profits of the business x Export turnover/Total turnover 49. The profits of the business as computed by him came to Rs. 3,39,85,047. The figure of export turnover, as already seen, was taken at Rs. 7,96,32,347. The figure of total turnover was taken at Rs. 9,26,23,216. The deduction was accordingly calculated at Rs. 2,92,18,474. The question before the Special Bench was as to whether the AO should have taken the figure of total turnover which is the denominator in the above formula at Rs. 8,97,16....
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....ould be considered as part of the total turnover for the purpose of allowing deduction u/s.80HHC of the Act. The Assessee in the case before the Hon'ble Supreme Court was a manufacturer and exporter of stainless steel utensils. In process of manufacturing, some portion of steel, which could not be used or reused for manufacturing utensils, was treated as scrap. Assessee disposed of said scrap in local market and income arising from sale was also reflected in P&L account. For purpose of availing deduction u/s 80HHC, income from sale proceeds of scrap was not included in total turnover but was shown separately in P&L account. Revenue submitted that sale proceeds from scrap should have been included in 'total turnover' as assessee was also selling scrap and that was also part of sale proceeds. High Court held that proceeds generated from the sale of scrap would not be included in 'total turnover'. On further appeal, the Hon'ble Supreme Court held to ascertain whether turnover would also include sale proceeds from scrap, one has to know the meaning of the term 'turnover'. The term 'turnover' has neither been defined in income tax Act nor has been explained by any of CBDT circulars. One....
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....ty are debited in EOU-I Profit and Loss account and the receipt from EOU-II by way of reimbursements are recorded in the credit side of the profit and loss account. Thus as far as EOU-I is concerned, there the effect is neutral. As far as EOU-II is concerned, the expenditure incurred by EOU-I for washing is recognised in the Profit and Loss account. Thus the profits of EOU-II are not inflated. Therefore by the process adopted by the Assessee there is no effect on the true profits from the business of both the EOUs for the purpose of allowing deduction u/s.10B of the Act. The question is should EOU-I recognise the services rendered by it to EOU-II as its 'turnover'. The Assessee is a manufacturer of readymade garments and does not do the activity of washing. As explained by the Hon'ble Supreme Court in the case of Punjab Stainless Steel Industries (supra) the term 'turnover' has neither been defined in the Act nor has been explained by any of the CBDT circulars. One has to look at the meaning of the term 'turnover' in ordinary accounting or commercial parlance. In ordinary accounting parlance, as approved by all accountants and auditors, the term 'sales', when reflected in the Profi....
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....essee in ITA No.1093/Bang/2009. For the reasons stated therein, we allow the claim of the Assessee in this regard. 56. Ground No.3 of the concise grounds is with regard to action of the CIT(Appeals) in upholding the disallowance of employees contribution to ESI payments by invoking the provisions of section 43B of the Act. The AO was of the view that the assessee company has belatedly paid the employees' contribution for ESI and therefore an amount of Rs. 8,46,458 was added u/s. 2(24)(x) r.w.s. 36(1)(va) of the Act. 57. The assessee raised a specific ground of appeal challenging the addition made by the AO as aforesaid viz., ground No.7 before the CIT(A). The CIT(A) has, however, not addressed the issue in the impugned order. At the time of hearing, it was brought to our notice that the issue in the aforesaid ground of appeal is squarely covered by the decision of the Hon'ble High Court of Karnataka in Spectrum Consultants (India) Pvt.Ltd. Vs. CIT, (2013) 34 Taxman.com 20 wherein it was held that if the employees contribution to ESI is paid on or before the due date for filing return of income u/s. 139(1), then the same cannot be disallowed. The AO is therefore directed to ve....
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....sessee had not paid Securities Transaction Tax (STT) on sale of units of mutual funds, the claim for exemption us. 10(38) of the Act was not available to the assessee. The said sum was accordingly brought to tax @ 20% by the AO. Before the CIT(Appeals), the assessee submitted that it had not claimed indexation benefits under the second proviso to section 48 of the Act and therefore rate of tax on long term capital gain should be 10% and not 20% as levied by the AO. The CIT(A) did not discuss this issue, nevertheless, he upheld the order of the AO. Aggrieved by the order of CIT(A), the assessee has raised ground No.3 before the Tribunal. 64. We have heard the submissions of the ld. counsel for the assessee and the ld. DR. Section 112(1) reads as follows:- Tax on long-term capital gains. 112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head "Capital gains", the tax payable by the assessee on the total income shall be the aggregate of,- (a) in the case of an individual or a Hindu undivided family, [being a resident,]- (i) the amount of income-tax payable on the total in....
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.... the Hon'ble High Court of Karnataka in the case of CIT v. Himmatsingike Seide Ltd (286 ITR 255), the AO held that the aggregate of the income and losses of all the units of the assessee had to be taken into account for calculating the deduction u/s 10B of the Act. Besides, the AO found from the assessee's submissions during the assessment proceedings that the long-term capital gains of Rs. 43,73,000/- in respect of which exemption u/s 10(38) had been claimed actually related to debt funds in respect of which no STT had been made. Taking into consideration all these factors, the AO held that the assessee was not entitled to exemption u/s 10B in respect of the profit of EOU-II and has also assessed long-term capital gains of Rs. 43,73,000/- arising from the sale of debt funds and brought the same to tax. 69. Aggrieved, the assessee preferred appeal before the first appellate authority on the following relevant grounds of appeal:- "2(A) The learned A.O. has erred in denying the deduction u/s 10B of the Act to which the appellant is legitimately entitled to while computing the assessment of the appellant. 2(B) The denial of deduction is on the erroneous appreciation of the po....