TaxTMI 
TaxTMI 
2018 (11) TMI 209
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.... of the CIT(A) on two grounds; firstly, the re-assessment proceedings under s.147 of the Act is marred with illegality and therefore, the action of the AO is without authority of law and secondly, re-working of exemption claimed under s.10B of the Act by artificially reducing the profits of the eligible profit by an amount of Rs. 41,54,153/- with reference to provisions of Section 10B(7) r.w.s. 80IA(10) of the Act. 4. When the matter was called for hearing, the learned AR for the assessee insisted that the action of the Revenue is neither sustainable on the jurisdictional point nor on merits of the addition. The learned AR simultaneously submitted that where the Tribunal is convinced with the substantive issue on merits, the adjudication on legal ground may not be necessary. Addressing the issue on merits, the learned AR pointed out that the assessee is a manufacturer of pharmaceutical products and has derived income from 100% export oriented unit which is eligible for deduction under s.10B of the Act. The assessee also derives income from other non-eligible unit as well. Making reference to the assessment order as well as the first appellate order, the learned AR submitted that....
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....vs. Gilvert Ispat ITA No. 345/Chd/2011. 5. The learned DR, on the other hand, relied upon the observations made by the CIT(A) concluding the issue against the assessee. 6. We have carefully considered the rival submissions. The central issue involved in the captioned appeal is whether an 'arrangement' of business transacted between the assesse and its Directors/shareholders can be inferred whereby the assessee earned more than ordinary profits as contemplated under s. 10B(7) r.w.s. 80IA(10) of the Act. An integral question would also arise as to whether the charge of interest on money lent by the Directors/shareholders can be said to be an activity falling within the scope of the expression 'business transacted between them' as codified in Section 80IA(10) of the Act. 6.1 Section 10B of the Act essentially provides for tax incentive in the form of deduction of profits and gains derived from export of articles or things etc. By virtue of sub-section 7 of Section 10B of the Act, fetters imposed under s.80IA (10) of the Act are applicable while determining deduction under s.10B of the Act. Section 80IA(10), in turn, seeks to negate an artificial inflation in profits due to so....
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....ly, the order of the CIT(A) on the aforesaid issue is set aside and the AO is directed to exclude the aforesaid adjustment for the purposes of determination of profits of the assessee company under s.10B of the Act. 7. Resultantly, appeal of the assessee is allowed on merits on this score. 8. In view of the grievance of the assessee meted out as above, we do not seek to delineate on other grounds raised. 9. In the result, the appeal of the assessee is allowed. 10. We shall now advert to the Revenue's appeal ITA No.788/Ahd/2016. 11. The Revenue in its appeal has challenged the disallowance of Rs. 81,06,518/- made on account of reduction in profit eligible for deduction under s.10B of the Act. From the perusal of the order of the AO, it appears that the AO has excluded an amount of Rs. 1,51,68,756/- towards freight and insurance expenses from the 'export turnover' . However, similar exclusion was not made from 'total turnover' for the purposes of computation of deduction under s.10B of the Act. This resulted in the aforesaid reduction of eligible profits for the purposes of deduction under s.10B of the Act. 12. The first appellate authority however after taking note....
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....s directed to exclude the quantum of insurance and freight amounting to Rs. 1,51,68,756/- also from the total turnover in order to come to the right quantum of deduction u/s.10B. Therefore, this ground of appeal is allowed." 13. With the assistance of the learned AR for the assessee, we find that apart from the several judicial precedents, the controversy is settled in favour of the assessee also by CBDT Circular No.4/2018 dated 14.08.2018. As per the CBDT circular, the expenditure incurred of such nature are required to be excluded from both 'export turnover' as well as 'total turnover' while computing deduction admissible under s.10A of the Act. In parity, we do not see any error in the order of the CIT(A). 14. In the result, appeal of the Revenue is dismissed. 15. We shall now advert to the appeal of the assessee in ITA No.720/Ahd/2016 concerning AY 2011-12. 16. The substantive grounds of appeal raised by the assessee read as under: "1. Ld. CIT (A) erred in law and on facts in confirming action of AO reducing profit of the eligible unit by an amount of Rs. 51, 17,782/- with respect to late realization of export proceeds. Ld. CIT (A) ought to have allowed the....
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....d. 21. In the result, the appeal of the assessee is allowed. 22. We shall now advert to the Revenue's appeal in ITA No.789/Ahd/2016 concerning AY 2011-12. 23. The substantive grounds of appeal raised by Revenue read as under: "1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 1,83,21,375/- made on account of reduction in profit eligible for deduction u/s.10B of the Act. 2. The Ld. CIT(A) has erred in law and on facts by not appreciating that the gain derived on conversion of funds from EEFC account into Indian Rupee, account does not have any proximate or direct nexus with export transactions and, therefore, will not be eligible for deduction u/s 10B of the Act. 3. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 3,12,111/- made on account of disallowance U/S.14A of the Act. 4. The Ld. CIT(A) has further erred in law and on facts by not appreciating that the assessee could not establish that the investment in assets yielding exempt income was clearly made out of interest free funds available." 24. Ground Nos.1 & 2 concern addition of Rs. 1,83,21,375/- made on account of reducti....
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.... account, does not have any proximate or direct nexus with export transaction and, therefore, will not be eligible for deduction under section 706." 4.3.2 Reliance for this ratio is also placed on the order of Hon'ble ITAT in the case of Tricom India Ltd 36 SOT 302 (Mum) (2010). 4.3.3 In view of the above, the assessee's eligible exemption/deduction u/s 10B is required to be reduced by Rs. 7,83,27,375/-." 5.1 On this issue the appellant vide its submission dated 10/9/2015 submitted as under :- "The ld AO also erred in law and on facts in reducing the deduction under section 10B of the Income tax Act, 1961 by reducing the profit of eligible unit by an amount of Rs. 7,83,27,375/- in respect of currency rate difference income due to foreign currency rate fluctuation ignoring the submissions regarding the purpose of keeping the amount in the EFCC account for business of the appellant and not as normal investment. Since the money was kept for meeting with appellant's business obligations, the gain is part of eligible profit of the undertaking / unit and entitled to deduction u/s. 10B. It be so held now and deduction be allowed with referen....
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....ot disputed, the ld AO erred in excluding the same from the profit eligible for deduction u/s 10B. The said judgment of the Karnataka High Court is also followed by the jurisdictional Ahmedabad ITAT in the case of M/s Karp Mfg. Co vs Addl CIT ITA No: 374 & 766/Ahd/2011 Copy attached EXHIBIT-B. The jurisdictional Tribunal vide Para 11 of the Order has held that as per the said judgment of Karnataka High Court which has taken in to account all judgments on the point at issue it has held that, due to sub-section (4) of section 706, what is exempt is not merely profits and gains from export of goods but also the income from the entire business of the undertaking. In view of above binding judgments and the decision of the Special Bench in the case of M/s Maral Overseas by Indore Bench, the disallowance made by the Id AO is unjustified. It be so held now and disallowance on Rs. 7,83,27,376/- be deleted. As far as the Tribunal decisions of Chennai Bench and Mumbai ITAT relied on by AO, the same are not applicable since they hold that section 10B is similar to section 80HHC which is fairly and clearly dealt with by the Karnataka High Court and Ahmedabad Tribunal in above ....