AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (5) TMI 408
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....ubsidy received of Rs.81,000/- and (ii) insurance claims of Rs.19,50,000/-] from the profits for computing deduction under section 10B of the Act, holding the same to have not been derived from the industrial undertaking of the appellant. 1.2 That the CIT(A) erred on facts and in law in not appreciating that the aforesaid income' was derived from the industrial undertaking of the appellant and was inextricably linked with the business of the appellant. 1.3 Without prejudice that the CIT(A) while holding interest income of Rs. 19,24,528/- as income from other sources, did not allow deduction for interest expenditure amounting to Rs. 19,89,545/- incurred in respect of borrowed funds utilized for making the deposit on which such interest income was earned. 1.4 That the CIT(A) erred on facts and in law in holding that the appellant did not place on record any material in order to establish that the interest income earned by the appellant had a nexus with such expenditure on account of interest. 2. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in excluding benefit under Duty Entitlement Pass Book ("DEPB") ....
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....tive source of the profit and gain or has direct nexus with the profit and gain, the Ld. AO held that the impugned interest income is at best "attributable to" the export activity of the assessee and has only incidental nexus with the export activity and constitute a 'step removed' from the export activity. Citing the decision of the Hon'ble Madras High Court in CIT vs. Madras Motors 257 ITR 60 (Mad) wherein it is held that interest earned on fixed deposits is not eligible for deduction under section 10B, and stating that the Tribunal in its order (supra) has fortified the stand of the Revenue that interest income could not be said to be derived from the export of article or thing and the matter was restored to the file of the AO for limited purpose on the issue of netting of interest which issue is covered against the assessee by the decision of Hon'ble Supreme Court in CIT vs. V.P. Gopinath 248 ITR 449 (SC), the Ld. AO proceeded to compute the eligible amount of deduction under section 10B at Rs. 1,82,59,833/- resulting in the disallowance of interest income of Rs. 19,24,528/- as also other income of Rs. 21,08,000/-. 4.2 The facts relating to the Ground No. 2 are that the Ld. ....
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....(A) gave the breakup of interest of Rs. 19,24,528/- earned by the assessee in its 'Basmati' division as under :- Division Value of FDRs placed with banks Interest on FDRs FDRs kept as margin money with banks for issuing BG in favour of various Govt. authorities Amount of FDRs kept with the banks by taking loan from the same bank Interest earned on FDRs kept as margin money with the banks for issuing BGs in favour of Govt. authorities Interest earned on FDRs of Rs. 213.51 lacs lodged with the bank by taking loan from same bank Rs. (Lac) Rs. Rs.(Lac) Rs.(Lac) Rs. Rs. Basmati Interest income assessable under section 10B 281.11 19,24,528 67.60 213.51 4,62,801 14,61,727 5.1 The Ld. CIT(A) noted that the Ld. AO negatived the assessee's claim of deduction of the impugned interest under section 10B for the reason that it is not derived from the undertaking of the assessee and held the same to be 'income from other sources'. The Ld. AO also did not allow net off of such income against interest expenditure incurred, thereby allowing lower deduction under section 10B of the Act to that extent. 5.2 The contention of th....
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.... will not have an immediate nexus with the export business and in both the situations the same will be treated as 'income from other sources' and not business income (para 4.3.5). He accordingly held that interest income and other misc. incomes are assessable under the head 'income from other sources'. He went on to observe further that since even in the case of interest earned on fixed deposits for the purpose of availing credit facilities is to be held as having no immediate nexus with the export business, the question of netting off the interest income against the interest expenditure becomes irrelevant. According to him, the entire misc. receipts, namely subsidy, insurance claim, interest on IT refund, rent, profit on sale of assets cannot be said to be derived from the industrial undertaking of the assessee. Hence, do not qualify for deduction under section 10B of the Act. 7. As regards denial of increasing the 'profits of the business' by the amount of benefit from DEPB scheme while computing deduction under section 80HHC, before the Ld. CIT(A) the assessee made very lengthy submission which is summarised by the Ld. CIT(A) in para 5.2 as under :- "5.2 The Ld. AR h....
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....es that allows-drawback of import charges paid on inputs used in the export product. DEPB scheme is an optional facility for exporters not desirous of going through the licensing route. The objective of DEPB Scheme is to neutralise the incidence of customs duty on the import content of the export product in order to enable the exporters competitive in the foreign market. The neutralisation is provided by way of grant of duty credit against the export product. Under the Scheme, an exporter applies for credit, at a specified percentage of FOB value of exports, made in freely convertible currency. The credit is available against such export products and at the rates specified for import of raw materials, intermediates, components, parts, packaging material etc. Para 7.17 clearly stipulates that the exports made under the DEPB Scheme is not entitled for duty drawback. This is understandably provided to avoid double benefit, one by way of DEPB credit and other by way of duty drawback. The credit is obtained on DEPB rates in relation to the FOB value of exports and is valid for a period of 12 months from the date of issue. The DEPB credit and the items imported there-against are freely t....
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....39;profit on transfer' of DEPB credit for the purposes of clause (iiid) of section 28 of the Act. it is submitted that DEPB credit is an export incentive that is given to an exporter to offset the import duty element in value of exports made by him. It is, therefore, nothing but a reimbursement of the import duty paid by him in making exportable goods. In contradistinction to Advance- License scheme, extension of this benefit does not precede the export of products. Further, unlike the Duty Drawback scheme, the value of the benefit is not straightaway reimbursed by the Government to the exporter in form of money after export of goods but is rather given as a credit in his books, like a bank passbook, which may be utilized by him at any time as a set-off against import duty payable on future imports. It would, therefore, inherently erroneous to treat entire such credit or entire realization of such credit as partaking the character of 'profit' for the assessee. It is, therefore submitted that only the amount, if any, in excess of the DEPB credit which is transferred is covered within the scope of section 28(iiid) of the Act. 5.2.6 Whether or not the assessee is able to sell....
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....(iiid) of the Act being clear and unambiguous, the said section, it is respectfully submitted, covers only the amount realized, if any, in excess of the DEPB credit which is transferred. Reference may be made to the following important decisions of the apex Court which lay down the proposition that the plain meaning of the statute must be given full effect: • Steel Authority of India v. CCE: AIR 1996 SC 120 • Innamuri Gopalan v. State of AP: 1964 SCR (2) 888 • AV Fernandez v. State of Kerala: AIR 1957 SC 657 " 7.1 The submissions of the assessee did not find favour of the Ld. CIT(A). In para 5.3.1 of his order he observed that the main contention of the assessee that only 'profit on transfer' of DEPB has to be excluded in clause (baa) may appear to be correct literally according to the language, but the interpretation of the said language as canvassed by the assessee is not correct by recording the following reasons :- "5.3.1 DEPB is an incentive which is allowed to the exporters as per the scheme framed by the Department of foreign trade. Various kinds of incentives have been allowed under different schemes applicable at different....
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...., the claim of the assessee for deduction in respect of 90% of DEPB receipts failed. 8. Being dissatisfied by the above findings and order of the Ld. CIT(A) confirming the action of the Ld. AO in excluding "interest income" of Rs. 19,24,528/-; other income being (i) subsidy of Rs. 81,000/- and (ii) insurance claims of Rs. 19,50,000/- from the profits for computing deduction under section 10B of the Act as also in confirming Ld. AO's action in excluding benefit under DEPB scheme in computing deduction under section 80HHC of the Act, the assessee is in appeal before the Tribunal. 9. On the issue of interest income on fixed deposits with the bank earned by the assessee in respect of 'Basmati' division for obtaining increased overdraft facility from the bank or as margin money for issue of bank guarantee etc., the Ld. AR submitted at the very outset that the said interest income is earned by the assessee from its 100% export oriented unit at Sonipat and the entire FDRs of the value of Rs. 281.11 lac placed with the banks were necessitated by business consideration and partakes the character of income from the business of the undertaking. Drawing our attention to the provisions of....
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....siness' and were eligible for deduction under section 10A. [The provisions of section 10A and 10B are identical]. This decision (supra) was approved by Hon'ble Bombay High Court in IT Appeal No. 662 of 2017 dated June 7, 2019. The SLP filed by the Revenue has been dismissed by the Hon'ble Supreme Court vide SLP (C) No. 003726/2020 order dated 07.02.2020. 9.5 Our attention was drawn by the Ld. AR to the judgment of the Hon'ble Delhi High Court in Pr. CIT-21 vs. Universal Precision Screws in ITA No. 392/2015 dated 06.10.2015. In that case also the assessee was a 100% EOU and had included, inter alia, interest received on fixed deposit as part of its income which was claimed as exempt under section 10B of the Act. The Ld. AO / CIT(A) had negatived the claim of the assessee but the Tribunal decided in favour of the assessee. When the matter reached before the Hon'ble Delhi High Court, it relied on the decision of Hon'ble Karnataka High Court in Motorola India Electronics Pvt. Ltd. (supra) and observed that the interest on FDRs was received on "margin kept in the bank for utilisation of letter of credit and bank guarantee limits" and in those circumstances, the decision of the Tribun....
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....se (iiid) of section 28 to his export profit of the business, which ultimately results in computation of a bigger export profit. 9.10.1 The Ld. AR submitted that in the case of the assessee realisation on transfer on DEPB is to the extent of Rs. 86.13 lacs. The said amount represents gross realisation on transfer of DEPB credit. As per the law laid down by the Hon'ble Supreme Court in Topman Exports (supra), only the profit earned from the sale of aforesaid DEPB credits not including the face value of the DEPB is required to be excluded in terms of clause (baa) of the Explanation for the purposes of computing deduction under section 80HHC of the Act. 9.11 The Ld. DR had nothing to say in the matter. 10. We have given our careful thought to the issues involved in this appeal after hearing both the parties and perusal of the material available in the records. Section 10B as substituted by the Finance Act 2000 w.e.f. 1.4.2001 under the heading "special provisions in respect of newly established 100% export oriented undertaking" reads as under :- "10B.(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred perce....
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.... the Act. 12. Before the Ld. CIT(A) assessee explained the nature of interest income earned by it on FDRs placed with banks for obtaining increased overdraft facility from the banks which amounted to Rs. 19,24,528/-. The issue whether interest payable on FDRs was part of the profits of the business of the undertaking, and therefore includible in the income eligible for deduction under section 10B of the Act came up for consideration before various judicial forum. 13. In CIT vs. Koshika Telecom Ltd. 287 ITR 479 (Delhi) the Hon'ble Delhi High Court held that if the deposits were indeed inextricably linked to the business of the assessee, the question whether the income accruing on the said deposits would constitute business income stands answered by the decisions of the Hon'ble Supreme Court in Bokaro Steel Ltd. (1999) 236 ITR 315 and Karnal Co-operation Sugar Mills Ltd. (2000) 243 ITR 2. Both these decisions are in our view sufficient authority for the proposition that where the income in the nature of interest flows from deposits made by the assessee which deposits are in turn inextricably linked to the business of the assessee, the income derived on such deposits cannot be t....
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.... loans would be entitled to hundred percent exemption or deduction under section 10B of the Act. 18. In recent decision in CIT vs. Sankhya Technologies (P) Ltd. (2020) 427 ITR 318 (Mad), The Hon'ble Madras High Court held that interest on bank deposits was eligible to be included in profits of hundred percent export oriented unit for purpose of claiming deduction under section 10B of the Act. 19. Following the decisions (supra) we decide Ground No. 1 in favour of the assessee by holding that interest income of Rs. 19,24,528/- would be entitled to claim exemption under section 10B of the Act. The Ld. AO is directed to modify the assessment accordingly. 20. The exclusion of other incomes, namely, receipt of subsidy of Rs. 81,000/- and insurance claim of Rs. 19,50,000/- from the profits for computing deduction under section 10B is also not sustainable in view of the decision of Hon'ble Delhi High Court in Riviera Home Furnishing (supra) and the decision of Delhi Bench of the Tribunal in Moser Baer India Ltd. (supra) wherein it is held that the above receipts form part of the profit of business of the undertaking and thus eligible for deduction under section 10B of the Act. Re....