TaxTMI 
TaxTMI 
2010 (2) TMI 1320
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.... deal with ITA No.519/Ahd/2007 of assessee's quantuam appeal. 2. The first issue in this appeal of the assessee is as regards to the order of CIT(A) making addition of Rs.44,22,659/- on account of deficit in consumption of some of the raw materials as compared to Standard Input Output Norms prescribed by the Govt. of India for quantifying the export benefits given to exporters added as on account of unexplained investment in the purchase of raw materials, and Rs.1,53,44,220/- on account of excess consumption of some of the raw materials as compared to Standard Input Output Norms prescribed by the Govt. of India for quantifying the export benefits given to exporters added as inflated purchases of raw materials. For this issue, the assessee has raised the following ground No.1 to 8:- "1. The learned CIT(A) has erred in law and on facts in confirming the action of AO in adding Rs.1,53,44,220/- on account of inflation of purchase of raw material. Under the facts and circumstances of the case no such addition is required to be made and the same deserves to be deleted. 2. The learned CIT(A) has erred in law and on facts in confirming the action of AO in adding Rs.....
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....or these drugs is of high standards and the composition of the drugs will have to be maintained as per the prescribed norms and of internationally quality. For a particular medicine which is to be exported the Government of India has prescribed the input ratio of various raw material which have been printed on the various sale invoices which have been mentioned by the appellant. As there was lot of variation in the ratio, to know the exact consumption of the raw material the statement of the General Manager (Works) namely Shri R. S. Sharma who is the in--charge of production was recorded. As he was the in-charge of production his statement would determine the actual consumption of various raw material for the production of particular medicine. The statement has been reproduced in the assessment order on page 10& 11. He has categorically stated in reply to various questions which have been put-up by the AO that the consumption of raw materials is exactly in accordance to the input output ratio prescribed by the Government and printed in the sale invoices. In reply to question No.5, 6, and 8 he has categorically mentioned that the production of export items is as per the standard nor....
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....is exempt u/s.80HHC of the I.T. Act is also of no relevance because the income will have to be computed on the basis of accounts and records maintained by the appellant and not on the basis of motive of the appellant and benefit of section 8HHC will be given as per provisions of the Act. The appellant has also not proved with any other evidence that the consumption has been different because of factors mentioned by it. The fact remains that the appellant has not been in a position to explain the deficiency and the alleged extra consumption of raw material vis-à-vis the standard input output ratio in view of the statement of the production manager who has strictly confirmed that the raw material has been consumed as per standard input output ratio." On these facts, the CIT(A) finally enhanced the addition vide para 2.2.3, by observing as under:- "2.2.3 From the facts on record and the above discussion, it is clear that the appellant had shown less consumption of certain input raw material of Rs.63,04,605/- and the only inference is the same have been purchased from outside the books of account and the same is liable to be added as the investment from undiscl....
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.... CIT(A) has wrongly relied on the input output consumption ratio and the facts in the present case are exactly identical what was before the Tribunal in the case of M/s. Gujarat Woolen Felt Mills (supra), respectfully following the said decision of the Tribunal, we delete the addition and allow this issue of the assessee's appeal." Ld CIT-DR tried to distinguish this issue, but nothing new was argued. 4. As the facts are exactly identical in the present year as was in earlier year as admitted by both the sides, taking a consistent view as in earlier year, we allow the claim of the assessee and this issue of the assessee's appeal is allowed. 5. The next issue in this appeal of the assessee is as regards to exclusion of 90% of interest income while quantifying business profits u/s.80HHC of the Act at Rs.1,89,975/-. For this assessee has raised the ground No.9 & 10 as under:- "9. The learned CIT(A) has erred in law and on facts in confirming the action of AO in excluding 90% of the interest income amounting to Rs.1,89,975/- from the profits of the business while quantifying deduction u/s.80HHC of the Act. 10. Alternatively and without prejudice, if the inter....
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.... necessarily be treated as income from other sources and not business income. However, this will apply only where there is a specific finding by the Assessing Officer that the interest income is not business income. If in a given case the Assessing Officer has held that the interest income is business income, and this has not been challenged by the Department thereafter'/ that question cannot to be permitted to be reopened and the only question then will be if netting should be allowed. Clause (baa) of the Explanation to section 80HHC envisages a two-step process in computing profits derived from exports, first, the Assessing Officer is required to apply sections 28 to 44 in order to compute the profits and gains of business or profession. In doing so, the Assessing Officer may find that certain incomes, which have no nexus to the export business of the assessee, are not allowable and therefore ought to be treated as income from other sources. Once the Assessing Officer computes what is business income then he proceeds to the next step of deducting 90 per cent, of the receipts referred to in clause (baa) of the Explanation to section 80HHC in order to arrive at the pro....
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....f section 80HHC(1) read with section 80HHC(3) are, the nexus test has to be applied to exclude that which does not I partake of profits that can be said to have been derived from the business of exports, (ii) In the specific context of clause (baa) of the Explanation to section 80HHC, while determining the "profits of the business", the Assessing I Officer has to undertake a two-step exercise in the following sequence. He has I to first "compute" the profits of the business under the head "Profits and gains of business or profession." In other words, he will have to compute business profits, in terms of the Act, by applying the provisions of sections 28 to 44 thereof. (Hi) In arriving at the profits of the business by the above method, the Assessing Officer will exclude all such incomes which partake of the char-I Jeter of "income from other sources" which in any event are treated under I sections 56 and 57 of the Act and are therefore not to be reckoned for the purposes of section 80HHC. (iv) Where surplus funds are parked with the bank I and interest is earned thereon it can only be categorized as income from other sources. This receipt merits separate treatment under section 56 ....
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....the AO to decide the same as per the above decision. These issue of the assessee's appeal is allowed for statistical purposes. 7. The next issue in this appeal of the assessee is as regards to exclusion of 90% of interest income from sale of advance license while quantifying assessee's business profits u/s.80HHC of the Act at Rs.1,92,500/-. For this assessee has raised the ground No.11 & 12 as under:- "11. The learned CIT(A) has erred in law and on facts in confirming the action of AO in excluding 90% of the income from sale of advance license amounting to Rs.1,92,500/- from the profits of the business while quantifying deduction u/s.80HHC of the Act. 12. Alternatively and without prejudice, only profit on sale of advance license may kindly be excluded." 8. At the outset, it is stated that the issue of profit from sale of advance license, whether is to considered for the purposes of computation of deduction u/s 80HHC of the act or not, is covered by the decision in the case of the Mumbai Special Bench in the case of Topman Exports v. ITO (2009) 318 ITR (AT) 87 (Mum) (SB), wherein it is held that only the net profit of DEPB should be excluded for the purpose ....