Income Tax Appellate Tribunal - Delhi
Taurus India Ltd., New Delhi vs Assessee on 30 June, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'H' : NEW DELHI)
BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER
AND
SHRI C.M. GARG, JUDICIAL MEMBER
ITA No.306/Del./2013
(ASSESSMENT YEAR : 2008-09)
M/s. Tauras India Limited, vs. DCIT, Circle 16 (1),
B - 54, Mayapuri Indl. Area, New Delhi.
Phase - I,
New Delhi.
(PAN : AABCT8680M)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ved Jain, CA and Shri V. Mohan, Advocate
REVENUE BY : Shri Sameer Sharma, Senior DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This appeal filed by the assessee emanates from the order of CIT (Appeals)-XI, New Delhi dated 02.11.2012 for the Assessment Year 2008-09.
2. The return of income was filed on 30.09.2008 declaring a loss of Rs.15,81,780/-. During the year, the company was engaged in the business of manufacturing and exporting of welding machine tools and accessories. The unit located at Bhiwadi (Rajasthan) was 100% export oriented unit, it was manufacturing and exporting garden tools, agricultural and fence post. The Assessing Officer rejected the books of accounts and made additions and also 2 ITA No.306/Del./2013 disallowed certain other expenses. The CIT (A) has confirmed the action of the Assessing Officer. Now, the assessee is in appeal before us by taking the following grounds of appeal :-
"1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts.
2(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of the AO in rejecting the books of accounts of the assessee.
(ii) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of the AO in rejecting the books of account ignoring the explanation and evidences submitted by the assessee in support of its contention and on the wrong premises that the accounts of the assessee have not been audited despite the fact that the audited accounts and the audit report was available with the AO during the assessment proceedings.
(iii) On the facts and circumstances of the case, the order passed by the learned CIT(A) is bad in the eye of law as the action of the AO rejecting the books of accounts has been confirmed without giving any findings on the various contentions raised by the assessee against rejection of the books of accounts during the appellate proceedings.
3(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of the AO in making an addition of Rs.2,68,28,749/- by applying gross profit rate of 28.39% in respect of Bhiwadi unit ignoring the detailed explanation and the evidences submitted by the appellant.
(ii) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of the AO in making an addition of Rs.38,04,328/- by applying a gross profit rate of 12.55% in respect of Delhi unit ignoring the explanation and the evidences submitted by the appellant.
(iii) That the CIT(A) has erred in confirming the above additions by making a wrong observation that the appellant had not produced the audited books of accounts and despite the fact that the appellant 3 ITA No.306/Del./2013 had not only produced the audited books of accounts but had also produced the stock records and submitted detailed justification for the decline in the gross profit rate during the year under consideration.
4(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the disallowance of managerial remuneration and salary to relatives of Director amounting to Rs.15,56,000/- made by AO.
(ii) On the facts and circumstances of the case, the learned CIT(A) has ignored the contention of the appellant that the provisions of Section 314(1) of the Companies Act are not applicable in respect of the managerial remuneration paid by the appellant company.
5(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of AO in disallowing foreign exchange fluctuation loss amounting to Rs.43,01,660/-.
(ii) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in distinguishing that the judgment of the Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC) is not applicable to the facts of the case.
6. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of AO in disallowing an amount of Rs.84,478/- made by AO on account of VAT written off.
7. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of AO in not allowing assessee the exemption under section 10B of the Act, despite the assessee being eligible for the same.
8. The appellant craves leave to add, amend or alter any of the grounds of appeal."
3. Ground No.1 is general in nature and does not require any adjudication.
4. In the ground nos.2(i), (ii) and (iii), the issue involved is confirming the action of Assessing Officer in rejecting the books of accounts of the assessee. 4 ITA No.306/Del./2013 While pleading on behalf of the assessee the ld. AR submitted that the Assessing Officer raised queries which have been replied by the assessee. He submitted that assessee company was managed by father and three brothers, who were also the directors of the company. There was a long pending dispute among them. The matter was pending with the Company Law Board, therefore, the company could not get its accounts audited in time. The previous auditors were siding with one group of directors and did not give report in time. Finally, the new auditors were appointed by the shareholders and the accounts were audited and signed by the new auditors on 01.09.2009. Thus, there was sufficient and reasonable cause for not getting the accounts audited within the due date. With regard to the qualifications of auditors as mentioned in the audited annual accounts, the ld. AR submitted that there were various procedural and technical matters. These were having no practical importance for computation of taxable income. These observations were certain reservations on some matters, which could be interpreted in more than one way. There are difference in perception between the taxpayer and the accountant and such differing views require certain explanation and such thing has been published in the accounts by way of notes and qualifications. The assessee company was following standard accounting practices and accordingly, the accounts were prepared. These accounts are completely in compliance of section 145 of the Income-tax Act, 1961. He further submitted 5 ITA No.306/Del./2013 that observations of auditors are of technical/explanatory in nature and will not have any effect on the taxable income. He also draws our attention towards the explanation provided by the assessee to various queries raised by the Assessing Officer in its reply. The same has been already reproduced in the order of the CIT (A) at pages 8 to 16. He submitted that the rejection of the books was not justified. Ld. AR submitted that in absence of any such discrepancies, the books of accounts cannot be rejected and the ld. AR placed reliance on the following judgments :-
1 Banarsidas Bhanot & Sons Vs. ITA (1983) 16 TTJ (JAB) 143 2 ETCO Engineering Co. Vs. ITO (1987) 27 TTJ (HYD) 350 3 Ladakchand Jivraj & Sons Vs. ITO (1989) 35 TTJ (AHD) 512 4 Sha Devji Keshvji .Ginning & Trading Co. (P) Ltd. Vs. DCIT (2005)OT 803 (Bang.) 5 DCIT Vs. Paras Dyeing & Printing Mills (P) Ltd (201) 4 ITR (Trib) 29 (Ahd) 6 Prahladdas Hari Kishan Vs. ACIT (1998) 60 TTJ (Ind) 27 7 Pushpanjali Dyeing & Printing Mills (P) Ltd. Vs. JCIT (2001) 72 TTJ (Ahd) 886 8 Ganesh Foundary Vs. ACIT (2003) 78 TTJ (Jd) 736
5. On the other hand, ld. DR relied on the orders of the authorities below and submitted that in the auditor's balance sheet, the auditors have made various observations like non-availability of various balance confirmations, non-availability of office copies of the invoices raised by the company, non- compliance of various provisions of Companies Act, 1956, non-maintenance of fixed asset register, payment of managerial remuneration without complying with the provisions of section 11 of Part II of Schedule XIII of the 6 ITA No.306/Del./2013 Companies Act, 1956 giving salary to relative of whole time director in contravention of the provisions of Companies Act, not physically verifying of the stock and various assets by the management, not maintaining proper stock record and sales transaction with the group company where directors are interested and no internal control system show that assessee's books of accounts were not reliable. He prayed that the action of the lower authorities below be confirmed.
6. We have heard both the sides on the issue. We have perused the records available and we decide as under :-
The company is managed by father and three brothers who were also directors of company. Assessee claims that they were having dispute among themselves. Dispute in directors or brothers shall not be sufficient to explain the delay in getting the accounts audited. However, we note that the shareholders of the company appointed new auditors who submitted audit report on 01.09.2009 and the assessment was completed on 31.12.2010 without considering the same. Undisputedly, the return was filed on 30.09.2008 on the basis of unaudited results and accounts as it was last date of filing the return. Since in the case of claim u/s 10B of the Act, it is mandatory to file return in time as prescribed in section 139 (1) of the Act as provided in Fourth Proviso to section 10 (B)(1) of the Act. This appears to be a reasonable cause to file return in haste and on the basis of unaudited results 7 ITA No.306/Del./2013 and statement of accounts. We observe that non-compliance of provisions of Companies Act, 1956 may invite some action from the ROC or other competent authorities. We also observe that it is not a case of non-
maintenance or not keeping stock register but it is case of not having stock register being maintained according to certain standard of compliance required by the auditors. Although, despite of qualifications, the auditors certified the correctness of the truthfulness of the financial statements. The Assessing Officer completed assessment on 31.12.2010 without considering the audit report dated 01.09.2009 which was submitted subsequent to the filing of return on 30.09.2008. In view of these facts, we set aside the issue of rejection of books of accounts to the file of Assessing Officer with a direction that the qualifications mentioned in the audit report should be examined by affording due opportunity of hearing for the assessee. We also direct the Assessing Officer that while adjudicating this issue it should be considered that whether qualifications are only pertains to lack of following of practice and procedure and they have no bearing on assessing the income of the assessee. With these directions to the Assessing Officer, ground nos.2 (i), (ii) and (iii) are disposed off and deemed to be allowed for statistical purposes.
7. In the ground nos.3(i), (ii) and (iii), the issue involved is confirming the addition made of Rs.2,68,28,749/- by applying a gross profit rate of 28.39% 8 ITA No.306/Del./2013 in respect of Bhiwadi unit and confirming the addition of Rs.38,04,328/- by applying a gross profit rate of 12.55% in respect of Delhi unit.
8. While pleading on behalf of the assessee, ld. AR submitted that assessee was having two units, one at Bhiwadi and another at Delhi. He submitted that the reason for fall in the gross profit rate during the year under consideration was fully explained with the documents to Assessing Officer. The Assessing Officer has not doubted the purchases and sales of assessee. In absence of any such discrepancy, the Assessing Officer was not justified in rejecting the books. The books were duly audited by the chartered accountant. The assessee has made total sales of Rs.11,39,10,962/- in respect of Bhiwadi unit during the year and earned gross profit of Rs.55,10,573/-. For the year, if compared to just preceding year, gross profit has gone down by Rs.95,98,673/-. This gross profit has gone down due to decline in the exchange rate of UK Pound which was Rs.86.90 in the financial year 2006-07 (Assessment Year 2007-08) as compared to the rate of Rs.79.81 in the year under consideration. The difference of Rs.6.38 in the exchange rate of UK Pound has contributed to a decline of gross profit to the tune of Rs.96,98,673/-. The realization of sale price has gone down to UK Pound 1,12,795 and by applying the rate 79.81 of the current year it has contributed for decline of gross profit of Rs.90,02,169/-. Further, there was an increase in the purchase prices of the CR Sheets. The average purchase price of the CR 9 ITA No.306/Del./2013 Sheets for financial year 2006-07 (Assessment Year 2007-08) was Rs.32.77 as against Rs.34.91 for the year under consideration. There was a difference of Rs.2.40 kg. on a total purchase of 1,583.47 MT which had contributed to a decline in the gross profit of Rs.32,81,638/-. Ld. AR further submitted that there has been a difference in the foreign exchange fluctuation which has contributed to decline in gross profit rate of Rs.29,05,122/-. He further submitted that there was an expenditure of Rs.45,42,929/- on account of outer coating as compared to the previous year. This has also contributed to a decline of gross profit rate. With regard to Delhi unit, the ld. AR submitted that the total sales in the year under consideration was Rs.7,20,10,816/- on which the gross profit declared was Rs.29,05,122/-. In this year, there was a decline in the exchange rate with US Dollar. Against the average sales realization of Rs.45.85 in the financial year 2006-07, the US Dollar average realization was Rs.40.90 only. The total sales in US Dollar of 3,05,763.25 which has contributed to a decline of gross profit to Rs.15,13,528/-. Similarly, there was a decline in the Euro exchange rate from Rs.57.40 for financial year 2006-07 to Rs.55.80 for the current year. This decline has contributed a decline in the gross profit rate of Rs.4,08,190/- in respect of Delhi unit. There was a decline in the UK Pound also which has also contributed. Similarly, the foreign exchange fluctuation in respect of Delhi unit has also reduced the gross profit. He submitted that all these factors are 10 ITA No.306/Del./2013 adversely effected the gross profit during the year under consideration. He submitted that all these factors explained the fall in the gross profit rate, therefore, the revenue authorities were not justified in sustaining the addition made on account of fall of gross profit.
9. On the other hand, the ld. DR relied on the orders of the authorities below. Ld. DR submitted that all the pleadings of ld. AR are hypothetical. No evidence in support of such claim was filed. Further, when cost of input rises then price of output must rise. Such facts have not been explained. He pleaded to sustain the addition.
10. We have heard both the sides on the issue. We have also perused the records filed in the paper book. On perusal of assessment order, we find that the Assessing Officer has not properly verified and examined the explanation of assessee pertaining to decline in GP rates at Bhiwadi and Delhi unit. From the orders of the authorities below, we also observe that neither the Assessing Officer nor the CIT (A) attempted to examine the veracity of reasons submitted by the assessee for decline in GP rate. The Assessing Officer as well as the CIT (A) made and confirmed the addition mainly on the reason that books of accounts stood rejected. As we have restored the issue of rejection of books to the file of the Assessing Officer for fresh and de novo adjudication, under these circumstances, we are also inclined to set aside the issue of GP rate to the file of Assessing Officer for de novo adjudication after 11 ITA No.306/Del./2013 affording due opportunity of hearing for the assessee. Considering all these facts, we hold that for the year under consideration, a fresh look is required on this issue at the Assessing Officer level. We set aside the issue to the file of Assessing Officer to be decided de novo.
11. In the ground nos.4(i) and 4(ii), the issue involved is confirming the disallowance of managerial remuneration and salary to relatives of Director amounting to Rs.15,56,000/-.
12. The Assessing Officer disallowed the amount of Rs.12,96,000/- on account of managerial remuneration and Rs.2,40,000/- on account of remuneration paid to relatives of director. This was based on auditor's report which read as under :-
" The company has not complied with the provisions of section II of Part II of Scheduled XIII of Companies Act, 1956 in respect of managerial remuneration of whole time directors amounting to Rs.12,96,000/-.
The company has not complied with the provisions of section 314(1) of Companies Act, 1956 in respect of salary to relative of director amounting to Rs.2,40,000/-."
The ld. AR submitted that the revenue authorities were not justified in disallowing such amount. The provisions of section 314(1) of the Companies Act are not applicable in respect of managerial remuneration paid by the assessee company. For which he draws our attention to relevant portion of 12 ITA No.306/Del./2013 Schedule XIII which has been reproduced in the order of CIT (A) at page 15, which is also being reproduced as under :-
"Let us now see the provisions of Schedule XIII and Section 314 of the Companies Act, 1956 in this regard.
Relevant portion of Schedule XIII reads as under:
"Section II - Remuneration payable by companies having no profits or inadequate profits [1. Notwithstanding anything contained in this Part, where in any financial year during the currency of tenure of the managerial person, a company has no profits or its profits are inadequate, it may pay remuneration to a managerial person by way of salary, dearness allowance, perquisites and any other allowances, -
(A) not exceeding the ceiling limit of Rs.24,00,000 per annum or Rs.2,00,000 per month calculated on the following scale :-
Where the effective capital of company is Monthly remuneration payable shall not exceed (Rupees)
(i) less than rupees 1 crore 75,000
(ii) rupees 1 crore or more but less than rupees 5 crore 1,00,000
(iii) rupees 5 crore or more but less than rupees 25 crore 1,25,000
(iv) rupees 25 crore or more but less than rupees 50 crore 1,50,000
(iv) rupees 50 crore or more but less than rupees 100 crore 1,75,000
(vi) rupees 100 crore or more 2,00,000 Provided that the ceiling limits specified under this sub-paragraph shall apply, if -
(i) payment of remuneration is approved by a resolution passed by the Remuneration Committee;
(ii) the company has not made any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in the preceding 13 ITA No.306/Del./2013 financial year before the date of appointment of such managerial person The term "effective capital" has been described as under:
"Explanation I . - For the purposes of section II of this part, "effective capital" means the aggregate of the paid-up share capital (excluding share application money or advances against shares): amount, if any, for the time being standing to the credit of share premium account, reserves and surplus (excluding revaluation reserve), long-term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc" and other short-term arrangements) as reduced by the aggregate of any investments (except in the case of investment by an investment company whose principal business is acquisition of shares, stock debentures or other securities), accumulated losses and preliminary expenses, not written off."
During the year under consideration the effective capital of the appellant company was Rs.7,62,71,683/- (3,50,00,000/- + 4,12,71,683/-). According to the above provisions the assessee falls under sub clause (ii) of the clause A. Thus the managerial remuneration which can be paid by the assessee per managerial person comes to Rs.l,25,000/- per month or Rs.15,00,000/- per annum. In the present case the ld. AO has disallowed an amount of Rs.12,96,000/- having been paid to the directors of the assessee company. Considering the above provisions of the Companies Act, 1956 the said disallowance is against the facts of the case and also against the provisions of the Companies Act, 1956.
With respect to the disallowance of salaries paid to the relatives of the directors of the assessee company the AO has disallowed an amount of Rs.2,40,000/- paid to the said parties. In this respect let us first see the provisions of section 314 of the Companies Act, 1956. The relevant provision of the same read as under:
(1B) Notwithstanding anything contained in sub-section (1),-
(a) no partner or relative of a director or manager,
(b) no firm in which such director or manager, or relative of either, is a partner,
(c) no private company of which such a director or manager, or relative of either, is a director or member, shall hold any office or 14 ITA No.306/Del./2013 place of profit in the company which carries a total monthly remuneration of not less than [such sum as may be prescribed], except with the prior consent of the company by a special resolution and the approval of the Central Government.
[Proviso to sub-section (18) omitted by the Companies (Amendment) Act, 1988 w.e.f. 15-6-1988.] [Substituted for "three thousand rupees" by the Companies (Amendment) Act, 1988, w.e.f. 15-6-1988. Sub-rule(2) of rule 10C of General Rules & Forms prescribes a sum being not less than Rs.20,000 for the purposes of this clause, Rule 3 of Director's Relatives(Office or Place of Profit) Rules, 2003, reads as under:
(a) Partner or relative of a Director or Manager; or
(b) Firm in which such Director or Manager, or relative of either is a partner; or
(c) Private Company of which such Director or Manager or relative of either is a Director or Member which carries a monthly remuneration exceeding Rs. 50,000 p.m.] As per these provisions of Schedule XIII, we find that the managerial remuneration which could be paid by the assessee per managerial person comes to Rs.1,25,000/- monthly or say Rs.15 lacs per annum. In the assessee's case, the amount paid is only Rs.12,96,000/-. Therefore, in our considered view, this is well within the limit as prescribed in the Companies Act, 1956. Therefore, the CIT (A) was not justified in sustaining the same.
Similarly, the salary can be paid to relative of the directors were up to Rs.20,000/- per month or Rs.2,40,000/- per annum. In this case, the salary paid was only Rs.2,40,000/-, therefore, this payment was also within the 15 ITA No.306/Del./2013 limits of Companies Act, 1956 which does not require any approval from Board or Central Government. Therefore, this ground of assessee's appeal stands allowed.
13. In the ground nos.5(i) & (ii), the issue involved is confirming the disallowance of foreign exchange fluctuation loss amounting to Rs.43,01,660/-.
14. While pleading on behalf of the assessee the ld. AR submitted that the issue is covered by the judgment of Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC). Ld. AR also submitted that the inference drawn by CIT (A) that loss is not revenue in nature is factually incorrect, conversion of outstanding debtors at the exchange rate as on 31.03.2008 will be revenue loss and allowable.
15. We have heard both the sides on the issue. After hearing, we find that this issue has been settled by Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd., cited supra, and the Hon'ble Supreme Court has held as under :-
" "Loss" suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Income-tax Act, 1961.
Decision of the Delhi High Court in CIT v. Woodward Governor India P. Lt. [2007] 294 ITR 451 affirmed.
For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profit/loss is embedded in the closing stock. While anticipated loss 16 ITA No.306/Del./2013 is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase in profits before actual realization. This is the theory underlying the rule that closing stock is to be valued at cost or market price whichever is lower.
Decision of the Delhi High Court affirmed.
The expression "any expenditure" has been used in section 37 of the Act, 1961, to cover both "expenses incurred" as well as an amount which is really a "loss" even though such amount has not gone out from the pocket of the assessee.
Profits and gains of the previous year are required to be computed in accordance with the relevant accounting standard. On general principles of commercial accounting, the value of the stock- in-trade at the beginning and at the end of the accounting year should be entered in the profit and loss account at cost or market price, whichever is lower-the market value being ascertained on the last date of the accounting year, not at any intermediate date. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word "profits" implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset: it is a trading asset. Therefore, the concept of profits and gains made by a business during the year can only materialize where a comparison of the assets of the business at two different dates are taken into account.
Under the mercantile system of accounting, what is due is brought into credit before it is actually received : it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed.
UNITED COMMERCIAL BANK v. CIT [1999] 240 ITR 355 (SC) followed. .
The accounting method followed by an assessee continuously for a given period of time has to be presumed to be correct till the Assessing Officer comes to the conclusion for reasons to be given that the system does not reflect true and correct profits."
Respectfully following the same, we allow this ground of assessee's appeal. 17 ITA No.306/Del./2013
16. In the ground no.6, the issue involved is confirming the disallowance of an amount of Rs.84,478/- on account of VAT written off.
17. This issue has been discussed by Assessing Officer at page 24 para 4 and the CIT (A) discussed the issue at page 25 of his order. The Assessing Officer disallowed this amount stating that the amount was a statutory payment and its write off was not allowable. The CIT (A) confirmed this by holding that it is a loss not incurred in the normal course of business, hence, it is not allowable u/s 37 of the Income-tax Act, 1961.
18. Ld. AR submitted that as per the provisions of VAT, the assessee is eligible to claim credit of VAT paid on the purchase against the sales made. The assessee is not claiming the expenditure on account of VAT paid on purchases and makes a claim against the liability arising on account of the sales during the year. The credit of VAT amount paid is not allowed because of consumption of stores/materials in process not forming part of the finished goods. He submitted that the issue is covered in favour of the assessee by the judgment of ITAT in the case of ITO vs. Binayak Hi-Tech Engg. Ltd. - 144 TTJ (Kol.)(UO) 53.
19. We have heard both the sides on the issue. Hon'ble Kolkata High Court in the case of ITO vs. Binayak Hi Tech Engg. Ltd., cited supra, has held as under :-
"Business income - Profits chargeable to tax under s. 41(1) - VAT refund receivable - Refund of VAT was receivable by the assessee 18 ITA No.306/Del./2013 and not actually received - Refund is not automatic - Refund arises pursuant to the decision of the commercial tax authority who has to adjudicate the claim - After the claim of refund is made by the assessee in the prescribed form, the Commercial Tax Department has to accept or reject the claim - No benefit has accrued to the assessee during the relevant year as the claim was not adjudicated by the commercial tax authority - Therefore, refund receivable by the assessee is not chargeable to tax - Addition made by the AO rightly deleted by CIT (A)."
Since the refund of VAT receivable by the assessee is not chargeable to tax u/s 41(1) until the claim of refund is adjudicated by the commercial tax authority, therefore, respectfully following the aforesaid decision, we allow this ground of assessee's appeal.
20. In the ground no.7, the issue involved is confirming the action of the Assessing Officer in not allowing assessee the exemption u/s 10B of the Act.
21. Ld. AR submitted that the assessee is eligible for deduction u/s 10B. Such deduction has been allowed in the past years, i.e. 2006-07 and 2007-08. Evidence is placed for Assessment Year 2006-07 at pages 1286 to 1288 of the paper book and for Assessment Year 2007-08, the evidence is placed at pages 1293 - 1295 of the paper book. The assessee fulfills all the conditions of exemption including approval of Development Commissioner. The CIT (A)'s observation that the assessee has not given submission and evidence to show that all conditions are fulfilled, is factually wrong as is evident from written submissions placed at pages 1377-78 of the paper book.
22. We have heard both the sides on the issue. The claim of deduction u/s 10B has been exempted by the Assessing Officer in assessee's own case in 19 ITA No.306/Del./2013 Assessment Years 2006-07 and 2007-08. The orders in which such claims have been allowed are placed at pages 1286-88 and 1293-95 of the paper book. As per the order, the Assessing Officer has allowed the assessee's claim u/s 10B by holding as under :-
" Assessee company is having Export oriented Unit at Bhiwadi. In this unit assessee company is manufacturing of garden tools and implements and fence post and exports thereof. From the Profit & Loss Account and other records or this unit it is noticed that the deduction u/s 10B is not inconformity with provisions set forth in the scheme of Act in this regard.
3.1 Firstly, while examining the computation of income of this unit, it was noticed that the assessee company has claimed the c1eductic)I1 on the book profits i.e. without computing the profits & gains of the business as per the provisions of section 28 to 44AD. Besides this, the profits on which deduction u/s 10B has been claimed is inclusive of other income by way of sa1e of scrap mounting to Rs.586443/-. Secondly, it is further noticed that in the depreciation chart as per I.T. Rules, depreciation on building has been claimed @ 5% against the allowable rate of 10%.
3.2 In the course of assessment proceedings, the AR was ask apprised with these discrepancies and was asked to reconcile the same.
3.3 In response to this query, the AR filed a revised computation of deduction u/s 10B along with revised computation of income of the EOU/s 10B in respect of its 100% EOU unit. It is seen from the revised computation of 10B, that the profit & gains adopted for computing the deduction are still inclusive of scrap sale. The AR on being questioned about the allowability of deduction u/s 10B on the scrap income replied as under
"The assessee that while calculating exemption u/s l0B in respect of its J 00% EOU at Bhiwadi had included the sale of scrap with export sales as generation and disposal of scrap is integral part of the manufacturing activities and such income is derived from the 100% EOU. In view of the above the profit derived from 100% EOU and profits of the business of the undertaking are one and the same figure"
3.4 The above reply as well revised computation of the assessee has been considered but not found satisfactory. Here, it would be in 20 ITA No.306/Del./2013 the fitness of things to refer to the wordings of section 10B which reads as under:
"10B Special provisions in respect of newly established hundred per cent export oriented undertakings (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 hardware for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce article or things or computer" software, as the case may be shall be allowed from the total income of the assessee."
3.5 The relevant words, here are profits and gains as are derived by a 100% EOU from the export of article. The expression "derived from" came up for consideration before the Apex Court in Cambay Electric Supply Industrial Co. Ltd. Vs CIT (1978) 113 ITR 84, where the Hon'ble court held that the expression "derived from" has to be given a restricted meaning as opposed to the word "attributable to"
which are wider and broader in scope. This principal was clearly enunciated by the Apex Court again in the case of CIT Vs Sterling Foods (1999) 237 ITR 579, where the Hon'ble Court held that export incentives could not be cl1nsidered to constitute a profit and gains derived from the industrial undertaking. This principal has further been reiterated by the Apex Court in the case of CIT Vs Pandian Chemicals Ltd (2003) 262 ITR 278.
3.6 This consistently reiterated view of the Hon'ble Supreme Court lays down the law that profit and gain can be said to have "derived"
from an activity only if the activity is the immediate and effective source of the profit and gain or has direct nexus with the profit or gains.
3.7 Testing the aforesaid item, income of sale scrap sale, on this touchstone of "derived from" it is clearly seen that income by way of scrap sale enumerated supra is at best "attributable to "export activity" of the undertaking and have only incidental nexus with export activity in as much as they constitute a 'step removed' from the export activity. The Hon'ble Madras High Court in the case of CIT Vs Madras Motors 257 ITR 60 has held that interest earned on fixed deposits in not eligible for deduction under section 10B. 3.8 Other incomes which have no nexus with the export activities, of the undertaking and the profits of which are eligible for deduction, are also not eligible for claim of deductions set forth under the 21 ITA No.306/Del./2013 Scheme of Act. This view is fortified by the deduction of Hon'ble Supreme Court in the CIT Vs Sterling Foods. Besides, various other High Courts have taken a different view in respect of Duty Drawback. Even the jurisdictional High Court of Delhi in the case of CIT Vs Ritesh Industries 274 ITR 324, has clearly held that "drawback received by the assessee under a scheme to encourage export was not profit and gains derived from industrial undertaking and therefore, not entitled for deduction u/s 80IB". Similar view has been taken by the Hon'ble Madras High Court in the cases of CIT Vs Jameel Leather and Uppers (2000) 246 ITR 97 and CIT Vs Vishwanath and Company 261 ITR 737. In view of the discussions supra, all other incomes enumerated, supra (income by way of scrap sale), are being removed from the profits and gains for the purposes of computation of deduction u/s 10B."
Since the assessee has been allowed claim u/s 10B but with certain observations in the earlier orders, we also direct to allow the claim of the assessee on the same conditions. This ground of assessee is allowed.
23. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in open court on this 30th day of June, 2014.
Sd/- sd/-
(C.M. GARG) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 30th day of June, 2014
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A), Dehradun.
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.