Universal Precision Screws, 146, New Cycle Market, Jhandewalan Extn., New Delhi. Vs. ACIT, Range-39, New Delhi.
January, 08th 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : H : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM
Assessment Year : 2009-10
Universal Precision Screws, Vs. ACIT,
146, New Cycle Market, Range-39,
Jhandewalan Extn., New Delhi.
Assessee By : Shri Ved Jain, &
Shri V. Mohan, CAs
Department By : Shri J.P. Chandrakar, Sr.DR
PER R.S. SYAL, AM:
This appeal by the assessee arises out of the order passed
by the CIT(A) on 28.02.2013 in relation to the assessment year
2. The first issue taken up by the ld. AR is against not
considering foreign exchange difference as part of export
turnover and total turnover. Briefly stated, the facts of the case
are that the assessee claimed deduction u/s 10B by, inter alia,
considering foreign exchange rate difference of `32,35,700/- as
eligible for deduction. The AO, going by the phraseology used in
section 10B(1) being, profits and gains as are `derived by' an
eligible undertaking from export of eligible articles, came to hold
that the foreign exchange difference could not be included in the
eligible amount. He, therefore, held that such amount of `32.35
lac was liable to be included in the domestic sales. The ld. CIT(A)
approved the view taken by the AO on this point.
3. We have heard the rival submissions and perused the
relevant material on record. There is no dispute on the fact that
the foreign exchange difference arose on account of transactions
of export carried out by the assessee during the year. The Hon'ble
Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd.
(2011) 330 ITR 175 (Bom) has held that gain from foreign
exchange fluctuation realized within stipulated period forms part
of the sale proceeds and is directly related with the export
activities and such gain should be considered as income derived
from export activities eligible for exemption under s. 10A of the
Income-tax Act, 1961 (hereinafter also called `the Act')in the year
in which export took place. The Special bench of the tribunal in
ACIT vs. Prakash I. Shah (2008) 118 TTJ (Mumbai) (SB) 577 has
also held that the gain due to fluctuation in the foreign exchange
rate emanating from export is its integral part and cannot be
differentiated from the export proceeds simply on the ground that
the rate has increased subsequent to sale but prior to realization.
Eventually it has been held that the foreign exchange fluctuation
gain is part of export turnover for purposes of section 80HHC of
the Act. Since the connotation of `export turnover' under section
10B is no different from that u/ss 10A or 80HHC of the Act, the
meaning ascribed to export turnover in such decisions will apply
with full vigour in the context of section 10B as well. We,
therefore, hold that such foreign exchange fluctuation difference
has to be considered as part of `export turnover'. As the instant
foreign exchange fluctuation difference forms part of the export
turnover, the total turnover, in the denominator will also include
the effect of foreign exchange fluctuation difference. We,
therefore, sum up by holding that the amount of foreign exchange
fluctuation difference should be included in the `export turnover'
and `total turnover' and it should be excluded from the `domestic
turnover' as was done by the AO.
4. The second issue taken up by the assessee is against the
treatment of scrap sale as domestic sale. The AO, while
computing deduction u/s 10B, considered scrap sale amounting to
`31,84,869/- as part of domestic turnover. The ld. CIT(A)
approved the view taken by the AO on this point.
5. After considering the rival submissions and perusing the
relevant material on record, we find that this issue is no more res
integra in view of the judgment of the Hon'ble Supreme Court in
the case of CIT vs. Punjab Stainless Steel Industries (2014) 364
ITR 144 (SC), in which it has been held that the sale of scrap is
not includible in the `total turnover.' While dealing with the
computation of deduction u/s 80HHC, the Hon'ble Supreme Court
held that the sale of scrap cannot be considered as part of total
turnover in the case of an assessee who is not engaged in the
business of scrap. The ratio decidendi of this decision will apply
with full force here also to the treatment of scrap sales in the
context of section 10B of the Act. As the assessee in question is
engaged in the business of manufacturing and export of
fasteners, the amount of sale of scrap cannot be included in the
`total turnover' or `domestic turnover'. Rather, it would go to
reduce the cost of production. We, therefore, set aside the
impugned order on this issue.
6. The next ground is against the treatment of interest income
as ineligible for deduction u/s 10B of the Act. The assessee
received interest on FDRs amounting to `16,01,196/-. On being
called upon to explain as to how this amount was eligible for
deduction u/s 10B, the assessee stated that the interest on FDR
was received on `margin kept in the bank for utilization of Letter
of Credit (L/C) and bank guarantee limits from bank.'
Unconvinced with the assessee's submissions, the AO treated
such interest as income from other sources and did not allow
deduction u/s 10B on it. The ld. CIT(A) echoed the assessment
order on this point.
7. After considering the rival submissions and perusing the
relevant material on record, we find that the AO held interest
income as ineligible for deduction under section 10B(1) as it was
not `derived from' the eligible business. The view point of the AO
would have been correct if there had been no further elaboration
of the expression `such profits and gains as are derived by a
hundred per cent export oriented undertaking from the export of
articles or things.......'. The position under consideration is not
akin to some of the sections employing this expression without
any further amplification of the same. Sub-section (4) of section
10B gives meaning to the expression `profits derived from export
of articles or things ........' to mean 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, etc., bears to the total turnover of the business carried on
by the undertaking. A bare perusal of sub-section (4) in
juxtaposition to sub-section (1) of section 10B transpires that the
expression `derived by'' used in sub-section (1) cannot be
construed in its literal sense to mean encompassing only such
items of income which have direct or immediate nexus with the
eligible undertaking. The meaning given to this expression in
sub-section (4) as referring to `the profits of the business' makes
the expression more liberal to cover any income which is
connected with `the business' and should not be necessarily
`derived from the industrial undertaking' alone. Turning to the
nature of present interest income, being arising from FDRs
obtained for margin money for the purposes of availing credit
limits from banks, it becomes vivid that such interest bears the
requisite characteristics of a `business income.' The Mumbai
Bench of the Tribunal in Livingstones Jewellery (P) Ltd. Vs. DCIT
(2009) 31 SOT 323 (Mum) has held that interest derived by an
exporter from fixed deposits made with the bank for obtaining
credit limits is eligible for the benefit u/s 10A. Similar view has
been expressed in ACIT vs. Motorola India Electricals (P) Ltd.
(2008) 114 ITD 387 (Bang.) by holding that the interest income
having close nexus with the business activity of the assessee is
assessable as income from business and, hence, eligible for the
benefit u/s 10A and section 10B. In view of the above discussion,
we hold that the assessee is entitled to deduction u/s10B of the
Act in respect of the interest income earned on FDRs made for the
purposes of keeping margin money or for availing any other credit
facility from banks.
8. The impugned order on the issue of deduction u/s 10B is set
aside and the matter is sent back to the AO for computing
deduction u/s 10B afresh in conformity with our above findings
9. The next ground is against not allowing of deduction of
`14,53,153/- on account of interest u/s 24(b) of the Act. Briefly
stated, the facts apropos this ground are that the assessee
claimed interest on term loan amounting to `14.53 lac as
deduction u/s 24(b) of the Act in the revised return of income.
The AO observed that no such deduction was claimed in the
earlier years and even for the year under consideration, it was
claimed only by means of the revised return. He accepted the
fact as correct that the assessee had taken loan from bank and
had utilized the loan for the purpose of business, but, refused to
allow deduction as it was not able to substantiate its claim that
part of the loan was utilized for the purpose of construction of let
out property from which rental income assessable as `Income
from house property' was earned. The assessee's claim of
deduction u/s 24(b) was accordingly jettisoned, which action
came to be upheld in the first appeal.
10. After considering the rival submissions and perusing the
relevant material on record, it is observed that section 24(b) talks
of allowing deduction for the interest payable by the assessee
where property has been acquired, constructed, repaired,
renewed or reconstructed with borrowed capital. The assessee
has admittedly shown some income from let out property under
the head `Income from house property.' Once some term loan
has been taken for acquiring or constructing, etc., the property,
which fetched income under the head `Income from house
property', then, interest on such loan has to be allowed as
deduction u/s 24(b) of the Act. The view point of the assessee to
this extent is ergo accepted in principle. However, we are unable
to calculate such amount of interest with precision. Under such
circumstances, the impugned order is set aside on this score and
the matter is sent back to the AO for verifying and ascertaining
the amount of loan utilized for the building in respect of which
rental income assessable under the head `Income from house
property' was earned and, accordingly, allowing deduction
towards such interest u/s 24(b) of the Act. Needless to say, the
assessee will be allowed a reasonable opportunity of being heard
in such determination.
11. The next ground is against the ad hoc disallowance of `1
lac. The assessee claimed deduction of `5.47 lac for Training,
`3.67 lac for Miscellaneous expenses; `1.62 lac for Short/excess
and `5.59 lac for Garden maintenance. In the absence of the
assesee producing sufficient external details except for internal
vouchers, the AO disallowed a sum of `1 lac on ad hoc basis. The
ld. CIT(A) upheld the impugned order on this score.
12. After considering the rival submissions and perusing the
relevant material on record, it is observed as an undisputed fact
that some of the expenses incurred by the assessee were backed
only by the internal vouchers. This view point of the AO has not
been controverted by the ld. AR. It is but natural that if some of
the expenses are not properly substantiated with evidence, then
disallowance to that extent is called for. Considering the totality
of facts and circumstances prevailing in this case and taking a
holistic view of the matter, we are of the considered opinion that
the ends of justice would meet adequately if the disallowance is
reduced to `50,000/-. We order accordingly.
13. The next ground is against disallowance of `86,400/- on
account of festival expenses. The AO made the disallowance on
the ground that there was no necessity and further proper bills
were not available. The ld. CIT(A) upheld the assessment order.
14. After considering the rival submissions and perusing the
relevant record, we find that the aspect of necessity considered
by the AO is of no substance. The AO cannot step into the shoes
of the businessman to decide as to whether a particular
expenditure is necessary or not. He is supposed to confine himself
only in determining the deductibility of the expenses incurred by
the assessee as per law. Coming to the second aspect about the
non-availability of bills, we find that pages 72 and 73 of the paper
book are two invoices for `66,000/- and `20,400/- in respect of
110 pieces of pressure cookers and 120 pieces of gift bags. In
view of the fact that complete details in respect of Diwali
expenses are available and further there is no otherwise disability
on such deduction, we find no reason to make or sustain any
disallowance in this regard. This ground is allowed.
15. The next ground is against the ad hoc disallowance of
expenses @ 10% on account of personal nature. The assessee
claimed deduction for several expenses including Entertainment,
Conveyance and Telephone expenses. Considering the personal
element in such expenses, the AO disallowed 10% and added the
same to the total income. The ld. CIT(A) affirmed the view taken
by the AO.
16. Having heard both the sides on this point and perused the
relevant material on record, we do not find any reason to disturb
the finding of the authorities below in making and sustaining the
disallowance @ 10% of these expenses towards personal use.
This disallowance, being reasonable, is upheld.
17. The last ground is against the confirmation of disallowance
of `1,111/- towards payment of contribution to ESI. The assessee
late deposited the employees' share of ESI for the month of June,
2008. Considering the provision of section 43B read with section
2(24)(x) and 36(i)(va), the AO made the disallowance, which was
upheld in the first appeal.
18. We have heard both the sides on this point and perused the
relevant material on record. There is no doubt on the fact that
the employees' share of ESI relating to the month of June, 2008
was deposited within the year though beyond the due date under
the respective Act. The Hon'ble jurisdictional High Court in CIT vs.
Aimil Ltd. & Others, 321 ITR 508 (Del), has held that if the
employees' share of contribution is paid before the due date of
filing the return u/s 139(1) of the Act, then, no disallowance can
be made. In view of the foregoing decision, which is squarely
applicable to the facts of the instant case, we hold that the
assessee deserves and is hereby allowed relief on this issue. This
ground is allowed.
19. In the result, the appeal is partly allowed.
The order pronounced in the open court on 07.01.2015.
[A.T. VARKEY] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 07th January, 2015.
Copy forwarded to:
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.