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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

                       ITA No.2034/Del/2013
                     Assessment Year : 2009-10

Universal Precision Screws,        Vs.   ACIT,
146, New Cycle Market,                   Range-39,
Jhandewalan Extn.,                       New Delhi.
New Delhi.
PAN: AABFU6927B


     (Appellant)                            (Respondent)

              Assessee By      :    Shri Ved Jain, &
                                    Shri V. Mohan, CAs
              Department By    :    Shri J.P. Chandrakar, Sr.DR

                                   ORDER

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

2009-10.


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,
                                                    ITA No.2034/Del/2013


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


                                 2
                                                    ITA No.2034/Del/2013


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'



                                 3
                                                    ITA No.2034/Del/2013


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


                                 4
                                                         ITA No.2034/Del/2013


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


                                    5
                                                       ITA No.2034/Del/2013


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

                                     6
                                                    ITA No.2034/Del/2013


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.



                                 7
                                                     ITA No.2034/Del/2013


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

and conclusions.


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.
                                 8
                                                     ITA No.2034/Del/2013





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



                                 9
                                                      ITA No.2034/Del/2013


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




                                10
                                                     ITA No.2034/Del/2013


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




                                 11
                                                       ITA No.2034/Del/2013


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




                                12
                                                     ITA No.2034/Del/2013


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.

           Sd/-                                           Sd/-

     [A.T. VARKEY]                              [R.S. SYAL]
   JUDICIAL MEMBER                          ACCOUNTANT MEMBER
Dated, 07th January, 2015.

                                 13
                                  ITA No.2034/Del/2013


dk

Copy forwarded to:

     1.   Appellant
     2.   Respondent
     3.   CIT
     4.   CIT (A)
     5.   DR, ITAT

                            AR, ITAT, NEW DELHI.




                       14

 
 
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