M/s K. Mohan & Compnay (Exports) Pvt. Ltd., Bangalore V. ACIT, Bangalore

ITA 1093/BANG/2009

• Counselvise Citation: 109321114 RSA 2009
• Duration Of Justice: 5 year(s) 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 08-04-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 17-11-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P DHIVAHAR JT
• Assessee Lawyers: V SRINIVASAN
• Keywords: Capital asset; Business income; Opportunity of being heard; Speculation loss; Bad and doubtful debts; Competent authority; Reason to believe
• Section: 43B; 80HHC; 43(5); 10B; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER ITA NOS.1093/BANG/2009, 1266/BANG/2010 & 1057/BANG/2012 ASSESSMENT YEARS : 2006-07, 2007-08 & 2008-09 M/S. K. MOHAN & COMPANY (EXPORTS) PVT. LTD., B1, 62-5, BEGUR ROAD, BOMMANAHALLI, BANGALORE 560 068. PAN: AAACL 9811H VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 11(5), BANGALORE. APPELLANT RESPONDENT ITA NO.1103/BANG/2012 ASSESSMENT YEAR : 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 11(5), BANGALORE. VS. M/S. K. MOHAN & COMPANY (EXPORTS) PVT. LTD., BANGALORE 560 068. PAN: AAACL 9811H APPELLANT RESPONDENT ASSESSEE BY : SHRI V. SRINIVASAN, C.A. REVENUE BY : SHRI P. DHIVAHAR, JT. CIT(DR) DATE OF HEARING : 09.04.2015 DATE OF PRONOUNCEMENT : 24.04.2015 ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 2 OF 50 O R D E R PER BENCH: ITA 1093/B/2009 THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 4.9.2009 OF CIT(APPEALS)-I, BANGALORE RELATING TO ASSESSMENT YE AR 2006-07. 2. GROUNDS NO.1 TO 8 ARE GENERAL IN NATURE AND CALL S FOR NO SPECIFIC ADJUDICATION. 3. GROUND NOS. 2, 3, 4 & 7 RAISED BY THE ASSESSEE R EAD AS FOLLOWS:- 2. THE CIT(APPEALS) OUGHT TO HAVE APPRECIATED THA T THE RECEIPTS FROM FORWARD CONTRACTS HAD DIRECT NEXUS WI TH THE UNDERTAKING OF THE APPELLANT TO BE CONSIDERED AS HA VING BEEN DERIVED FROM EXPORT BUSINESS AND THEREFORE THE APPE LLANTS COMPUTATION OF DEDUCTION UNDER SECTION 10B DID NOT REQUIRE INTERFERENCE AND OUGHT TO HAVE DELETED THE DISALLOW ANCE MADE BY THE ASSESSING OFFICER. 3. WITHOUT PREJUDICE, THE CIT(APPEALS) OUGHT TO HA VE APPRECIATED THAT FORWARD CONTRACTS COULD NOT BE BOO KED UNLESS AND OTHERWISE EXPORT CONTRACTS OR EXPORT BILLS WERE SUBMITTED TO THE BANKERS AND COULD BE SETTLED ONLY BY WAY OF DEL IVERING EXPORT PROCEEDS. 4. WITHOUT PREJUDICE, THE CIT(APPEALS) OUGHT TO HA VE APPRECIATED THAT THE REQUIREMENT OF SECTION 10B WAS NOT THE INCOME DERIVED FROM EXPORT OF GOODS OR MERCHANDISE AS CONCLUDED BY THE ASSESSING OFFICER AND THE SAME BEI NG CONTRARY TO THE REQUIREMENT OF SECTION 10B, OUGHT TO HAVE SUSTA INED THE DISALLOWANCE AS MADE BY THE ASSESSING OFFICER. 7. WITHOUT PREJUDICE, THE CIT(APPEALS) OUGHT TO HA VE APPRECIATED THAT FOR THE ASSESSMENT YEAR 2005-06, T HE TRIBUNAL IN THE APPELLANTS OWN CASE HAD NOT AT ALL DISTINGUISH ED THE ORDER OF THE MUMBAI BENCH IN THE CASE OF D.KISHOREKUMAR & CO VS. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 3 OF 50 DCIT REPORTED IN (2005) 2 SOT 769 AND THEREFORE THE CIT(APPEALS) OUGHT TO HAVE FOLLOWED THE SAID ORDER OF THE MUMBAI BENCH. 4. THE ISSUE THAT ARISES FOR CONSIDERATION IS AS TO WHETHER RECEIPTS FROM FORWARD CONTRACTS CAN BE CONSIDERED AS PROFITS DERI VED FROM THE BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 10B OF THE INCOME TAX ACT, 1961 (ACT)? THE MATERIAL FACTS THAT ARE RELEVANT I N THIS REGARD ARE AS FOLLOWS. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT OF READYMADE GARMENTS. THE ASSESSEE HAS TWO EXPORT ORIENTED UNITS (EOUS), EOU-I & EOU-II, BESID ES DOMESTIC UNIT (DTA) 5. ON PERUSAL OF THE PROFIT AND LOSS ACCOUNT OF TH E ASSESSEE, THE AO NOTICED THAT THE ASSESSEE HAD EARNED PROFIT ON ACCO UNT OF FORWARD CONTRACT OF RS. 1,10,97,116/-. THE PROFIT SO EARNED WAS RED UCED FROM THE FINANCE EXPENSES PAID AND THE NET FINANCE EXPENSES HAD BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT. THE ABOVE INCOME HAVE BEEN CONSID ERED IN THE DTA, EOU-I AND EOU-II AS UNDER: UNIT AMOUNT DTA 4,99,370 EOU-I 61,58,900 EOU-II 44,38,846 TOTAL 1,10,97,116 ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 4 OF 50 6. ACCORDING TO THE AO DEDUCTION U/S.10B OF THE AC T PROVIDES FOR A DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY A 100% EXPORT ORIENTED UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS. THEREFORE, SECTION 10B SHALL APPLY ONLY TO PROFITS THAT ARE DERIVED FROM EXPORT OF ARTICLE OR THINGS. THE AO WAS ALSO OF THE VIEW THA T U/S.10B(3) THE SALE PROCEEDS OF ARTICLES OR THINGS ARE TO BE RECEIVED I N CONVERTIBLE FOREIGN EXCHANGE. IN THE LIGHT OF THE AFORESAID PROVISIONS , THE AO WAS OF THE VIEW THAT THE ASSESSEE HAD INDULGED IN HEDGING FOREIGN C URRENCY RISK AND AT BEST, THE SAID TRANSACTION CAN BE TERMED AS FINANC IAL TRANSACTION. IT IS ALSO PERTINENT TO MENTION THAT ASSESSEE HAS ALREADY BOOK ED FLUCTUATION OF FOREIGN EXCHANGE IN THE ACCOUNTS AND THE SAME IS BE ING TREATED AS PART OF TOTAL TURNOVER. ACCORDING TO THE AO BY NO STRETCH O F IMAGINATION, HEDGING OF FOREIGN CURRENCY, ALTHOUGH PERTAINING TO ASSESSEES OWN EXPORTS, CAN BE TREATED AS INCOME DERIVED FROM EXPORT OF GOODS AND MERCHANDISE. IT MAY BE MENTIONED THAT ONLY THE INCOME DERIVED FROM EXP ORT OF GOODS AND MERCHANDISE IS ELIGIBLE TO EXEMPTION U/S 10B. CONS EQUENTLY, THE INCOME EARNED BY WAY OF PROFIT ON FORWARD CONTRACTS WAS NO T INCLUDED IN EXPORT TURNOVER WHITE ARRIVING AT DEDUCTION U/S 10B. 7. BEFORE CITA THE ASSESSEE SUBMITTED THAT IT IS E NGAGED IN THE BUSINESS OF EXPORTS ONLY. THE ASSESSEE ENTERS INTO A CONTRACT WITH THE BANKERS IN ORDER TO HEDGE EXPORT SALES AGAINST ANY FOREIGN EXCHANGE FLUCTUATION. THESE CONTRACTS BOOKED BY THE BANKS ST RICTLY IN ACCORDANCE WITH RBI GUIDELINES WHICH ARE REPRODUCED BELOW:- ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 5 OF 50 A) ONLY ENTITIES WHICH EXPORT TO OTHER COUNTRIES C AN BOOK FORWARD CONTRACTS. B) THESE CONTRACTS CAN BE BOOKED BASED ON ACTUAL O RDERS ON HAND OR BASED ON ORDERS IN PIPELINE OR BASED ON PAST PERFOR MANCE C) THESE CONTRACTS WILL HAVE TO BE DELIVERED ONLY BY DELIVERING EXPORT DOCUMENTS OR EXPORT PROCEEDS LYING IN EEFC ACCOUNTS D) ON THE DELIVERY DATE, IF THE EXPORTER IS UNABLE TO DELIVER EXPORT DOCUMENTS OR DOLLARS FROM ITS EEFC ACCOUNT, THE BAN KER WILL CANCEL THE CONTRACT AND WHATEVER IS THE DIFFERENCE BETWEEN THE CONTRACT RATE AND PREVAILING RATE ON THE DATE OF CANCELLATION WIL L BE EITHER PAID TO OR RECEIVED FROM THE EXPORTER FROM THE EXPORTER AS THE CASE MAYBE. E) CANCELLATION OF A CONTRACT DUE TO NON DELIVERY OF THE CONTRACTED AMOUNT ON THE DUE DATE MAY RESULT IN PROFIT OR LOSS AS PER THE SPOT RATE ON DUE DATE. 8. THE ASSESSEE POINTED OUT THAT DURING THE PREVIOU S YEAR IT HAD BOOKED FORWARD CONTRACTS ONLY FOR A PART OF THE EXP ORT TURNOVER WHICH CLEARLY INDICATED THAT THE ASSESSEE DID NOT OVER BO OK FORWARD CONTRACTS IN ORDER TO SPECULATE. WHATEVER CONTRACTS BOOKED WERE BASED ON BUSINESS REQUIREMENTS SUBSTANTIATED BY ACTUAL EXPORTS PERFOR MED. THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HONBLE ITAT , MUMBAI BENCH IN THE CASE OF D KISHOREKUMAR AND CO. V DCIT (ITA NO.3883/MUM/1997 DATED 31.03.2005) WHEREIN IT WAS HELD THAT INCOME FROM CANCELLATION OF FORWARD CONTRACT WAS PART AND PARCEL OF INCOME ELIG IBLE FOR DEDUCTION U/S 80 HHC. THE ASSESSEE ARGUED THAT SINCE IT HAD ENTERED INTO FORWARD CONTRACTS TO COVER LOSSES ARISING ON ACCOUNT OF DEVALUATION I N FOREIGN CURRENCY, THE PROFIT ON FORWARD CONTRACT IS NOTHING BUT SALE PROC EEDS OF GOODS EXPORTED OUT OF INDIA AND ARE PART AND PARCEL OF THE BUSINES S PROFITS OF THE UNIT. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 6 OF 50 9. THE CIT(A) HOWEVER FOUND THAT SIMILAR ISSUE HA D COME UP FOR CONSIDERATION IN ASSESSEES CASE FOR AY 05-06 AND T HE TRIBUNAL IN I.T.A.NO.113/BANG/09 (A.Y.2005-06) DATED 07-08-2009 , AFTER DISTINGUISHING THE FACTS OF THE ASSESSEES CASE FROM THE CASE CITE D BY THE ASSESSEE, I.E. D. KISHORE KUMAR & CO. VS. DCIT (SUPRA), ARRIVED AT A CONCLUSION THAT HEDGING IN FOREIGN EXCHANGE THROUGH FORWARD CONTRAC TS TANTAMOUNTS TO SPECULATION BUSINESS WHICH IS DIFFERENT FROM AND HA S NO RELATION WITH THE BUSINESS OF THE ASSESSEE I.E., GARMENTS EXPORT AND HENCE, FOUND THE ACTION OF A.O. JUSTIFIED. FOLLOWING THE SAID DECISION, THE CIT(A) UPHELD THE ORDER OF THE AO. 10. AGGRIEVED BY THE ORDER OF THE CITA, THE ASSESS EE HAS RAISED THE AFORESAID GROUNDS BEFORE THE TRIBUNAL. THE LD. COU NSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE DECISION RENDERED BY T HE TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE EARLIER ASSESSMENT YEAR S HAS NOT BEEN CHALLENGED BY THE ASSESSEE BEFORE THE HON'BLE HIGH COURT OF KARNATAKA. NEVERTHELESS, IT WAS SUBMITTED BY HIM, THAT THE DEC ISION RENDERED BY THE TRIBUNAL FOR A.Y. 2005-06 REQUIRES RECONSIDERATION. IN THIS REGARD, THE LD. COUNSEL DREW OUR ATTENTION TO THE PROVISIONS OF SEC TION 43(5), WHICH READ AS FOLLOWS:- 43. IN SECTIONS 28 TO 41 AND IN THIS SECTION, UNLESS T HE CONTEXT OTHERWISE REQUIRES .. . ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 7 OF 50 ( 5 ) 'SPECULATIVE TRANSACTION' MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SE TTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMM ODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE ( A ) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHAN DISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HI M; OR ( B ) TO (D).. SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION . 11. IT WAS FIRST POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE THAT SPECULATIVE TRANSACTION MEANS A TRANSACTION IN WHIC H A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY IS ULTIMATELY SET TLED OTHERWISE BY ACTUAL DELIVERY. ACCORDING TO HIM, THE EXPRESSION 'COMMOD ITY' USED IN SECTION 43(5) OF THE ACT DOES NOT INCLUDE FOREIGN EXCHANGE, WHICH WAS SUBJECT MATTER OF THE FORWARD CONTRACT IN THE PRESENT CASE. IN THIS REGARD, OUR ATTENTION WAS DRAWN TO THE DECISION RENDERED BY THE ITAT AHMEDABAD BENCH IN ADANI ENTERPRISES LTD. V. ACIT [2015] 55 TAXMAN.COM 375 (AHD-TRIB) . IN THE AFORESAID CASE, THE ASSESSEE WAS ENGAGED IN EXPORT, IMPORT AND DOMESTIC TRADING OF VARIOUS COMMODITIES. THE ASSESSEE BORROWED MONEY FOR THE PURPOSE OF ITS BUSINESS I.E. , GLOBAL TRADING VARIOUS COMMODITIES. AS PER TERMS OF BORROWING OF FOREIGN CURRENCY WORKING CAPITAL LOAN, THE ASSESSEE HAD TO ENTER INTO A CURRENCY SWA P ARRANGEMENT. THE ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 8 OF 50 ASSESSEE ENTERED INTO CURRENCY SWAP TRANSACTION IN RESPECT OF OUTSTANDING FOREIGN CURRENCY LOANS AS PER THE PREVAILING RBI GU IDELINES. THE CURRENCY SWAP TRANSACTION ON SETTLEMENT RESULTED IN A LOSS O F RS.6.05 CRORES. THE QUESTION BEFORE THE TRIBUNAL WAS WHETHER THE AFORES AID LOSS CAN BE SAID TO BE SPECULATIVE LOSS. THE TRIBUNAL ACCEPTED THE ARG UMENT OF THE ASSESSEE THAT THE WORD 'COMMODITY' IN SECTION 43(5) OF THE A CT CANNOT COVER CURRENCY WHICH IS ONLY A MEDIUM OF EXCHANGE WITH WHICH GOODS AND SERVICES CAN BE BOUGHT. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE CONTAINED IN PARA 4.10 OF THE ORDER OF THE TRIBUNAL. 12. ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE, FOREIGN CURRENCY SWAP TRANSACTION WHICH WAS THE TRANSACTION IN THE CASE O F ADANI ENTERPRISES (SUPRA) IS AKIN TO THE FOREIGN EXCHANGE FORWARD CONTRACT E NTERED INTO BY THE ASSESSEE IN THE PRESENT CASE AND APPLYING THE DECIS ION OF AHMEDABAD BENCH OF THE TRIBUNAL, IT HAS TO BE HELD THAT THE G AIN RECEIVED BY THE ASSESSEE ON SETTLEMENT OF FOREIGN EXCHANGE FORWARD CONTRACT HAS TO BE CONSIDERED AS PROFITS OF THE BUSINESS OF THE ASSESS EE ON WHICH DEDUCTION U/S. 10B SHOULD BE ALLOWED. 13. THE LD. COUNSEL FOR THE ASSESSEE FURTHER PLACED RELIANCE ON THE DECISION OF ITAT BANGALORE BENCH IN THE CASE OF STAR EXPORTS & IMPORTS V. ACIT, ITA NO.997/BANG/2012, A.Y. 2009-10, WHEREIN THIS TRIBUNAL CONSIDERED THE DECISION RENDERED BY THE TRIBUNAL IN ASSESSEE'S OWN CASE (K. MOHAN & CO. EXPORTS PVT. LTD.) AND BY ITS ORDER DATED 6.2.2005, HELD ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 9 OF 50 THAT THE DECISION RENDERED BY THE TRIBUNAL REFERRED TO ABOVE NEED NOT BE FOLLOWED AS IT WAS CONTRARY TO THE DECISION RENDERE D BY THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT V. FRIENDS & FRIENDS SHIPPING CO. [2013] 217 TAXMAN 267 (GUJ) . IN THE CASE OF STAR IMPORTS & EXPORTS (SUPRA) , THE QUESTION BEFORE THE TRIBUNAL WAS AS TO WHETHER LOSS ON ACCOUNT OF FOREIGN EXCHANGE CONTRACTS TO HEDGE AGAINST FOREIGN EXCHANGE FLUCTUATION WAS A SPECULATIVE LOSS U/S. 43(5) OR A NORMAL BUSIN ESS LOSS? THE TRIBUNAL AFTER CONSIDERING THE DECISION OF THE HONBLE GUJAR AT HIGH COURT IN THE CASE OF FRIENDS & FRIENDS SHIPPING COMPANY (SUPRA) , WHEREIN IT WAS HELD THAT FORWARD CONTRACTS ENTERED INTO WITH THE BANKS IN RESPECT OF FOREIGN EXCHANGE ARE NOT TO BE REGARDED AS SPECULATIVE TRAN SACTIONS. THE HONBLE COURT OBSERVED THAT THE ASSESSEE WAS NOT A DEALER I N FOREIGN EXCHANGE AND FORWARD EXCHANGE CONTRACT WAS INCIDENTAL TO THE ASSESSEES REGULAR COURSE OF BUSINESS. FOLLOWING THE AFORESAID DECISI ON, THE TRIBUNAL HELD AS FOLLOWS:- IN VIEW OF THE ABOVE DECISION OF THE HONBLE GUJAR AT HIGH COURT WE ARE OF THE OPINION THAT THE DECISIONS RELIED ON BY THE REVENUE WHICH ARE OF VARIOUS TRIBUNAL BENCHES PALE INTO INS IGNIFICANCE. JUDICIAL DISCIPLINE REQUIRES US TO FOLLOW JUDGMENT OF HIGH COURT UNLESS AND UNTIL A CONTRARY JUDGMENT OF JURISDICTIO NAL HIGH COURT IS SHOWS BY THE PARTIES TO THE LITIGATION. EVEN IF THERE IS A CONFLICT OF OPINION BETWEEN VARIOUS HIGH COURTS, UNLESS AND UNTIL, THERE IS A JURISDICTIONAL HIGH COURT DECISION, ONE WAY OR TH E OTHER, AN ASSESSEE CAN RIGHTLY SUBMIT THAT THE ONE IN ITS FAV OUR SHOULD BE FOLLOWED. WE ARE THEREFORE, OF THE OPINION THAT THE ASSESSEE HAS TO SUCCEED IN THIS APPEAL. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 10 OF 50 14. THE REVENUE HAD, BEFORE THE TRIBUNAL, PLACED RE LIANCE ON THE DECISION OF TRIBUNAL RENDERED IN THE CASE OF K.M. MOHAN & CO. EXPORT PVT. LTD. (SUPRA) FOR A.Y. 2005-06. 15. BESIDES THE ABOVE, THE LD. COUNSEL FOR THE ASSE SSEE ALSO PLACED RELIANCE ON THE DECISION OF THE ITAT MUMBAI BENCH I N THE CASE OF S. VINODKUMAR DIAMONDS PVT. LTD. V. DCIT (SUPRA) . 16. THE LD. DR, ON THE OTHER HAND, PLACED STRONG RE LIANCE ON THE DECISION RENDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE AND SUBMITTED JUDICIAL DISCIPLINE REQUIRES THAT THE SAME SHOULD B E FOLLOWED. HE DREW OUR ATTENTION TO THE PROVISIONS OF SECTION 10B(4) OF TH E ACT AND HIGHLIGHTED THE FACT THAT DEDUCTION IS ALLOWED ONLY ON PROFITS DERI VED FROM EXPORT OF ARTICLES OR THINGS. ACCORDING TO HIM, GAIN ON FOREIGN EXCHA NGE FORWARD CONTRACTS CANNOT BE SAID TO BE DERIVED FROM THE BUSINESS OF E XPORT OF ARTICLES OR THINGS. HE ALSO PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA, 317 ITR 218 W HEREIN THE CONCEPT OF THE WORDS DERIVED FROM WAS EXPLAINED BY THE SUPRE ME COURT AS IMMEDIATE OR DIRECT NEXUS WITH THE BUSINESS OF THE ASSESSEE. IT WAS ALSO SUBMITTED BY HIM THAT THE TRANSACTION OF FOREIGN EX CHANGE FORWARD CONTRACT ENTERED INTO BY THE ASSESSEE WAS NOT A HEDGING TRAN SACTION AS IT DID NOT FALL WITHIN THE AMBIT OF CLAUSE (A) OF SECTION 43(5) OF THE ACT. IN THIS REGARD, HE SUBMITTED THAT ONLY CONTRACTS IN RESPECT OF RAW MAT ERIALS OR MERCHANDISE ARE COVERED UNDER CLAUSE (A) AND NOT FOREIGN EXCHAN GE FORWARD CONTRACTS. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 11 OF 50 HE ALSO HIGHLIGHTED THE FACT THAT FOREIGN EXCHANGE CONTRACT ITSELF WAS DONE BY THE ASSESSEE IN A SYSTEMATIC MANNER FOR A PERIOD OF TIME AND THERE IS EVERY REASON TO BELIEVE THAT IT WAS A SEPARATE BUSI NESS WHICH ITSELF CONTRADICTS THE PROVISIONS OF SECTION 28 OF THE ACT . 17. THE LD. DR RELIED ON THE FOLLOWING DECISIONS IN SUPPORT OF THE REVENUES CASE THAT THE INCOME DERIVED FROM FOREIGN EXCHANGE FORWARD CONTRACTS CANNOT BE REGARDED AS INCOME FROM BUSINES S:- (A) SHANKARA INFRASTRUCTURE MATERIALS LTD. V. ACIT (2015) 53 TAXMANN.COM 429, (BANG. TRIB.) (B) ARASKA DIAMOND (P.) LTD. V. ACIT, 52 TAXMANN.CO M (MUMBAI-TRIB.) 18. BESIDES THE ABOVE, THE LD. DR ALSO SUBMITTED TH AT IT WILL NOT BE CORRECT TO SAY THAT FOREIGN CURRENCY IS NOT A COMMO DITY. ACCORDING TO HIM, FOREIGN CURRENCY IS USED AS A MEDIUM OF EXCHANGE OR VALID LEGAL TENDER. IT COULD BE REGARDED AS A COMMODITY. IN THIS REGARD, OUR ATTENTION WAS DRAWN TO THE DEFINITION OF COMMODITY AS GIVEN IN WEBSIT E WWW.INVESTOPEDIA.COM , WHEREIN IT HAS BEEN EXPLAINED THAT SOME TRADITIONAL EXAMPLES OF COMMODITIES WOULD BE GRAINS, GOLD, BEEF, OIL AND NA TURAL GAS. MORE RECENTLY, DEFINITION WAS EXTENDED TO INCLUDE FINANC IAL PRODUCTS SUCH AS FOREIGN CURRENCIES AND INDEXES. THE DEFINITION IN WEBSITE WWW.INVESTORWORDS.COM GIVING IDENTICAL MEANING WAS ALSO PLACED BEFORE US. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 12 OF 50 19. IT WAS ALSO SUBMITTED BY HIM THAT IN ALL THE CA SES CITED BY THE LD. COUNSEL FOR THE ASSESSEE, THERE WAS NEXUS ESTABLISH ED BETWEEN FOREIGN EXCHANGE FORWARD CONTRACTS AND THE EXPORT ORDERS OF THE CONCERNED ASSESSEE. ACCORDING TO HIM, IN THE PRESENT CASE, T HE ASSESSEE HAS NOT FILED ANY DOCUMENTARY EVIDENCE TO SHOW NEXUS BETWEE N EXPORTS MADE BY IT AND FOREIGN EXCHANGE FORWARD CONTRACT. 20. THE LD. AR, IN HIS REJOINDER, SUBMITTED THAT IN THE ORDER OF ASSESSMENT, THE AO HAS CLEARLY RECORDED THE FACT TH AT FOREIGN CURRENCY FORWARD CONTRACTS, ALTHOUGH PERTAINING TO ASSESSEE S OWN EXPORTS, CANNOT BE TREATED AS INCOME DERIVED FROM EXPORT OF GOODS A ND MERCHANDISE. ACCORDING TO HIM, THIS FINDING OF THE AO IS ITSELF ENOUGH EVIDENCE THAT HE HAD NOT DISPUTED THE FACT THAT FOREIGN EXCHANGE FOR WARD CONTRACTS WAS IN RELATION TO THE EXPORTS MADE BY THE ASSESSEE. IT W AS ALSO POINTED OUT BY HIM THAT THE EXPRESSION PROFITS OF THE BUSINESS U /S. 10B MEANS PROFITS OF THE BUSINESS OF THE UNDERTAKING WHICH HAS A BROADER CONNOTATION. 21. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO T HE RIVAL SUBMISSIONS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF READYMAD E GARMENTS. THE ASSESSEE REALIZES THE EXPORT PROCEEDS IN FOREIGN EX CHANGE. AS A RESULT OF VARIATION IN THE RATES OF FOREIGN EXCHANGE, THE ASS ESSEE MIGHT RECEIVE MORE OR LESS THAN THE CONTRACTED VALUE IN INDIAN RUPEE A T THE TIME OF REALIZATION OF EXPORT PROCEEDS. IN ORDER TO SAFEGUARD AGAINST SUC H UNCERTAINTIES, THE ASSESSEE ENTERS INTO A FORWARD CONTRACT IN FOREIGN EXCHANGE. THE RBI ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 13 OF 50 GUIDELINES IN REGARD TO FORWARD EXCHANGE CONTRACT P ROVIDES THAT ONLY ENTITLES WHICH EXPORT TO OTHER COUNTRIES CAN BOOK F ORWARD CONTRACTS. THE CONTRACTS HAVE TO BE BASED ON ACTUAL ORDERS ON HAND OR BASED ON ORDERS IN PIPELINE OR BASED ON PAST PERFORMANCE. THE FORWARD CONTRACT CAN BE PERFORMED ONLY BY DELIVERING EXPORT DOCUMENTS OR EX PORT PROCEEDS LYING IN EEFC ACCOUNTS. ON THE DELIVERY DATE, IF THE EXPORT ER IS UNABLE TO DELIVER EXPORT DOCUMENTS OR DOLLARS FROM ITS EEFC ACCOUNT, THE BANKER WILL CANCEL THE CONTRACT AND WHATEVER IS THE DIFFERENCE BETWEEN THE CONTRACT RATE AND PREVAILING RATE ON THE DATE OF CANCELLATION WILL BE EITHER PAID TO OR RECEIVED FROM THE EXPORTER FROM THE EXPORTER AS THE CASE MAY BE. CANCELLATION OF A CONTRACT DUE TO NON- DELIVERY OF THE CONTRACTED AMO UNT ON THE DUE DATE MAY RESULT IN PROFIT OR LOSS AS PER THE SPOT RATE ON DU E DATE. IT IS NOT IN DISPUTE THAT THE FORWARD CONTRACTS WHICH RESULTED IN GAIN T O THE ASSESSEE WERE ENTERED INTO IN RELATION TO EXPORT ORDERS WHICH THE ASSESSEE HAD PROCURED. 22. IN AY 06-07, ON IDENTICAL FACTS AND CIRCUMSTANC ES, THIS TRIBUNAL HELD THAT THE GAIN OR LOSS ON FORWARD CONTRACT IN FOREIG N EXCHANGE WAS SPECULATIVE IN CHARACTER AND CANNOT BE REGARDED A S INCOME DERIVED FROM EXPORT BUSINESS ON WHICH DEDUCTION U/S.10B OF THE A CT CAN BE ALLOWED. 23. THE CIT(A) IN AY 06-07 HAD ALLOWED THE CLAIM OF THE ASSESSEE BY PLACING RELIANCE ON D. KISHORE KUMAR & CO. VS. DCIT (2005) 2 SOT 769 (MUM.) THE DECISION OF THE ITAT MUMBAI BENCH IN THE CASE O F WHEREIN THE QUESTION BEFORE THE HONBLE TRIBUNAL WAS AS TO WHETHER THE PROFIT ON ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 14 OF 50 CANCELLATION OF FORWARD CONTRACT IN FOREIGN EXCHANG E WAS TO BE REGARDED AS PROFITS OF THE BUSINESS ON WHICH DEDUCTION U/S.80HH C OF THE ACT CAN BE ALLOWED. THE TRIBUNAL HELD THAT THE IMPORTS IN CON NECTION WITH WHICH ASSESSEE HAD ENTERED INTO FORWARD CONTRACTS, ACTUAL LY TOOK PLACE, PROFIT ON CANCELLATION OF SAID CONTRACTS EFFECTIVELY ONLY RED UCED COSTS OF PURCHASES IN RESPECT OF THESE IMPORTS AND COULD NOT BE, BY ANY L OGIC, CONSTRUED AS TRANSACTIONS INDEPENDENT OF ASSESSEES BUSINESS. T HE TRIBUNAL ALSO HELD THAT EVEN THOUGH THE TRANSACTIONS HAD BEEN SETTLED WITHOUT DELIVERY, THE CONDITIONS OF SECTION 43(5) OF THE ACT DESCRIBING S PECULATIVE TRANSACTION, WERE CLEARLY FULFILLED, BUT THE REQUIREMENT OF EXPL N.-2 TO SEC.28 WAS NOT FULFILLED IN AS MUCH AS IT COULD NOT BE CONCLUDED T HAT THE TRANSACTIONS WERE OF SUCH A NATURE AS TO CONSTITUTE A BUSINESS BY ITS ELF. THE TRIBUNAL EXPLAINED THAT PROFIT ON CANCELLATION OF FORWARD CO NTRACTS IS GENERALLY REVENUE NEUTRAL BECAUSE THE QUESTION OF PROFIT ON C ANCELLATION OF FORWARD CONTRACTS CAN ONLY ARISE IN A SITUATION WHEN THE VA LUE OF FOREIGN CURRENCY IS INCREASING VIS--VIS DOMESTIC CURRENCY, AND WHEN TH E FOREIGN EXCHANGE VALUE IS SO INCREASING, THE ULTIMATE PAYMENT MADE I N FOREIGN CURRENCY WAS NOT TO GO UP, THERE WOULD NOT HAVE BEEN GAINS ON CA NCELLATION OF CONTRACTS BUT THEN THE ACTUAL COSTS, IN TERMS OF DOMESTIC CU RRENCY THAT THE ASSESSEE PAYS WHEN HE HAS TO PAY FOR IMPORTS IN FOREIGN CURR ENCY DOES NOT ALSO GO UP. 24. THE REVENUE CHALLENGED THE ORDER OF CIT(A) FOR AY 06-07 AND THE SAME WAS CONSIDERED BY THE ITAT BANGALORE IN ITA NO .113/BANG/09 FOR AY ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 15 OF 50 05-06 BY ORDER DATED 7.8.2009. THE TRIBUNAL DID NO T AGREE WITH THE DECISION RENDERED BY THE MUMBAI BENCH IN THE CASE O F D.KISHORE KUMAR & CO. (SUPRA) ON WHICH THE CIT(A) HAD PLACED RELIANCE IN ALLOWING THE CLAIM OF THE ASSESSEE. THE TRIBUNAL HELD :- (I) THE FORWARD CONTRACT WAS NOT SETTLED BY ACTUAL LY DELIVERY AND WAS THEREFORE SPECULATIVE TRANSACTION WITHIN THE MEANIN G OF SEC.43(5) OF THE ACT. (II) CLAUSE (A) TO SEC.43(5) OF THE ACT EXEMPTING HEDGING TRANSACTIONS FROM THE PURVIEW OF SEC.43(5) OF THE ACT WAS NOT AP PLICABLE TO THE CASE OF THE ASSESSEE AS IT APPLIED ONLY WHEN THE CO NTRACT IS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED OR MERCHANDIS E SOLD BY AN ASSESSEE AND FOREIGN EXCHANGE IS NOT GOODS MANUFAC TURED OR MERCHANDISE SOLD. (III) IN THE DECISION RENDERED BY THE MUMBAI BENC H IN THE CASE OF D.KISHORE KUMAR & CO. (SUPRA) , THE EFFECT OF EXPLN.-2 TO SEC.28 OF THE ACT WAS NOT CONSIDERED. (IV) THE TRIBUNAL IN PARA 20 OF ITS ORDER FURTHER HELD THAT IN THE CASE OF THE ASSESSEE THERE ARE A NUMBER OF TRANSACTIONS AND THE FORWARD CONTRACTS HAVE BEEN TAKEN IN RESPECT OF 46% OF THE EXPORT TURNOVER. THUS, IT IS NOT AN ISOLATED TRANSACTION. HENCE, IN VIEW OF EXPLN.-2 TO ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 16 OF 50 SEC.28, THE PROFIT FROM THE FORWARD CONTRACT WILL H AVE TO BE ASSESSED AS PROFIT FROM SPECULATION BUSINESS. (V) IN PARA 21 OF ITS ORDER THE TRIBUNAL HELD THA T DEDUCTION U/S.10B OF THE ACT IS TO BE ALLOWED ONLY ON THE PROFITS OF THE BUS INESS OF THE UNDERTAKING. PROFIT OF THE BUSINESS OF THE UNDERT AKING ACCORDING TO THE TRIBUNAL WOULD BE ONLY PROFIT FROM MANUFACTURE AND EXPORT OF READYMADE GARMENTS AND NOT FROM GAIN ON FORWARD CON TRACT WHICH HAS TO BE ASSESSED AS PROFITS OF SPECULATION BUSIN ESS SEPARATELY. 25. THE CIT(A) IN THE PRESENT ASSESSMENT YEAR TO WH ICH THIS APPEAL RELATES TO, FOLLOWED THE ORDER OF THE ITAT AND UPHE LD THE ACTION OF THE AO IN EXCLUDING THE GAIN ON FORWARD FOREIGN EXCHANGE CONT RACTS FROM THE PROFITS OF THE BUSINESS ON WHICH DEDUCTION U/S.10B OF THE ACT HAS TO BE ALLOWED. THOUGH THE TRIBUNAL IN THE ORDER FOR AY 06-07 GAVE SEVERAL REASONS WHY DEDUCTION U/S.10B OF THE ACT SHOULD NOT BE ALLOWED ON GAIN ON FOREIGN EXCHANGE FORWARD CONTRACT, THE ONLY BASIS GIVEN BY THE AO IN THE PRESENT AY 07-08 TO WHICH THIS APPEAL PERTAINS, IS THAT THE GAIN ON FOREIGN EXCHANGE FORWARD CONTRACT IS NOT DERIVED FROM THE B USINESS OF EXPORT OF READYMADE GARMENTS. THE AO HAS NOT ASSESSED THE SA ID GAIN AS SPECULATIVE INCOME BUT AS REGULAR BUSINESS INCOM E. 26. FROM THE ARGUMENTS ADVANCED BEFORE US ON THE BA SIS OF SEVERAL JUDICIAL PRONOUNCEMENTS OF VARIOUS BENCHES OF ITAT, IT BECOMES CLEAR THAT THERE IS AN APPARENT CONFLICT OF JUDICIAL OPINION O N THE QUESTION AS TO ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 17 OF 50 WHETHER THE GAIN ON FORWARD FOREIGN EXCHANGE CONTRA CTS IS TO BE REGARDED AS INCOME FROM SPECULATIVE BUSINESS. NONE OF THE D ECISIONS RENDERED ARE IN THE CONTEXT OF THE QUESTION AS TO WHETHER SUCH G AIN CAN BE SAID TO BE PROFITS DERIVED FROM THE BUSINESS OF EXPORT ON WHIC H DEDUCTION U/S.10B OF THE ACT HAS TO BE ALLOWED. 27. THE DECISIONS WHERE IT WAS HELD THAT GAIN ON FO RWARD FOREIGN EXCHANGE CONTRACTS IS TO BE REGARDED AS INCOME FROM BUSINESS, WHICH WERE CITED ON BEHALF OF THE ASSESSEE ARE AS FOLLOWS: (I) ITA NO.1320/BANG/2012 FOR AY 09-10 M/S.HANUMAN WEAV ING FACTORY VS. ACIT ORDER DATED 23.8.2013 . IN THIS DECISION THE TRIBUNAL DISTINGUISHED THE CASE OF K.MOHAN & CO. (ASSESSEES CASE FOR AY 06-07 BY OBSERVING THAT THE ISSUE THEREIN WAS AS TO WHETHER GAIN ON FORWARD FOREIGN EXCHANGE CONTRACTS IS TO BE REGARDED AS INCOME DERI VED FROM THE BUSINESS OF EXPORT ELIGIBLE FOR DEDUCTION U/S.10B OF THE ACT . THE TRIBUNAL ULTIMATELY HELD THAT THE GAIN IN QUESTION WAS TO BE REGARDED A S INCOME FROM BUSINESS. (II) LONDON STAR DIAMOND COMPANY (I) PVT.LTD. VS. DCIT ( 2013) 54(II)ITCL 254 (MUMD-TRIB) . IN THIS DECISION ALSO THE RULING WAS THAT GAIN ON FORWARD FOREIGN EXCHANGE CONTRACTS IS TO BE REGARDED AS INCOME FROM BUSINESS AND NOT INCOME FROM SPECULATIVE BUSIN ESS U/S.43(5) OF THE ACT. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 18 OF 50 (III) STAR EXPORTS & IMPORTS VS. ACIT ITA NO.997/BANG/201 2 (AY 09-10) ORDER DATED 6.2.2015 . IN THIS DECISION THE DECISION OF THE HONBLE GUJ ARAT HIGH COURT IN THE CASE OF FRIENDS AND FRIENDS SHIPPING PVT. LTD. (2013) 217 TAXMANN 267 WAS FOLLOWED. IN THE AFORESAID DECISION THE REVEN UE TREATED LOSS IN FORWARD CONTRACT IN FOREIGN EXCHANGE AS SPE CULATIVE LOSS AND DID NOT ALLOW SET OFF OF SUCH LOSS AGAINST INCOME FROM BUSI NESS. THE TRIBUNAL HELD THAT THE LOSS WAS NOT SPECULATIVE LOSS AND THE SET OFF CLAIMED BY THE ASSESSEE HAD TO BE ALLOWED. THE HONBLE HIGH COURT UPHELD THE ORDER OF THE TRIBUNAL. THIS DECISION WAS REFERRED TO BY THE TRIBUNAL IN THE ORDER IN THE CASE OF STAR EXPORTS & IMPORTS (SUPRA) AND IT W AS FURTHER OBSERVED THAT DECISION RENDERED BY THE TRIBUNAL IN THE CASE OF AS SESSEE K. MOHAN & CO. FOR AY 06-07 PALE INTO INSIGNIFICANCE AS THE DECISION OF THE HON BLE HIGH COURT HAS TO BE FOLLOWED. THE CLAIM OF THE ASSESS EE WAS ACCORDINGLY UPHELD. (IV) ADANI ENTERPRISES LTD. VS. ACIT (2015) 55 TAXMANN.C OM 375 (AHD.- TRIB): IN THIS CASE IT WAS HELD THAT SEC.43(5) OF THE AC T DO NOT APPLY TO CURRENCIES AND THEREFORE LOSS INCURRED BY ASSESSEE IN CURRENCY SWAP CONTRACT CANNOT BE DENIED TO BE SET OFF AGAINST OTH ER HEADS OF INCOME TAKING IT AS SPECULATIVE LOSS. 28. AS CAN BE SEEN FROM THE ABOVE DECISIONS REFERRE D TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, NONE OF THE DECISIONS REN DERED ARE IN THE CONTEXT OF THE QUESTION AS TO WHETHER SUCH GAIN CAN BE SAID TO BE PROFITS DERIVED ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 19 OF 50 FROM THE BUSINESS OF EXPORT ON WHICH DEDUCTION U/S. 10B OF THE ACT HAS TO BE ALLOWED. WE ARE THEREFORE OF THE VIEW THAT THE DECISION RENDERED IN ASSESSEES OWN CASE IN AY 06-07 IS APPLICABLE, WHER EIN THE TRIBUNAL TOOK THE VIEW THAT DEDUCTION U/S.10B OF THE ACT IS TO BE ALLOWED ONLY ON THE PROFITS OF THE BUSINESS OF THE UNDERTAKING. PROFI T OF THE BUSINESS OF THE UNDERTAKING, ACCORDING TO THE TRIBUNAL, WOULD BE O NLY PROFIT FROM MANUFACTURE AND EXPORT OF READYMADE GARMENTS AND NO T FROM GAIN ON FORWARD CONTRACT, HAS TO BE FOLLOWED IN THE PRESENT AY ALSO. AS WE HAVE ALREADY OBSERVED, THE AO HAS ASSESSED THE SAID GAIN AS BUSINESS INCOME AND THEREFORE THE DECISIONS REFERRED TO ABO VE RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE NOT RELEVANT A ND HELPFUL TO THE PLEA OF THE ASSESSEE BEFORE US. IN VIEW OF THE ABOVE CONC LUSIONS, WE DO NOT DEEM IT NECESSARY TO ELABORATE ON THE ARGUMENTS ADV ANCED BY THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US. 29. FOR THE REASONS GIVEN ABOVE, WE DISMISS GROUND NO. 2 TO 4 AND GROUND NO.7 RAISED BY THE ASSESSEE BEFORE US. 30. GROUND NOS. 5 & 6 RAISED BY THE ASSESSEE READS AS FOLLOWS:- 5. THE CIT(APPEALS) OUGHT NOT TO HAVE UPHELD THE INCLUSION OF INTER UNIT JOB WORK CHARGES FOR ARRIVING AT THE TOTAL TURNOVER OF THE EOU. 6. THE CIT(APPEALS) FAILED TO APPRECIATE THAT THE INTER UNIT JOB WORK CHARGES REPRESENTED JOB WORKS CARRIED OUT BY ONE EOU BY UTILIZING THE FACILITY AVAILABLE WITH IT TO THE OTHER EOU. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 20 OF 50 31. AS WE HAVE ALREADY SEEN THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF READYMADE GARMENTS FOR EXPORTS. THE ASSESSEE HAS TWO EXPORT ORIENTED UNITS (EOUS) AND OTHER UNITS WHICH FALL UNDER DOMESTIC TARIFF AREA (DTA). THE MANUFACTURING ACTIVITY INVOL VES SEVERAL PROCESSES WHICH RESULTS IN ONE EOU UNDERTAKING CERTAIN MANUFA CTURING PROCESS FOR THE OTHER EOU AND SUCH INTER UNIT TRANSACTIONS, ARE PERMITTED UNDER THE EOU REGULATIONS. PROFITS FROM BOTH THE EOUS ARE ELI GIBLE FOR DEDUCTION U/S 10B. THE ASSESSEE COMPANY HAS SHOWN A BREAK-UP OF THE TURNOVER OF ALL THE UNITS AS UNDER :- DTA EOU I EOU II TOTAL SALES EXPORT (RMG & SAMPLES) 15,16,20,901 193,69,48,059 139,87,61,923 348,73,30,383 SALES - DOMESTIC 57,98,871 30,25,398 10,46,001 98,70,270 LABOUR CHARGES 6,75,188 - - 6,75,188 SALE OF MISC. ITEMS 1,22,54,744 21,01,187 8,03,684 1,51,59,615 INTER UNIT TRANSFERS (TAILORING/ WASHING/EMB) 15,87,54,791 34,63,195 6,81,34,730 1,51,59,615 TOTAL 32,91,04,495 194,55,37,839 146,87,338 351,30,35,956 32. THE ASSESSEE WHILE COMPUTING DEDUCTION U/S.10B OF THE ACT TOOK THE TOTAL TURNOVER OF EOU-I AND EOU-11, AT RS. 194,20,7 4,644 AND RS. 140,06,11,608 RESPECTIVELY. THE INTER UNIT TRANSFE RS WERE EXCLUDED FROM THE TOTAL TURNOVER. ACCORDING TO THE AO THE INTER UNIT TRANSFERS WERE ALSO TO BE REGARDED AS PART OF THE TOTAL TURNOVER FOR THE P URPOSE OF COMPUTING ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 21 OF 50 DEDUCTION U/S.10B OF THE ACT. THE AO ACCORDINGLY A DOPTED TOTAL TURNOVER OF EOU-I AND EOU-II IS RS. 194,55,37,839 AND RS. 146,8 7,46,338 RESPECTIVELY FOR THE PURPOSE OF COMPUTING DEDUCTION U/S.10B OF THE ACT. 33. THE ASSESSEES STAND WAS THAT THE INTER UNIT C HARGES DO NOT FORM PART OF THE TURNOVER AND ENTRIES RELATING TO THESE TRANSACTIONS HAVE BEEN MADE ONLY WITH A VIEW TO ARRIVE AT THE CORRECT PROF ITS OF THE UNDERTAKINGS: THESE CHARGES CANNOT BE VIEWED SEPARATELY AND ONLY THE END RESULT WHICH IS TO BE LOOKED INTO, NAMELY, THE READYMADE GARMENT S WHICH ARE EXPORTED WHICH ALONE NEED TO BE RECKONED FOR THE PURPOSE OF ARRIVING AT TOTAL TURNOVER FIGURE. THE INTER UNIT CHARGES ARE CREDIT ED IN ONE EOU AND THEY ARE DEBITED IN ANOTHER EOU. THESE CHARGES ARE NOT R ECOVERED FROM ANY OUTSIDER. THEY DO NOT AFFECT THE OVERALL PROFIT OF THE EOUS WHICH REMAIN THE SAME. THEY ARE SHOWN AS TWO DIFFERENT EOUS AS THEY ARE UNDER DIFFERENT LICENSES. THERE WILL BE NO EFFECT ON THE DEDUCTION AS BOTH THE UNITS ARE CLAIMING DEDUCTION UNDER SECTION 10B. 34. THE AO, HOWEVER, DID NOT AGREE WITH THE SUBMIS SIONS OF THE ASSESSEE. IN THIS REGARD THE AO REFERRED TO THE PR OVISIONS OF SECTION 10B WHICH READS AS FOLLOWS:- 10B. (1) SUBJECT TO THE PROVISIONS OF THIS SECTIO N, 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, SOFTWARE FOR A PERIOD OF TEN CONSECUTI VE ASSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT T O THE PERVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 22 OF 50 ARTICLES OR THINGS OR COMPUTER, SOFTWARE, AS THE CA SE MAY BE, SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE: (4) FOR THE PURPOSES OF SUB-SECTION (1), THE PROFI TS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTW ARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS O F THE UNDERTAKING , THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEA RS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAK ING . EXPLANATION 2 (III) EXPORT TURNOVER MEANS THE CO NSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES OR THINGS OR COMPUTER SOFTWARE RECEIVED IN, OR BROUGHT INTO INDI A BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDA NCE WITH SUB- SECTION (3), BUT DOES NOT INCLUDE FREIGHT, TELECOMM UNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY O F THE ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENS ES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHN ICAL SERVICES OUTSIDE INDIA. (EMPHASIS SUPPLIED) 35. ACCORDING TO THE AO, FROM A PLAIN READING OF S ECTION 10B IT WAS CLEAR THAT THE SAID PROVISION PROVIDES DEDUCTION QU A UNDERTAKING AND NOT QUA COMPANY. HENCE, WHILE ARRIVING AT THE DEDUCTION FOR AN UNDERTAKING, THE PROFITS OF THE UNDERTAKING HAVE TO BE ARRIVED A T BY CONSIDERING THE UNIT AS THE ONLY EXISTING BUSINESS OF THE ASSESSEE. THE SAME IS DONE IN MOST CASES BY MAINTAINING SEPARATE BOOKS OF ACCOUNTS. TH IS FICTION OF SEPARATE ENTITY REQUIRES THAT EVERY TRANSACTION DONE WITH AN EXTERNAL ENTITY, BE IT ANOTHER UNIT OF THE SAME COMPANY OR ANOTHER COMPANY , BE CONSIDERED AS EXTERNAL TRANSACTION AND BE INCLUDED IN THE ACCOUNT S OF THE UNIT ACCORDINGLY. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 23 OF 50 IT IS PRECISELY FOR THIS REASON THAT THE ASSESSEE H AS ALSO MAINTAINED SEPARATE BOOKS FOR THE UNITS AND HAS INDICATED THE INTER-UNIT TRANSFER OF EACH UNIT. THE EXPENSE INCURRED FOR DOING THE JOB W ORK FORMS PART OF THE EXPENDITURE BOOKED IN THE ACCOUNTS OF THE UNIT AND HENCE EXCLUSION OF THE INTER-UNIT CHARGES WILL PROVIDE FOR INCORRECT COMPU TATION OF THE PROFITS AND ALSO OF THE DEDUCTION U/S 10B. 36. ACCORDING TO THE AO, THE VERY FACT THAT THE SE CTION ITSELF PROVIDES FOR THE TOTAL TURNOVER (IN SUB-SECTION (4)) AND EXPO RT TURNOVER (IN SUB- SECTION (4) AND IN EXPLANATION QUOTED SUPRA) TO BE CALCULATED FOR THE UNDERTAKING , IMPLIES THAT THE ACT REQUIRES THAT THEY BE CALCUL ATED FOR THE UNDERTAKING ALONE AND NOT FOR THE TOTAL BUSINESS. T HE ASSESSEES CONTENTION REGARDING COMMERCIAL SENSE OF TURNOVER IS NOT RELEVANT WHEN SPECIFIC DEFINITIONS AND MANNER OF COMPUTATION HAS BEEN PROVIDED IN THE SECTION. 37. THE AO ALSO TOOK SUPPORT FOR HIS CONCLUSION FRO M FORM 56G WHICH IS REQUIRED TO BE FILED BY THE ASSESSEE, WHEREIN THE F OLLOWING PARTICULARS ARE REQUIRED TO BE GIVEN:- 1. NAME OF THE ASSESSEE: 2. ASSESSMENT YEAR: 3. NAME OF THE UNDERTAKING 4. LOCATION AND ADDRESS OF THE UNDERTAKING 5. NATURE OF BUSINESS OF THE UNDERTAKING 6. DATE OF INITIAL REGISTRATION IN FTZ /EPZ / SEZ 7. DATE OF COMMENCEMENT OF MANUFACTURE OR PRODUCTIO N 8. NUMBER OF THE CONSECUTIVE YEAR FOR WHICH THE DED UCTION IS CLAIMED ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 24 OF 50 9. TOTAL TURNOVER OF THE BUSINESS 10. TOTAL TURNOVER OF THE UNDERTAKING 11. TOTAL PROFITS DERIVED BY THE BUSINESS 12. TOTAL PROFITS DERIVED BY THE UNDERTAKING 13. TOTAL EXPORT TURNOVER 38. ACCORDING TO THE AO, THE ACT ENVISAGES DIFFEREN T TURNOVER FOR THE BUSINESS AND THE UNDERTAKING, AND DIFFERENT PROFITS FOR THE BUSINESS AND THE UNDERTAKING. THE INTER-UNITS TRANSFERS WILL NOT BE A PART OF THE TOTAL TURNOVER FOR THE ASSESSEE AS A WHOLE, BUT WILL DEF INITELY FORM A PART OF THE TOTAL TURNOVER FOR THE UNDERTAKING. ON CONSIDERING BUSINESS OF THE UNIT/UNDERTAKING INDEPENDENT OF THE ASSESSEE, THE I NTER-UNIT TRANSFER ACQUIRES THE CHARACTER OF SALE. HENCE, THE SAME IS INCLUDIBLE AS PART OF TOTAL TURNOVER OF THE UNIT. THE AO ACCORDINGLY COM PUTED DEDUCTION U/S.10B OF THE ACT BY INCLUDING INTER-UNIT TRANSFER AS PART OF TOTAL TURNOVER OF THE CONCERNED UNIT WHICH PROVIDED SERVICE TO THE OTHER UNIT. 39. ON APPEAL BEFORE THE CIT(A), THE ASSESSEE SUBM ITTED THAT THE WORD TURNOVER IS A COMMERCIAL TERM AND SHOULD BE CONST RUED IN THE COMMERCIAL SENSE AND IN ACCORDANCE WITH THE NORMAL RULES OF AC COUNTANCY. ACCORDINGLY, TURNOVER MEANS GROSS IN-FLOW OF CASH RECEIVABLES AND OTHER CONSIDERATIONS ARISING IN THE COURSE OF ORDINARY AC TIVITIES OF AN ENTERPRISE FROM THE SALE OF GOODS OR FROM RENDERING OF SERVICE S TO THE BUYER OR CLIENT. IN THE ASSESSEES CASE, INTER-UNIT JOB WORK CHARGES RELATE TO THE ASSESSEE ONLY AND THERE IS NO BUYER. THE ASSESSEE RELIED ON THE GUIDE TO COMPANY ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 25 OF 50 AUDIT ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTA NTS WHICH STATES AS FOLLOWS:- TOTAL TURNOVER, THAT IS, THE AGGREGATE AMOUNT FOR WHICH SALES ARE EFFECTED BY THE COMPANY, GIVING THE AMOUNT OF SALES IN RESPECT OF EACH CLASS OF GOODS DEALT WITH BY THE COMPANY AND I NDICATING THE QUANTITIES OF SUCH SALES FOR EACH CLASS SEPARATELY. NOTE (I) THE TERM TURNOVER WOULD MEAN THE TOTAL SALES AFTER DEDUCTING THEREFROM GOODS RETURNED, PRICE ADJUSTMEN TS, TRADE DISCOUNT AND CANCELLATION OF BILLS FOR THE PERIOD O F AUDIT, IF ANY, ADJUSTMENTS WHICH DO NOT RELATE TO TURNOVER SHOULD NOT BE MADE E.G. WRITING OFF BAD DEBTS, ROYALTY, ETC. 40. THE CIT(A) DID NOT AGREE WITH THE SUBMISSIONS OF THE ASSESSEE AND HE HELD AS FOLLOWS:- 12. I SEE NO MERIT IN THE ABOVE ARGUMENTS OF THE A .R. THE LEGISLATURE WAS AWARE OF SUCH A PREDICAMENT WHEN TH IS SECTION WAS DRAFTED. THEREFORE, IT MADE THE SECTION A SELF- CONTAINED CODE. IT SPECIFICALLY SPOKE AS TO COMPUTATION OF BUSINESS PROFIT OF AN UNDERTAKING AND SPOKE OF TOTAL TURNOVER AS WELL AS EXPORT TURNOVER OF THE UNDERTAKING. IT IS NOW WELL SETTLED THAT TOT AL TURNOVER IS EQUAL TO EXPORT TURNOVER PLUS DOMESTIC TURNOVER. THIS DEFINITION IS NOW ADOPTED BY THE ITAT SPECIAL BENCH, CHENNAI, IN THE CASE OF ITO VS. SAK SOFT LTD. (2009 ) REPORTED IN 313 ITR 353. WHILE DECIDING THAT CASE, THE LEARNED ITAT FOLLOWED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. LAKSHMI MACHINE WORKS (2007) 290 ITR 667 (SC) WHEREIN THE HONBLE COURT HELD THAT SINCE THE TERM TURNOVER IS IN RELATION TO BUSINESS PROFITS ONLY, IT MUST INC LUDE THE RECEIPTS WHICH ONLY INVOLVES ELEMENTS OF PROFIT. BASED ON SU CH INTERPRETATION, IT WAS HELD THAT REIMBURSEMENT OF E XPENDITURE HAS NO ELEMENT OF PROFIT AND HENCE REIMBURSEMENT OF SAL ES TAX AND EXCISE DUTY DO NOT FORM PART OF THE TOTAL TURNOVER. ON THE SAME RATIO, THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. RAVINDRANATHAN NAIR (2007) 295 JTR 228 (SC) HELD TH AT ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 26 OF 50 PROCESSING CHARGES RECEIVED BY THE ASSESSEE EOU IS INCLUDIBLE IN THE TOTAL TURNOVER AS IT INCLUDED ELEMENT OF PROFIT . SIMILAR IS THE CASE HERE. 13. THE RECEIPT FOR DOING JOB WORK FROM ANOTHER EOU IS NOTHING BUT ITS DOMESTIC TURNOVER BECAUSE THE ELEME NT OF PROFIT THEREFROM IS NOT DENIED AND ONLY SET OFF OF JOB CHA RGES DONE FOR EACH OTHER IS CLAIMED AGAINST EACH OTHER. THE A.R. PROBABLY TREATS SALES AS A SYNONYM OF TURNOVER AND THEREFORE PL EADS THAT NONE OF EOUS CAN BE CONSIDERED AS SELLER OR BUYER. SECTION 44AB OF I.T.ACT PUTS A COMA IN BETWEEN THE WORD SALES AND TURNOVER TO DISTINGUISH THAT BOTH TERMS ARE DISTI NCT AND HAVE DIFFERENT CONNOTATIONS. SALES DOES NOT INCLUDE GOOD S RETURNED, PRICE DISCOUNT ETC., TURNOVER HAS A WIDER CONNOTATI ON. THE WORD OR INTERSPERSED BETWEEN THE WORDS TURNOVER AND GROSS RECEIPTS IN S-44AB OF IT ACT EVINCES THAT BOTH CAN BE USED INTERCHANGEABLY AND ARE SYNONYMOUS. IT INCLUDES ALL RECEIPTS EVEN HAVING NO ELEMENT OF PROFIT. SUCH IS THE INTERPRETA TION OF THE TERM GROSS RECEIPTS BY THE GUIDANCE NOTE ISSUED BY ICA AI REPRODUCED BELOW:- THE TERM GROSS RECEIPTS IS ALSO NOT DEFINED IN TH E ACT. IT WILL INCLUDE ALL RECEIPTS WHETHER IN CASH OR IN KIN D ARISING FROM CARRYING ON OF THE BUSINESS WHICH WILL NORMALL Y BE ASSESSABLE AS BUSINESS INCOME UNDER THE ACT. BROADL Y SPEAKING, THE FOLLOWING ITEMS OF INCOME AND/OR RECE IPTS WOULD BE COVERED BY THE TERM GROSS RECEIPTS IN BUSI NESS (I) PROFITS ON SALE OF A LICENCE GRANTED UNDER THE IMPORTS (CONTROL) ORDER, 1955 MADE UNDER THE IMPORTS & EXPORTS (CONTROL) ACT, 1947; (II) CASH ASSISTANCE (BY WHATEVER NAME CALLED) RECEIVED OR RECEIVABLE BY ANY PERSON AGAINST EXPORTS UNDER ANY SCHEME OF THE GOVERNMENT OF INDIA; (III) ANY DUTY OF CUSTOMS OR EXCISE RE-PAID OR REPA YABLE AS DRAWBACK TO ANY PERSON AGAINST EXPORTS UNDER THE CUSTOMS & CENTRAL EXCISE DUTIES DRAWBACK RULES, 1995; (IV) THE AGGREGATE OF GROSS INCOME BY WAY OF INTERE ST RECEIVED BY THE MONEY LENDER; ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 27 OF 50 (V) COMMISSION, BROKERAGE, SERVICE AND OTHER INCIDENTAL CHARGES RECEIVED IN THE BUSINESS OF CHIT FUNDS; (VI) REIMBURSEMENT OF EXPENSES INCURRED (E.G. PACKING, FORWARDING, FREIGHT, INSURANCE, TRAVELING, ETC.) AND IF THE SAME IS CREDITED TO A SEPARATE ACCOUNT IN THE BOOKS, ONLY THE NET SURPLUS ON THIS ACCOUNT SHOULD BE ADDED TO THE TURNOVER FOR THE PURPOSE OF SECTION 44AB; (VII) THE NET EXCHANGE RATE DIFFERENCE ON EXPORT S ALES DURING THE YEAR ON THE BASIS OF THE GUIDING PRINCIPLE EXPLAINED IN (VI) ABOVE WILL HAVE TO BE ADDED; (VIII) HIRE CHARGES OF COLD STORAGE; (IX) LIQUIDATED DAMAGES; (X) INSURANCE CLAIMS EXCEPT FOR FIXED ASSETS; (XI) SALE PROCEEDS OF SCRAP, WASTAGE, ETC. UNLESS TREATED AS PART OF SALE OR TURNOVER, WHETHER OR NOT CREDITE D TO MISCELLANEOUS IN COME ACCOUNT; (XII) GROSS RECEIPTS INCLUDING LEASE RENT IN THE B USINESS OF OPERATING LEASE; (XIII) LEASE RENT OR INTEREST ON FINANCING IN THE BUSINESS OF FINANCE LEASE; AND (XIV) HIRE CHARGES RECEIVED IN THE CASE OF HIRE PU RCHASE BUSINESS AND INSTALLMENTS RECEIVED IN THE CASE OF INSTALLMENT SALE. (UNDERLINED FOR EMPHASIS) HERE EVEN IF IT IS ACKNOWLEDGED FOR ARGUMENTS SAKE THAT THE RECEIPT FOR JOB WORK DOES NOT INVOLVE AN ELEMENT OF PROFIT, STILL IT CANNOT BE DENIED THAT THE SAME IS NOT RECEIPT AND T HEREFORE NOT INCLUDIBLE IN TOTAL TURNOVER. THE BASIC MISUNDERS TANDING; I VISUALIZE, HAS CREPT IN BECAUSE THE EOUS HAVE BEEN CONSIDERED AS TWO UNITS OF THE SAME BUSINESS AND HENCE THE CLAIM OF SET OFF. THE LAW IS VERY CLEAR ON THAT ISSUE. EACH 100% EOU IS N OTIFIED SEPARATELY BY THE COMPETENT AUTHORITY AND THEIR PRO FIT / EXEMPTION ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 28 OF 50 / 1OSS NEED TO BE COMPUTED SEPARATELY. EACH IS INDE PENDENT AND SEPARATE FROM THE OTHER FOR ALL PURPOSES AND THEREF ORE THE JOB WORK DONE BY EACH OF THEM HAS TO BE INCLUDED IN THE TOTAL TURNOVER OF THAT CONCERN ONLY FOR COMPUTATION OF EX EMPTION U/S. 10B OF IT ACT. .. I HOLD THEM INCLUDIBLE IN TH E TURNOVER OF RESPECTIVE EOUS EVEN IF BOTH ARE OWNED BY THE SA ME ASSESSEE. I HOLD THAT SET-OFF IS NOT LIABLE TO BE GIVEN AS PE R THE PROVISIONS OF ACT BECAUSE RELIEF IS TO BE COMPUTED QUA UNDERTAKIN G AND NOT COMPANY (VIDE SUPRA). 41. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE AS SESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 42. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTE NTION TO THE DECISION OF HONBLE SUPREME COURT IN CIT V. PUNJAB STAINLESS STEEL INDUSTRIES, 364 ITR 144 (SC) . IN THE AFORESAID DECISION, THE QUESTION WHETHER THE SALE OF SCRAP SHOULD FORM PART OF THE TOTAL TURNOVE R WHILE COMPUTING DEDUCTION U/S. 80HHC OF THE ACT CAME UP FOR CONSIDE RATION. THE ASSESSEE IN THAT CASE WAS A MANUFACTURER AND EXPORTER OF STA INLESS STEEL UTENSILS. IN THE PROCESS OF MANUFACTURING OF STAINLESS STEEL UTE NSILS, SOME PART OF THE STEEL WHICH CANNOT BE USED OR REUSED FOR MANUFACTUR ING UTENSILS REMAINS UNUSED, WHICH IS TREATED AS SCRAP. THE ASSESSEE SE LLS THE SCRAP IN THE LOCAL MARKET. THE INCOME ARISING FROM SALE OF SCRA P IS REFLECTED IN THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE. WHILE COMPUTING DE DUCTION U/S. 80HHC, THE ASSESSEE DID NOT INCLUDE THE SALE PROCEEDS OF T HE SCRAP IN THE TOTAL TURNOVER AND WAS SHOWING THE SAME SEPARATELY IN THE PROFIT & LOSS ACCOUNT. ACCORDING TO THE REVENUE, SALE OF SCRAP WAS ALSO PA RT OF THE TURNOVER AND ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 29 OF 50 SHOULD BE INCLUDED IN THE TOTAL TURNOVER. THE HON BLE SUPREME COURT ON THE ABOVE ISSUE OBSERVED AS FOLLOWS:- NORMALLY, THE TERM TURNOVER WOULD SHOW THE SALES EFFECTED BY A BUSINESS UNIT. IN THE COURSE OF BUSINESS, IN ADD ITION TO THE NORMAL SALES, THE BUSINESS UNIT MAY ALSO SELL SOME OTHER THINGS. IN ORDINARY ACCOUNTING PARLANCE, AS APPROVED BY ALL ACCOUNTANTS AND AUDITORS, THE TERM SALES, WHEN REFLECTED IN T HE PROFIT AND LOSS ACCOUNT, WOULD INDICATE SALE PROCEEDS FROM SAL E OF THE ARTICLES OR THINGS IN WHICH THE BUSINESS UNIT IS DE ALING. WHEN OTHER THINGS LIKE OLD FURNITURE OR A CAPITAL ASSET, IN WHICH THE BUSINESS UNIT IS NOT DEALING ARE SOLD, THE SALE PRO CEEDS THEREFROM WOULD NOT BE INCLUDED IN SALES BUT WOULD BE SHOWN SEPARATELY. SALE PROCEEDS FROM SCRAP MAY EITHER BE SHOWN SEPARA TELY IN THE PROFIT AND LOSS ACCOUNT OR MAY BE DEDUCTED FROM THE AMOUNT SPENT BY THE MANUFACTURING UNIT ON THE RAW MATERIAL FROM WHICH GOODS ARE MANUFACTURED. THE RAW MATERIAL, WHICH IS NOT CAPABLE OF BEING USED FOR MANUFACTURING THE GOODS WILL HAVE TO BE EITHER SOLD AS SCRAP OR MIGHT HAVE TO BE RE-CYCLED OF DISP OSED OF TO SOMEONE WHO WOULD RE-CYCLE THE SCRAP. WHEN SUCH SC RAP IS SOLD, THE SALE PROCEEDS OF THE SCRAP CANNOT BE INCLUDED I N THE TERM TURNOVER. THEREFORE, THE PROCEEDS OF SUCH SCRAP WOULD NOT BE INCLUDED IN SALES IN THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE. THE SITUATION WOULD BE DIFFERENT IN THE CASE OF T HE BUYER, WHO PURCHASES SCRAP FROM THE ASSESSEE AND SELLS IT TO SOMEONE ELSE. THE SALE PROCEEDS FOR SUCH A BUYER WOULD BE T REATED AS TURNOVER FOR THE SIMPLE REASON THAT THE BUYER OF THE SCRAP IS A PERSON WHO IS PRIMARILY DEALING IN SCRAP. WHEN A RECOGNISED BODY OF ACCOUNTANTS, SUCH AS TH E INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, AFTER DUE DELIBERATION AND CONSIDERATION PUBLISHES CERTAIN MATERIAL ONE C AN RELY UPON IT. THE MEANING GIVEN BY THE INSTITUTE CLEARLY DENOTES THAT IN NORMAL ACCOUNTING PARLANCE THE WORD TURNOVER WOULD MEAN TOTAL SALES. THE SALES WOULD DEFINITELY NOT INCLUDE SCRA P WHICH IS EITHER TO BE DEDUCTED FROM THE COST OF RAW MATERIAL OR IS TO BE SHOWN SEPARATELY UNDER A DIFFERENT HEAD. THERE IS N O REASON NOT TO ACCEPT THE MEANING OF THE TERM TURNOVER GIVEN BY A BODY OF ACCOUNTANTS, HAVING A STATUTORY RECOGNITION. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 30 OF 50 IF ALL ACCOUNTANTS, AUDITORS, BUSINESSMEN, MANUFAC TURERS ETC. ARE NORMALLY INTERPRETING THE TERM TURNOVER AS SALE PROCEEDS OF THE COMMODITY IN WHICH THE BUSINESS UNIT IS DEAL ING, THERE IS NO REASON TO TAKE A DIFFERENT VIEW. 43. ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE, THE INTER-UNIT TRANSFER BETWEEN UNIT-I & II IN THE PRESENT CASE WOULD ALSO BE AKIN TO SALE OF SCRAP. ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE, THE INTER-UNIT TRANSFERS WILL ONLY ULTIMATELY GO TO REDUCE THE COST OF SALES OF T HE ASSESSEE AND NEED NOT BE REGARDED AS TURNOVER OF THE UNIT PROVIDING INTER -UNIT SERVICES. THE LD. COUNSEL FOR THE ASSESSEE FURTHER DREW OUR ATTENTION TO THE DECISION OF THE SPECIAL BENCH ITAT IN THE CASE OF ITO V. SAK SOFT LTD., 313 ITR (AT) 353 (CHN.) . IN THE AFORESAID DECISION, THE QUESTION FOR CONS IDERATION BEFORE THE SPECIAL BENCH WAS, AS TO THE MEANING OF TOTAL TURNOVER AND EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCT ION U/S. 10B OF THE ACT. THE SPECIAL BENCH OBSERVED AS FOLLOWS:- TO SAY THAT IN THE ABSENCE OF ANY DEFINITION OF TOTAL TURNOVER FOR THE PURPOSE OF TOTAL TURNOVER FOR T HE PURPOSE OF SECTION 10B, THERE IS NO AUTHORITY TO EXCLUDE ANYTH ING FROM THE EXPRESSION AS UNDERSTOOD IN GENERAL PARLANCE WOULD BE WRONG, AS THERE HAS TO BE AN ELEMENT OF TURNOVER IN THE RECEI PT IF IT HAS TO BE INCLUDED IN THE TOTAL TURNOVER. THAT ELEMENT IS MI SSING IN THE CASE OF FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTAB LE TO DELIVERY OF THE GOODS OUTSIDE INDIA AND EXPENSES INCURRED IN FO REIGN EXCHANGE IN CONNECTION WITH THE PROVISION OF TECHNI CAL SERVICES OUTSIDE INDIA. THESE RECEIPTS CAN ONLY BE RECEIVED BY THE ASSESSEE AS REIMBURSEMENT OF SUCH EXPENSES INCURRED BY HIM. MERE REIMBURSEMENT OF EXPENSES CANNOT HAVE AN ELEME NT OF TURNOVER. IT IS ONLY IN RECOGNITION OF THIS POSITI ON THAT IN THE DEFINITION OF EXPORT TURNOVER IN SECTION 10B THE AFORESAID TWO ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 31 OF 50 ITEMS HAVE BEEN DIRECTED TO BE EXCLUDED. SECONDLY, THE DEFINITION OF EXPORT TURNOVER CONTEMPLATES THAT THE AMOUNT REC EIVED BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE SHOULD REP RESENT CONSIDERATION IN RESPECT OF THE EXPORT. ANY REIM BURSEMENT OF THE TWO ITEMS OF EXPENSES MENTIONED IN THE DEFINITI ON CAN UNDER NO CIRCUMSTANCES BE CONSIDERED TO REPRESENT CONSID ERATION FOR THE EXPORT OF THE COMPUTER SOFTWARE OR ARTICLES OR THINGS. THUS THE EXPRESSION TOTAL TURNOVER WHICH IS NOT DEFINE D IN SECTION 10B SHOULD ALSO BE INTERPRETED IN THE SAME MANNER. THUS THE TWO ITEMS OF EXPENSES REFERRED TO IN THE DEFINITION OF EXPORT TURNOVER CANNOT FORM PART OF THE TOTAL TURNOVER SI NCE THE RECEIPT BY WAY OF RECOVERY OF SUCH EXPENSES CANNOT BE SAID TO REPRESENT CONSIDERATION FOR THE GOODS EXPORTED SINCE TOTAL TU RNOVER IS NOTHING BUT THE AGGREGATE OF THE DOMESTIC TURNOVER AND THE EXPORT TURNOVER. IN THE FORMULA PRESCRIBED BY SECTION 10B (4) THE FIGURE OF EXPORT TURNOVER HAS TO BE THE SAME BOTH IN THE N UMERATOR AND IN THE DENOMINATOR OF THE FORMULA. IT FOLLOWS THAT THE TOTAL TURNOVER CANNOT INCLUDE THE TWO ITEMS OF EXPENSES R ECOVERED BY THE ASSESSEE AND REFERRED TO IN THE DEFINITION OF EXPORT TURNOVER. 44. THE LD. COUNSEL FOR THE ASSESSEE LAID EMPHASIS ON THE OBSERVATIONS OF THE SPECIAL BENCH WHEREIN THEY HAVE EMPHASIZED T HAT MERE REIMBURSEMENT OF EXPENSES CANNOT HAVE AN ELEMENT OF TURNOVER. HE ALSO EMPHASIZED THAT FOR A RECEIPT TO BE CALLED AS TURNO VER, THERE SHOULD BE AN ELEMENT OF INCOME EMBEDDED IN SUCH RECEIPT. WHEN A RECEIPT DOES NOT HAVE AN ELEMENT OF INCOME EMBEDDED, THEN IT CANNOT BE CALLED AS TURNOVER. ACCORDING TO HIM, THE AFORESAID DECISIONS CLEARLY L AY DOWN THE PROPOSITION THAT INTER-UNIT EXPENSES INCURRED BY ONE UNIT ON BE HALF OF THE OTHER UNIT CANNOT BE CONSIDERED AS TOTAL TURNOVER OF THE UNIT INCURRING THE EXPENSES IN GETTING IT REIMBURSED BY THE OTHER UNIT. IT WAS AL SO POINTED OUT BY HIM THAT THE UNIT PROVIDING SERVICES RECOGNIZES THE EXPENSES IN THE DEBIT SIDE OF THE ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 32 OF 50 PROFIT & LOSS ACCOUNT AND ALSO RECOGNIZES THE RECEI PT ON THE CREDIT SIDE OF THE PROFIT & LOSS ACCOUNT, THEREBY HAVING NIL EFFEC T ON THE PROFITS AS PER THE PROFIT & LOSS ACCOUNT. THE UNIT RECEIVING THE SERV ICES CLAIMS THE EXPENSES INCURRED BY THE OTHER UNIT AS EXPENSES AND THEREBY PROFITS OF THE UNIT RECEIVING THE BENEFIT OF SERVICES PROVIDED BY THE O THER UNIT GETS REDUCED TO THAT EXTENT. IT WAS HIS SUBMISSION THAT THERE IS N O ATTEMPT ON THE PART OF THE ASSESSEE IN EITHER OF THE UNITS TO EITHER DECREASE THE TOTAL TURNOVER OR INCREASE THE PROFITS OF THE BUSINESS, THEREBY DISCH ARGING THE CLAIM FOR DEDUCTION U/S. 10B OF THE ACT. 45. THE LD. COUNSEL FOR THE ASSESSEE ALSO MADE AN ALTERNATE SUBMISSION THAT WHEN THERE ARE INTER-UNIT TRANSFERS BETWEEN TH E SAME ASSESSEE, THEN THERE CANNOT BE ANY ELEMENT OF PROFIT IN SUCH TRANS FERS AND THEREFORE THE PROFIT ELEMENT OF THE UNIT CAPTIVELY CONSUMING THE SERVICES OF OTHER UNIT, ITS PROFIT SHOULD BE EXCLUDED WHILE COMPUTING DEDUCTION U/S. 80HH OF THE ACT. FOR THE ABOVE PROPOSITION, LD .COUNSEL FOR THE ASSE SSEE RELIED ON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN CIT V. METAL POWDER CO. LTD., (2012) 75 DTR 233 (MAD) . 46. THE LD. DR SUBMITTED THAT SECTION 10B(7) OF TH E ACT PROVIDES THAT PROVISIONS OF SECTION 80IA(8) & (10) SHALL APPLY TO THE UNDERTAKING REFERRED TO IN SECTION 10B ALSO. SECTION 80IA(8) OF THE ACT PROVIDES FOR A SITUATION WHERE ANY GOODS OR SERVICES HELD FOR THE PURPOSE OF ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE. IN SUCH ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 33 OF 50 CIRCUMSTANCES, IT IS PROVIDED THEREIN THAT THE COST AS RECORDED IN THE BOOKS OF ACCOUNT OF ELIGIBLE BUSINESS SHOULD CORRESPOND T O THE MARKET VALUE OF GOODS OR SERVICES. ACCORDING TO HIM, THEREFORE, T HE INTER-UNIT SERVICES AND THE COST THEREOF SHOULD CORRESPOND TO THE MARKET VA LUE. IT IS FOR THIS REASON THAT THE INTER-UNIT SERVICES AND THE COST RECEIVED BY THE UNIT RENDERING SERVICES SHOULD BE TAKEN AS PART OF TURNOVER OF THE UNIT RENDERING THE SERVICES. IN ALL RESPECTS, HE PLACED RELIANCE ON T HE ORDER OF CIT(APPEALS). 47. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS O F THE LEARNED COUNSEL FOR THE ASSESSEE AND THE LEARNED DR BEFORE US. AS FAR AS GROUNDS NO.5 AND 6 ARE CONCERNED, THEY RELATE TO TH E MANNER OF COMPUTATION OF TOTAL TURNOVER. THE LEARNED COUNSE L FOR THE ASSESSEE PLACED STRONG RELIANCE ON THE DECISION OF THE HONB LE ITAT SPECIAL BENCH IN THE CASE OF ITO VS. SAK SOFT LTD. 313 ITR (AT) 353 (CHENNAI) (S B) . THE ASSESSEE IN THAT CASE WAS ENGAGED IN THE EXPORT OF COMPUTER SOFTWARE ENTITLED TO DEDUCTION U/S.10B OF THE ACT. WHILE CL AIMING DEDUCTION UNDER S. 10B, THE ASSESSEE HAS DECLARED EXPORT TURNOVER OF R S. 8,33,64,528. THE DETAILS FURNISHED BY THE ASSESSEE SHOWED THAT IT HA D INCURRED THE FOLLOWING EXPENDITURE IN FOREIGN CURRENCY :- ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 34 OF 50 (RS.) 1. EMPLOYERS NIC CONTRIBUTION 2,19,672 2. SALARY AT LONDON OFFICE 20,92,763 3. LODGING EXPENSES AT LONDON 6,263 4. TRAVELLING EXPENDITURE 5,62,896 5. PROFESSIONAL CHARGES AT LONDON OFFICE 25,462 TOTAL 29,07,056 48. ACCORDING TO THE AO, THE AFORESAID EXPENDITURE WAS TO BE EXCLUDED FROM THE EXPORT TURNOVER IN TERMS OF CL. (III) OF E XPLN. 2 BELOW THE SECTION AND ACCORDINGLY HE EXCLUDED THE SAME FROM THE EXPOR T TURNOVER AND ARRIVED AT THE EXPORT TURNOVER AT RS. 8,04,57,472 (I.E., RS . 8,33,64,528 MINUS RS. 29,07,056). HE FURTHER REDUCED THE EXPORT TURNOVER BY RS. 8,25,125 BUT THAT WAS FOR THE REASON THAT THE INWARD REMITTANCES WERE NOT PROVED. HE THUS ARRIVED AT THE EXPORT TURNOVER AT RS. 7,96,32,347. THE AO THEREAFTER COMPUTED THE DEDUCTION UNDER S. 10B BY APPLYING THE FOLLOWING FORMULA PRESCRIBED BY S. 10B(4) :- DEDUCTION UNDER S. 10B = PROFITS OF THE BUSINESS X EXPORT TURNOVER TOTAL TURNOVER 49. THE PROFITS OF THE BUSINESS AS COMPUTED BY HIM CAME TO RS. 3,39,85,047. THE FIGURE OF EXPORT TURNOVER, AS ALRE ADY SEEN, WAS TAKEN AT RS. 7,96,32,347. THE FIGURE OF TOTAL TURNOVER WAS T AKEN AT RS. 9,26,23,216. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 35 OF 50 THE DEDUCTION WAS ACCORDINGLY CALCULATED AT RS. 2,9 2,18,474. THE QUESTION BEFORE THE SPECIAL BENCH WAS AS TO WHETHER THE AO S HOULD HAVE TAKEN THE FIGURE OF TOTAL TURNOVER WHICH IS THE DENOMINATOR I N THE ABOVE FORMULA AT RS. 8,97,16,160 I.E., AFTER DEDUCTING THE EXPENDITURE O F RS. 29,07,056 FROM THE TOTAL TURNOVER OF RS. 9,26,23,216. 50. THE SPECIAL BENCH HELD THAT AS PER CL. (III) O F EXPLN. 2 TO S. 10B, FREIGHT, TELECOM CHARGES AND INSURANCE ATTRIBUTABLE TO DELIVERY OF GOODS OUTSIDE INDIA AND EXPENSES INCURRED IN FOREIGN EXCH ANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA HAVE TO BE EXCLUDE D FROM EXPORT TURNOVER. ON THE BASIS OF PARITY PRINCIPLE, SAME HAVE TO BE E XCLUDED ALSO FROM THE TOTAL TURNOVER THOUGH THAT EXPRESSION HAS NOT BEEN DEFINED IN THE SECTION. THE SPECIAL BENCH HELD THAT ELEMENT OF TURNOVER IS MISSING IN THESE RECEIPTS AND RECEIPTS ARE RECEIVED BY THE ASSESSEE ONLY AS REIMBURSEMENT OF EXPENSES INCURRED BY IT. SECONDLY, THE DEFINITI ON OF EXPORT TURNOVER CONTEMPLATES THAT THE AMOUNT RECEIVED BY THE ASSESS EE IN CONVERTIBLE FOREIGN EXCHANGE SHOULD REPRESENT 'CONSIDERATION' I N RESPECT OF THE EXPORT. ANY REIMBURSEMENT OF THE ITEMS OF EXPENSES MENTIONE D IN THE DEFINITION CAN UNDER NO CIRCUMSTANCES BE CONSIDERED TO REPRESE NT 'CONSIDERATION' FOR THE EXPORT. THUS, THE EXPRESSION TOTAL TURNOVER SHOULD ALSO BE INTERPRETED IN THE SAME MANNER AND THE SAID ITEMS OF EXPENSES C ANNOT FORM PART OF TOTAL TURNOVER. EXPRESSION TOTAL TURNOVER AS DEF INED IN SS. 80HHE AND 80HHF EXCLUDES FREIGHT, TELECOM CHARGES, ETC AND EX PENSES INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OU TSIDE INDIA. STATUTORILY ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 36 OF 50 PARITY IS MAINTAINED BETWEEN EXPORT TURNOVER AND TO TAL TURNOVER IN THESE SECTIONS. HENCE, THERE IS NO REASON WHY SUCH PARIT Y CANNOT BE MAINTAINED BETWEEN EXPORT TURNOVER AND TOTAL TURNOVER IN S. 10 B. WORDS TOTAL TURNOVER APPEARING IN VARIOUS PROVISIONS OF THE ACT SHOULD B E CONSTRUED IN THE SAME MANNER UNLESS IT LEADS TO CONTEXTUAL INCONSISTENCIE S OR REPUGNANCY. THEREFORE, FOR THE PURPOSE OF APPLYING THE FORMULA UNDER SUB-S. (4) OF S. 10B, THE FREIGHT, TELECOM CHARGES OR INSURANCE ATTR IBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE IND IA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPO RT TURNOVER AND FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DEN OMINATOR RESPECTIVELY IN THE FORMULA. 51. IN THE CASE OF CIT VS. PUNJAB STAINLESS STEEL INDUSTRIES 364 ITR 144 (SC) , THE HONBLE SUPREME COURT HAD TO ANSWER A QUESTIO N AS TO WHETHER SCRAP SALE SHOULD BE CONSIDERED AS PART OF THE TOTAL TURNOVER FOR THE PURPOSE OF ALLOWING DEDUCTION U/S.80HHC OF THE ACT. THE ASSESSEE IN THE CASE BEFORE THE HONBLE SUPREME COURT WAS A MAN UFACTURER AND EXPORTER OF STAINLESS STEEL UTENSILS. IN PROCESS O F MANUFACTURING, SOME PORTION OF STEEL, WHICH COULD NOT BE USED OR REUSED FOR MANUFACTURING UTENSILS, WAS TREATED AS SCRAP. ASSESSEE DISPOSED OF SAID SCRAP IN LOCAL MARKET AND INCOME ARISING FROM SALE WAS ALSO REFLEC TED IN P&L ACCOUNT. FOR PURPOSE OF AVAILING DEDUCTION U/S 80HHC, INCOME FROM SALE PROCEEDS ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 37 OF 50 OF SCRAP WAS NOT INCLUDED IN TOTAL TURNOVER BUT WAS SHOWN SEPARATELY IN P&L ACCOUNT. REVENUE SUBMITTED THAT SALE PROCEEDS FROM SCRAP SHOULD HAVE BEEN INCLUDED IN TOTAL TURNOVER AS ASSESSEE WAS ALSO SELLING SCRAP AND THAT WAS ALSO PART OF SALE PROCEEDS. HIGH COUR T HELD THAT PROCEEDS GENERATED FROM THE SALE OF SCRAP WOULD NOT BE INCLU DED IN TOTAL TURNOVER. ON FURTHER APPEAL, THE HONBLE SUPREME COURT HELD T O ASCERTAIN WHETHER TURNOVER WOULD ALSO INCLUDE SALE PROCEEDS FROM SCRA P, ONE HAS TO KNOW THE MEANING OF THE TERM TURNOVER. THE TERM TURNOVER HAS NEITHER BEEN DEFINED IN INCOME TAX ACT NOR HAS BEEN EXPLAINED BY ANY OF CBDT CIRCULARS. ONE HAS TO LOOK AT MEANING OF TERM TUR NOVER IN ORDINARY ACCOUNTING OR COMMERCIAL PARLANCE. IN SIMPLE WORDS , WORD 'TURNOVER' WOULD MEAN ONLY AMOUNT OF SALE PROCEEDS RECEIVED IN RESPECT OF THE GOODS IN WHICH AN ASSESSEE IS DEALING IN. SALE PROCEEDS FROM SCRAP MAY EITHER BE SHOWN SEPARATELY IN P&L ACCOUNT OR MAY BE DEDUCT ED FROM AMOUNT SPENT BY MANUFACTURING UNIT ON RAW MATERIAL, WHICH WAS STEEL IN CASE OF ASSESSEE. RAW MATERIAL, WHICH WAS NOT CAPABLE OF B EING USED FOR MANUFACTURING UTENSILS WOULD HAVE TO BE EITHER SOLD AS SCRAP OR MIGHT HAVE TO BE RE-CYCLED IN FORM OF SHEETS OF STAINLESS STEE L, IF MANUFACTURING UNIT IS ALSO HAVING ITS RE-ROLLING PLANT. IF IT IS NOT HAV ING SUCH A PLANT, THE MANUFACTURER WOULD DISPOSE OF SCRAP OF STEEL TO SOM EONE WHO WOULD RE- CYCLE SAID SCRAP INTO STEEL SO THAT SAID STEEL CAN BE RE-USED. WHEN SUCH SCRAP IS SOLD SALE PROCEEDS OF SCRAP CANNOT BE INCL UDED IN TERM TURNOVER, SINCE ASSESSEE UNIT WAS ENGAGED PRIMARILY IN MANUFA CTURING AND SELLING OF ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 38 OF 50 STEEL UTENSILS AND NOT SCRAP OF STEEL. PROCEEDS OF SUCH SCRAP WOULD NOT BE INCLUDED IN SALES IN P&L ACCOUNT OF ASSESSEE. SI NCE ASSESSEE WAS NOT PRIMARILY DEALING IN SCRAP BUT WAS A MANUFACTURER O F STAINLESS STEEL UTENSILS, ONLY SALE PROCEEDS FROM SALE OF UTENSILS WOULD BE T REATED AS HIS 'TURNOVER'. MEANING GIVEN BY ICAI ALSO CLEARLY DENOTES THAT IN NORMAL ACCOUNTING PARLANCE THE WORD 'TURNOVER' WOULD MEAN 'TOTAL SALE S' AND SAID SALES WOULD DEFINITELY NOT INCLUDE SCRAP MATERIAL. FURTHER INT ENTION BEHIND ENACTMENT OF S 80HHC WAS TO ENCOURAGE EXPORT SO AS TO EARN MORE FOREIGN EXCHANGE. LEGISLATURE WOULD SURELY LIKE TO GIVE MORE BENEFIT TO PERSONS WHO WERE MAKING AN EFFORT TO HELP NATION IN PROCESS OF BRING ING MORE FOREIGN EXCHANGE. VIEW EXPRESSED BY HIGH COURT WAS IN CONFO RMITY WITH NORMAL ACCOUNTING PRACTICE FOLLOWED BY TRADERS. PROCEEDS GENERATED FROM SALE OF SCRAP WOULD NOT BE INCLUDED IN TOTAL TURNOVER. 52. IN THE PRESENT CASE, THE ASSESSEE HAS TWO EOU S EOU-I AND EOU II. BOTH THE EOUS ARE MANUFACTURING AND EXPORTING READYMADE GARMENTS. LET US ASSUME THAT THE PROCESS OF MANUFACTURE OF RE ADYMADE GARMENTS INVOLVES 4 DIFFERENT ACTIVITIES SAY, WASHING CLOTH, CUTTING CLOTH, STITCHING AND PACKING. DEPENDING ON WORK LOAD SOME ACTIVITY WILL BE UNDERTAKEN BY ONE EOU ON BEHALF OF THE OTHER EOU. SAY EOU-I WILL UND ERTAKE THE JOB OF WASHING FOR EOU-II. THE CHARGES ATTRIBUTABLE TO TH E SAID ACTIVITY ARE DEBITED IN EOU-I PROFIT AND LOSS ACCOUNT AND THE RE CEIPT FROM EOU-II BY WAY OF REIMBURSEMENTS ARE RECORDED IN THE CREDIT SI DE OF THE PROFIT AND LOSS ACCOUNT. THUS AS FAR AS EOU-I IS CONCERNED, THERE THE EFFECT IS NEUTRAL. AS ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 39 OF 50 FAR AS EOU-II IS CONCERNED, THE EXPENDITURE INCURRE D BY EOU-I FOR WASHING IS RECOGNISED IN THE PROFIT AND LOSS ACCOUNT. THUS THE PROFITS OF EOU-II ARE NOT INFLATED. THEREFORE BY THE PROCESS ADOPTED BY THE ASSESSEE THERE IS NO EFFECT ON THE TRUE PROFITS FROM THE BUSINESS OF BOT H THE EOUS FOR THE PURPOSE OF ALLOWING DEDUCTION U/S.10B OF THE ACT. THE QUESTION IS SHOULD EOU-I RECOGNISE THE SERVICES RENDERED BY IT TO EOU- II AS ITS TURNOVER. THE ASSESSEE IS A MANUFACTURER OF READYMADE GARMENTS AN D DOES NOT DO THE ACTIVITY OF WASHING. AS EXPLAINED BY THE HONBLE S UPREME COURT IN THE CASE OF PUNJAB STAINLESS STEEL INDUSTRIES (SUPRA) THE TERM TURNOVER HAS NEITHER BEEN DEFINED IN THE ACT NOR HAS BEEN EXPLAI NED BY ANY OF THE CBDT CIRCULARS. ONE HAS TO LOOK AT THE MEANING OF THE TE RM TURNOVER IN ORDINARY ACCOUNTING OR COMMERCIAL PARLANCE. IN ORDINARY ACCO UNTING PARLANCE, AS APPROVED BY ALL ACCOUNTANTS AND AUDITORS, THE TERM SALES, WHEN REFLECTED IN THE PROFIT AND LOSS ACCOUNT, WOULD INDICATE SALE PROCEEDS FROM SALE OF THE ARTICLES OR THINGS IN WHICH THE BUSINESS UNIT I S DEALING. WHEN SOME OTHER THINGS LIKE OLD FURNITURE OR A CAPITAL ASSET, IN WHICH THE BUSINESS UNIT IS NOT DEALING ARE SOLD, THE SALE PROCEEDS THEREFROM W OULD NOT BE INCLUDED IN SALES BUT IT WOULD BE SHOWN SEPARATELY. THE REASO NING ADOPTED BY THE CIT(A) IN THE PRESENT CASE IS THAT SALES AND TUR NOVER ARE NOT SYNONYMOUS. ACCORDING TO HIM THE WORD SALE AND TURNOVER AS USED IN SEC.44AB OF THE ACT REVEALS THE INTENTION OF THE LE GISLATURE IN THIS REGARD. ACCORDING TO HIM THE TERM TURNOVER WOULD INCLUDE HAVE A WIDER CONNOTATION AND WOULD ALSO INCLUDE INTER-UNIT SALES . ACCORDING TO HIM THERE ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 40 OF 50 WOULD HAVE BEEN AN ELEMENT OF PROFIT IN THE INTER U NIT SERVICES TO THE UNIT PROVIDING SERVICE TO THE OTHER UNIT. FACTUALLY IT HAS NOT BEEN DEMONSTRATED SO. THE CIT(A) HAS ALSO PROCEEDED TO HOLD THAT EVE N ASSUMING THAT THERE WAS NO PROFIT ELEMENT, YET SUCH RECEIPTS HAVE TO BE CONSIDERED AS INCLUDIBLE IN TOTAL TURNOVER. WE DO NOT THINK TH AT THE ABOVE REASONING CAN BE ADOPTED IN THE CONTEXT OF THE PROVISIONS OF SEC. 10B OF THE ACT. IN ANY EVENT, THE APPROACH OF THE HONBLE SUPREME COURT IN THE CASE OF PUNJAB STAINLESS STEEL INDUSTRIES (SUPRA) , CLEARLY SUGGESTS THAT THE TOTAL TURNOVER SHOULD BE ONLY IN RELATION TO THE BUSINES S OF THE ASSESSEE WHICH IN THIS CASE IS MANUFACTURE AND SALE OF GARMENTS. HAD GARMENTS BEEN SOLD LOCALLY BY EITHER OF THE UNITS THAN THEY WERE TO BE INCLUDED IN THE TOTAL TURNOVER. KEEPING IN MIND THE FACTS AND CIRCUMSTA NCES OF THE PRESENT CASE AND THE PRECEDENTS ON WHICH THE LEARNED COUNSE L FOR THE ASSESSEE HAS PLACED RELIANCE, WE ARE OF THE VIEW THAT THE IN TER UNIT TRANSFER SHOULD NOT BE TREATED AS PART OF THE TOTAL TURNOVER WHIL E COMPUTING DEDUCTION U/S.10B OF THE ACT. WE HOLD ACCORDINGLY AND ALLOW THE RELEVANT GROUND OF APPEAL OF THE ASSESSEE. 53. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED. ITA 1266/B/2010 54. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORD ER DATED 9.9.2010 OF THE CIT(APPEALS)-I, BANGALORE, RELATING TO A.Y. 200 7-08. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 41 OF 50 55. THE ASSESSEE HAS FILED CONCISE GROUNDS OF APPE AL, OF WHICH GROUND NO.2 IS WITH REGARD TO THE INCLUSION OF INTER-UNIT JOB WORK IN THE TOTAL TURNOVER OF THE ASSESSEE WHILE COMPUTING DEDUCTION U/S. 10B OF THE ACT. THIS ISSUE IS IDENTICAL TO GROUNDS 5 & 6 RAISED BY THE ASSESSE E IN ITA NO.1093/BANG/2009. FOR THE REASONS STATED THEREIN, WE ALLOW THE CLAIM OF THE ASSESSEE IN THIS REGARD. 56. GROUND NO.3 OF THE CONCISE GROUNDS IS WITH REG ARD TO ACTION OF THE CIT(APPEALS) IN UPHOLDING THE DISALLOWANCE OF EMPLO YEES CONTRIBUTION TO ESI PAYMENTS BY INVOKING THE PROVISIONS OF SECTION 43B OF THE ACT. THE AO WAS OF THE VIEW THAT THE ASSESSEE COMPANY HAS BELAT EDLY PAID THE EMPLOYEES CONTRIBUTION FOR ESI AND THEREFORE AN AM OUNT OF RS.8,46,458 WAS ADDED U/S. 2(24)(X) R.W.S. 36(1)(VA) OF THE ACT . 57. THE ASSESSEE RAISED A SPECIFIC GROUND OF APPEA L CHALLENGING THE ADDITION MADE BY THE AO AS AFORESAID VIZ., GROUND N O.7 BEFORE THE CIT(A). THE CIT(A) HAS, HOWEVER, NOT ADDRESSED THE ISSUE IN THE IMPUGNED ORDER. AT THE TIME OF HEARING, IT WAS BROUGHT TO OUR NOTIC E THAT THE ISSUE IN THE AFORESAID GROUND OF APPEAL IS SQUARELY COVERED BY T HE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN SPECTRUM CONSULTANTS (INDIA) PVT.LTD. VS. CIT, (2013) 34 TAXMAN.COM 20 WHEREIN IT WAS HELD THAT IF THE EMPLOYEES CONTRIBUTION TO ESI IS PAID ON OR BEF ORE THE DUE DATE FOR FILING RETURN OF INCOME U/S. 139(1), THEN THE SAME CANNOT BE DISALLOWED. THE AO IS THEREFORE DIRECTED TO VERIFY IF THE EMPLOYEES CO NTRIBUTION TO ESI HAS BEEN ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 42 OF 50 PAID BY THE ASSESSEE WITHIN THE TIME LIMIT AS LAID DOWN IN THE AFORESAID DECISION OF THE HONBLE HIGH COURT OF KARNATAKA AND ALLOW THE CLAIM OF THE ASSESSEE, IF IT IS FOUND TO BE IN ACCORDANCE WITH T HE SAID DECISION. 58. THE LD. COUNSEL FOR THE ASSESSEE ALSO MADE A P RAYER FOR ADJUDICATION OF GROUND NO.12 (1) & 12(2) AS RAISED BY THE ASSESSEE IN THE ORIGINAL GROUNDS OF APPEAL WHICH ARE WITH REGARD TO THE ACTION OF THE REVENUE AUTHORITIES IN TREATING THE GAIN ON FOREIGN EXCHANGE CONTRACTS AS INCOME NOT DERIVED FROM THE EXPORT BUSINESS AND THE REFORE NOT ELIGIBLE FOR DEDUCTION U/S. 10B OF THE ACT. WE MAY ALSO MENTION THAT THE ASSESSEE DID NOT SPECIFICALLY RAISE A GROUND OF APPEAL BEFORE TH E CIT(A) ON THE ABOVE ISSUE. ACCORDING TO THE LD. DR, THE ISSUE THEREFOR E SHOULD NOT BE CONSIDERED FOR ADJUDICATION. WE ARE, HOWEVER, OF T HE VIEW THAT THE POWERS OF THE TRIBUNAL TO ENTERTAIN A GROUND ARISING OUT O F THE ASSESSMENT PROCEEDINGS CANNOT BE CURTAILED. WE THEREFORE ENTE RTAIN FOR ADJUDICATION GROUND NOS.12(1) & 12(2) OF THE ORIGINAL GROUNDS OF APPEAL. THIS ISSUE IS IDENTICAL TO GROUND NOS.2, 3, 4 & 7 RAISED BY THE A SSESSEE IN ITA NO.1093/BANG/2009. FOR THE REASONS STATED THEREIN, THE ACTION OF THE REVENUE AUTHORITIES IS UPHELD AND THE RELEVANT GROU NDS ARE DISMISSED. 59. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED. ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 43 OF 50 ITA NO.1057 & 1103/BANG/2012 60. ITA 1057/12 IS AN APPEAL BY THE ASSESSEE, WHIL E ITA 1103/12 IS AN APPEAL BY THE REVENUE. BOTH THESE APPEALS ARE DIRE CTED AGAINST THE ORDER DATED 19.6.2012 OF THE CIT(APPEALS)-I, BANGALORE, R ELATING TO A.Y. 2008-09. ITA 1057/12 61. WE SHALL FIRST TAKE UP FOR CONSIDERATION APPEA L BY THE ASSESSEE. GROUND NO.2 IS IDENTICAL TO GROUND NOS.2, 3, 4 & 7 RAISED BY THE ASSESSEE IN ITA NO.1093/BANG/2009. FOR THE REASONS STATED T HEREIN, THE ACTION OF THE REVENUE AUTHORITIES IS DISMISSED. 62. GROUND NO.3 RAISED BY THE ASSESSEE READS AS FO LLOWS:- 3. THE LEARNED CIT(A) IS NOT JUSTIFIED IN UPHOLDIN G THE TAXATION OF LONG TERM CAPITAL GAINS AT THE RATE OF @0% INSTEAD OF 10% UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE. 63. THE ASSESSEE DURING THE PREVIOUS YEAR HAD SOLD UNITS OF MUTUAL FUND AND DERIVED LONG TERM CAPITAL GAIN OF RS.43,73 ,000. THE ASSESSEE HAD CLAIMED LONG TERM CAPITAL GAIN AS EXEMPTION U/S . 10(38) OF THE ACT. SINCE THE ASSESSEE HAD NOT PAID SECURITIES TRANSACT ION TAX (STT) ON SALE OF UNITS OF MUTUAL FUNDS, THE CLAIM FOR EXEMPTION U S. 10(38) OF THE ACT WAS NOT AVAILABLE TO THE ASSESSEE. THE SAID SUM WAS AC CORDINGLY BROUGHT TO TAX @ 20% BY THE AO. BEFORE THE CIT(APPEALS), THE ASSESSEE SUBMITTED ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 44 OF 50 THAT IT HAD NOT CLAIMED INDEXATION BENEFITS UNDER T HE SECOND PROVISO TO SECTION 48 OF THE ACT AND THEREFORE RATE OF TAX ON LONG TERM CAPITAL GAIN SHOULD BE 10% AND NOT 20% AS LEVIED BY THE AO. THE CIT(A) DID NOT DISCUSS THIS ISSUE, NEVERTHELESS, HE UPHELD THE ORD ER OF THE AO. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE HAS RAISED GRO UND NO.3 BEFORE THE TRIBUNAL. 64. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNS EL FOR THE ASSESSEE AND THE LD. DR. SECTION 112(1) READS AS FOLLOWS:- TAX ON LONG-TERM CAPITAL GAINS. 112. (1) WHERE THE TOTAL INCOME OF AN ASSESSEE INCL UDES ANY INCOME, ARISING FROM THE TRANSFER OF A LONG-TERM CA PITAL ASSET, WHICH IS CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS', THE TAX PAYABLE BY THE ASSESSEE ON THE TOTAL INCOME SHALL B E THE AGGREGATE OF, ( A ) IN THE CASE OF AN INDIVIDUAL OR A HINDU UNDIVIDED FAMILY, [BEING A RESIDENT,] ( I ) THE AMOUNT OF INCOME-TAX PAYABLE ON THE TOTAL INC OME AS REDUCED BY THE AMOUNT OF SUCH LONG-TERM CAPITAL GAI NS, HAD THE TOTAL INCOME AS SO REDUCED BEEN HIS TOTAL INCOME ; AND ( II ) THE AMOUNT OF INCOME-TAX CALCULATED ON SUCH LONG- TERM CAPITAL GAINS AT THE RATE OF TWENTY PER CENT : PROVIDED THAT WHERE THE TOTAL INCOME AS REDUCED BY SUCH LONG- TERM CAPITAL GAINS IS BELOW THE MAXIMUM AMOUNT WHIC H IS NOT CHARGEABLE TO INCOME-TAX, THEN, SUCH LONG-TERM CAPI TAL GAINS SHALL BE REDUCED BY THE AMOUNT BY WHICH THE TOTAL INCOME AS SO REDUCED FALLS SHORT OF THE MAXIMUM AMOUNT WHICH IS NOT CHARGEABLE TO INCOME-TAX AND THE TAX ON THE BALANCE OF SUCH LONG- TERM CAPITAL GAINS SHALL BE COMPUTED AT THE RATE OF TWENTY PER CENT; ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 45 OF 50 ( B ) IN THE CASE OF A [DOMESTIC] COMPANY, ( I ) THE AMOUNT OF INCOME-TAX PAYABLE ON THE TOTAL INC OME AS REDUCED BY THE AMOUNT OF SUCH LONG-TERM CAPITAL GAI NS, HAD THE TOTAL INCOME AS SO REDUCED BEEN ITS TOTAL INCOME ; AND ( II ) THE AMOUNT OF INCOME-TAX CALCULATED ON SUCH LONG- TERM CAPITAL GAINS AT THE RATE OF [TWENTY] PER CENT : 65. IT CAN BE SEEN FROM THE AFORESAID PROVISO THAT IF THE BENEFIT OF INDEXATION IS NOT CLAIMED UNDER SECOND PROVISO OF S ECTION 48, THEN THE RATE OF TAX ON LONG TERM CAPITAL GAIN WILL ONLY BE @ 10% . IN THE PRESENT CASE, NEITHER THE AO NOR THE CIT(A) HAS EXAMINED THE QUES TION AS TO WHETHER THE BENEFIT OF INDEXATION WAS CLAIMED BY THE ASSESSEE O R NOT. WE THEREFORE SET ASIDE THE ORDER OF THE AO FOR FRESH CONSIDERATION I N THE LIGHT OF THE PROVISIONS OF LAW REFERRED TO ABOVE, AFTER AFFORDIN G OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 66. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS A CCORDINGLY PARTLY ALLOWED. ITA 1103/12 67. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION I N THE REVENUES APPEAL IS AS TO WHETHER THE CIT(APPEALS) WAS JUSTIFIED IN DIRECTING THE AO TO COMPUTE DEDUCTION U/S. 10B ON THE PROFITS OF EOU UN IT-II WITHOUT ADJUSTING THE LOSSES OF EOU UNIT-I FROM THE PROFITS AND GAIN S OF BUSINESS / ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 46 OF 50 PROFESSION BEFORE COMPUTING SUCH DEDUCTION, WITHOU T APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CASE. 68. THE ASSESSEE HAS TWO 100 EOUS. THE AO FOUND THAT THE EOU-I AND SEZ UNITS SUFFERED LOSSES. THE ASSESSEE CLAIMED RELIEF U/S 10B IN RESPECT OF THE INCOME EARNED BY ITS PROFIT-MAKING E OU I.E. UNIT-IL WITHOUT AGGREGATING THE INCOME AND LOSSES OF ALL ITS UNITS. QUOTING SECTION 2(45) OF THE ACT FOR DETERMINING THE TOTAL INCOME OF THE ASS ESSEE AND THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. HIMMATSINGIKE SEIDE LTD (286 ITR 255) , THE AO HELD THAT THE AGGREGATE OF THE INCOME AND LOSSES OF ALL THE UNITS OF THE ASSESSEE HAD TO BE TAKEN INTO ACCOUNT FOR CALCULATING THE DEDUCTION U/S 10B OF THE ACT. BESID ES, THE AO FOUND FROM THE ASSESSEES SUBMISSIONS DURING THE ASSESSMENT PR OCEEDINGS THAT THE LONG-TERM CAPITAL GAINS OF RS.43,73,000/- IN RESPEC T OF WHICH EXEMPTION U/S 10(38) HAD BEEN CLAIMED ACTUALLY RELATED TO DEBT FU NDS IN RESPECT OF WHICH NO STT HAD BEEN MADE. TAKING INTO CONSIDERATION ALL THESE FACTORS, THE AO HELD THAT THE ASSESSEE WAS NOT ENTITLED TO EXEMPTIO N U/S 10B IN RESPECT OF THE PROFIT OF EOU-II AND HAS ALSO ASSESSED LONG-TER M CAPITAL GAINS OF RS.43,73,000/- ARISING FROM THE SALE OF DEBT FUNDS AND BROUGHT THE SAME TO TAX. 69. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFOR E THE FIRST APPELLATE AUTHORITY ON THE FOLLOWING RELEVANT GROUNDS OF APPE AL:- ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 47 OF 50 2(A) THE LEARNED A.O. HAS ERRED IN DENYING THE DE DUCTION U/S 10B OF THE ACT TO WHICH THE APPELLANT IS LEGITIMATE LY ENTITLED TO WHILE COMPUTING THE ASSESSMENT OF THE APPELLANT. 2(B) THE DENIAL OF DEDUCTION IS ON THE ERRONEOUS A PPRECIATION OF THE POSITION OF LAW .AND ON MISPLACING RELIANCE ON THE RATIO OF THE DECISION OF THE KARNATAKA HIGH COURT REPORTED IN 28 6 ITR 255 WHICH IS INAPPLICABLE TO THE FACTS OF THE CASE. 3. WITHOUT PREJUDICE TO THE ABOVE, APART FROM THE DENIAL, THE LEARNED A.O. OUGHT TO HAVE GRANTED A GREATER DEDUCT ION U/S 10B OF THE ACT, ALTHOUGH NOT SPECIFICALLY CLAIMED FOR BY C ONSIDERING THE PROFITS APPERTAINING TO THE INCOME FROM THE CANCELL ATION (OF) FORWARD CONTRACTS OF 100% EOU UNITS. 4. THE LEARNED A.O. HAS ERRED IN SUBJECTING THE LO NG TERM CAPITAL GAINS AT 20% INSTEAD OF 10% IN ACCORDANCE W ITH LAW. 70. THE ASSESSEE MADE THE FOLLOWING SUBMISSIONS IN THE STATEMENT OF FACTS ACCOMPANYING THE APPEAL MEMO ON THIS ISSUE BE FORE THE CIT(APPEALS):- 4 IT IS THE SUBMISSION OF THE APPELLANT THAT THE P ROFITS FROM THE EXPORT UNIT, WHICH ARE ENTITLED TO DEDUCTION U/ S 10B OF THE ACT, WHILE COMPUTING THE DEDUCTION AS ASCRIBED TO S UCH UNIT SHOULD BE CONSIDERED ON STANDALONE BASIS IN TERMS O F THE PROVISION OF SECTION 10B OF THE ACT. THE LEARNED A. O. RELIED ON THE DECISION OF THE KARNATAKA HIGH COURT IN THE CAS E OF CIT V. HIMATASINGIKE SEIDE LIMITED REPORTED IN 286 ITR 255 , WHICH IS ALTOGETHER ON DIFFERENT FACT, SITUATION AND FOR DIF FERENT LEGAL PROPOSITION. IT IS NOT THE CASE OF THE APPELLANT AT ALL WHILE COMPUTING THE GROSS TOTAL. INCOME, THE INCOME OR LO SS FROM ALL THE UNITS INCLUDING EOU UNITS, IN RESPECT OF WHICH DEDU CTION IS CLAIMED SHOULD NOT BE INCLUDED. EVEN IF THE INCOME FROM ALL THE EOU UNITS INCLUDING THE UNIT IN RESPECT OF WHICH DE DUCTION U/S 10B OF THE ACT, IS CLAIMED THERE IS STILL GROSS TOT AL INCOME AND SO LONG THERE IS A POSITIVE GROSS TOTAL INCOME DEDUCTI ON U/S 10B OF THE ACT, IN RESPECT OF THE UNIT HAS TO BE GIVEN. IN THE INSTANT CASE OF THE APPELLANT THERE IS POSITIVE GROSS TOTAL INCO ME AFTER ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 48 OF 50 CONSIDERING ALL THE LOSSES AND THE DEDUCTION CLAIME D U/S 10B OF THE ACT IS FAR LESS THAN THE GROSS TOTAL INCOME AND IT IS CALCULATED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT IN FAC T BY COMMITTING AN ERROR IN FAVOUR OF THE REVENUE, AS TH E APPELLANT COMMITTED A MISTAKE WHILE CALCULATING THE DEDUCTION IN EXCLUDING THE INCOME FROM FORWARD CONTRACTS RELATING TO THE E XPORT UNIT AS NOT EXPORT INCOME AND CONSEQUENTLY, NOT ELIGIBLE TO DEDUCTION U/S 10B OF THE ACT. HOWEVER, SUCH INCOME HAS BEEN TAXED UNDER THE HEAD BUSINESS ITSELF AND NOT UNDER THE HEAD OTHER S OURCES OR NOT AS APPERTAINING TO OR DEHORS TO THAT EOU UNIT. THE LEA RNED A.O. AFTER HAVING ACCEPTED AS BUSINESS INCOME OF THE EXP ORT UNIT OUGHT TO HAVE GIVEN GREATER DEDUCTION IN ACCORDANCE WITH LAW BY NOT RESTRICTING TO THE AMOUNT AS CLAIMED BY THE APPELLA NT AND GRANTED GREATER DEDUCTION WHEREAS, EVEN THE RESTRICTED DEDU CTION CLAIMED HE DENIED IT UNREASONABLY. 71. THE LD. CIT(APPEALS) ON A CONSIDERATION OF THE SUBMISSIONS OF THE ASSESSEE HELD THAT THE ISSUE UNDER CONSIDERATION WA S COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE HIGH CO URT OF KARNATAKA IN THE CASE OF CIT & ANOTHER V. YOKOGAWA INDIA LTD. 341 ITR 38 5 . THEREFORE, HE DIRECTED THE AO TO FOLLOW THE DECISION AND RECOM PUTE THE DEDUCTION U/S 10B ACCORDINGLY. AGGRIEVED BY THE ORDER OF THE CIT (A), THE REVENUE HAS FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 72. AT THE TIME OF HEARING OF THIS APPEAL, THE LD . COUNSEL FOR THE ASSESSEE FILED BEFORE US THE DECISION OF THE BANGAL ORE BENCH OF THE TRIBUNAL IN MINDTECH INDIA LTD. V. ITO, ITA NO.1054/BANG/2013, ORDER DATED 4.7.2014 , WHEREIN THE ISSUE WAS WHETHER SECTION 10B IS AN EXEMPTION PROVISION UNDER CHAPTER III OR A DEDUCTIO N UNDER CHAPTER VIA OF THE ACT WAS CONSIDERED AND THIS TRIBUNAL TOOK THE V IEW THAT THE PROVISIONS ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 49 OF 50 ARE EXEMPTION PROVISIONS AND THEREFORE LOSS OF EOU OR OTHER UNITS WILL NOT ENTER THE COMPUTATION OF TOTAL INCOME AT ALL. IN F ACT, THE CIT(A) HAS FOLLOWED THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN CIT V. YOKOGAWA INDIA LTD., 341 ITR 385 , WHEREIN IT WAS HELD THAT SECTION 10A AND 10B ARE EXEMPTION PROVISIONS AND THEREFORE INCOME OF SUCH U NITS HAVE TO BE EXCLUDED AT SOURCE ITSELF BEFORE ARRIVING AT GTI AN D SINCE INCOME IS NOT TO BE INCLUDED IN THE INCOME OF THE ASSESSEE AT ALL, T HERE IS NO OCCASION TO SET OFF LOSSES OF THE ASSESSEE IN RESPECT OF ITS OTHER BUSINESS AGAINST PROFITS OF THE EXEMPT UNIT. FOLLOWING THE AFORESAID DECISION OF THE HONBLE HIGH COURT OF KARNATAKA, WE UPHOLD THE ORDER OF THE CIT(APPEAL S) AND DISMISS THE APPEAL BY THE REVENUE. 73. IN THE RESULT, ITA 1057/B/12 IS PARTLY ALLOWED AND ITA 1103/B/12 IS DISMISSED. 74. TO SUM UP, THE APPEALS BY THE ASSESSEE ARE PAR TLY ALLOWED AND THE APPEAL BY THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 24 TH DAY OF APRIL , 2015 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 24 TH APRIL , 2015 . /D S/ ITA NOS. 1093/B0/09, 1266/B/10 & 1057 & 1103/B/12 PAGE 50 OF 50 COPY TO: 1. ASSESSEE 2. REVENUE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR/ SENIOR PRIVATE SECRETARY ITAT, BANGALORE.