Matrix Laboratories Ltd., Secunderabad V. ACIT, Hyderabad

ITA 509/HYD/2008

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 5997 (ITAT-HYDERABAD)
• Duration Of Justice: 8 year(s) 7 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 14-09-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 25-03-2008
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Business income; Depreciation; Transfer pricing; Retrospective amendment; Bad and doubtful debts; Unabsorbed depreciation
• Section: 143(3); 80HHC; 115JB; 10B; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. ASST. YEAR APPELLANT RESPONDENT 509/HYD/2008 200 4 - 0 5 MYLAN LABORATORIES LIMITED (FORMERLY KNOWN AS MATRIX LABORATORIES LTD) HYDERABAD [PAN: AADCM3491M] ASST. COMMISSIONER OF INCOME TAX, CIRCLE-16(2), HYDERABAD 521/HYD/2008 2004 - 05 DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-16(2), HYDERABAD MATRIX LABORATORIES LTD SECUNDERABAD [PAN: AADCM3491M] FOR ASSESSEE : SHRI K.A. SAI PRASAD, AR FOR REVENUE : SHRI P. SOMA SEKHAR REDDY, CIT-DR DATE OF HEARING : 14-09-2016 DATE OF PRONOUNCEMENT : 23-11-2016 O R D E R PER B. RAMAKOTAIAH, A.M. : THESE ARE CROSS-APPEALS BY ASSESSEE AND REVENUE AGA INST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-V, HYDERABAD, DATED 11-01-2008. 2. BRIEFLY STATED, ASSESSEE, FORMERLY KNOWN AS M/S. MATRIX LABORATORIES LTD., IS A PUBLIC LIMITED COMPANY, ENGAG ED IN THE BUSINESS OF MANUFACTURE OF ACTIVE PHARMACEUTICAL INGRE DIENTS (API). FOR THE AY. 2004-05, ASSESSEE FILED ITS RETURN OF INCOME ON I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 2 -: 01-11-2005 DECLARING TOTAL INCOME OF RS. 9,32,14,921/ - UNDER NORMAL COMPUTATION AND RS. 51,96,92,295/- UNDER 115J B OF THE OF THE INCOME TAX ACT [ACT]. ASSESSING OFFICER [AO] COMP LETED THE ASSESSMENT U/S. 143(3) OF THE ACT ASSESSING TOTAL INCO ME AT RS. 21,83,21,320/- UNDER NORMAL COMPUTATION AND BOOK PROF ITS OF RS. 1,34,47,08,088/- U/S. 115JB OF THE ACT. SINCE THE TAX LIABILITY UNDER THE PROVISIONS OF SECTION 115JB WAS MORE THAN THE TAX LIABILITY UNDER NORMAL COMPUTATION, AO RAISED THE DEM AND ACCORDINGLY. ASSESSEE PREFERRED APPEAL BEFORE THE L D.CIT(A). THE MAIN ISSUES FOR CONSIDERING WERE COMPUTATION OF BOOK PROFIT U/S. 115JB AND COMPUTATION OF DEDUCTION U/S. 80HHC. VARIOU S ISSUES WERE RAISED AND LD.CIT(A) PARTIALLY ALLOWED THE CONTEN TIONS. ACCORDINGLY, BOTH ASSESSEE AND REVENUE WERE AGGRIEVE D ON THE ORDER OF THE LD.CIT(A). 3. ASSESSEE HAS CHANGED ITS NAME FROM M/S. MATRIX LABORATORIES LTD., TO M/S. MYLAN LABORATORIES LIMITED. ACCORDINGLY, IT HAS FILED REVISED FORM 36 INCORPORATI NG THE NEW NAME. FURTHER, IN ADDITION TO THE ORIGINAL GROUNDS RA ISED (FOUR IN NUMBER) WHILE FILING THE APPEAL, ASSESSEE ALSO RAISE D ADDITIONAL GROUNDS WHICH ARE LEGAL IN NATURE AND WERE ADMITTED. THESE ARE ADJUDICATED AFTER HEARING THE LD.CIT-DR AND LD. COUN SEL FOR ASSESSEE. THE PAPER BOOKS PLACED ON RECORD WERE AL SO PERUSED. ASSESSEES APPEAL IN ITA NO. 509/HYD/2008 : 4. THE FIRST GROUND RAISED BY ASSESSEE IS ON THE AC TION OF AO IN ADDING BACK THE DEFERRED TAX PROVISION OF RS. 1 1,59,55,000/- UNDER THE PROVISIONS OF SECTION 115JB INVOKING THE EX PLANATION. IT I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 3 -: WAS THE CONTENTION OF ASSESSEE THAT AS PER THE ACCOUNTI NG STANDARD 22, IT IS NOT UN-ASCERTAINED LIABILITY AND H ENCE CANNOT BE DISALLOWED AS UN-ASCERTAINED LIABILITY. LD.CIT(A) U PHELD THE ACTION OF AO. IT WAS FAIRLY ADMITTED BY BOTH THE PARTIES THAT IN VIEW OF THE AMENDMENT BROUGHT TO SECTION 115JB BY THE FINANCE ACT, 2008, W.E.F. 01-04-2001, THIS ISSUE WAS TO BE HELD AGAINST A SSESSEE. THE CO-ORDINATE BENCH IN ITA NOS. 835, 836 & 837/HYD/200 5, DT. 02- 07-2012 IN EARLIER ASSESSMENT YEARS HAS CONSIDERED THIS ISSUE AND HELD VIDE PARA 14 & 15 AS UNDER: 14. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE A ND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN OUR OP INION, AFTER INSERTION OF CLAUSE (H) IN THE EXPLANATION-1 TO SEC TION 115JB WITH RETROSPECTIVE EFFECT VIDE FINANCE ACT, 2008 WITH EF FECT FROM 1.4.2001, THIS ISSUE HAS TO BE DECIDED AGAINST THE ASSESSEE AS THIS CLAUSE READS AS FOLLOWS: '(H) THE AMOUNT OF DEFERRED TAX AND THE PROVISION THEREFOR.' 15. IN VIEW THIS CLAUSE THE BOOK PROFIT SHOWN IN TH E PROFIT AND LOSS ACCOUNT IN THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUBSECTION (2) OF SECTION 115JB TO BE INCREASED, IN TER ALIA BY THE AMOUNT OF DEFERRED TAX AND THE PROVISIONS THEREFOR. HENCE THIS GROUND IS REJECTED. IN VIEW OF THE AMENDMENT BROUGHT TO SECTION ITSELF, THE I SSUE HAS TO BE DECIDED AGAINST ASSESSEE. THIS GROUND IS A CCORDINGLY REJECTED. 5. GROUND NO. 2 PERTAINS TO THE ISSUE OF NOT ALLOWIN G 100% DEDUCTION IN RESPECT OF EXPORT PROFITS UNDER CLAUSE (IV ) OF EXPLANATION TO SECTION 115JB FOR COMPUTING BOOK PROFITS. AO RESTRICTED THE DEDUCTION CALCULATING THE PROFITS ON THE BASIS OF THE NORMAL COMPUTATION AND ALSO CONSIDERING THE PRO-RATA DEDUCTION I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 4 -: PROVIDED FOR PHASING OUT THE BENEFITS UNDER THE SECTION . IT WAS THE CONTENTION THAT THIS DEDUCTION IS TO BE ALLOWED ON THE PR OFITS COMPUTED U/S. 115JB ALONE AND SHOULD NOT BE ON THE BAS IS OF NORMAL COMPUTATION. THIS ISSUE IS COVERED IN FAVOUR OF ASSESSEE AS THE PRINCIPLE WAS APPROVED BY THE HON'BLE APEX COURT I N THE CASE OF AJANTA PHARMA LTD. VS. CIT [327 ITR 305]. THE CO-O RDINATE BENCH IN THE ABOVE REFERRED ORDER IN ASSESSEE OWN CA SE HAS CONSIDERED SIMILAR ISSUE AND HELD AS UNDER: 10. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. THIS ISSUE IS COMMON IN ALL THESE APPEALS. WHILE THE ASSESSEE CONTESTS THE CIT (A)'S ORDER FOR NOT ALLOWING DEDUCTION UNDER CLAUSE (IV) OF' EXPLANATION ON THE ENTIRE AMOUNT OF EXPORT PROFITS COMPUTED FROM THE BASE OF BOOK PROFITS BUT INSTEAD RESTRICTING TH E DEDUCTION IN TERMS OF THE PHASING OUT PER SUB-SECTION (1B), THE DEPARTMENT IS DISPUTING THE ORDER OF THE CIT(A) FOR COMPUTING THE DEDUCTION BASED ON BOOK PROFITS INSTEAD OF THE AMOUNT AS COMPUTED U NDER SECTION 80HHC BASED ON PROFITS OF THE BUSINESS UNDER CLAUSE (BAA). THE ASSESSEE RELIES ON THE RECENT DECISION OF THE SUPRE ME COURT IN THE CASE OF AJANTA PHARMA LTD V CIT (2010) (327 ITR 305 ). THE ASSESSEE SUBMITTED THAT THE APEX COURT HAS APPROVED THE SPEC IAL BENCH DECISION OF ITAT IN DCIT V SYNCOM FORMULATIONS (I) LTD. (2007) (106 ITD 193). 11. THE DR FAIRLY CONCEDED THAT THE DECISION OF THE SUPREME COURT IN THE CASE OF AJANTA PHARMA (SUPRA) IS AGAIN ST THE DEPARTMENT AND IN FAVOUR OF THE ASSESSEE. THE APEX COURT LAID DOWN THE LAW THAT FOR PURPOSES OF COMPUTING BOOK PR OFIT, THE DEDUCTION TO BE ALLOWED UNDER CLAUSE (IV) OF EXPLAN ATION IS THE EXPORT PROFITS AS COMPUTED WITH REFERENCE TO BOOK P ROFITS. SEC. 115JB IS A SEPARATE CODE FOR COMPANY ASSESSEES' FOR COMPUTING MINIMUM TAX PAYABLE IN THE ABSENCE / INADEQUACY OF NORMAL TAXABLE INCOME FALLING UNDER THE 5 HEADS OF INCOME. THE MINIMUM TAX IS TO BE COMPUTED WITH REFERENCE TO BOOK PROFIT S AS PER THE AUDITED ACCOUNTS OF THE COMPANY. CONSEQUENTLY THE E XPORT PROFITS COMPUTED UNDER THE PROVISIONS OF SEC. 80HHC BASED O N 'PROFITS OF BUSINESS OR PROFESSION' CANNOT BE SUBSTITUTED INTO THE COMPUTATION SCHEME AS PRESCRIBED IN SEC. 115JB WHICH IS AN ALTE RNATIVE COMPUTATION TO THE NORMAL COMPUTATION OF INCOME. TH E COURT ALSO HELD THAT THE DEDUCTION UNDER CLAUSE (IV) OF EXPLAN ATION FOR THE EXPORT PROFITS SHOULD NOT BE PHASED OUT AS PROVIDED IN SUB-SECTION (1B) OF SEC. 80HHC BECAUSE, 115JB IS AN INDEPENDENT CODE AND IT I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 5 -: COVERS FULL EXPORT PROFITS AS THE ELIGIBLE PROFITS FOR THE PURPOSES OF BOOK PROFITS TAX AND NO PHASING IS REQUIRED TO BE C ARRIED OUT. THIS VIEW HAS BEEN REITERATED BY THE APEX COURT IN THE R ECENT CASE OF CIT V BHARI INFORMATION TECH. SYS. P. LTD IN CIVIL APPEAL NO. 33750/2009 RENDERED ON 20.10.2011. THUS, THIS GROUN D IN ASSESSEES APPEALS ITA NOS. 835 TO 837/HYD/05 IS AL LOWED AND RELATED GROUND IN REVENUE APPEALS IN ITA NOS. 930 T O 932/HYD/05 IS DISMISSED. 5.1. IN THE COURSE OF ARGUMENTS, LD.CIT-DR PLACED ON RECORD THE DECISION OF HON'BLE KERALA HIGH COURT IN THE CASE OF CIT VS. PACKWORTH UDYOG LTD [331 ITR 416] FOR THE PROPOSITION TH AT THE HON'BLE KERALA HIGH COURT HAS ANALYSED THE DECISION O F THE HON'BLE SUPREME COURT IN THE CASE OF AJANTA PHARMA LTD. VS. CIT [327 ITR 305] (SUPRA), AND DIRECTED TO COMPUTE THE DEDUCTION ON LY ON THE BASIS OF PROFITS EARNED IN THE NORMAL COMPUTATION BEF ORE SETTING-OFF LOSSES AND DEPRECIATION. 5.2. LD. COUNSEL HOWEVER, PLACED ON RECORD THE DECI SION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. BHAR I INFORMATION TECHNOLOGY SYSTEMS (P.) LTD., [340 ITR 593 ], WHEREIN UNDER THE PROVISIONS OF 80HHE, HON'BLE SUPREME COURT HAS HELD THAT THE DEDUCTION IS TO BE WORKED OUT ON THE BASIS OF AD JUSTED BOOK PROFIT U/S. 115JA AND NOT ON THE BASIS OF THE PROF ITS COMPUTED UNDER REGULAR PROVISIONS OF LAW APPLICABLE TO COMPUTATION OF PROFITS AND GAINS OF BUSINESS. LD. C OUNSEL FURTHER SUBMITTED THAT PROVISIONS OF SECTION 80HHE ARE PARI MATERIA WITH THAT OF 80HHC AND THE DECISION OF SPECIAL BENCH OF TH E ITAT IN THE CASE OF DCIT VS. SYNCOM FORMULATIONS (I) LTD. [10 6 ITD 193] (MUM) (SB) HAS BEEN UPHELD BY THE HON'BLE SUPREME CO URT IN THE AFORESAID DECISION. CONSIDERING THE LATER JUDGMENT O F THE SUPREME COURT WHICH APPROVED THE SPECIAL BENCH DECISION SPECI FICALLY IN I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 6 -: THE CONTEXT OF 115JB, WE ARE OF THE OPINION THAT THERE IS NO MERIT IN LD.CIT-DRS CONTENTIONS. THE DEDUCTION HAS TO BE CALC ULATED ON THE PROFITS AS WORKED OUT ON THE BASIS OF ADJUSTED BOOK PROFIT, FOLLOWING THE PRINCIPLES LAID DOWN BY THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF AJANTA PHARMA LTD. VS. CIT [327 ITR 305] (SUPRA) AND CIT VS. BHARI INFORMATION TECHNOLOG Y SYSTEMS (P.) LTD., [340 ITR 593] (SUPRA). 5.3. IN VIEW OF THE ABOVE, THIS GROUND IS ALLOWED AN D AO IS DIRECTED TO COMPUTE THE DEDUCTION ACCORDINGLY. 6. GROUND NO. 3 PERTAINS TO THE ISSUE OF SET-OFF OF BROUGHT FORWARD LOSS OF RS. 58,50,51,636/- AND BROUGHT FORWA RD DEPRECIATION ALLOWANCE OF RS. 48,26,81,129/- OF AMAL GAMATING COMPANIES [NAMELY FINE DRUGS & CHEMICALS LTD., AND VERA LABORATORIES LTD]. IT WAS THE CONTENTION OF ASSESSEE TH AT WHILE COMPUTING THE DEDUCTION U/S. 80HHC, WHAT IS REQUIRED TO BE ADJUSTED IS THE PROPORTIONATE LOSSES PERTAINING TO EXPOR T BUSINESS OF RELEVANT PREVIOUS YEARS AND NOT ENTIRE CARRIED FORW ARD BUSINESS LOSS/DEPRECIATION WHICH INCLUDES LOSSES FROM NON-EXP ORT BUSINESS. THE AO HAS NEGATIVED THE CONTENTIONS WHICH WERE UPHELD BY THE LD.CIT(A). 7. IT WAS CONTENDED BY LD. COUNSEL THAT IN VIEW OF THE DECISION OF ITAT, MUMBAI BENCH IN THE CASE OF SKF BE ARINGS INDIA LTD., VS. JCIT [4 SOT 534 (MUM)] ADJUSTMENT HAS TO BE FROM THE BROUGHT FORWARD LOSS/DEPRECIATION FROM EXPORT ACTIVITIES ALONE WHICH CAN BE SET-OFF AGAINST EXPORT PROFITS OF THE CURR ENT YEAR. AO HOWEVER, RELIED ON THE DECISION OF CO-ORDINATE BENCH OF ITAT, PUNE I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 7 -: IN THE CASE OF THERMAX SURFACE COATINGS LTD., VS. JC IT [104 ITD 199 (PUNE)]. IT WAS SUBMITTED THAT FOR THE PURPOSE OF COMPUTING ELIGIBLE EXPORT PROFITS U/S. 80HHC R.W.S. 80AB, THE PROFITS OF THE BUSINESS UNDER CLAUSE (BAA) SHOULD BE REDUCED NOT B Y THE ENTIRE AMOUNT OF BROUGHT FORWARD LOSS/DEPRECIATION OF THE EARL IER YEARS BUT ONLY THAT PORTION OF THE BROUGHT FORWARD LOSS/DEPRECI ATION AS CAN BE ATTRIBUTED TO THE EXPORT ACTIVITY OF THE PRECEDING R ELEVANT ASSESSMENT YEAR. 7.1. IT WAS HOWEVER, FAIRLY ADMITTED THAT THIS ISSUE WA S HELD AGAINST ASSESSEE BY THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF COSMO FILMS LTD. VS. CIT [17 TAXMANN.COM 144] (DELHI) WHEREIN, IT WAS HELD AS UNDER: THE MOOT ASPECT WHICH NEEDS DETERMINATION PERTAINS TO THE TREATMENT THAT IS TO BE GIVEN TO BROUGHT FORWARD LO SSES OF THE AMALGAMATING COMPANY FROM BOTH EXPORT AND NON-EXPOR T ACTIVITIES. IT IS NOT IN DISPUTE THAT SECTION 72 POSTULATES CAR RYING FORWARD AND SET OFF OF SUCH LOSSES OF THE AMALGAMATING COMPANY IN THE HANDS OF THE AMALGAMATED COMPANY. THE QUESTION IS WHETHER L OSSES BOTH FROM EXPORT AND NON-EXPORT ACTIVITIES ARE LIABLE TO BE SET OFF, THAT TOO, WHILE DETERMINING PROFIT OF THE BUSINESS FOR COMP UTING DEDUCTION UNDER SECTION 80HHC. WHEREAS THE ASSESSING OFFICER AND THE TRIBUNAL HAVE TAKEN THE VIEW THAT THE BROUGHT FORWA RD LOSSES FROM BOTH EXPORT AND NON-EXPORT ACTIVITIES WERE LIABLE T O BE SET OFF, IN VIEW OF COMMISSIONER (APPEALS), IT IS ONLY BROUGHT FORWARD LOSSES FROM EXPORT ACTIVITIES (AND NOT FROM NON-EXPORT ACT IVITIES) WHICH ARE LIABLE TO BE SET OFF IN COMPUTING DEDUCTION UNDER S ECTION 80HHC. THE SUPREME COURT IN THE CASE OF IPCA LABORATORY LT D. V. DY. CIT [2004] 266 ITR 521 CONSIDERED THE SCOPE EXPRESS ION PROFIT OCCURRING IN SECTION 80HHC AND IN NO UNCERTAIN TERM HELD THAT IT WOULD MEAN A POSITIVE PROFIT. IT WAS CLEARLY HELD THAT IF THERE IS A LOSS THEN NO DEDUCTION WOULD BE AVAILABLE UNDER THI S PROVISION. THE COURT FURTHER CLARIFIED THAT FOR ARRIVING AT POSITI VE PROFIT, BOTH THE PROFITS AND THE LOSSES WILL HAVE TO BE CONSIDERED. IT IS ONLY WHEN THE NET FIGURE IS A POSITIVE PROFIT THEN THE ASSESS EE IS ENTITLED TO DEDUCTION. ONCE THAT JUDGMENT IS APPLICABLE WHICH ANSWERS THE I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 8 -: QUESTION, IT IS NOT NECESSARY TO DEAL WITH OTHER SU BMISSIONS OF THE ASSESSEE. HAVING REGARD TO THE INTERPRETATION GIVEN TO SECTIO N 80HHC BY THE APEX COURT, IT NECESSARILY FOLLOWS THAT TO ARRI VE AT A NET FIGURE OF POSITIVE PROFITS, LOSSES FROM EXPORT AS WELL AS NON -EXPORT ACTIVITIES ARE TO BE TAKEN INTO CONSIDERATION. THUS THE MATTE R IS SQUARELY COVERED BY THIS JUDGMENT OF THE SUPREME COURT IN IP CA LABORATORY (SUPRA) AND THE TRIBUNAL RIGHTLY RELIED UPON THE AF ORESAID JUDGMENT WHILE DECIDING THE ISSUE. IT IS TO BE BORNE IN MIN D THAT THE ASSESSEE- COMPANY AND THE MERGED COMPANY WERE ENGAGED IN THE SAME BUSINESS OF MANUFACTURING OF BOPP FILM WHICH IS USE D FOR LAMINATING PAPERS AND CARD BOARD IN THE PACKAGING I NDUSTRY. FURTHER AS HELD BY THE SUPREME COURT IN THE AFORESA ID CASE, SECTION 80AB HAS THE OVERRIDING EFFECT UPON ALL THE SECTION OF CHAPTER VI-A EXCEPT SECTION 80M. THEREFORE, THE DEDUCTION UNDER SECTION 80HHC IS RESTRICTED BY THE SAID PROVISION NAMELY SECTION 80AB. IN VIEW OF AFORESAID, THE TRIBUNAL WAS RIGHT IN HOL DING THAT AGGREGATE BROUGHT FORWARD LOSSES OF THE AMALGAMATIN G COMPANY FROM BOTH EXPORT AND NON-EXPORT ACTIVITIES WERE LIA BLE TO BE SET OFF IN DETERMINING PROFIT OF THE BUSINESS FOR COMPUTING DEDUCTION UNDER SECTION 80HHC. 7.2. IN VIEW OF THAT, WE DO NOT FIND ANY MERIT IN ASSE SSEES CONTENTIONS AND ACCORDINGLY, THE ORDERS OF AO AND CIT( A) ON THIS ISSUE ARE UPHELD. GROUND IS REJECTED. 8. ASSESSEE HAS RAISED ALTERNATIVE GROUND TO GROUND N O. 3 AS AN ADDITIONAL GROUND AS UNDER: 1. ALTERNATIVE TO GROUND NO. 3, THE COMMISSIONER E RRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN R EDUCING THE ENTIRE BROUGHT FORWARD LOSSES/UNABSORBED DEPRECIATION ALLO WANCE OF AMALGAMATING COMPANIES ELIGIBLE FOR SET OFF UNDER S EC 72A WHILE COMPUTING RELIEF UNDER SEC. 80HHC. 8.1. IT WAS SUBMITTED THAT AS PER CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC THE TERM PROFITS OF THE BU SINESS WOULD MEAN THE PROFITS OF THE BUSINESS AS COMPUTED UNDE R THE I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 9 -: HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. CHAPTER IV OF THE ACT UNDER D PROVIDED THE METHODOLOGY FOR COMPUTING PROFITS AND GAINS OF BUSINESS OR PROFESSION WHICH INCLUDES SECTION 28 TO 44DA. SECTION 72A STIPULATES THAT BROUGHT FORWARD DEPR ECIATION AND BUSINESS LOSS OF AMALGAMATED COMPANY (ASSESSEE) IN THE YEAR OF AMALGAMATION (THE APPOINTED DATE OF AMALGAMATION IS 1 ST JAN, 2004) SECTION 32(2) DEEMS THE BROUGHT FORWARD DEPRECIA TION TO BE A PART OF CURRENT DEPRECIATION. ACCORDINGLY, FOR THE PUR POSES OF ARRIVING AT THE ELIGIBLE PROFITS AS PER THE STATUTORY DEF INITION GIVEN IN CLAUSE (BAA) OF EXPLANATION TO SECTION 80HHC, IT IS ONLY THE BROUGHT FORWARD DEPRECIATION WHICH SHOULD BE DEDUCTED FROM THE PROFITS AND GAINS OF BUSINESS FOR COMPUTING THE EXPORT RELIEF AND THE AMOUNT OF BROUGHT FORWARD BUSINESS LOSS COVERED B Y SECTION 72 R.W.S. 72A SHOULD NOT BE REDUCED FOR ARRIVING AT PRO FITS AND GAINS OF BUSINESS BOTH FOR PURPOSES OF CLASSIFYING U/S. 14 AS WELL AS FOR CLAUSE (BAA) OF SECTION 80HHC. THE CIT(A) AT PARAGRA PHS 8.1 TO 8.4.1 OF HIS ORDER RELIED ON THE DECISION OF THE AP EX COURT IN THE CASE OF CIT VS. SHIRKE CONSTRUCTION EQUIPMENT LTD., [29 1 ITR 380] AND DECIDE THE ISSUE AGAINST ASSESSEE. 9. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE DO NOT SEE ANY MERIT IN THE GROUND RAISED BY ASSESSEE. AS ALREA DY DISCUSSED ABOVE, THE BROUGHT FORWARD LOSSES AND DEPRECIATIONS AR E TO BE ADJUSTED IN TOTO WHILE COMPUTING THE DEDUCTION U/S. 80HHC AS HELD IN THE MAIN GROUND. EVEN IN THE ALTERNATE GROUN D, IF THEY ARE NOT TO BE CONSIDERED AS BROUGHT FORWARD LOSSES AND CONSIDERED AS CURRENT YEAR LOSS AND CURRENT YEAR DEPRECIATION IN T HE YEAR OF AMALGAMATION, THEN ALSO, THE SAME AMOUNT GETS DEDUCTED FR OM THE BUSINESS PROFITS OF THIS YEAR IN TOTO AS DISCUSSED ABOVE IN THE I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 10 -: GROUND AT PARA 7. WHETHER IT IS ALLOWED AS CURRENT YEA R LOSS/DEPRECATION OR AS BROUGHT FORWARD LOSS/DEPRECIATI ON, THE SAME ARE TO BE REDUCED WHILE ARRIVING AT THE PROFITS OF THE BUSINESS FOR THE PURPOSE OF SECTION 80HHC. IN VIEW THIS, THE OR DER OF CIT(A) ON THIS WAS UPHELD AND THE ADDITIONAL GROUND NO. 1 IS REJECTED. 10. GROUND NO. 4 PERTAINS TO VARIOUS ISSUES U/S 80 HHC WHICH IS AS UNDER: 4. THE CIT(A) ERRED IN REDUCING 90% OF THE FOLLOWI NG AMOUNTS FOR COMPUTING ELIGIBLE PROFITS FOR ALLOWING DEDUCTION U /S. 80HHC IN TERMS OF CLAUSE (BAA) OF EXPLANATION THERETO. (A) CONVERSION INCOME OF RS. 54,81,485/- (B) INTEREST INCOME OF RS. 2,62,10,968/- THE CIT(A) ERRED IN NOT PERMITTING NETTING OFF INTE REST EARNED AGAINST INTEREST PAID FOR ARRIVING AT PROFITS OF THE BUSINE SS UNDER CLAUSE (BAA). (C) FAVOURABLE FOREIGN EXCHANGE FLUCTUATIONS RS. 6,96,2 4,295/- 10.1. ASSESSEE ALSO RAISED ADDITIONAL GROUND WITHOU T PREJUDICE TO GROUND NO. 4(A) WHICH IS AS UNDER: 2. WITHOUT CAUSING PREJUDICE TO GROUND NO. 4(A), T HE COMMISSIONER OF INCOME TAX (A) IS NOT JUSTIFIED IN NOT DIRECTING THE ASSESSING OFFICER TO EXCLUDE ONLY NET CONVERSION CHARGES IN C OMPUTING THE ELIGIBLE PROFITS FOR DEDUCTION U/S. 80HHC IN TERM O F (BAA) OF EXPLANATION THERETO. 10.2. ASSESSEE HAS RAISED THREE ISSUES IN THIS GROUN D. THE ISSUE IN SUB-GROUND (A) IS WITH REFERENCE TO CONVERSI ON CHARGES OF RS. 54,81,485/- WHICH WAS TREATED AS AMOUNT TO BE EXCL UDED UNDER THE PROVISIONS OF CLAUSE (BAA) FROM THE PROFITS OF THE BUSINESS. IT WAS THE CONTENTION OF AO THAT CONVERSION CHARGES ARE I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 11 -: NOT PART OF ASSESSEES MAIN BUSINESS INCOME AND THE SA ME SHOULD BE EXCLUDED AT 90% OF THE SAID RECEIPTS UNDER CLAUSE ( BAA) FOR COMPUTING THE PROFITS OF THE BUSINESS U/S. 80HHC. IT W AS THE CONTENTION OF ASSESSEE THAT CONVERSION CHARGES CONSTITUT E BUSINESS INCOME AND PLACED RELIANCE ON THE DECISION OF THE HO N'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BANGALORE CLOTHING COMPANY [260 ITR 371]. AO HOWEVER, DID NOT ACCEPT AND HAS EX CLUDED 90% OF THE CONVERSION CHARGES WHILE COMPUTING THE DEDUCTIO N U/S. 80HHC. LD.CIT(A), FOLLOWING THE DECISION OF THE HON' BLE SUPREME COURT IN THE CASE OF CIT VS. K. RAVINDRANATHAN NAIR [2 95 ITR 228] HAS HELD THAT, IN THAT CASE THE HON'BLE SUPREME COURT HA S CONSIDERED THAT PROCESSING CHARGES CONSTITUTE INDEPENDE NT INCOME LIKE RENT AND THE SAME ARE TO BE REDUCED BY 90% TO ARRI VE AT THE BUSINESS PROFITS. ACCORDINGLY, HE HAS CONSIDERED TH AT CONVERSION CHARGES ARE ALSO TO BE REDUCED AND FURTHER, THE SAME ARE TO BE ADDED TO THE TOTAL TURNOVER AS WELL. AO WAS DIRECTED TO RE-WORK OUT THE DEDUCTION ACCORDINGLY. LD. COUNSEL WHILE ADMITTING THAT THIS ISSUE WAS DECIDED BY THE HON'BLE ITAT IN EARLIER YEA R, FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT, HOWEVER, SUBMI TTED THAT HON'BLE HIGH COURT OF TELANGANA AND ANDHRA PRADESH I N THE CASE OF AUROBINDO PHARMA LTD., VS. CIT [370 ITR 216] HAS CONSIDERED THE CASE LAW ON THE ISSUE AND HELD THAT CONVERSION CHAR GES ARE RELATED TO MANUFACTURING ACTIVITY, HENCE THEY ARE ELIG IBLE FOR DEDUCTION U/S. 80HHC. IT WAS SUBMITTED THAT IN VIEW OF THE JURISDICTIONAL HIGH COURT JUDGMENT SUBSEQUENTLY GIVEN O N SIMILAR FACTS, ITAT ORDER OF EARLIER YEAR IS NO LONGER CORR ECT IN LAW. 10.3. LD. DR HOWEVER, FAIRLY ADMITTED THE FACTUAL POSI TION. ADMITTEDLY, THE ITAT IN EARLIER YEAR HAS HELD AGAINST ASSESSEE I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 12 -: FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT. THE ITAT HAS HELD AS UNDER IN THE ABOVE REFERRED CASE(S) OF ITA NOS. 835, 836 & 837/HYD/2005, DT. 02-07-2012 (SUPRA): 53. IN VIEW OF THE ABOVE JUDGEMENT OF SUPREME COUR T, 90% OF CONVERSION CHARGES HAS TO BE REDUCED FROM THE GROSS TOTAL INCOME TO ARRIVE AT THE BUSINESS PROFIT AND IT HAS TO BE INCL UDED IN THE TOTAL TURNOVER IN THE FORMULA OF ARRIVING AT THE BUSINESS PROFIT IN TERMS OF CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC(3) OF THE ACT. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO R ECOMPUTE THE DEDUCTION U/S. 80HHC OF THE ACT IN THE LIGHT OF THE JUDGEMENT OF SUPREME COURT CITED SUPRA. THIS GROUND OF THE REVEN UE IS PARTLY ALLOWED. 10.4. HOWEVER, SUBSEQUENTLY, HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF AUROBINDO PHARMA LTD., VS. CIT [ 370 ITR 216] (SUPRA) HAS ANALYSED THE CASE LAW ON THE SUBJECT AND HELD AS UNDER: 16. CIT V. BANGALORE CLOTHING CO. [2003] 260 ITR 3 71/127 TAXMAN 637 (BOM.) WAS A CASE, IN WHICH THE ASSESSEE NOT ONLY CARRIED OUT THE ACTIVITY OF MANUFACTURE AND EXPORT OF ITS OWN BUT ALSO TOOK UP THE JOB WORK OF OTHER MANUFACTURES. T HE QUESTION AROSE AS TO WHETHER THE CHARGES LEVIED FOR JOB WORK CAN BE TREATED ON PAR WITH THE ITEMS MENTIONED IN THE CLAUSE. THE ANSWER WAS IN THE NEGATIVE. IN CIT VS. K. RAVINDRANATHAN NAIR [2 007] 295 ITR 228/165 TAXMAN 282 (SC), THE SUPREME COURT AFFIRMED THAT VIEW. IN THAT CASE, THE ASSESSEE WAS A PROCESSOR OF CASHE W NUTS AND APART FROM PROCESSING ITS OWN PRODUCT, IT HAS UNDER TAKEN THE PRODUCTS OF OTHERS ALSO. THE ASSESSEE DID NOT ADD THE PROCESSING CHARGES TO THE TURNOVER AT ALL. IT WAS HELD THAT S UCH AMOUNT IS LIABLE TO BE ADDED TO THE TURNOVER. HOWEVER, AT ONE PLACE OF THE JUDGMENT, IT WAS MENTIONED THAT SUCH AMOUNT MUST BE DEDUCTED ALONG WITH OTHER ITEMS MENTIONED IN THE CLAUSE. IN THE SUBSEQ UENT JUDGMENT IN ACG ASSOCIATED CAPSULES (P) LTD., VS. CIT [2012] 34 3 ITR 89/205 TAXMAN 136/18 TAXMANN.COM 137 (SC), THE HON'BLE SUP REME COURT HELD THAT THE QUESTION AS TO THE DEDUCTION TO BE MA DE UNDER THE CLAUSE DID NOT FALL FOR CONSIDERATION IN K. RAVINDR ANATHAN NAIRS CASE (SUPRA). THE RESULT IS THAT THE VIEW EXPRESSE D BY THE BOMBAY HIGH COURT IN BANGALORE CLOTHING COS CASE (SUPRA) HOLDS THE FIELD. I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 13 -: 17. THEREFORE, WE ARE OF THE VIEW THAT THE AMOUNTS THAT CAN BE TREATED AS FALLING IN THE CATEGORY OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARGES OCCURRING IN THE CLAUSE ARE ONLY THOSE ITEMS, WHICH ARE UNRELATED TO, AND OTHER THAN THE AMOUNTS FORMING PART OF THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY TH E ASSESSEE OCCURRING IN SUB-SECTION (3) OF SECTION 80HHC OF TH E ACT. SINCE THE CONVERSION CHARGES ARE EARNED THROUGH THE ACTIVIT Y OF MANUFACTURING THOUGH FOR THE BENEFIT OF OTHER CUSTO MERS, THE QUESTION OF DEDUCTING THE SAME FROM THE GENERAL PRO FITS, IN THE CONTEXT OF ARRIVING AT PROFITS FROM BUSINESS UNDER THE CLAUSE DOES NOT ARISE. 10.5. ACCORDINGLY, WE ARE OF THE OPINION THAT ASSESSE ES CONTENTIONS ARE TO BE UPHELD AS THE CONVERSION CHARGES ARE RECEIVED AS A PART OF ACTIVITY OF MANUFACTURING, THOUG H FOR THE BENEFIT OF OTHER CUSTOMERS. HOWEVER, CONVERSION CHARG ES ARE TO BE INCLUDED AS PART OF TOTAL TURNOVER AND TO THAT EXTENT, A S THERE IS NO GROUND ON THIS ASPECT, ORDER OF CIT(A) IS UPHELD. CONVERSION CHARGES ARE ACCORDINGLY TO BE INCLUDED AS PROFIT AND NOT TO BE EXCLUDED UNDER (BAA). ASSESSEES GROUND IS ALLOWED . AO IS DIRECTED TO WORK OUT THE DEDUCTION ACCORDINGLY. 10.6. THE SUB-GROUND (B) IS WITH REFERENCE TO INTERES T INCOME OF RS. 2,62,10,968/-. AO WHILE COMPUTING THE DEDUCTI ON U/S. 80HHC, EXCLUDED 90% OF THE INTEREST INCOME AS OTHER INCOME UNDER CLAUSE (BAA). THE SAME WAS UPHELD BY THE LD.CI T(A). IT WAS FAIRLY ADMITTED THAT THIS ISSUE WAS COVERED AGAINST BY TH E ORDER OF ITAT, WHEREIN IT WAS HELD AS UNDER: 45. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE DEPOSIT MADE BY THE ASSESSEE IN THE BANK AND INTEREST EARNED ON IT CANNOT BE CONSIDERED AS INCOM E FROM BUSINESS MUCH LESS INCOME FROM EXPORT EARNING, IT CANNOT BE CONSIDERED AS INCOME FROM EXPORT EARNINGS, AS THERE IS NO NEXUS B ETWEEN EXPORT BUSINESS AND INTEREST INCOME. INTEREST INCOME WAS E ARNED FROM THE DEPOSITS MADE BY THE ASSESSEE WITH THE BANK AND NOT FROM EXPORT I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 14 -: BUSINESS. PLACING RELIANCE ON THE JUDGEMENT OF MADR AS HIGH COURT IN THE CASE OF DOLLAR APPARELS VS. ITO, 294 ITR 484 WH EREIN PLACING RELIANCE ON THE JUDGEMENT OF THE SAME HIGH COURT IN THE CASES OF CIT VS. A.S. NIZAR AHMED & CO. (259 ITR 244) (MAD), K. S. SUBBAIAH PILLAI & CO. INDIA PVT. LTD. (260 ITR 304) (MAD) IT WAS HELD THAT INTEREST INCOME CANNOT BE CONSIDERED AS INCOME FROM BUSINESS. IN VIEW OF THE ABOVE JUDGEMENTS WE ARE INCLINED TO HOL D THAT INTEREST INCOME CANNOT BE CONSIDERED AS BUSINESS PROFIT OF T HE ASSESSEE U/S. 28 TO 44 OF THE IT ACT. THIS GROUND IN REVENUE APPE ALS IS ALLOWED. 10.7. HOWEVER, LD. COUNSEL HAS SUBMITTED THAT IN THE L IGHT OF THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF ACG ASSOCIATED CAPSULES (P) LTD. VS. CIT [343 ITR 89] (SC ), ASSESSEE IS ENTITLED FOR DEDUCTION OF 90% OF NET INTEREST ONLY AND NO T GROSS INTEREST UNDER CLAUSE (I) OF EXPLANATION (BAA) TO SECT ION 80HHC. THIS ARGUMENT OF ASSESSEE HAS BEEN VALIDLY RAISED BA SED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF A CG ASSOCIATED CAPSULES (P) LTD. VS. CIT [343 ITR 89] (SC ), (SUPRA). HOWEVER, IT IS FOR ASSESSEE TO ESTABLISH THAT THERE IS EX PENDITURE WHICH CAN BE DIRECTLY CONSIDERED AS A DEDUCTION BY PR OVING THE NEXUS OF THE INTEREST INCOME WITH THAT OF EXPENDITURE S O AS TO ARRIVE AT THE NET INTEREST. WHILE ACCEPTING THE CONTENTION IN PRINCIPLE, SINCE DETAILS OF EXPENDITURE HAVE NOT BEEN PLACED ON RECORD, WE DIRECT THE AO TO EXAMINE THE ISSUE AND CON SIDER ONLY NET INTEREST FOR EXCLUSION, FOLLOWING THE PRINCIPLES L AID DOWN BY THE HONBLE SUPREME COURT STATED SUPRA. WITH THESE DIRECTION S, THE GROUND IS CONSIDERED PARTLY ALLOWED. 10.8. THE SUB-GROUND (C) PERTAINS TO THE ISSUE OF EXC LUSION OF 90% OF FAVOURABLE FOREIGN EXCHANGE FLUCTUATIONS AMOU NTING TO RS. 6,96,24,295/-. IN THE P&L A/C, ASSESSEE HAS CREDITE D THE ABOVE AMOUNT UNDER THE HEAD OTHER INCOME AS FOREIGN EXCHA NGE FLUCTUATION GAIN. AO NOTED THAT THE EXCHANGE FLUCTUATIO N I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 15 -: REPRESENTS FLUCTUATIONS ON LOANS AND CREDITORS OF ASS ESSEE. HE WAS OF THE OPINION THAT THIS GAIN IS NOT ON ASSESSEES DEBTOR S OR PURCHASES. HE ACCORDINGLY EXCLUDED 90% OF THE ABOVE AMOUNT IN TERMS OF CLAUSE (BAA) TO EXPLANATION U/S. 80HHC. T HOUGH ASSESSEE CONTENDED THAT FAVOURABLE EXCHANGE DIFFERENCE WAS A NO RMAL BUSINESS INCOME AND COULD NOT BE EQUATED WITH NON-OPE RATING INCOMES LIKE RENT AND COMMISSION ETC., AO HAS NOT ACCE PTED THE SAME AND OBSERVED THAT ALL THE INCOMES LISTED THEREIN HAVE NO NEXUS WITH THE MANUFACTURING ACTIVITY OR EXPORT TURNOVER . ACCORDINGLY, HE EXCLUDED 90% OF THE ABOVE AMOUNT. BE FORE THE LD.CIT(A), ASSESSEE ALTERNATIVELY CONTENDED THAT THE GAIN SHOULD BE NETTED TO THE INTEREST PAID ON SUCH LOANS AND FOREIGN EX CHANGE GAIN RELATING TO CREDITORS WOULD REDUCE THE COST ON PURCHASE S. IT REITERATED THE MAIN CONTENTION THAT FAVOURABLE FOREIGN EXCHANGE DIFFERENCE IS A NORMAL BUSINESS INCOME AND CANNOT BE EQUATED WITH NON-OPERATING INCOMES. LD.CIT(A) HOWEVER, DID NOT A GREE WITH THE CONTENTIONS OF ASSESSEE AND HAS UPHELD THE ACTION OF THE AO. 10.9. BEFORE US, LD. COUNSEL MADE DETAILED SUBMISS IONS ON THE ISSUE TO SUBMIT THAT IN THE EARLIER YEAR, THE ITAT HA S HELD AGAINST ASSESSEE, BUT THE MAIN DISCUSSION WAS WITH REF ERENCE TO CONVERSION CHARGES WHICH WERE ALSO DISCUSSED TOGETHER WITH FOREIGN EXCHANGE FLUCTUATIONS. LD. COUNSEL SUBMITTED THAT THE F OREIGN EXCHANGE FLUCTUATION INVOLVES GAIN ON THE LOANS IN FOR EIGN CURRENCY OF RS. 5,15,58,695/-, CREDITORS REINSTATEMENT (BORROWE D LOANS) RS. 1,68,94,608/- AND OTHERS OF RS. 11,70,993/- TOTALING TO RS. 6,96,24,296/-. WHILE SUBMITTING THE DETAILS OF THE GA INS, IT WAS THE CONTENTION THAT THE GAIN ON ACCOUNT OF CREDITORS REINS TATEMENT WOULD SIGNIFICANTLY REDUCED THE IMPORT BILL. THEREFO RE, THE COST OF I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 16 -: MATERIALS WOULD BE REDUCED. WITH REFERENCE TO THE FLU CTUATION ON ACCOUNT OF FOREIGN CURRENCY LOANS, IT WAS SUBMITTED THAT THE SAME SHOULD BE NETTED OFF AGAINST THE INTEREST PAID BY ASSE SSEE. THE BALANCE AMOUNTS ALSO SHOULD BE NETTED OFF AGAINST VARI OUS INTEREST PAYMENTS. WHILE CONTENDING THAT AO OR THE CIT(A) HAS N OT CONSIDERED THIS ASPECT, LD. COUNSEL RELIED ON PRINCI PLES LAID DOWN IN THE DECISION OF THE HON'BLE SUPREME COURT IN THE CAS E OF ACG ASSOCIATED CAPSULES (P) LTD. VS. CIT [343 ITR 89] (SC ), (SUPRA) TO SUBMIT THAT THE EXCHANGE FLUCTUATIONS GAIN SHOULD BE RED UCED AGAINST THE EXPENDITURE DEBITED TO THE P&L A/C AND ONL Y THE NET GAIN SHOULD BE EXCLUDED. HE ALSO RELIED ON THE ORDE RS OF THE CO- ORDINATE BENCH IN THE CASE OF C4C BUSINESS SOLUTIONS P . LTD. VS. DCIT [67 TAXMAN.COM 68] (BANGALORE TRIB) FOR THE PROPOSITION THAT FOREIGN EXCHANGE FLUCTUATIONS ARE TAKEN AS OPERATING INCOME UNDER THE TRANSFER PRICING PROVISIONS, THEREFORE, THE SAME SHOULD ALSO BE CONSIDERED AS BUSINESS INCOME FOR THE PURP OSE OF 80HHC. 10.10. LD. DR HOWEVER, REITERATED THE STAND OF THE REV ENUE THAT THESE INCOMES ARE NOT DIRECTLY CONNECTED WITH EXPOR T ACTIVITY, HENCE ARE TO BE EXCLUDED. 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERU SED THE ORDERS ON RECORD. AO HAS NOT EXAMINED THE NATURE OF INCOME COMPRISING OF FOREIGN EXCHANGE GAIN. EVEN THOUGH ASS ESSEE CONTENDED BEFORE THE LD.CIT(A) THAT ONLY NET INCOME SHO ULD BE EXCLUDED, LD.CIT(A) ALSO HAS NOT ADJUDICATED THE SAME . IN VIEW OF THIS, WE ARE OF THE OPINION THAT AO SHOULD EXAMINE THE NATURE OF FOREIGN EXCHANGE GAIN AND EXAMINE WHETHER THE SAME IS RELATED TO BUSINESS ACTIVITY OF ASSESSEE SO AS TO CONSIDER AS IN COME FOR THE I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 17 -: PURPOSE OF COMPUTING PROFITS AND GAINS U/S. 80HHC. IN CASE ANY OF THE FOREIGN EXCHANGE GAIN IS DIRECTLY RELATED TO EI THER EXPORT ACTIVITY OR MANUFACTURING ACTIVITY, THEN, THE FOREIGN EXCHANGE GAIN HAS TO BE CONSIDERED AS INCOME OF THE BUSINESS. S INCE THESE ASPECTS ARE NOT EXAMINED, WITHOUT GOING INTO THE ISSUE O F INCLUSION OR EXCLUSION UNDER THE PROVISIONS OF (BAA), THE MATTER IS RESTORED TO THE FILE OF AO TO EXAMINE THE NATURE OF INCOME AND THE CONTENTIONS OF ASSESSEE IN DETAIL AND ACCORDINGLY DECIDE BASED O N THE FACTS AND LAW AS APPLICABLE. AO IS ALSO DIRECTED TO KEEP IN M IND THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAPSULES (P) LTD. VS. CIT [343 ITR 89] (SC), (SUPRA) WHILE CONSIDERING THE AMOUNTS. WITH THESE OBSERVATIONS , THE ISSUE IN THIS SUB-GROUND IS RESTORED TO THE FILE OF AO FOR E XAMINATION AND FRESH ADJUDICATION. 12. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. REVENUES APPEAL IN ITA NO. 521/HYD/2008: 13. THIS IS REVENUES APPEAL ON THE ISSUES WHICH A RE HELD AGAINST BY THE LD.CIT(A). REVENUE HAS RAISED AS MAN Y AS SIX GROUNDS. OUT OF WHICH GROUND NO. 6 IS GENERAL IN NA TURE. THESE ISSUES ARE CONSIDERED GROUND-WISE. 14. GROUND NO. 1 PERTAINS TO THE ISSUE OF EXCLUDING PROVISION FOR BAD DEBTS, PROVISION FOR GRATUITY, PROV ISION FOR LEAVE ENCASHMENT AND PROVISION FOR BONUS. AO CONSIDERED TH AT THESE PROVISIONS ARE UN-ASCERTAINED LIABILITIES AND THEREFO RE THEY ARE TO I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 18 -: BE EXCLUDED UNDER EXPLANATION-(C) TO SECTION 115JB(2 ). LD.CIT(A) FOLLOWING THE DECISION OF THE ITAT IN THE CASE OF J CIT VS. USHA MARTIN INDUSTRIES LTD., [288 ITR (AT) 64]/[104 ITD 249 ] CONSIDERED THAT THESE AMOUNTS ARE NOT UN-ASCERTAINED LIABILITIES AND ACCORDINGLY DIRECTED THE AO NOT TO ADD THE AMOUNTS. HE ALSO CONSIDERED THE DECISION OF THE HON'BLE BOMBAY HIGH CO URT IN THE CASE OF CIT VS. ECHJAY FORGINGS PVT. LTD. [251 ITR 15 ] WITH REFERENCE TO THE PROVISIONS FOR GRATUITY. 15. LD. DR SUBMITTED THAT THE PROVISION FOR BAD DEBTS I S TO BE DISALLOWED IN VIEW OF THE INSERTION OF CLAUSE-(I) TO EXPLANATION (I) TO SECTION 115JB AND THIS ISSUE WAS HELD IN FAVOUR OF REVENUE IN ITA NOS. 930 TO 932/HYD/2005 DT. 02-07-2012 IN ASSES SEES OWN CASE. ACCORDINGLY, THE PROVISION FOR BAD DEBTS ARE TO BE ADDED BACK. WITH REFERENCE TO OTHER PROVISIONS ALSO LD.CIT- DR RELIED ON THE ORDERS OF THE AO. 16. LD. COUNSEL IN REPLY SUBMITTED THAT AS FAR AS THE PROVISIONS FOR BAD DEBTS ARE CONCERNED, IN VIEW OF T HE RETROSPECTIVE AMENDMENT MADE TO THE PROVISION, THE ISSUE IS TO BE HEL D IN FAVOUR OF REVENUE. ACCORDINGLY, WE DIRECT THE AO TO ADD BAC K THE PROVISION FOR BAD DEBTS WHILE COMPUTING THE DEDUCTION U /S. 115JB. TO THAT EXTENT, ORDER OF THE CIT(A) STANDS MODIFIED. TH AT LEAVES US WITH THE BALANCE OF THE AMOUNTS OF PROVISION FOR GRAT UITY, LEAVE ENCASHMENT AND BONUS. 16.1. THE ASSESSEE DEBITED THE ABOVE AMOUNTS IN ITS P ROFIT AND LOSS ACCOUNT PREPARED IN ACCORDANCE WITH PART II A ND PART III OF SCHEDULE VI TO THE COMPANIES ACT, 1956. THE PROVISION FOR BONUS I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 19 -: IS MADE UNDER THE PAYMENT OF BONUS ACT, WHILE THE GRATUI TY AND LEAVE ENCASHMENT LIABILITIES ARE CREATED ON THE BASIS OF ACTUARIAL VALUATION AS CERTIFIED BY AN INDEPENDENT PERSON. THE AO DID NOT DISPUTE ANY OF THIS BUT CONTENDED THAT THE ABOVE AMOUNTS F ALL UNDER CLAUSE OF THE EXPLANATION TO SEC. 115JB. HE DI STINGUISHED THE DECISION RENDERED BY BOMBAY HIGH COURT IN THE CASE OF CIT VS ECHJAY FORGINGS P LTD (2001)(251 ITR 15). THE CIT(A) AT PARA 5.3 OF HIS ORDER DIRECTED ALLOWANCE OF THE ABOVE MOUNTS BY F OLLOWING THE DECISION OF BOMBAY HIGH COURT. 16.2. WE HAVE CONSIDERED THE ISSUE. THE HONBLE BO MBAY HIGH COURT'S DECISION IS RENDERED U/S. 115J BUT IT HAS EQUAL FORCE FOR THE PURPOSES OF SECTION 115JB AS BOTH ARE PARI MA TERIA. THE COURT ALLOWED DEDUCTION OF PROVISION FOR BONUS, GRATU ITY AND DOUBTFUL DEBTS FOR COMPUTING BOOK PROFITS. DELHI HIGH C OURT IN THE CASE OF CIT VS. ILPEA PARAMOUNT (P.) LTD (2010)(336 I TR 54) AND IN THE CASE OF CIT VS HEWLETT PACKARD INDIA (P) LTD 314 IT R 55 HAS PERMITTED DEDUCTION OF GRATUITY LIABILITY FOR COMPUTING THE BOOK PROFITS. THE CO-ORDINATE VISAKHAPATNAM BENCH OF ITAT I N EASTERN POWER DISTRIBUTION CO. LTD V ACIT (2011)(132 ITD 568) RENDERED ON 14-3-2011 HAS HELD THAT GRATUITY AND LEAVE ENCASHMENT A RE ASCERTAINED LIABILITIES. IN ALL THESE DECISIONS THE PO SITION EVEN AFTER IN SECTION OF CLAUSE (I) TO EXPLANATION 1 TO SECTION 1 15JB WAS CONSIDERED. IN VIEW OF THIS WE DO NOT FIND ANY MERIT IN REVENUE CONTENTIONS ON THESE AMOUNTS. THIS GROUND IS PARTLY ALLO WED. 17. GROUND NO. 2 PERTAINS TO THE ISSUE OF COMPUTATION OF DEDUCTION U/S. 10B WHILE WORKING OUT THE EXCLUSION OF INCOME U/S. 115JB. LD.CIT(A) DIRECTED THAT THE EXCLUSION OF AMOUN TS U/S. 10B I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 20 -: SHALL BE COMPUTED AS PER THE BOOK PROFIT ARRIVED FOR TH E PURPOSE OF 115JB VIDE PARA 7.4.1. LD.CIT(A) HAS FOLLOWED THE D ECISION OF ITAT SPECIAL BENCH IN THE CASE OF DCIT VS. SYNCOME FORMU LATIONS (I) LTD. [106 ITD 193] (MUM) (SB) (SUPRA) AND ALLOWED AS SESSEES CONTENTIONS. 17.1. WE DO NOT FIND ANY REASON TO INTERFERE WITH THE DECISION OF THE LD.CIT(A). IN FACT THE HON'BLE SUPREME COURT IN THE CASE OF AJANTA PHARMA LTD. VS. CIT [327 ITR 305] (SUPRA) AND ALSO IN ITS LATER DECISION CIT VS. BHARI INFORMATION TECHNOLOGY S YSTEMS (P.) LTD., [340 ITR 593] (SUPRA) HAS HELD THAT THE DEDUCTIONS ARE TO BE WORKED OUT AS PER THE BOOK PROFITS COMPUTED. THIS ISS UE IS ALREADY DISCUSSED IN DETAIL IN ASSESSEES APPEAL AGAINST GROU ND NO. 2. IN VIEW OF THIS, WE DO NOT FIND ANY MERIT IN REVENUES CO NTENTIONS. HENCE, REJECTED. 18. GROUND NO. 3 IS PERTAINING TO THE ISSUE OF DIREC TING THE AO TO EXCLUDE SALES TAX AND EXCISE DUTY FROM THE TOTA L TURNOVER WHILE COMPUTING DEDUCTION U/S. 80HHC. THIS ISSUE IS COVERED AGAINST THE REVENUE BY THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. LAKSHMI MACHINE WORKS [290 ITR 6 67]. ITAT ALSO IN ITS OWN CASE IN EARLIER YEARS IN ITA NOS. 93 0 TO 932/HYD/2005 DT. 02-07-2012 HAS HELD AS UNDER: 55. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSE E BY THE JUDGEMENT OF SUPREME COURT IN THE CASE OF CIT VS. L AKSHMI MACHINE WORKS (290 ITR 667) WHEREIN THE APEX COURT HELD AS UNDER: 'SECTION 80HHC OF THE INCOME-TAX ACT, 1961, IS A BE NEFICIAL SECTION: IT WAS INTENDED TO PROVIDE INCENTIVE TO PROMOTE EXPORTS. T HE INTENTION WAS TO EXEMPT PROFITS RELATABLE TO EXPORTS. JUST AS COMMISSION RE CEIVED BY THE ASSESSEE IS RELATABLE TO EXPORTS AND YET IT CANNOT FORM PART OF TURNOVER FOR THE PURPOSES OF I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 21 -: SECTION 80HHC, EXCISE DUTY AND SALES TAX ALSO CANNO T FORM PART OF TURNOVER. JUST AS INTEREST, COMMISSION, ETC., DO NOT EMANATE FROM THE TURNOVER SO ALSO EXCISE DUTY AND SALES TAX DO NOT EMANATE FROM SUCH TURNOVER. SINCE EXCISE DUTY AND SALES TAX DID NOT INVOLVE ANY SUCH TURNOVER SUC H TAXES HAD TO BE EXCLUDED. COMMISSION, INTEREST, RENT, ETC., DO YIELD PROFITS, BUT THEY DO NOT PARTAKE OF THE CHARACTER OF TURNOVER AND THEREFORE THEY ARE NOT IN CLUDIBLE IN THE TOTAL TURNOVER. IF SO, EXCISE DUTY AND SALES TAX ALSO CA NNOT FORM PART OF THE TOTAL TURNOVER UNDER SECTION 80HHC(3). ONE CANNOT INTERPRET THE WORDS TOTAL TURNOVER WIT H REFERENCE TO THE DEFINITION OF THE WORD TURNOVER IN OTHER LAWS LIK E THE CENTRAL SALES TAX OR AS DEFINED IN ACCOUNTING PRINCIPLES. EXCISE DUTY AND SALES TAX ARE INDIRECT TAXES. THEY ARE RECOVERED BY THE ASSESSEE ON BEHALF OF THE GOVERNMENT. BY THE COURT : THE PRINCIPAL REASON FOR ENACTING A FORMULA IN SECTION 80HHC OF THE INCOME-TAX ACT, 1961, IS TO DISALLOW A PART OF THE CONCESSION THEREUNDER WHEN THE ENTIRE DEDUCTION CLAIMED CANNOT BE REGARDED AS RELATING TO EXPORTS. THEREFORE, WHILE INTERPRETING THE WORDS T OTAL TURNOVER IN THE FORMULA IN SECTION 80HHC ONE HAS TO GIVE A SCHEMATIC INTERP RETATION. THE VARIOUS AMENDMENTS MADE THEREIN SHOW THAT RECEIPTS BY WAY O F BROKERAGE, COMMISSION, INTEREST, RENT, ETC., DO NOT FORM PART OF BUSINESS PROFITS AS THEY HAVE NO NEXUS WITH THE ACTIVITY OF EXPORT. THE AMENDMENTS MADE FR OM TIME TO TIME INDICATE THAT THEY BECAME NECESSARY IN ORDER TO MAKE THE FOR MULA WORKABLE. IF SO, EXCISE DUTY AND SALES TAX ALSO CANNOT FORM PART OF THE TO TAL TURNOVER UNDER SECTION 80HHC(3) : OTHERWISE THE FORMULA BECOMES UNWORKABLE . DECISIONS OF THE MADRAS HIGH COURT IN CIT V. SUNDAR AM CLAYTON LTD. [2006] 281 ITR 425 (MAD) AND CIT V. SRI JAYAJOTHI A ND CO. LTD. [2007] 290 ITR 660 (MAD) AFFIRMED. [THE SUPREME COURT MADE IT CLEAR THAT THE REASONING IN THIS CASE IS CONFINED TO THE WORKABILITY OF THE FORMULA IN SECTI ON 80HHC AS IT STOOD IN THE ASSESSMENT YEAR 1993-94.] 56. THIS GROUND IN REVENUE APPEALS IS DISMISSED. 18.1. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY MERI T IN REVENUES CONTENTIONS. GROUNDS IS ACCORDINGLY REJECT ED. I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 22 -: 19. GROUND NO. 4 PERTAINS TO THE ISSUE OF LD.CIT(A) DIRECTING TO COMPUTE DEDUCTION U/S. 80HHC ON ADJUSTED B OOK PROFITS FOR THE PURPOSE OF 115JB. AS DISCUSSED AGAIN ST GROUND NO. 2 ABOVE, LD.CIT(A) FOLLOWED THE SPECIAL BENCH DECISI ON IN THE CASE OF DCIT VS. SYNCOME FORMULATIONS (I) LTD. [106 ITD 1 93] (MUM) (SB) (SUPRA). NOW, THIS ISSUE IS COVERED IN FAVOUR OF ASSESSEE BY THE ORDER OF HON'BLE SUPREME COURT IN THE CASE OF AJAN TA PHARMA LTD. VS. CIT [327 ITR 305] (SUPRA) AND CIT VS. BHARI INFORMATION TECHNOLOGY SYSTEMS (P.) LTD., [340 ITR 593] (SUPRA). ACCORDINGLY, THE GROUND IS REJECTED. 20. GROUND NO. 5 PERTAINS TO THE ISSUE OF DIRECTING T HE AO TO CONSIDER DEPB BENEFITS AS ELIGIBLE PROFITS FOR THE P URPOSE OF 80HHC. THIS ISSUE IS ALSO COVERED AGAINST THE REVEN UE BY THE DECISION OF THE ITAT IN ASSESSEES OWN CASE CITED SUP RA. FOLLOWING THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COUR T IN THE CASE OF TOPMAN EXPORTS VS. CIT [342 ITR 49], ITAT IN PAR A 72 HELD AS UNDER: 72. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGEMENT OF THE SUPREME COURT IN T HE CASE OF TOPMAN EXPORT (SUPRA) WHEREIN THEY HAVE CONFIRMED T HE ORDER OF THE TRIBUNAL IN THE CASE OF TOPMAN EXPORTS VS. ITO (318 ITR 87) WHEREIN THE APEX COURT HELD THAT THE FACE VALUE WOULD BE AS SESSABLE UNDER 28(IIIB) AND THE PROFIT UNDER 28(IIID) AND IN CASE THE EXPORTER (HAVING EXPORT TURNOVER IN EXCESS OF RS. 10 CRORES) IS UNAB LE TO FULFIL THE CONDITIONS SPECIFIED IN THIRD PROVISO IT IS ONLY TH E PROFITS EARNED ON THE SALE OF DEPB BENEFITS TO THE EXTENT OF FACE VAL UE SHOULD BE ALLOWED TO THE ASSESSEE IN TERMS OF FIRST PROVISO U NDER SUBSECTION (3) WITHOUT APPLYING THE CONDITIONS STIPULATED IN T HIRD PROVISO. THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. REVENUE GROUND IS DISMISSED. THERE IS NO MERIT IN THE GROUND RAISED. THE SAME IS R EJECTED. I.T.A. NOS. 509/HYD/2008 521/HYD/2008 :- 23 -: 21. IN THE RESULT, APPEAL OF REVENUE IS PARTLY ALLOWED . 22. TO SUM-UP, APPEAL OF ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND APPEAL OF REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD NOVEMBER, 2016 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMB ER HYDERABAD, DATED 23 RD NOVEMBER, 2016 TNMM COPY TO : 1. MYLAN LABORATORIES LIMITED (FORMERLY KNOWN AS MA TRIX LABORATORIES LTD.,) PLOT NO. 564/A/22, ROAD NO. 92, JUBILEE HILLS, HYDERABAD. 2. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-16(2), HYDERABAD. 3. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-16(2), HYDERABAD. 4. COMMISSIONER OF INCOME TAX(APPEALS)-V, HYDERABAD 5. COMMISSIONER OF INCOME TAX-IV, HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.