ADDL CIT 20(3), MUMBAI V. TEXPPORT CLOTHING INDUSTRIES, MUMBAI

ITA 5513/MUM/2009

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 7602 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 19-03-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 08-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PARTHASARTHI NAIK
• Keywords: Business income
• Section: 80HHC; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH I BENCH BEFORE SHRI G.E. VEERABHADRAPPA (HONBLE PRESIDENT) AND SHRI VIVEK VARMA (JUDICIAL MEMBER) ITA NO. 5513/MUM/2009 ASSESSMENT YEAR: 2005-06 DY. CIT 20(3) ROOM NO. 506, PIRAMAL CHAMBER, PAREL, MUMBAI 12 PAN NO. AABFT6831H VS. M/S. TEXPORT CLOTHING INDUSTRIES, PLOT NO.88, STREET NO. 15, MIDC, ANDHERI, (E) MUMBAI 400 093. (APPELLANT) (RESPONDENT) APPELLANT BY : MR. PANKAJ R. TOPRANI RESPONDENT BY : MR. PARTHASARTHI NAIK DATE OF HEARING : 19.03.2012 DATE OF PRONOUNCEMENT : 28.03.2012 ORDER PER VIVEK VARMA, JM: THIS IS AN APPEAL FILED BY THE REVENU E AGAINST THE ORDER OF CIT(A) XXXII, MUMBAI, DATED 06.07.2009, WHEREIN THE REVENUE HAS RAISED SIX GROUNDS OF APPEAL FOR TWO ISSUES. IT IS SEEN THAT GROUNDS NO. 1 & 3 PERTAIN TO INTEREST ON FDS AND GROUNDS NO. 2 & 4 TO FOREIGN EXCHANGE GA IN ON FORWARD CONTRACT. 2. THE FACTS OF THE CASE ARE THAT THE A SSESSEE FILED ITS RETURN DECLARING BUSINESS INCOME OF RS. 2,99,33,617, AGAINST WHICH THE ASSESSEE CLAIMED EXEMPTION U/S 10B FOR AN AMOUNT OF RS. 2,55,18,496. DURING THE SCRU TINY PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD CLAIMED EXEMPTION U/S. 10B ON THE INCOME WHICH INCLUDED INTEREST ON FIXED DEPOSITS AT RS. 5,31,836 AND FORWARD CONTRACT GAINS AT RS. 11,39,970. THE AO OBJECTED TO THE EXEMPTION ON THESE TWO POINTS AND HELD THAT BOTH THESE INCOMES CANNOT BE HELD TO HAVE BEEN DERIVED FROM THE MANUFACTURING ON PRODUCING ARTICLES OR THINGS. HE, THEREFORE, DISALLOWED THE EXEMPTION ON BOTH THESE POINTS, THEREBY ADDING RS. 16,71,806 BEING THE AGGREGATE OF THESE TWO FIGURES TO THE INCOME OF THE ASSESSEE. THE ITA NO. 5513/MUM/2009 ASSESSMENT YEAR: 2005-06 2 ASSESSEE NOT SATISFIED BY THE FINDINGS OF THE AO PREFERRED AN APPEAL BEFORE THE CIT(A), IMPUGNING THE ABOVE ADDITION ALONGWITH OTHER ADDITION. 3. THE CIT(A), WHILE DEALING WITH THE ISSU E OF DISALLOWANCE OF EXEMPTION OF RS. 5,31,836, OBSERVED THE FACTS OF THE CASE IN DETAIL AND REPRODUCE THE SAME WHICH ARE AS UNDER : THE APPELLANT IS A 100% EXPORT ORIENT ED UNIT WHICH ENJOYS EXEMPTION U/S 10B. THE DEDUCTION U/S 10B IS TO BE COMPUTED ON THE BASIS OF BUSINESS INCOME IN THE RATIO OF EXPORT TURNOVER TO TOTAL TURNOVER. THE AO HELD THAT THE INTEREST OF RS. 5,31,836/- ON FIXED DEPOSITS KEPT WITH THE BANK IS NOT IN THE NATURE OF BUSINESS INCOME. THEREFORE THIS AMOUNT WAS REDUCED FROM THE DEDUCTION CLAIMED AT RS. 2,55,18,496/-. THE APPELLANT IN THIS REGARD CONTENDS THAT AS PER THE PROVISIONS OF SECTION 10B AS AMENDED W.E.F. 1 ST APRIL, 2001 DEDUCTION IS TO BE COMPUTED IN TERMS OF PROVISIONS OF SECT ION 10B(4) OF THE I.T. ACT WHICH PROVIDE THAT PROFIT DERIVED FROM EXPORT SHALL BE THE AMOUNT WHICH BEARS TO PROFIT OF BUSINESS OF UNDERTAKING, THE SAME PROPORTION AS EXPORT TURNOVER BEARS TO TOTAL TURNOVER OF THE BUSINESS CARRIED-ON BY TH E UNDERTAKING. IN TERMS OF SECTION 10B(4), THE BUSINESS INCOME IS TO BE APPORTIONED IN THE RATIO OF EXPORT TURNOVER TO TOTAL TURNOVER TO DETERMINE THE ELIGIBLE DEDUCTION U/S, 10B. IT IS STATED THAT THE APPELLANT MADE DEPOSIT WITH THE BANK FO R THE NECESSITY OF ITS BUSINESS AS IT IS HAVING SECURED LOAN OF RS. 12.09 CRORES BY WAY OF PACKING CREDIT AND BILL DISCOUNTING FROM BANKS WITH A VIEW TO PROVIDE MARGIN MONEY. THE APPELLANT GAVE SECURITY BY WAY OF FIXED DEPOSIT TO THE BANK FOR THE PURPOSE OF BUSINESS AND NOT FOR MERELY EARNING INTEREST AND HENCE INTEREST EARNED BEING INTIMATELY CONNECTED TO THE BUSINESS IS ASSESSABLE AS BUSINESS INCOME. THE APPELLANT HAS PAID INTEREST OF RS. 27,52,914/- AND HAS REFLECTED NET INTEREST OF RS. 22,21,078/- IN THE P&L ACCOUNT AFTER NETTING OFF BY THE INTEREST RECEIVED OF RS. 5,31,836/-. IT IS SUBMITTED BY THE APPELLANT THAT THE INTE REST BEING BUSINESS IN COME IS ENTITLED TO BE CONSIDERED WHILE COMPUTING DEDUCTIO N U/S. 10B. HENCE IT IS ENTITLED TO BE NETTED-OFF AGAINST INTEREST PAID. A SIMILA R ISSUE CAME UP FOR CONSIDERATION THE HONBLE I.T.A.T. HAS HELD THAT THE INCOME IS BUSINESS AND ENTITLED FOR DEDUCTION U/S. 10B. 4. BEFORE US, THE DR STRONGLY CONTESTED THE ORDER OF THE AO AND PLACED BEFORE US THE DECISION TRICOM INDIA LT D. VS. ACIT, ITA NO. 1924/2008, WHEREIN MUMBAI BENCH HAD SET ASIDE THE ORDER OF THE CIT(A), WHEREIN CIT(A) HAD DENIED THE RELIEF USING THE WORD DERIVED FROM. IT WAS SEEN THAT IN THIS CASE THE INTEREST FROM FD AND OTHER MISCELLANEOUS INCOMES WERE EXCLUDED FROM 10B(1). THE HONBLE COORDINATE BENCH HAD TAKEN THE VIEW THAT THE EXPRESSION DERIVED FROM INCLUDES ONLY THOSE ITEMS OF PROFITS ITA NO. 5513/MUM/2009 ASSESSMENT YEAR: 2005-06 3 WHICH WERE DERIVED FORM SUCH UNDERTAKING. TH E DR RELIED ON THE DECISION RENDERED BY THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF LIBERTY INDIA VS. CIT, REPORTED IN 317 ITR 218. HERE THE HONBLE SUPREME COURT WAS VESTED WITH THE ISSUE OF OTHER INCOME (DUTY DRAWBACK AND DEPB) BEING DERIVED FROM ELIGIBLE BUSINESS AND WHETHER THESE OTHER INCOMES WERE ELIGIBLE FOR DEDUCTION U/S 80IA/80IB. THE DR ALSO RELIED ON THE DECISION OF ACG ASSOCIATES CAPSULES (P) LTD. VS. CIT, REPORTED IN 247 CTR 372, WHEREIN THE HONBLE SUPREME COURT OF INDIA HELD THAT SALE VALUE LESS THE FACE VALUE OF DEPB AND NOT THE ENTIRE AMOUNT REPRESENT PROFIT ON TRANSFER. HE, THEREFORE, VERY STRONGLY SUBMITTED THAT THE ASSESSEE CANNOT BE A LLOWED EXEMPTION ON THE FULL VALUE WHICH INCLUDED INTEREST ON FIXED DEPOSITS. 5. THE AR OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS A 100% EXPORT ORIENTED UNIT IN THE MANUFACTURE AND EXPORT OF CLOTHINGS. HE REITERATED THE SUBMISSION WHICH HE MADE BEFORE THE CIT(A) AND POINTED OUT THAT THE COMPUTATION FOR EXEMPTION U/S 10B IS PROVIDED FOR IN THE RELEVANT PROVISION ITSELF AND THE ASSESSEE, WHO IS CLAIMING EXEMPTION U/S 10B HAS TO ENTER THE FORMULA AS PROVIDED IN THE SECTION. THE AR SUBMITTED, THE ASSESSEE HAD EARNED THE INTEREST AS IT HAD TO PROVIDED MARGIN MONEY TO AVAIL PACKING CREDIT AND BILL DISCOUNTING. THE AR FURTHER REITERATED THAT THE ASSESSEE HAD TO GIVE SECURITY BY WAY OF FIXED DEPOSIT FOR THE PURPOSE OF ITS BUSINESS AND NOT FOR EARNING INTEREST, HE THEREFORE, CONTENTED THAT THE FIXED DEPOSIT WAS INTIMATELY CONNECTED TO THE BUSINESS OF THE ASSESSEE. THE AR FURTHER POINTED OUT THAT A SIMILAR ISSUE WAS BEFORE THE HONBLE MUMBAI BENCH OF ITAT IN THE CASE OF SAJJAN INDIA PVT. LTD. VS. ACIT IN ITA NO. 3245/M/07, WHEREIN IT WAS HELD THAT NEXU S OF THE INCOME WITH THE BUSINESS OF THE ASSESSEE HAS TO BE SEEN. IT WA S FOUND THAT THE FIXED DEPOSITS WERE GIVEN AS SECURITY TO AVAIL LOAN FACILITIES. ON THESE FACTUAL FINDIN GS OF THE HONBLE MUMBAI ITAT DIRECTED THE AO TO TREAT INTEREST INCOME AS BUSINESS INCOME AND WORK OUT THE DEDUCTION U/S 80HHC AND SECTION 10B. THE AR FURTHER POINTED OUT THAT THIS ISSUE WAS BEFORE THE HONBLE ITAT FOR CONSIDERATION IN THE ASSESSEES OWN CA SE IN ASSESSMENT YEAR 2003-04 IN ITA NO. 503/M/2006, WHEREIN THE CONTENTION OF THE ASSESSEE WAS ALLOWED. 6. ON GOING THROUGH THE FACTS AS CITED IN THE ASSESSMENT ORDER AND IN THE ORDER OF THE CIT(A), WE ARE OF THE CONSIDERED OPINION THAT THE VIEW TAKEN BY THE CIT(A), WELL ITA NO. 5513/MUM/2009 ASSESSMENT YEAR: 2005-06 4 SUPPORTED BY VARIOUS CASE LAWS AS CITED BY THE AR, SHOULD NOT BE DISTURBED, PARTICULARLY WHEN THE SIMILAR ISSUE HAS ALREADY BEEN DEALT WITH BY THE HONBLE ITAT IN THE ASSESSEES OWN CASE. WE, THEREFORE UPHOLD THE FINDINGS OF THE CIT(A) AND DISMISS THE APPEAL FILED BY THE AO. 7. ON THE ISSUE OF FOREIGN EXCHANGE FORWARD CONTACT, THE AO HELD THAT THIS INCOME TOO, CANNOT BE HELD TO BE DERIVED FROM TH E BUSINESS OF THE ASSESSEE. ACCORDING TO THE AO, FOREIGN EXCHANGE GAIN ON FORWARD CONTACT WAS IN THE NATURE OF SPECULATION INCOME. 8. THE ASSESSEE, BEFORE THE CIT(A) SUBMITTED THAT THE TRANSACTION WAS IN THE NATURE OF A HEDGING TRANSACTION, AND NOT SPECULAT ION. THE ASSESSEE SUBM ITTED THAT HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P) LTD. REPORTED IN 261 ITR 256 DEALT WITH THIS ISSUE AND HELD THAT FO RWARD FOREIGN EXCHANGE CONTACTS ARE NOT SPECULATIVE AND THAT TRANSACTION WERE INTI MATELY CONNECTED TO APPELLANTS EXPORT BUSINESS AND HELD IT TO BE BUSINESS TRANSACTION. 9. THE DR, BEFORE US REFERRED TO THE CASE OF CIT VS. SHAH ORIGINALS REPORTED IN 327 ITR 19 AND PLACED THE COPY OF THE ORDER ON RECORD. 10. THE AR, ONCE AGAIN REITERATED THE FACT S AND SUBMITTED THAT HEDGING IN FORWARD FOREIGN EXCHANGE CONTRACTS IS A GLOBAL BUSINESS PRACTICE AND IT IS ENTERED INTO TO PROTECT ONE SELF FROM LOSS DUE TO FOREIGN EXCHANGE CURRENCY FLUCTUATION. 11. WE HAVE GONE THROUGH THE SUBMISSIONS MADE BY THE DR AND THE AR AND WE FIND THAT THE CASE OF CIT VS. SHAH ORIGINALS DOES NOT SUPPORT THE FACTS OF THE AO, BECAUSE THE HONBLE BOMBAY HIGH COURT IN THAT CASE NOTED THAT FOREIGN EXCHANGE FLUCTUATION AROSE SUBSEQUENT TO THE TRANSACTION OF EXPO RT AND CERTAIN FUNDS WERE PLACED WITH EEFC ACCOUNT AS PER RBI GRANTED FACILIT Y TO CERTAIN CATEGORIES OF EX PORTS. IN THAT CASE, IT WAS FURTHER OBSERVED THAT EXCHANGE FLUCTUATION WAS NOT ON ACCOUNT OF A DELAYED REALIZATION OF EXPORT PROCEEDS. ITA NO. 5513/MUM/2009 ASSESSMENT YEAR: 2005-06 5 12. IN THE CASE AT HAND, THE FORWARD CONT ACT IS MADE IN ADVANCE TO ENSURE THAT THERE IS NO LOSS OCCURRING TO THE ASSESSEE AT THE TIME WHEN FOREIGN EXCHANGE RECEIPTS ARE TO BE RECEIVED BY THE ASSESSEE. WE, THEREFORE, FIND SUPPORT FROM THE CASE OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BA DRIDAS GAURIDU (P.) LTD. AND FIND THAT THE FACTS IN THE CASE OF SHAH ORIGINALS ARE ON DIFFERENT GROUND. 13. WE, THEREFORE, FIND NO REASON TO DISTURB THE FINDINGS OF THE CIT(A) ON THIS ISSUE. 14. ON BOTH THE IMPUGNED ISSUES, WE AC CEPT THE CONTENTIONS OF THE AR, MADE IN RESPONSE TO THE GROUNDS FILED BY THE AO. THE APPEAL FILED BY THE AO IS, THUS DISMISSED PRONOUNCED IN THE OPEN COURT ON 28 TH MARCH, 2012 SD/- SD/- G.E. VEERABHADRAPPA VIVEK VARMA (PRESIDENT) (JUDICIAL MEMBER) MUMBAI, DATED 28 TH MARCH, 2012 RASIKA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A), -MUMBAI 4. THE CIT, MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH I MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI