VMT Spinning Co. Limited, Ludhiana V. ACIT, Ludhiana

ITA 682/CHANDI/2007

• Counselvise Citation: 68221514 RSA 2007
• Duration Of Justice: 5 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-07-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 04-06-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 22-06-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JAI SHREE SHARMA
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Depreciation; Benefit of exemption
• Section: 10; 143(3); 80HHC; 115JB; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B, CHANDIGARH BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA NO.682 /CHD/2007 (ASSESSMENT YEAR: 2003-04) VMT SPINNING CO. LTD., VS. THE A.C.I.T., CHANDIGARH ROAD, RANGE-1, LUDHIANA. LUDHIANA. PAN: (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUBHASH AGGARWAL RESPONDENT BY : SMT.JAISHREE SHARMA, DATE OF HEARING : 05.06.2012 DATE OF PRONOUNCEMENT : 13.07.2012 O R D E R PER SUSHMA CHOWLA, J.M. : THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER O F THE COMMISSIONER OF INCOME TAX (APPEALS)-II, LUDHIANA D ATED 16.04.2007 RELATING TO ASSESSMENT YEAR 2003-04 AGAI NST THE ORDER PASSED U/S 143(3) OF INCOME TAX ACT, 1961. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL : 1. THAT THE IMPUGNED ORDER HAS BEEN PASSED BY CIT( A) WITHOUT PROPER APPLICATION OF MIND AND IS BAD IN LAW AND ON FACTS SO FAR AS THE FOLLOWING GROUNDS ARE CONCERNED: 2. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACTS WHILE CONFIRMING THE ACTION OF ASSESSING OFFICER FOR REDU CING PROFITS OF UNDERTAKING FOR CALCULATING EXEMPTION U/S 1 OB BY THE FOLLOWING AMOUNTS: AMOUNT (IN RS.) INTEREST FROM: O INTEREST FROM CUSTOMERS ON BELATED PAY MENTS 23,10,475 O INTEREST RECEIVED FROM EMPLOYEES TOWARD S HOUSING LOANS 89,752 O INTEREST RECEIVED ON INCOME TAX REFUND 51,062 O INTEREST RECEIVED FROM BANKS 82,009 PROVISIONS WRITTEN BACK 3,18.210 TOTAL 28.51.508 3. THAT THE LD. CIT (A) HAS ERRED IN LAW AND ON THE FACTS WHILE REDUCING PROFITS OF BUSINESS FOR CALCULATING DEDUCTION U/S 8 0HHC BY 90% OF THE FOLLOWING AMOUNTS/ - PARTICULARS 2 PARTICULARS AMOUNT (IN RS.) INTEREST FROM: O INTEREST FROM CUSTOMERS ON BELATED PAYMENT S 23,10,475 O INTEREST RECEIVED FROM EMPLOYEES TOWARDS HO USING LOANS 89,752 O INTEREST RECEIVED ON INCOME TAX REFUND 51 ,062 TOTAL 24.51.289 4. (A)THAT THE LD. CIT (A) IS ERRED IN LAW AND ON FACT S WHILE TREATING GROUND NUMBER 6 AS GENERAL IN NATURE (B) THAT THE LD. CIT (A) IS ERRED IN LAW AND ON FA CTS WHILE NOT CONSIDERING THE SUBMISSIONS OF ASSESSEE ON GROUND N O. 6 OF GROUNDS OF APPEAL (C) THAT THE LD. CIT (A) IS ERRED IN LAW AND ON FACTS WHILE REDUCING THE DEDUCTION U/S 80HHC BY APPLYING THE METHOD OF CALCU LATING DEDUCTION U/S 80HHC(3)(C)(I) OTHER THAN AS SPECIFIE D UNDER SECTION 80HHC. (D) THAT THE LD. CIT (A) IS ERRED IN LAW AND ON F ACTS WHILE TAKING ONLY 10% OF PROFITS OF UNDERTAKING AS ELIGIBLE PROF ITS FOR CALCULATING DEDUCTION U/: 80HHC INSTEAD OF BUSINESS PROFITS OF COMPANY COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. 5. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACT S WHILE UPHOLDING THE ACTION OF ASSESSING OFFICER WHILE APPLYING METHOD OF CALCULAT ING COST OF TRADING GOODS FOR DEDUCTION U/S 80HHC OTHER THAN THAT SPECIFIED U/S 8 0HHC AND AT VARIANCE TO THE METHOD REGULARLY ADOPTED BY THE APPELLANT IN EARLIE R YEARS AND ACCEPTED BY THE DEPARTMENT 6. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACTS WHILE UPHOLDING THE ACTION OF ASSESSING OFFICER WHILE APPORTIONING PR OPORTIONATE PERSONNEL EXPENSES ADMINISTRATION AND OTHER EXPENSES, FINANCIAL EXPENSES, SELLING EXPENSES, MISCELLANEOUS EXPENSES AND DEPRECIATION NOT RELATIN G TO TRADING ACTIVITIES OF THE APPELLANT'S BUSINESS FOR CALCULATING INDIRECT COST OF TRADING EXPORTS WHILE CALCULATING DEDUCTION U/S 80HHC OF INCOME TAX ACT. 7. THE LD. CIT(A) HAS NOT DISPOSED OFF THE FOLLOWIN G GROUND WHILE PASSING THE ORDER U/S 250(6) OF INCOME-TAX ACT :- THAT THE LD. AO HAS ERRED IN LAW AND ON FACTS WHIL E REDUCING PROFITS OF UNDERTAKING FOR CALCULATING DEDUCTION U/S 80HHC BY THE FOLLOWING AMOUNTS :- PARTICULARS AMOUNT (IN RS.) PROVISIONS WRITTEN BACK 3,18,210/- 8. (A) THE LD. CIT(A) MISAPPLIED THE PRO VISIONS OF SECTION 115JB READ WITH SECTION 10B OF INCOME TAX ACT. (B) THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS B Y UPHOLDING THE DECISION OF ASSESSING OFFICER WHILE NOT APPORTIONIN G ALL RECEIPTS AS PER PROFIT AND LOSS ACCOUNT AS PER COMPANIES ACT OF THE APPELLANT. (C) THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS W HILE CALCULATING INCOME ELIGIBLE FOR EXEMPTION U/S 1 OB BY WAY OF METHOD AT VARIANCE TO THE 3 METHOD REGULARLY ADOPTED BY THE APPELLANT IN EARLIER YEARS AND ACCEPTED BY THE DEPARTMENT. 9. THE APPELLANT CRAVES LEAVE TO ADD/AMEND/ALTER A NY GROUNDS OF APPEAL ON OR BEFORE THE DATE OF HEARING. IT IS PRAYED THAT APPEA L MAY KINDLY BE ALLOWED, NECESSARY RELIEFS AS PER AFORESAID GROUNDS MAY KIND LY BE GRANTED AND/OR OTHER RELIEFS DEEMED FIT AND PROPER UNDER THE CIRCUMSTANC ES OF THE CASE MAY KINDLY BE GRANTED. 3. THE GROUND NO.1 RAISED BY THE ASSESSEE BEING GEN ERAL IN NATURE IS DISMISSED. 4. THE ISSUE IN GROUND NO.2 RAISED BY THE ASSESSEE IS AGAINST COMPUTATION OF EXEMPTION AVAILABLE U/S 10B OF THE I T ACT. 5. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E WAS ENGAGED IN THE MANUFACTURING OF YARN. DURING THE YEAR UNDER CONSI DERATION, THE ASSESSEE WAS CARRYING ON ITS MANUFACTURING UNIT AT BADDI AND THE SAID UNIT WAS 100% EXPORT ORIENTED UNIT. THE ASSESSEE HAD CLAIMED EXEMPTION U/S 10B OF THE ACT FROM THE PROFITS OF THE MANUFACTURING BU SINESS CARRIED ON AT BADDI UNIT. THE ASSESSEE HAD ALSO CLAIMED DEDUCTIO N U/S 80HHC OF THE ACT ON TRADING EXPORT AND MANUFACTURING EXPORT. DU RING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE FURNISHED REVI SED FORM NO. 56G FOR CLAIMING DEDUCTION U/S 10B OF THE ACT. THE ERROR I N THE EARLIER FORM NO. 56G FILED BY THE ASSESSEE, AS POINTED OUT BY THE AU DITOR WAS THAT, BY AN ERROR, HE HAD REDUCED THE EXPORT TURNOVER OF TRADIN G GOODS TWICE FROM THE EXPORT TURNOVER OF THE UNDERTAKING AND HENCE, THE R EVISED FORM NO. 56G CLAIMING DEDUCTION U/S 10B OF THE ACT. IN ADDITION , THE ASSESSEE HAD SHOWN OTHER INCOME TOTALING RS.31,01,716/- ON WHICH IT HAD CLAIMED DEDUCTION U/S 10B OF THE ACT. THE GROUND NO.2 RAISE D BY THE ASSESSEE IS IN RESPECT OF THE AFORESAID CLAIM OF EXEMPTION U/S 10B OF THE ACT ON OTHER INCOMES. THE BREAK-UP OF THE SAID OTHER INCOME W AS AS UNDER : INTEREST FROM CUSTOMERS ON BELATED PAYMENTS RS.23, 10,475/- 4 INTEREST RECEIVED FROM EMPLOYEES TOWARDS RS. 8 9,752/- HOUSING LOANS INTEREST RECEIVED ON INCOME TAX REFUND RS. 5 1,062/- INTEREST RECEIVED FROM BANK RS. 82,009/- PROVISION WRITTEN BACK RS. 318,210/- ---------------- TOTAL : RS.28,51,508/- ---------------- 6. THE CLAIM OF THE ASSESSEE BEFORE THE AO WAS THAT THE AFORESAID OTHER INCOME RECEIVED BY IT WAS DERIVED FROM THE INDUSTRIAL UNDERTAKING AND CONSEQUENTLY, WAS ELIGIBLE FOR EXEMPTION U/S 10 B OF THE ACT. THE AO RELYING UPON THE RATIO LAID DOWN BY THE HON'BLE SUP REME COURT IN M/S STERLING FOODS 237 ITR 579 (S.C) EXCLUDED OTHER IN COME AMOUNTING TO RS.28.52 LACS FROM THE ELIGIBLE PROFITS OF THE UNDE RTAKING, RESULTING IN REDUCTION OF EXEMPTION U/S 10B OF THE ACT. THE CIT( A) UPHELD THE ORDER OF AO AS THE ITEMS OF INCOME WERE NOT DERIVED FROM BY THE UNDERTAKING. THE LD. AR FOR THE ASSESSEE MADE ELABORATE SUBMISSI ONS IN RESPECT OF EACH ITEMS OF INCOME, WHICH SHALL BE DEALT WITH BY US IN THE PARAS HEREUNDER. 7. THE FIRST ITEM OF INCOME IS REGARDING INTERE ST FROM CUSTOMERS ON DELAYED PAYMENTS TOTALING RS.23,10,475/-. THE PLEA OF THE LD. AR FOR THE ASSESSEE WAS THAT THE SAID INTEREST WHICH WAS REALI ZABLE FROM ITS CUSTOMERS, WAS CONNECTED WITH THE SALES AND CONSEQU ENTLY, THE SAME WAS DERIVED FROM THE BUSINESS OF UNDERTAKING AND WAS EL IGIBLE FOR EXEMPTION U/S 10B OF THE ACT. 8. THE DEDUCTION U/S 10B OF THE ACT IS ALLOWABLE FROM SUCH PROFITS AND GAINS, WHICH ARE DERIVED BY 100% EXPORT ORIENTE D UNDERTAKING FROM THE EXPORT OF ARTICLES OR THING OR COMPUTER SOFTWAR E, AS PER THE PROVISIONS OF THE SAID SECTION. THE ASSESSEE BEFORE US HAD ES TABLISHED 100% EXPORT ORIENTED UNDERTAKING AT BADDI FOR THE MANUFACTURE A ND EXPORT OF YARN AND WAS FOUND ELIGIBLE FOR THE CLAIM OF EXEMPTION U/S 1 0B OF THE ACT. THE 5 ISSUE ARISING BEFORE US IS IN RELATION TO THE OTHER INCOME RECEIVED BY THE ASSESSEE UNDERTAKING AND WHETHER THE SAME IS ELIGIB LE FOR EXEMPTION U/S 10B OF THE ACT. THE FIRST HEAD OF SUCH OTHER INCOME TO BE CONSIDERED IS INTEREST RECEIVED FROM CUSTOMERS ON DELAYED PAYMENT S. THE PLEA OF THE ASSESSEE, IN THIS REGARD WAS THAT THE SAID INTEREST WHICH WAS RECEIVED FROM THE CUSTOMERS WAS ON ACCOUNT OF DELAYED PAYMEN TS OF THE SALE PROCEEDS OF THE GOODS EXPORTED BY IT AND HENCE WAS CONNECTED TO ITS SALE AND WAS DERIVED FROM EXPORT OF ARTICLES OR THINGS B Y THE SAID UNDERTAKING. WE FIND MERIT IN THE CLAIM OF THE ASSESSEE IN THIS REGARD. HOWEVER, THE FACTUM OF THE NATURE OF INTEREST INCOME RECEIVED BY THE ASSESSEE TOTALING RS.23.10.475/- NEEDS VERIFICATION BY THE AO. IN CAS E SAID INTEREST IS RECEIVED/RECEIVABLE BY THE ASSESSEE FROM ITS CUSTOM ERS ON THE DELAYED PAYMENTS, RELATABLE TO THE EXPORT SALES MADE BY THE ASSESSEE, THEN SUCH INTEREST IS TO BE INCLUDED AS PART OF THE ELIGIBLE PROFITS, FOR COMPUTING THE EXEMPTION U/S 10B OF THE ACT. HOWEVER, WHERE SUCH INTEREST DUE FROM THE PARTIES IS NOT SO RELATABLE TO THE EXPORT SALES MADE BY THE UNDERTAKING, THEN THE ASSESSEE IS NOT ENTITLED TO THE BENEFIT OF EXEMPTION U/S 10B OF THE ACT ON SUCH OTHER INCOMES. THE AO SHALL COMP UTE THE EXEMPTION U/S 10B OF THE ACT IN ACCORDANCE WITH OUR GUIDELINE S AND AFTER AFFORDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 9. THE SECOND ELEMENT OF OTHER INCOME IS INTERES T RECEIVED FROM EMPLOYEES ON HOUSING LOANS AMOUNTING TO RS.89,752/- . THE LD. AR FOR THE ASSESSEE PLACED RELIANCE ON JOYCO INDIA P.LTD.V ITO (2009) 122 TTJ 940 (DEL). 10. THE DEDUCTION U/S 10B OF THE ACT IS ALLOWABLE ON SUCH PROFIT & GAINS OF THE UNDERTAKING WHICH ARE DERIVED FROM EXP ORT OF ARTICLE OR THING. THE INTEREST RECEIVABLE FROM EMPLOYEES ON H OUSING LOANS ADVANCED TO THEM BY THE ASSESSEE UNDERTAKING, BEING LINKED T O THE BUSINESS OF THE 6 UNDERTAKING AND SUCH INTEREST, BEING INCLUDED AS BU SINESS IS ELIGIBLE FOR THE AFORESAID DEDUCTION. CONSEQUENTLY, THE ASSESSE E IS ENTITLED TO THE CLAIM OF EXEMPTION U/S 10B OF THE ACT ON SUCH INTER EST RECEIVED FROM THE EMPLOYEES ON HOUSING LOANS, FOLLOWING THE RATIO LAI D DOWN BY THE DELHI BENCH OF THE TRIBUNAL IN JOYCO INDIA P.LTD. (SUPRA) . 11. THE NEXT CLAIM OF THE ASSESSEE WAS ON THE INTER EST ON INCOME TAX REFUND AND INTEREST FROM BANKS, BEING ELIGIBLE FOR EXEMPTION U/S 10B OF THE ACT. THE ASSESSEE HAS FAIRLY NOT PRESSED THE A BOVESAID TWO SUB-ISSUES FOR CLAIM OF EXEMPTION U/S 10B OF THE ACT AND CONSE QUENTLY, SAME ARE DISMISSED. 12. THE LAST ITEM OF OTHER INCOME WAS PROVISIONS WR ITTEN BACK, TOTALING RS.3,18,210/-. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT THE ISSUE WAS FULLY COVERED BY THE DECISION OF THE CHANDIGARH BEN CH OF TRIBUNAL IN THE CASE OF SISTER CONCERN OF THE ASSESSEE, M/S VARDHMA N THREADS LTD. V DCIT IN ITA NO.399/CHD/2000 RELATING TO A.Y. 2002-0 3 ORDER DATED 11.5.2007.. WE FIND THE ISSUE OF PROVISIONS WRITTE N BACK ELIGIBLE FOR EXEMPTION U/S 10B OF THE ACT. WE FIND THAT THE ISSU E IS COVERED BY THE RATIO LAID DOWN BY THE ORDER OF THE TRIBUNAL AND FO LLOWING THE SAME, WE ALLOW THE CLAIM OF THE ASSESSEE IN RESPECT OF THE P ROVISIONS WRITTEN BACK BEING ELIGIBLE FOR EXEMPTION U/S 10B OF THE ACT. T HE RELEVANT PART OF THE SAID DECISION IS REPRODUCED AS UNDER : 15. OSTENSIBLY, THERE IS NO DISPUTE THAT THE ABOV E CATEGORY OF EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE DURING THE COURSE OF CARRYING OF THE ELIGI BLE BUSINESS OF ITS INDUSTRIAL UNDERTAKING. SUCH EXPEN SES GO TO REDUCE THE PROFITS OF THE INDUSTRIAL UNDERTAK ING ELIGIBLE FOR DEDUCTION U/S 80IA OF THE ACT. NOW, THEREFORE, REDUCTION IN SUCH EXPENSES CANNOT BE EXCLUDED TO COMPUTE THE PROFITS OF THE INDUSTRIAL UNDERTAKING ELIGIBLE FOR DEDUCTION U/S 80IA OF THE ACT. SUCH REDUCTION OF EXPENSES MAY NOT CONSTITUTE INCOM E 7 DERIVED FROM THE INDUSTRIAL UNDERTAKING BUT ALL THE SAME SINCE SUCH EXPENSES IN THE PAST HAVE REDUCED T HE ELIGIBLE PROFITS OF THE INDUSTRIAL UNDERTAKING AS A CONSEQUENCE THE REDUCTION IN SUCH EXPENSES, WHICH I S PORTRAYED BY THE PROVISION NO LONGER REQUIRED WRIT TEN BACK DESERVES TO BE CONSIDERED TO COMPUTE PROFITS OF THE INDUSTRIAL UNDERTAKING ELIGIBLE FOR DEDUCTION U /S 80IA OF THE ACT. THUS, ON THIS ASPECT THE ASSESSEE SUCCEEDS. 13. GROUND NO. 2 RAISED BY THE ASSESSEE, THUS, IS P ARTLY ALLOWED. 14. THE ISSUE IN GROUND NO.3 IS NOT PRESSED AND THE SAME IS DISMISSED. 15. THE ISSUE RAISED BY THE ASSESSEE VIDE GROUND NO .4 IN RESPECT OF COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT BY AP PLYING THE METHOD OF CALCULATING THE DEDUCTION U/S 80HHC(3)(C)(I) OF THE ACT WAS CHALLENGED BY THE ASSESSEE BEFORE US. THE LD.AR FO R THE ASSESSEE FAIRLY POINTED OUT THAT THE ISSUE IS PRESENTLY COVERED AGA INST THE ASSESSEE BOTH BY THE RATIO LAID DOWN BY THE CHANDIGARH BENCH OF T RIBUNAL IN THE CASE OF SISTER CONCERN OF THE ASSESSEE IN MAHAVIR SPINNING MILLS LTD. REPORTED IN 110 ITD 211 (CHD), AGAINST WHICH APPEAL IS PENDING BEFORE HON'BLE PUNJAB & HARYANA HIGH COURT. THE ISSUE OTHERWISE S TANDS COVERED AGAINST THE ASSESSEE BY THE HON'BLE MADRAS HIGH COU RT IN M/S AMBATTURE CLOTHING LTD. 194 TAXMAN 79 (MAD). IN VIEW OF THE ADMISSION OF THE LD. AR FOR THE ASSESSEE, THE ISSUE BEING COVERED AGAINS T THE ASSESSEE BY THE JUDGEMENT OF HON'BLE MADRAS HIGH COURT (SUPRA) AND THE DECISION OF THE CHANDIGARH BENCH OF TRIBUNAL (SUPRA), WE DISMISS GR OUND NO.4 RAISED BY THE ASSESSEE. 16. THE ISSUE IN GROUND NO.5 & 6 RAISED BY THE ASSE SSEE IS IN RELATION TO THE METHOD OF CALCULATING INDIRECT COST OF TRADI NG GOODS FOR COMPUTING THE DEDUCTION U/S 80HHC OF THE ACT. THE AO, WHILE COMPUTING 8 DEDUCTION U/S 80HHC OF THE ACT, HAD RECOMPUTED THE PERCENTAGE OF INDIRECT COST ATTRIBUTABLE TO TRADING GOODS BY CONS IDERING CERTAIN ITEMS OF EXPENDITURE AS TABULATED IN THE COMPUTATION SHEET O F DEDUCTION U/S 80HHC OF THE ACT, ANNEXED TO THE ASSESSMENT ORDER. THE SAID COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT IN RE LATION TO TRADING GOODS WAS UPHELD BY THE CIT(A), AGAINST WHICH THE A SSESSEE IS IN APPEAL. 17. LD. AR FOR THE ASSESSEE HAD DRAWN OUR ATTENTI ON TO THE COMPARATIVE CHART FOR INDIRECT COSTS OF TRADING GOO DS AS WORKED OUT BY THE ASSESSEE AND AS WORKED OUT BY THE AO, WHICH IS PLACED AT PAGE 17 OF THE PAPER BOOK AND POINTED OUT THAT THE CALCULATION S MADE BY THE AO AT PAGE 17 OF THE ASSESSMENT ORDER IN COMPARISON TO TH E CALCULATIONS SUBMITTED BY THE ASSESSEE IN THE AUDIT REPORT, WERE AT VARIANCE. LD. AR FOR THE ASSESSEE FURNISHED EXPLANATION IN RESPECT O F EACH ITEM OF EXPENDITURE AND POINTED OUT THAT THE AO HAD COMPUTE D THE PROPORTIONATE INDIRECT COST OF TRADING GOODS AT RS.92,84,331/- AS AGAINST THE CALCULATION OF ASSESSEE AT RS.25,24,978/-. IT WAS FURTHER POIN TED OUT THAT WHILE CALCULATING NUMERATOR, MANUFACTURED GOODS BEING FOR DOMESTIC OR EXPORT WERE TO BE CONSIDERED AND FURTHER THE TOTAL TURNOVE R TAKEN BY THE AO INCLUDED BOTH THE DOMESTIC AND EXPORT SALES, WHICH WAS NOT CORRECT. LD. AR ALSO POINTED OUT THAT WHILE COMPUTING THE COST O F THE TRADING GOODS, THE EXPENSES WHICH WERE PURELY RELATING TO MANUFACT URING ACTIVITIES WERE EXCLUDED AT THE THRESHOLD AND THE REMAINING EXPENSE S WERE ALLOCATED TO THE TRADING GOODS. LD. DR FOR THE REVENUE PLACED O N THE ORDER OF THE AUTHORITIES BELOW. 18. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. THE ISSUE RAISED BY THE ASSESSEE IS IN RELATION TO COMP UTATION OF INDIRECT COST OF TRADING GOODS WHICH ARE TO BE WORKED OUT FOR COM PUTING DEDUCTION U/S 80HHC OF THE ACT ON SUCH TRADED GOODS. THE ASSESSE E BEFORE US IS 9 ENGAGED IN TWO TYPES OF ACTIVITIES I.E., FIRST THE MANUFACTURE AND EXPORT OF ITS MANUFACTURED ITEMS AND THE SECOND IS THE DOMEST IC AND EXPORT OF TRADED ITEMS DEALT IN BY THE ASSESSEE. THE ASSESSE E IS PREPARING A CONSOLIDATED STATEMENTS OF PROFIT & LOSS ACCOUNT AN D CONSEQUENTLY, WHERE THE ASSESSEE IS ENGAGED IN BOTH MANUFACTURING AND SALE OF ITS MANUFACTURED GOODS AND ALSO TRADING AND EXPORT OF O THER GOODS NOT MANUFACTURED BY IT, THE PROVISIONS OF SECTION 80HHC (3) ARE ATTRACTED IN ORDER TO COMPUTE THE DEDUCTION UNDER THE SAID SECTI ON. CONSEQUENTLY, THERE IS A NEED TO WORK OUT THE COST OF TRADING GOO DS, WHICH IN TURN ARE EXPORTED BY THE ASSESSEE. ADMITTEDLY, THE ITEMS OF EXPENDITURE WHICH ARE PURELY RELATABLE TO THE MANUFACTURING ACTIVITIES, C ARRIED ON BY THE ASSESSEE, ARE TO BE EXCLUDED FROM THE LIST OF EXPEN SES BEING ATTRIBUTABLE TO SUCH MANUFACTURING ACTIVITIES. HOWEVER, THE BAL ANCE EXPENDITURE IS TO BE ATTRIBUTED BOTH TO THE MANUFACTURING ACTIVITY AN D TRADING ACTIVITY, IN ORDER TO COMPUTE THE DEDUCTION AVAILABLE TO THE ASS ESSEE. THE FIRST ITEM OF EXPENDITURE TO BE CONSIDERED IS THE PERSONNEL EX PENSES. THE ASSESSEE HAD ATTRIBUTED 33,56,010/- BEING COMMON EXPENSES BO TH FOR MANUFACTURING AND TRADING ACTIVITIES. THE AO ADOPTE D SAID PERSONNEL EXPENSES AT RS.1,18,88,142/-. AS PER THE ASSESSEE, THE AO HAD EXCLUDED ONLY PROPORTIONATE EXPENSES RELATED TO EXPORT WHILE ASSESSEE HAD EXCLUDED ALL THE EXPENSES RELATED TO MANUFACTURING I.E. DOMESTIC AS WELL AS EXPORTS AND ALLOCATED ONLY EXPENSES WHICH WERE C OMMON FOR TRADING AS WELL AS MANUFACTURING. 19. THE NEXT ITEM OF EXPENDITURE CONSIDERED IS ADMI NISTRATION AND OTHER EXPENSES AT RS.1.44 CRORES, BOTH BY THE AO AN D THE ASSESSEE AND THERE IS A PETTY DIFFERENCE BETWEEN THE TWO FIGURES , WHICH IS TO BE IGNORED. 10 20. THE THIRD ITEM OF EXPENDITURE CONSIDERED BY THE AO AND THE ASSESSEE WERE THE FINANCIAL EXPENSES. THE ASSESSEE HAD EXCLUDED THE FINANCIAL EXPENSES DIRECTLY RELATABLE TO MANUFACTUR ING ACTIVITY I.E. THE INTEREST ON TERM LOAN RELATING TO PLANT & MACHINERY WAS TO BE EXCLUDED AND THE BALANCE EXPENSES BEING COMMON BOTH FOR MANU FACTURING AS WELL AS TRADING WERE TO BE ALLOCATED FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT. THE ASSESSEE HAD AD OPTED THE FIGURE OF RS.1.96 CRORE ON ACCOUNT OF FINANCIAL EXPENSES, WHE REAS THE AO INCLUDED THE TOTAL FINANCE EXPENSES OF RS.2.65 CRORES AS BEI NG ATTRIBUTABLE TO BOTH MANUFACTURING AND TRADING GOODS. WE FIND MERIT IN T HE PLEA OF THE ASSESSEE IN THIS REGARD THAT SUCH FINANCIAL EXPENSE S WHICH ARE DIRECTLY RELATABLE TO THE MANUFACTURING ACTIVITIES CARRIED O UT BY THE ASSESSEE, THEN THE SAME ARE TO BE EXCLUDED WHILE COMPUTING THE IND IRECT COST OF TRADING GOODS, AS PER SECTION 80HHC(3) OF THE ACT. HOWEVER, THIS CLAIM OF THE ASSESSEE NEEDS VERIFICATION AT THE LEVEL OF AO AS D ETAILS ARE NOT AVAILABLE ON RECORD. ACCORDINGLY, WE DIRECT THE AO TO INCLUD E ONLY SUCH PART OF FINANCIAL EXPENSES WHICH ARE RELATED BOTH TO MANUFA CTURING AND TRADING ACTIVITY AND EXCLUDE SUCH FINANCIAL EXPENSES WHICH ARE DIRECTLY RELATED TO THE MANUFACTURING ACTIVITY I.E. THE INTEREST ON TER M LOAN RAISED FOR THE PURCHASE OF PLANT & MACHINERY. THE AO SHALL, ACCOR DINGLY, RECOMPUTE THE FIGURE OF FINANCIAL EXPENSES, AFTER AFFORDING R EASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 21. SIMILARLY, IN RESPECT OF PERSONNEL EXPENSES, TH E EXPENDITURE WHICH IS DIRECTLY RELATABLE TO THE MANUFACTURING ACTIVITY I.E. THE WAGES PAID FOR WORKERS AT THE MANUFACTURING UNIT AND ANY OTHER EXP ENDITURE WHICH IS DIRECTLY LINKED IN LINE WITH THE MANUFACTURING ACTI VITIES, CARRIED ON BY THE ASSESSEE, IS TO BE EXCLUDED AND ONLY SUCH EXPENSES WHICH ARE COMMON BOTH FOR THE TRADING AND MANUFACTURING ACTIVITIES, NEED TO BE CONSIDERED 11 FOR COMPUTING THE INDIRECT COST OF TRADING GOODS. THE AO IS, THUS DIRECTED TO RECOMPUTED PERSONNEL EXPENSES AFTER AFF ORDING REASONABLE OPPORTUNITY OF HEARING TO ASSESSEE. 22. NEXT ITEM OF EXPENDITURE IS DEPRECIATION OF RS. 5.7 CRORES. IN LINE WITH OUR OBSERVATION IN THE PARAS HEREIN ABOVE, WHE RE SUCH DEPRECIATION IS ON THE PLANT INSTALLED AT THE MANUFACTURING UNIT AND BEING INVOLVED IN THE MANUFACTURING PROCESS AND SUCH DEPRECIATION ON ASSETS USED IN MANUFACTURING ACTIVITIES ARE TO BE EXCLUDED FROM TH E COST OF EXPENDITURE WHICH IS ATTRIBUTABLE TO TRADING GOODS. HOWEVER, T HE DEPRECIATION ON ASSETS INSTALLED IN THE OFFICE OF THE ASSESSEE WHIC H IS COMMON FOR BOTH MANUFACTURING AND TRADING ACTIVITIES ARE TO BE INCL UDED AS PART OF INDIRECT COST FOR TRADING GOODS. ACCORDINGLY, AO SHALL RE-C OMPUTE THE DEPRECIATION AND ASSETS ATTRIBUTABLE TO THE INDIREC T COST OF TRADING GOODS. 23. NEXT ITEM OF EXPENDITURE IS SELLING EXPENSES AN D ONLY SUCH SELLING EXPENSES WHICH ARE COMMON FOR MANUFACTURING AND TRA DING ACTIVITIES, ARE TO BE SO INCLUDED AND THAT PART OF THE SELLING EXPE NSES, WHICH IS EXCLUSIVELY ATTRIBUTABLE TO THE MANUFACTURED GOODS, ARE NOT TO BE CONSIDERED AS PART OF INDIRECT COST OF TRADING GOOD S. THE ASSESSEE, IN THIS REGARD SHALL FURNISH THE NECESSARY EVIDENCE TO PROV E ITS CLAIM THAT ONLY SUCH EXPENSES COULD BE ALLOCATED BEING COMMON FOR T RADING AND MANUFACTURING ACTIVITIES. THE AO, ON CONSIDERATION OF SUCH EVIDENCE, SHALL DETERMINE THE COST OF SELLING EXPENSES TO BE ATTRIBUTED TO THE TRADING ITEMS. 24. THE LAST ITEM OF EXPENDITURE IS MISCELLANEOUS E XPENSES AMOUNTING TO THE TUNE OF RS.4207/-, WHICH IS VERY PETTY AND T HE SAME IS IGNORED FOR SUCH ALLOCATION. 12 25. THE OTHER ASPECT WHICH NEEDS TO BE KEPT IN MIND BY THE AO WHILE COMPUTING DEDUCTION U/S 80HHC OF THE ACT IS THAT TH E ASSESSEE IS ENGAGED IN THE MANUFACTURE OF CERTAIN ITEMS WHICH H E IS SELLING BY WAY OF ITS DOMESTIC SALES AND CERTAIN PART OF THE MANUFACT URED ITEMS ARE BEING EXPORTED. THE TRADING IN THE ITEMS NOT MANUFACTURE D BY THE ASSESSEE IS ALSO BEING CARRIED OUT BY IT. THE EXPENSES RELATED PURELY TO THE MANUFACTURING ACTIVITIES, ARE TO BE EXCLUDED AT THE THRESHOLD AND THEREAFTER, BALANCE OF THE EXPENDITURE HEAD-WISE, A S EARLIER CONSIDERED BY THE AO, IS TO BE CONSIDERED, BEING BOTH ATTRIBUTABL E TO THE MANUFACTURE AND TRADING ACTIVITIES CARRIED ON BY THE ASSESSEE A ND CONSEQUENTLY, THE INDIRECT COST OF TRADING GOODS IS WORKED OUT. 26. THE OTHER ASPECT OF THE ISSUE IS THE COMPUT ATION OF TOTAL TURNOVER WHICH INCLUDES BOTH DOMESTIC AND EXPORT SALES AND I N THIS REGARD, IT IS DIRECTED THAT ONLY TOTAL EXPORT SALES, BOTH OF THE MANUFACTURED ITEMS AND TRADED ITEMS, IS TO BE TREATED AS PART OF THE TOTAL TURNOVER FOR DEDUCTION U/S 80HHC(3) OF THE ACT. CONSEQUENTLY, GROUND NOS. 5 & 6, RAISED BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 27. GROUND NO. 7 RAISED BY THE ASSESSEE IS IN RESPE CT OF CLAIM OF DEDUCTION U/S 80HHC ON PROVISIONS WRITTEN BACK IS L INKED TO GROUND NO.2 RAISED BY THE ASSESSEE ON SIMILAR ITEMS OF INC OME BEING ELIGIBLE FOR EXEMPTION U/S 10B OF THE ACT. IN VIEW OF OUR ALLOW ING THE CLAIM OF THE ASSESSEE I.E. INCOME FROM PROVISIONS WRITTEN BACK, BEING ELIGIBLE FOR EXEMPTION U/S 10B OF THE ACT, ISSUE RAISED VIDE GRO UND NO.7 IS DISMISSED. 28. THE ISSUE IN GROUND NO. 8 RAISED BY THE ASSESSE E IS IN RELATION TO ADJUSTMENTS TO BE MADE TO THE BOOK PROFITS OF THE A SSESSEE COMPANY IN VIEW OF THE PROVISIONS OF SECTION 115JB OF THE ACT. THE ASSESSEE HAS ALSO 13 RAISED ADDITIONAL GROUND OF APPEAL WHICH READS AS U NDER : THAT THE AUTHORITIES BELOW HAVE ERRED IN NOT ALLOW ING 100% DEDUCTION U/S 80HHC ON THE BOOK PROFITS. 29. THE SAID ADDITIONAL GROUND OF APPEAL, RAISED BY THE ASSESSEE BEING PURELY LEGAL IN NATURE IS ADMITTED FOR ADJUDICATION . 30. THE AO, WHILE COMPUTING THE BOOK PROFITS U/S 11 5JB OF THE ACT, HAD MADE CERTAIN ADJUSTMENTS BY RE-COMPUTING TURNOV ER OF THE BUSINESS I.E. ON ACCOUNT OF THE INCOME TO WHICH SECTION 10B APPLIES AND HENCE, ALSO EXCLUDED THE PROFITS ELIGIBLE FOR DEDUCTION U/ S 80HHC OF THE ACT. THE PLEA OF THE ASSESSEE THAT A UNIFORM AMOUNT OF T OTAL TURNOVER FOR APPROPRIATION OF AMOUNTS OF INCOME AS WELL AS EXPEN DITURE TO BE ADOPTED FOR THIS PURPOSE, WAS REJECTED BY THE AO AND THE BO OK PROFITS WERE RE- COMPUTED. THE ASSESSEE WHILE CALCULATING THE BOOK PROFITS U/S 115JB OF THE ACT HAD APPROPRIATED THE INCOME AND EXPENDITURE OF SECTION 10B IN THE SAME RATIO WHICH WAS USED TO CALCULATE THE DEDU CTION U/S 10B AND REDUCING THEREFROM 100% OF THE PROFITS, ELIGIBLE FO R DEDUCTION U/S 80HHC OF THE ACT. THE CIT(A) HAD UPHELD THE ORDER OF AO AND CONSEQUENTLY, THE ASSESSEE IS IN APPEAL. FROM THE PERUSAL OF THE RECORD, WE FIND THAT AT PAGE 18 OF THE PAPER BOOK, THE ASSESSEE HAS ATTACHE D THE AUDIT REPORT IN FORM NO.29D ALONGWITH ANNEXURES PLACED AT PAGES 18, 22 OF THE PAPER BOOK UNDER WHICH THE BOOK PROFITS HAVE BEEN COMPUTE D BY THE AUDITOR AT NIL. HOWEVER, WE ARE OF THE VIEW THAT THIS COMPU TATION IS TO BE LOOKED INTO BY THE AO IN VIEW OF THE SETTLED LEGAL PROPOSI TIONS AND ALSO THE WORKING OF THE ASSESSEE IN GETTING ALL THE INCOME I N THE SAME RATIO OF EXPORT TURNOVER TO THE TOTAL TURNOVER. WE FIND NO MERIT IN THE ALLOCATION MADE BY THE AO OF DIFFERENT COMPONENTS OF INCOME WI TH DIFFERENT TOTAL TURNOVER. CONSEQUENTLY, WE DIRECT AO TO RECOMPUTE T HE BOOK PROFITS U/S 14 115JB OF THE ACT. GROUND NO. 8 AND ADDITIONAL GROU ND OF APPEAL RAISED BY THE ASSESSEE ARE, THUS, ALLOWED FOR STATISTICAL PURPOSES. 31. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 13 TH DAY OF JULY, 2012. SD/- SD/- (MEHAR SINGH) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 13 TH JULY,2012 POONAM COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR BY ORDER ASSISTANT REGISTRAR, ITAT, CHANDIGARH