Ii. Whether On The Facts And Circumstances Of Thecase And In Law, The Tribunal Was Justified Indirecting Not To Exclude The Exchange Ratedifference Of Rs.21,81, v. Cit (2009)317 Itr 6218 (Sc)?”

Priya Soparkar IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1160 OF 2016WITHINCOME TAX APPEAL NO.1149 OF 2016WITHINCOME TAX APPEAL NO.1150 OF 2016WITHINCOME TAX APPEAL NO.1139 OF 2016 The Pr. Commissioner of Income Tax… Appellant V/s. Hamilton Houseware P. Ltd.… Respondent --- Mr.Tejveer Singh for the Appellant.Mr.S.Sriram with Mr.B.V.Jhaveri with Mr.Mayank Thosar for theRespondent. --- CORAM : AKIL KURESHI AND M.S.SANKLECHA, JJ. DATE : JANUARY 16, 2019. P.C.:- 1.These appeals involve the same assessee and raise similarquestions. We may notice facts from Income Tax Appeal No.1160of 2016. This appeal is filed by the revenue to challenge thejudgment of Income Tax Appellate Tribunal in case of therespondent-assessee for the assessment year 2005-06. Followingquestions are raised by the revenue:- Priya Soparkar “i. Whether on the facts and circumstances of thecase and in Law, the Tribunal was justified indirecting not to exclude the interest income ofRs.69,936/- from the profits eligible for deductingu/s 80IB, without considering the fact that thesaid income is not directly 'derived from' themanufacturing activity of the assessee? ii. Whether on the facts and circumstances of thecase and in Law, the Tribunal was justified indirecting not to exclude the exchange ratedifference of Rs.21,81,641/- from the profitseligible for deducting u/s 80IB? iii. Whether on the facts and circumstances ofthe case and in Law, the Tribunal was justified indirecting not to exclude the scrap income ofRs.13,25,620/- from the profits eligible fordeduction u/s 80IB, even though the said incomeis not directly 'derived from' the manufacturingactivity of the assessee?iv.Whether on the facts and circumstances ofthe case and in Law, the Tribunal was justified insetting aside the settled issue to the file of theA.O. in respect of exclusion of export benefitssuch as DEPB & duty drawback etc from theprofits eligible for deduction u/s 80IB incontravention of the ratio laid down by theHon'ble Apex Court Liberty India Vs. CIT (2009)317 ITR 6218 (SC)?” 2. The respondent-assessee is a manufacturer-exporter and claims deduction of income derived from such business in termsof Section 80IB of the Income Tax Act, 1961 (“the Act” for short).In this context, the revenue has raised objections which aresubject matter of the present appeals. 3.Question No.1 noted above refers to the revenue's objectionto the interest income earned by the assessee being eligible fordeduction. The question as framed does not bring about thecorrect controversy. The assessee does not claim deduction ofsuch interest income. The assessee however argued thatdisallowance of interest income for such deduction should be thenet of the interest and not gross. The revenue argues to thecontrary. The Tribunal by the impugned judgment accepted theassessee's contention holding that the disallowance from thededuction of interest can be only be of the net of the interestincome. 4.Having heard learned counsel for the parties, we do notfind any error in the view of the Tribunal . It is undisputedly thatthe interest income earned by the assessee cannot be said tohave been derived from its export business. However, when thequestion of disallowance comes, the revenue cannot ignore theassessee's interest expenditure and disallow the entire interestearned by the assessee without netting if to off. Revenue cannot 49 itxa 1139-16 and ors-o give different treatment to interest income and interest expenditure. 4.Having heard learned counsel for the parties, we do notfind any error in the view of the Tribunal . It is undisputedly thatthe interest income earned by the assessee cannot be said tohave been derived from its export business. However, when thequestion of disallowance comes, the revenue cannot ignore theassessee's interest expenditure and disallow the entire interestearned by the assessee without netting if to off. Revenue cannot 49 itxa 1139-16 and ors-o give different treatment to interest income and interest expenditure. 5.Question No.2 pertains to revenue's objection to the incomeearned by the assessee on account of foreign exchange ratefluctuation. Counsel for the revenue submitted that incomecannot be stated to have been derived from the assessee's exportbusiness. We however notice that the CIT Appeals while grantingthe relief to the assessee had recorded that the additionalincome earned by the assessee on account of the fluctuation offoreign exchange rate was out of its receipts for exported goods.This is not a case where the assessee after completing theexports and receipt of the sale consideration, realized the samein rupee turns after a gap of time and in the meantime, theforeign exchange rate having fluctuated favourably, the assesseeearned additional income. We are therefore, of the opinion thatthe Tribunal correctly confirmed the view of the CIT appealsand granted the benefit to the assessee. We are not oblivious to the decision of this Court inIncome Tax Appeal No. 2131 of 2008 dated 22[nd] April, 2010. Priya Soparkar 59 itxa 1139-16 and ors-o In such case, however, the Court while holding that theadditional income earned by the assessee on account offluctuation of the foreign exchange rate would not qualify fordeduction under Section 80HHC of the Act, noted that suchexchange fluctuation was not on account of delayed realizationof export proceeds. It was the case in which the interest ratefluctuation arose after completion of the export activities and thereceipts which were kept in EEFC account. The facts of thepresent case are therefore, distinguishable. 6.The question No.3 arises out of the revenue's objection tothe assessee's claim of deduction of income arising out of sale ofscrap. The revenue argues that such income cannot be stated tohave been derived from the assessee's export business. In thisrespect, we notice that the Commissioner appeals while grantingthe relief to the assessee had come to factual finding that theassessee was engaged in manufacturing activity. During thecourse of such manufacturing activity scrap was generated out ofuse of various raw materials till the finished goods are produced.Such scrap was sold which generated receipts which in turn reduced the costs of manufacturing. It can thus be seen that scrap was generated in the courseof assessee's manufacturing activity and the income generatedout of sale of such scrap was adjusted to the cost of manufacturingof the product itself. Such additional income thus was clearlyderived out of the assessee's activity of manufacturing and exportof such manufactured goods. In this context, we may refer to thedecision of the division bench of Gujarat High Court in case ofDeputy Commissioner of Income-Tax Vs. HarjivandasJuthabhai Zaveri and anr.[1] on which reliance was also placed bythe CIT appeals and the Tribunal in the present case. It was thecase in which the assessee had claim deduction under Section80I of the Act in respect of the profits and gains from industrialundertaking. The assessee had earned income out of sale ofempty barrels and used jute bags. The assessee reduced thecosts of manufacturing to the extent it received income out ofsale of such items. The Court accepted the assessee's contentionand upheld the claim of deduction granted by the Tribunal.Learned counsel for the revenue however brought to our notice Priya Soparkar79 itxa 1139-16 and ors-oan order dated 3[rd] April, 2018 in Income Tax Appeal No.1086 of2016 and connected appeal in which the Court has admitted aquestion as to whether in facts and circumstances of the case theTribunal had erred in allowing the claim of the assessee underSection 80IB of the Act on income earned on sale of scrap“When it was not derived from the activities of the allegedbusiness”. Thus, the Court is examining a question in differentcontext on the ground that such income out of sale of scrap wasnot derived from the assessee's eligible business. In the presentcase, as noted, the facts are different. This question is thereforenot considered. 7.The fourth question arises out of the revenue's objection tothe assessee's claim of deduction pertaining to benefits of DEPBand duty drawback. Here also the question as framed fails tobring to about the true controversy. Upon perusal of the impugnedjudgment of the Tribunal, we notice that the assessee had raisedan alternative contention of disallowance of net of the benefitsand not gross. The Tribunal while upholding revenue's objectionto the assessee's principal claim of deduction accepted the Priya Soparkar89 itxa 1139-16 and ors-oalternative contention and held that such disallowance would berestricted to the net of the benefit and not gross. Here also wedo not find any error in view of the Tribunal. Even if the benefitsof the DEPB and duty drawback were to be excluded from thepurview of deduction for the assessee's export business, the costsincurred for receiving such benefits must be accounted for. 8.In Income Tax Appeal No.1139 of 2016 the revenue hassuggested one more question which reads as under: “Whether on the facts and circumstances of thecase and in Law, the Tribunal was justified indeleting the addition made by AO on account ofsetting off the loss amounting to Rs.1,10,79,284?” 9.This question rises out of the revenue's objection to theassessee's claim of deduction under Section 80IC of the Act inrespect of its one of the units.The assessee had claim a deductionof 1.70 crores (rounded off) . The Assessing Officer noticed thatthe assessee had incurred loss of Rs.1.10 crores (rounded off) inrelation to the said unit in the earlier assessment year which wasabsorbed against other incomes. The Assessing Officer was ofthe opinion that the assessee should have brought forwarded 99 itxa 1139-16 and ors-o the national loss to the current year which had to be set offagainst its claim of deduction for the present year. This viewwas also accepted by the CIT appeals. The Tribunal howeverreversed the decision relying on the decision of the Madras HighCourt in case of Velayudhaswamy Spinning Mills Pvt. Ltd. andanr. Vs. ACIT[1]. 10.Having heard learned counsel for the parties and havingperused the documents on record, we notice that the divisionbench of this Court in case of Commissioner of Income Tax-10Vs. Hercules Hoists Ltd. Dated 14[th] June, 2017 (Income Tax Appeal No.707 of 2014) had occasion to consider a similarissue. The Court referred to and relied upon the decision of theMadras High Court in case of Velayudhaswamy Spinning Mills Pvt. Ltd.(supra) and made following observations: “7. The learned standing Counsel appearing forthe revenue submitted that the assessee is notentitled to claim deduction under Section 80-IA ofthe Act. Since the accumulated losses andunabsorbed depreciation were more than theprofits of this year, the same had to be set offagainst the profits and therefore, the assessee isnot entitled for any deduction as per Section 80-IA Appeal No.707 of 2014) had occasion to consider a similarissue. The Court referred to and relied upon the decision of theMadras High Court in case of Velayudhaswamy Spinning Mills Pvt. Ltd.(supra) and made following observations: “7. The learned standing Counsel appearing forthe revenue submitted that the assessee is notentitled to claim deduction under Section 80-IA ofthe Act. Since the accumulated losses andunabsorbed depreciation were more than theprofits of this year, the same had to be set offagainst the profits and therefore, the assessee isnot entitled for any deduction as per Section 80-IA read with Section 80AB of the Act. Further, it iscontended that the Special Bench of the Tribunalhas correctly decided the issue and held thatprofits from the eligible business for the purposeof determination of the quantum of deductionunder Section 80-IA have to be computed onlyafter deduction of notionally brought forwardlosses and depreciation of the eligible businesseven though they have been set off against otherincome in earlier years. Therefore, the assessee isnot entitled to the relief of claim under Section80-IA of the Act. In addition to that, the learnedCounsel appearing for the revenue also submittedthat in respect of Tax Case No.918 of 2008, theTribunal is not right in holding that the initialassessment year is 2004-05. He further submittedthat before the Tribunal, the revenue filed a letterstating that the assessee had exercised the optionof claiming the deduction under Section 80-IAduring the assessment year ,1999-2000, which isthe initial assessment year and not the assessmentyear 2004-05 as held by the Tribunal. Further, theTribunal ought to have considered the letter given,after affording one more opportunity to the partiesbefore deciding the matter. Without consideringthe same, the Tribunal simply rejecting thecontention of the revenue in respect of Tax CaseNo. 918 of 2008 is not correct and this Court mayremand the matter to the Tribunal to decide theissue afresh in respect of the initial assessmentyear. 8. Heard the counsel appearing for the parties andperused the materials available on record. 9. On a perusal of the order of the assessingofficer, it is seen that the eligible income fordeduction under Section 80-IA is worked out in allthe cases as follows: Tax Case No. 909 of 2009Net income from Windmill Division 1 1,70,76,945(2002-03) Less: (a) Unabsorbed depreciation 8,26,84,110allowance assessment year 2003-04 (b) Income from Windmill Division 1 71,16,270(200203) assessment year 2004-05 Balance of unabsorbed depreciation 7,55,67,840allowanceUnabsorbeddepreciationallowance(-)5,84,90,895 balance Tax Case No. 940 of 2009 Net income from Windmill Division 2,82,67,370----------------------------------------------------- Less: Unabsorbed depreciation allowance (initialassessment year) ------------ Asst. yr. 2003-0412,11,01,360 --------------------------------------------------------------------- ------------ Asst. yr. 2004-05 1,59,85,972 13,70,87,332Balance (-) 10,88,19,962 Tax Case No. 918 of 2008 Total loss + depreciation of the units claimingdepreciation For all earlier years-V (-) 24,63,50,426 Less: Current years income from the unit10,63,74,164 Balance income available for deduction (-)13,99,76,362 under Section 80-IA. Thus, the assessee has been setting off the lossagainst the income of the company for the earlieryears. During the assessment year, the assesseeexercised the option claim of deduction underSection 80-IA of the Act. But the assessing officerdenied the exemption on the finding that loss ordepreciation already allowed and set off against --------------------------------------------------------------------- ------------ Asst. yr. 2004-05 1,59,85,972 13,70,87,332Balance (-) 10,88,19,962 Tax Case No. 918 of 2008 Total loss + depreciation of the units claimingdepreciation For all earlier years-V (-) 24,63,50,426 Less: Current years income from the unit10,63,74,164 Balance income available for deduction (-)13,99,76,362 under Section 80-IA. Thus, the assessee has been setting off the lossagainst the income of the company for the earlieryears. During the assessment year, the assesseeexercised the option claim of deduction underSection 80-IA of the Act. But the assessing officerdenied the exemption on the finding that loss ordepreciation already allowed and set off against other sources of the income of the assessee has tobe nationally carried forward and set off againstthe current years income from the units for whichthe assessee is claiming deduction under Section80-IA. There is no dispute that during the year,there is a profit. Therefore, the assessee claimeddeduction under Section 80-IA and the revenuehas no authority to notionally bring forward theunabsorbed depreciation and loss of the earlieryear which has been already set off as against thecurrent year profit from the unit. 10. It is pertinent to note that the learned seniorCounsel appearing for the assessee invited theattention of this Court to an unreported judgmentof this Court dated 23-12-2009 in Tax Case(Appeal) No.298 of 2004 wherein, this Courtconsidered the similar substantial question of law,which reads as follows: Whether the Tribunal was right in holding thatfor the purpose of allowing deduction underSection 80I, the brought forward losses andunabsorbed depreciation etc., of the newindustrial undertaking need not be taken intoconsideration, once they have been set off againstother sources of income, especially in view of theclear provisions of Sub-section 6 of Section 80-I,the application of which is mandatory? 11.This question is therefore concluded against the revenueby virtue of the judgment of this Court in case of HerculesHoists Ltd.(supra) and is therefore not required to beconsidered. In the result, all the tax appeals are dismissed. Priya Soparkar (M.S.SANKLECHA,J.) (AKIL KURESHI,J.) ….