The order of the Bench was delivered by
R. S. Syal, AM:-This appeal by the assessee arises out of the order passed by the CIT(A) on 28.02.2013 in relation to the assessment year 2009-10.
2. The first issue taken up by the ld. AR is against not considering foreign exchange difference as part of export turnover and total turnover. Briefly stated, the facts of the case are that the assessee claimed deduction u/s 10B by, inter alia, considering foreign exchange rate difference of Rs. 32,35,700/- as eligible for deduction. The AO, going by the phraseology used in section 10B(1) being, profits and gains as are ‘derived by’ an eligible undertaking from export of eligible articles, came to hold that the foreign exchange difference could not be included in the eligible amount. He, therefore, held that such amount of Rs. 32.35 lac was liable to be included in the domestic sales. The ld. CIT(A) approved the view taken by the AO on this point.
3. We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the foreign exchange difference arose on account of transactions of export carried out by the assessee during the year. The Hon’ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd. (2011) 330 ITR 175 (Bom) has held that gain from foreign exchange fluctuation realized within stipulated period forms part of the sale proceeds and is directly related with the export activities and such gain should be considered as income derived from export activities eligible for exemption under s. 10A of the Income-tax Act, 1961 (hereinafter also called ‘the Act’)in the year in which export took place. The Special bench of the tribunal in ACIT vs. Prakash I. Shah (2008) 118 TTJ (Mumbai) (SB) 577 has also held that the gain due to fluctuation in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds simply on the ground that the rate has increased subsequent to sale but prior to realization. Eventually it has been held that the foreign exchange fluctuation gain is part of export turnover for purposes of section 80HHC of the Act. Since the connotation of ‘export turnover’ under section 10B is no different from that u/ss 10A or 80HHC of the Act, the meaning ascribed to export turnover in such decisions will apply with full vigour in the context of section 10B as well. We, therefore, hold that such foreign exchange fluctuation difference has to be considered as part of ‘export turnover’. As the instant foreign exchange fluctuation difference forms part of the export turnover, the total turnover, in the denominator will also include the effect of foreign exchange fluctuation difference. We, therefore, sum up by holding that the amount of foreign exchange fluctuation difference should be included in the ‘export turnover’ and ‘total turnover’ and it should be excluded from the ‘domestic turnover’ as was done by the AO.
4. The second issue taken up by the assessee is against the treatment of scrap sale as domestic sale. The AO, while computing deduction u/s 10B, considered scrap sale amounting to Rs. 31,84,869/- as part of domestic turnover. The ld. CIT(A) approved the view taken by the AO on this point.
5. After considering the rival submissions and perusing the relevant material on record, we find that this issue is no more res integra in view of the judgment of the Hon’ble Supreme Court in the case of CIT vs. Punjab Stainless Steel Industries (2014) 364 ITR 144 (SC), in which it has been held that the sale of scrap is not includible in the ‘total turnover.’ While dealing with the computation of deduction u/s 80HHC, the Hon’ble Supreme Court held that the sale of scrap cannot be considered as part of total turnover in the case of an assessee who is not engaged in the business of scrap. The ratio decidendi of this decision will apply with full force here also to the treatment of scrap sales in the context of section 10B of the Act. As the assessee in question is engaged in the business of manufacturing and export of fasteners, the amount of sale of scrap cannot be included in the ‘total turnover’ or ‘domestic turnover’. Rather, it would go to reduce the cost of production. We, therefore, set aside the impugned order on this issue.
6. The next ground is against the treatment of interest income as ineligible for deduction u/s 10B of the Act. The assessee received interest on FDRs amounting to Rs. 16,01,196/-. On being called upon to explain as to how this amount was eligible for deduction u/s 10B, the assessee stated that the interest on FDR was received on ‘margin kept in the bank for utilization of Letter of Credit (L/C) and bank guarantee limits from bank.’ Unconvinced with the assessee’s submissions, the AO treated such interest as income from other sources and did not allow deduction u/s 10B on it. The ld. CIT(A) echoed the assessment order on this point.
7. After considering the rival submissions and perusing the relevant material on record, we find that the AO held interest income as ineligible for deduction under section 10B(1) as it was not ‘derived from’ the eligible business. The view point of the AO would have been correct if there had been no further elaboration of the expression ‘such profits and gains as are derived by a hundred per cent export oriented undertaking from the export of articles or things…….’. The position under consideration is not akin to some of the sections employing this expression without any further amplification of the same. Sub-section (4) of section 10B gives meaning to the expression ‘profits derived from export of articles or things ……..’ to mean the amount which bears to the ‘profits of the business’ of the undertaking the same proportion as the export turnover in respect of such articles or things, etc., bears to the total turnover of the business carried on by the undertaking. A bare perusal of sub-section (4) in juxtaposition to sub-section (1) of section 10B transpires that the expression ‘derived by’’ used in sub-section (1) cannot be construed in its literal sense to mean encompassing only such items of income which have direct or immediate nexus with the eligible undertaking. The meaning given to this expression in sub-section (4) as referring to ‘the profits of the business’ makes the expression more liberal to cover any income which is connected with ‘the business’ and should not be necessarily ‘derived from the industrial undertaking’ alone. Turning to the nature of present interest income, being arising from FDRs obtained for margin money for the purposes of availing credit limits from banks, it becomes vivid that such interest bears the requisite characteristics of a ‘business income.’ The Mumbai Bench of the Tribunal in Livingstones Jewellery (P) Ltd. Vs. DCIT (2009) 31 SOT 323 (Mum) has held that interest derived by an exporter from fixed deposits made with the bank for obtaining credit limits is eligible for the benefit u/s 10A. Similar view has been expressed in ACIT vs. Motorola India Electricals (P) Ltd. (2008) 114 ITD 387 (Bang.) by holding that the interest income having close nexus with the business activity of the assessee is assessable as income from business and, hence, eligible for the benefit u/s 10A and section 10B. In view of the above discussion, we hold that the assessee is entitled to deduction u/s10B of the Act in respect of the interest income earned on FDRs made for the purposes of keeping margin money or for availing any other credit facility from banks.
8. The impugned order on the issue of deduction u/s 10B is set aside and the matter is sent back to the AO for computing deduction u/s 10B afresh in conformity with our above findings and conclusions.
9. The next ground is against not allowing of deduction of Rs. 14,53,153/- on account of interest u/s 24(b) of the Act. Briefly stated, the facts apropos this ground are that the assessee claimed interest on term loan amounting to Rs. 14.53 lac as deduction u/s 24(b) of the Act in the revised return of income. The AO observed that no such deduction was claimed in the earlier years and even for the year under consideration, it was claimed only by means of the revised return. He accepted the fact as correct that the assessee had taken loan from bank and had utilized the loan for the purpose of business, but, refused to allow deduction as it was not able to substantiate its claim that part of the loan was utilized for the purpose of construction of let out property from which rental income assessable as ‘Income from house property’ was earned. The assessee’s claim of deduction u/s 24(b) was accordingly jettisoned, which action came to be upheld in the first appeal.
10. After considering the rival submissions and perusing the relevant material on record, it is observed that section 24(b) talks of allowing deduction for the interest payable by the assessee where property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital. The assessee has admittedly shown some income from let out property under the head ‘Income from house property.’ Once some term loan has been taken for acquiring or constructing, etc., the property, which fetched income under the head ‘Income from house property’, then, interest on such loan has to be allowed as deduction u/s 24(b) of the Act. The view point of the assessee to this extent is ergo accepted in principle. However, we are unable to calculate such amount of interest with precision. Under such circumstances, the impugned order is set aside on this score and the matter is sent back to the AO for verifying and ascertaining the amount of loan utilized for the building in respect of which rental income assessable under the head ‘Income from house property’ was earned and, accordingly, allowing deduction towards such interest u/s 24(b) of the Act. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such determination.
11. The next ground is against the ad hoc disallowance of Rs. 1 lac. The assessee claimed deduction of Rs. 5.47 lac for Training, Rs. 3.67 lac for Miscellaneous expenses; Rs. 1.62 lac for Short/excess and Rs. 5.59 lac for Garden maintenance. In the absence of the assesee producing sufficient external details except for internal vouchers, the AO disallowed a sum of Rs. 1 lac on ad hoc basis. The ld. CIT(A) upheld the impugned order on this score.
12. After considering the rival submissions and perusing the relevant material on record, it is observed as an undisputed fact that some of the expenses incurred by the assessee were backed only by the internal vouchers. This view point of the AO has not been controverted by the ld. AR. It is but natural that if some of the expenses are not properly substantiated with evidence, then disallowance to that extent is called for. Considering the totality of facts and circumstances prevailing in this case and taking a holistic view of the matter, we are of the considered opinion that the ends of justice would meet adequately if the disallowance is reduced to Rs. 50,000/-. We order accordingly.
13. The next ground is against disallowance of Rs. 86,400/- on account of festival expenses. The AO made the disallowance on the ground that there was no necessity and further proper bills were not available. The ld. CIT(A) upheld the assessment order.
14. After considering the rival submissions and perusing the relevant record, we find that the aspect of necessity considered by the AO is of no substance. The AO cannot step into the shoes of the businessman to decide as to whether a particular expenditure is necessary or not. He is supposed to confine himself only in determining the deductibility of the expenses incurred by the assessee as per law. Coming to the second aspect about the non-availability of bills, we find that pages 72 and 73 of the paper book are two invoices for Rs. 66,000/- and Rs. 20,400/- in respect of 110 pieces of pressure cookers and 120 pieces of gift bags. In view of the fact that complete details in respect of Diwali expenses are available and further there is no otherwise disability on such deduction, we find no reason to make or sustain any disallowance in this regard. This ground is allowed.
15. The next ground is against the ad hoc disallowance of expenses @ 10% on account of personal nature. The assessee claimed deduction for several expenses including Entertainment, Conveyance and Telephone expenses. Considering the personal element in such expenses, the AO disallowed 10% and added the same to the total income. The ld. CIT(A) affirmed the view taken by the AO.
16. Having heard both the sides on this point and perused the relevant material on record, we do not find any reason to disturb the finding of the authorities below in making and sustaining the disallowance @ 10% of these expenses towards personal use. This disallowance, being reasonable, is upheld.
17. The last ground is against the confirmation of disallowance of Rs. 1,111/- towards payment of contribution to ESI. The assessee late deposited the employees’ share of ESI for the month of June, 2008. Considering the provision of section 43B read with section 2(24)(x) and 36(i)(va), the AO made the disallowance, which was upheld in the first appeal.
18. We have heard both the sides on this point and perused the relevant material on record. There is no doubt on the fact that the employees’ share of ESI relating to the month of June, 2008 was deposited within the year though beyond the due date under the respective Act. The Hon’ble jurisdictional High Court in CIT vs. Aimil Ltd. & Others, 321 ITR 508 (Del), has held that if the employees’ share of contribution is paid before the due date of filing the return u/s 139(1) of the Act, then, no disallowance can be made. In view of the foregoing decision, which is squarely applicable to the facts of the instant case, we hold that the assessee deserves and is hereby allowed relief on this issue. This ground is allowed.
19. In the result, the appeal is partly allowed.
The order pronounced in the open court on 07.01.2015.