Super Tannery Ltd., Kanpur vs Assessee

M/s Super Tannery Ltd., Vs JCIT (OSD)/DCIT-VI, 187/170, Jajmau, Kanpur. Kanpur. PAN:AAICS1142C (Appellant) (Respondent)

Appellant by Shri P. K. Kapoor, C.A. Respondent by Shri Amit Nigam, D. R. Date of hearing 17/06/2015 Date of pronouncement 17/07/2015

ORDER PER A. K. GARODIA, A.M.

This is assessee's appeal directed against the order passed by learned CIT(A)-I, Kanpur dated 13/09/2015 for the assessment year 2009-2010.

2. Ground No. 1 & 2 are inter-connected, which are as under:

"1. BECAUSE the "CIT(A)" has erred in law and on facts in upholding disallowance of appellant's claim for deduction under section 80 IB amounting to Rs.1,26,12,083/-, caused by exclusion of "duty drawback" from computation of "eligible profit"

by observing/holding that "The question whether the duty drawback is an incidental profit or a profit of the first degree depends on the business model followed by the assessee. In the present case Dharam Pal Premchand 317 ITR 353 (Del) is not applicable and the case is squarely covered by Liberty India 317 ITR 218 (SC)".

2. BECAUSE the "CIT(A)", on the facts and circumstances of the present case should have held that the controversy deserved to decided in favour of the appellant by referring to:

2 (a) earlier decision of Hon'ble Apex Court in the case of B. Desraj vs. CIT reported in (2008) 301 ITR 439 read with Circulars no.564 dated 05.07.1990 and 571 dated 01.08.1990 (as has been referred to in the said judgment);

and

(b) subsequent decision of Hon'ble Apex Court itself in the case of Topman Exports Vs. ITO reported in (2012) 342 ITR 49 (SC).

as per the detailed analysis given in Annexure - I hereto."

3. Learned A.R. of the assessee reiterated the same contentions which were raised before learned CIT(A). He also placed reliance on the judgment of Hon'ble Delhi High Court rendered in the case of CIT vs. Dharam Pal Prem Chand Ltd. [2009] 317 ITR 353 (Del). He also placed reliance on a synopsis on the term "derived from" in the context of section 80IB of the Act, which is available on pages 116 to 127 of the paper book.

4. Learned D. R. of the Revenue supported the orders of the authorities below. He also submitted that the issue is covered against the assessee by the judgment of Hon'ble Apex Court rendered in the case of Liberty India vs. CIT [2009] 317 ITR 218 (SC).

5. We have considered the rival submissions. We find that the issue regarding allowability of deduction u/s 80IB in respect of export incentive such as Duty Drawback is covered against the assessee by the judgment of Hon'ble Apex Court rendered in the case of Liberty India (supra). Now Learned A.R. of the assessee has placed reliance on a judgment of Hon'ble Delhi High Court rendered in the case of Dharam Pal Prem Chand Ltd. (supra). In this case, the issue was regarding Excise Duty refund and not any export incentive such as Duty Drawback as in the present case. As per the facts noted by Hon'ble Delhi High Court in that case, the assessee was entitled to exemption from Excise Duty but the procedure for claiming exemption was that the assessee would first clear the goods from its bonded 3

warehouse by paying the excise duty and, thereafter, the assessee would claim refund of excise duty on the seventh day of the succeeding month in which clearance had been made. The net result was that in the first instance, Excise Duty was paid by the assessee while clearing the goods, from the bonded warehouse which was subsequently refunded in the succeeding month. Under these facts, it was noted by the Tribunal in that case that what was paid by the assessee in consonance with the modalities provided for claiming exemption of Excise Duty was refunded to the assessee and had resulted into no profit and therefore, it was held that no part of the refund of Excise Duty was to be reduced from the profit of the assessee company in that case for the purpose of claiming deduction u/s 80IB of the Act. In the case of Liberty India (supra) also, the basis of decision of Hon'ble Apex Court is that as per section 75 of the Customs Act, 1962 and Section 37 of Central Excise Act, 1944, Government of India is empowered to provide for repayment of customs duty and excise duty paid by an assessee but the refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export of goods of specified class and the Rules do not envisage a refund of an amount arithmetically equal to customs duty or Central excise duty actually paid by an individual importer-cum-manufacturer. It is also noted by Hon'ble Apex Court that Sub-section (2) of section 75 of the Customs Act requires the amount of drawback to be determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported. Hence, in a case where the refund of Excise Duty is not arithmetically equal to customs duty or Central excise duty actually paid by the assessee, it amounts to export incentive, which is not derived from industrial undertaking as per this judgment of Hon'ble Apex Court in the case of Liberty India (supra) and therefore, deduction u/s 80IB is not allowable with regard to this income but in the case of Dharam Pal Premchand (supra), the facts were 4

different because in that case, the exact amount of Excise Duty paid by the assessee was refunded to the assessee and therefore, this judgment of Hon'ble Delhi High Court is not applicable in the facts of the present case because in the present case, it is not the claim of the assessee that exact amount of duty by the assessee has been refunded to it. Therefore, in the present case, in our humble opinion, the judgment of Hon'ble Apex Court rendered in the case of Liberty India (supra), is applicable and not the judgment of Hon'ble Delhi High Court in the case of Dharam Pal Premchand (supra).

6. Regarding the synopsis on the term "derived from" as available on pages 116 to 127 of the paper book, we find that as per this synopsis, the assessee has placed reliance on a judgment of Hon'ble apex Court rendered in the case of B. Desraj vs. CIT [2008] 301 ITR 439 and other judgment of Hon'ble Apex Court rendered in the case of Topman Exports vs. CIT [2012] 342 ITR 49 (SC). We examine the applicability of both these judgments in the present case. We find that both these judgments are in the context of allowability of deduction u/s 80HHC and not 80IB of the Act. It is observed by Hon'ble Apex Court on page No. 442 of 301 ITR that the formula of deduction prescribed in section 80HHC itself shows that the business profits includes export incentives and this formula is also indicated in the circular referred to in this case issued by the Central Board of Direct Taxes and on this basis, it was held that the words business profit in the formula prescribed u/s 80HHC would include cash compensatory allowance or Duty Drawback and therefore, the Assessing Officer should work out the deduction u/s 80HHC in accordance with the law but for the purpose of 80IB, the requirement is different and only that income, which is derived from industrial undertaking, is allowable u/s 80IB. Hence, both these judgments of Hon'ble Apex Court referred to by the assessee in the synopsis are not applicable in the present case.

5 7. It is also stated in the synopsis that as per the judgment of Hon'ble Apex Court rendered in the case of Topman Exports (supra), it was held that the face value of DEPB is related to export business as it is given by Government to neutralize the cost of imports. It is also stated in the synopsis that subsequent sale of such DEPB constitute different business and excess as adjustment thereof is of business wholly not connected with the export business. It is stated that both the profits are profit derived from business of industrial undertaking eligible for deduction u/s 80IB of the Act. We find no merit in these contentions because as per the judgment of Hon'ble Apex Court in Liberty India (supra), export incentive in any form is not an income derived from industrial undertaking and these judgments of Hon'ble Apex Court in context of deduction u/s 80HHC cannot help the assessee in a case where the dispute is with regard to allowability of deduction u/s 80IB because the allowability of deduction u/s 80IB in respect of export incentive is squarely and directly covered against the assessee by the judgment of Hon'ble Apex Court in Liberty India (supra) and therefore, there is no merit in the synopsis filed by the assessee as available on 116 to 127 of the paper book. As per above discussion, we have seen that this issue is covered against the assessee by the judgment of Hon'ble Apex Court rendered in the case of Liberty India (supra) and therefore, we do not find any reason to interfere in the order of CIT(A) on this issue. Accordingly ground No. 1 & 2 are rejected.

8. Ground No. 3 is as under:

"3. BECUAE the "CIT(A)" has erred in law and on facts in upholding the disallowance of Rs.7,37,928/- out of expenditure claimed, by invoking the provisions of section 14A of the Act."

9. It was submitted by Learned A.R. of the assessee that no borrowed fund was used for making investment in shares and therefore, no disallowance is justified u/s 14A out of interest expenditure. He also drawn 6

our attention to page 24 of the paper book which contains the balance sheet of the assessee and it was pointed out that the shareholders fund was to the extent of Rs.4,472 lacs at the end of the year whereas the investment was only Rs.186.75 lac. He also submitted that the list of investment in share is available on page 28 of the paper book, which includes investment in foreign company also i.e. Rs.1,55,043/- in Super Tannery (U.K.) Ltd. and Safety Solutions S.R.O. Rs.4,42,755/-. He submitted that the income from foreign company is taxable and therefore, investment in these shares should not be considered for making disallowance u/s 14A of the Act.

10. Learned D. R. of the Revenue supported the orders of the authorities below.

11. We have considered the rival submissions. We find that as per page 6 of the assessment order, the Assessing Officer has added the total investment in share of Rs.1,86,74,948/- as on 31/03/2009 for working out the disallowance. Admittedly, this investment amount includes two investments in foreign subsidiaries of Rs.1,55,043/- and Rs.4,42,755/- as on 31/03/2009 and since the dividend income from these two investments is not exempt, this investment should not be included in the amount of investment for the purpose of making disallowance u/s 14A of the Act. To this extent, we find force in the contentions of Learned A.R. of the assessee and direct the Assessing Officer to recompute the disallowance u/s 14A of the Act after excluding the amount of investment in foreign subsidiaries.

12. Regarding this contention of Learned A.R. of the assessee that borrowed fund was not used for making investment in share because there is sufficient own funds of the assessee company, we find that as per the provision of section 14A of the Act and Rule 8D, if mixed funds are used by the assessee for making investment in share then the formula is prescribed for making proportionate disallowance and this formula has to be applied if the assessee is not in a position to establish the direct nexus of entire 7

borrowed funds with earning of taxable income. In the present case, we find that on page No. 24 of the paper book is a secured loan of Rs.7,513.58 lac. The details of this loan are available on page No. 26 of the paper book, which includes cash credit, packing credit and advance against bills under collection Rs.73.07 lac, Rs.6,637.92 lac and Rs.338.62 lac respectively. In respect of these loans, it cannot be said that no part of these loans was used for making investment in shares because overall availability of own funds is different thing and the availability of own fund at the time of making investment in share is altogether different thing and if the assessee does not establish that on the date of making investment in share, own fund was available, it has to be accepted that mixed funds were used for making investment in share and as a consequence, disallowance u/s 14A as per formula prescribed in Rule 8D has to be made. We direct the Assessing Officer to recompute the disallowance after excluding the amount of investment in foreign subsidiaries. Accordingly, this ground of the assessee is allowed for statistical purposes.

13. Ground No. 4 & 5 are general, which do not call for any separate adjudication.

14. In the result, the appeal of the assessee stands allowed partly for statistical purposes.

(Order was pronounced in the open court on the date mentioned on the caption page)

Sd/. Sd/.

(SUNIL KUMAR YADAV) ( A. K. GARODIA ) Judicial Member Accountant Member

Dated:17/07/2015 *C.L.Singh

Copy of the order forwarded to : 1.The Appellant 2.The Respondent. 3.Concerned CIT 4.The CIT(A) 5.D.R., I.T.A.T., Lucknow Asstt. Registrar