Unicorn Natural Products Limited, ... vs Assessee

This is an appeal preferred by the assessee against the order of the ld CIT (A)-II Hyderabad, dated 13.10.2014 relating to A.Y 2010-11.

2. Briefly stated, the assessee is engaged in the business of manufacture, trading and export of natural products. Assessee filed its return of income for A.Y 2010-11 on 12.10.2010 admitting income of Rs.48,85,370. The scrutiny assessment was completed. While deducting the deduction u/s 10(B), the AO followed the following principle:

Profits of the export unit x Turnover of the export unit Turnover of EOU Unit + Trading Unit turnover

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3. Aggrieved the assessee filed appeal before the CIT (A) and submitted that while computing deduction u/s 10(B) where the consolidated profits and total turnover of both the Units i.e. EOU and Trading Divisions are to be considered, only the profits and turnover of the EOU are to be considered. The ld Counsel for the assessee submitted the figures pertaining to both the Units as per the annual reports as under:

Description EOU Unit Trading Unit Total Turnover 7,95,41,956 6,83,84,266 14,79,26,222 Profits 52,35,364 41,20,029 93,55,393 (profit as per 56G of Rs.51,02,162)

4. It was further submitted by the ld Counsel that the assessee has two units, one is a manufacturing unit and the other is a trading unit. The EOU is engaged in the business of processing and exports of herbs, whereas the trading unit is engaged in the business of purchase and sale of herbs, without processing. Separate accounts are maintained for both units, separate final accounts in the form of balance sheet and profit and loss account and separate audit report was prepared for both the units. In addition consolidated audit report was also prepared.

The ld Counsel for the assessee's contention was that the deduction u/s 10B is to be computed as under:

Profits of the EOU Unit x Export Turnover of EOU Unit Exports + Domestic Turnover of EOU Unit

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5. The ld CIT (A) held as under:

"The CBDT vide Circular No.7 dated 16.07.2013 clarified the issue as under:

5. From the above it is evident that irrespective of their continued placement in Chapter III, section 10A and 10B as substituted by Finance Act, 2000 provide for deduction of the profits and gains derived from the export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such article or thing or computer software. The deduction is to be allowed from the total income of the assessee. The term 'total income' has been defined in section 2 (45) of the IT Act and it means the total amount of income referred to in section 5, computed in the manner laid down in the Income-tax Act.

5.1 All income for the purposes of computation of total income is to be classified under the following heads of income and computed in accordance with the provisions of Chapter IV of the Act-

• Salaries • Income from house property • Profits and gains of business and profession • Capital gains • Income from other sources

5.2 The income computed under various heads of income in accordance with the provisions of Chapter IV of the IT Act shall be aggregated in accordance with the provisions of Chapter VI of the IT Act, 1961. This means that first the income/loss from various sources i.e. eligible and ineligible units, under the same head are aggregated in accordance with the provisions of section 70 of the Act. Thereafter, the income from one ahead is aggregated with the income or loss of the other head in accordance with the provisions of section 71 of the Act. If after giving effect to the provisions of section 70 and

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71 of the Act there is any income (where there is no brought forward loss to be set off in accordance with the provisions of section 72 of the Act) and the same is eligible for deduction in accordance with the provisions of Chapter VI-A or section 10A, 10B etc. of the Act, the same shall be allowed in computing the total income of the assessee".

Therefore, the principle adopted by the AO is correct. Keeping in view the above directions, the AO is directed to recomputed the deduction u/s 10B.

5. In the result the appeal is partly allowed".

6. Aggrieved, assessee is in appeal before us. The ld Counsel for the assessee submitted before us that the CIT (A) has not appreciated, that the ld AO has incorrectly added the non EOU turnover for the purpose of total turnover for 10B purposes. This is even though the company has maintained and submitted separate set of audited accounts for the export unit, non export trading activity and consolidated accounts for the entire entity. The ld Counsel for the assessee also submitted that the CIT (A) has evolved a completely new method of calculating the deduction u/s 10B. The correct way to calculate the deduction u/s 10B is by considering the division-wise profits and the profits attributable to exports. This is also supported by various judicial decisions.

7. Assessee also relied on the decisions of the Madras High Court in the case of M/s Ventura Metal Products (P) Ltd Chennai vs. DCIT Circle III(4) Chennai (Tax Case Appeal No.749 of 2013) and in the case of M/s Sandoz (P) Ltd Mumbai vs. DCIT Circle 7(1) Mumbai (ITAT Mumbai 'K' Bench) in ITA No.6922/Mum/2012 dated 05.04.2013.

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8. We heard both the parties. Section 10B states as follows:

"10B (1). Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee:

Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the period of aforesaid ten consecutive assessment years".

9. The company has maintained and submitted separate set of audited accounts for the export unit, non export trading activity and consolidated accounts for the entire entity, whereas we find that the AO has not taken into account and has got confused between the total turnover of the business and total turnover of the undertaking. The CIT (A) also confirmed the same. We find that in the proviso to section 10B refers to computation of total income of "Undertaking". Further, the proviso states that the undertaking shall be entitled to deduction referred to the sub-section only for the unexplained part of the aforesaid ten consecutive assessment years. Hence we set aside the issue to the AO to compute deduction u/s 10B according to

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the proviso to section 10B after giving a reasonable opportunity to the assessee.

10. In the result, appeal is allowed for statistical purposes.

Order pronounced in the Open Court on 17th June,2015.

Sd/- Sd/- (B. Ramakotaiah) (Asha Vijayaraghavan) Accountant Member Judicial Member

Hyderabad, dated 17th 2015.

Vnodan/sps Copy to:

1. Unicorn Natural Products Ltd, Unicorn House No.3 Balaji Enclave, Diamond Point, Secunderabad

2. Dy. Commissioner of Income Tax, Circle 3(3) Hyderabad

3. CIT(A) -II Hyderabad

4. CIT -III Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File

By Order

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