Internal transfers between two EOUs are exempt under Section 10B

Fact and issue of the case

These cross appeals by the assessee and the Revenue are against the order of the Commissioner of Income-tax (Appeals)-1, Mumbai dated 01/03/2011 for A.Y. 2001-02.

The assessee is a company engaged in the manufacture, trading and marketing (including export) of fast moving consumer goods (FMC goods). For the year under consideration, the assessee filed a return of income on 31/10/2001 declaring a total income of Rs.830,19,95,740/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. The Assessing Officer completed the assessment assessing the income at Rs.948,46,19,890/- after making various disallowances / additions. Aggrieved, the assessee filed further appeal before the CIT(A) in which the CIT(A) gave partial relief. Against the order of the CIT(A) both the assessee and the Revenue are in appeal before the Tribunal raising various grounds contending the following issues:-

Assessee

(1) Disallowance of travelling expenditure relating to foreign travel in respect of spouses who accompanied some of the company employees or official tour.(Ground 1)

(2) Deduction under section 80I / 80IB (Grounds 2 – 2.1 to 2.3)

(3) Allocation of expenditure to individual units in respect of deduction u/s 80IB (Ground 3)

(4) Deduction under section 80IB in respect of tea unit at Dharwad (Ground 4 – 4.1 to 4.2)

(5) Allocating research expenses whilst determining the profits and gains derived from industrial undertaking eligible for deduction u/s 80IB (Ground 5- 5.1)

(6) Allocating interest expenses whilst determining the profits and gains derived from industrial undertaking eligible for deduction u/ 80IB. (Ground 6- 6.1)

(7) Deduction under section 80HHC – scrap sales / sale of miscellaneous products is required to be included in total turnover for the purpose of computing deduction under sec 80HHC (Ground 7- 7.1)

(8) Excluding 90% certain incomes for the purpose of allowing deduction u/s 80HHC (Ground 8- 8.1 & 8.2)

(9) Unrealised sales proceeds till 30.09.2001 reduced from turnover (Ground 9- 9.1)

(10) Loss on export of traded goods to be reduced from profits for the purpose of computing deduction under section 80HHC (Ground 10 – 10.1 to 10.3)

(11) Provision for retirement pension payable to the employees(Ground 11)

(12) Increasing value of closing stock of raw materials and packing materials unutilized balance of Modvat as on 31.03.2001 (Ground12) (13) Reduction in exemption u/s 10B in respect of miscellaneous income. (Ground 13 – 13.1)

(14) Disallowance of exemption u/s 10B in respect of internal transfer included in sales (Grounds 14 – 14.1)

(15) Treatment of legal cost incurred in respect of merger of erstwhile Industrial Perfumes Limited as capital expenditure (Grounds 15 – 15.1)

(16) Disallowance of capital expenditure on Scientific research incurred at Hyderabad (Grounds 16 – 16.1)

(17) Claim of cess on green leaf (Ground 17 – 1 to 17.3)

Revenue

(1) Deleting addition of Rs.65,92,482 towards Membership Fees and Entrance to Club (Ground 1)

(2) Deleting disallowance of Rs.38,92,129 towards rural development activities.(Ground 2)

(3) Restoring the 14A disallowance to AO and directing to re-compute the disallowance as per immediate preceding year.(Ground 3)

(4) Allowing the claim of deduction u/s 10B for Pune and Kidderpore Units.(Grounds 4 – 4.1)

I.T.A. No.5431/Mum/2011 –

Assessee’s appeal Disallowance of travelling expenditure – Ground 1 3. This ground pertains to disallowance of travelling expenditure relating to foreign travel in respect of spouses who accompanied some of the company employees or official tour. The assessee debited a sum of Rs.41,35,481/- on account of foreign travel expenses of spouses of employees of the company and claimed it under the head „travelling and motor car expenses’. The assessee submitted before the authorities below that the spouses have to sometime accompany the senior executives who were sent abroad to international educational institutions or to attend seminars or to work in Unilever companies on temporary posts abroad. The assessee, therefore, argued that expenses are incurred for the purposes of business and hence allowable. The Assessing Officer, however, did not agree with the same and relying on earlier year’s order disallowed the claim. On appeal, the Ld CIT(A), upheld the finding of the Assessing Officer, with regard to the disallowance. Further aggrieved, the assessee is in appeal before the Tribunal. 4. Before us, the Ld.AR for the assessee submitted that the issue stands decided in favour of the assessee by the Tribunal in assessee’s own case for A.Y. 2000-01 in ITA Nos.3951/Mum/2008 & 4033/Mum/2008 vide order dated 16/05/2023. The Ld. DR relied on the order of the lower authorities.

We heard the rival submissions, we find that the Tribunal in assessee‟s own case for A.Y. 2000-01 (supra) has considered the identical issue and decided the issue in favour of the assessee by holding that :-

During the course of appellate proceedings before us the ld. Counsel contended that such foreign travelling expenses is covered in favour of the assesse vide order of the ITAT, Mumbai in the case of assessee itself for assessment year 1998-99. He also referred the decision of Hon’ble Bombay High Court in the case of CIT Vs. Alfa Laval (I) Ltd. (2015) 149 taxman.com 29 (Bom) dated 15.07.2015. On the other hand, the ld. D.R supported the order of lower authorities.

With the assistance of ld. Representative we have perused the decision of ITAT vide ITA No. 2031/Mum/2004 for assessment year 1998-99 wherein the identical issue on similar fact has been adjudicated in favour of the assessee after referring the decision of the coordinate benches of the Tribunal in assesse‟s own case for assessment year 1985-86 to assessment year 1997-98. Consistent with the view taken by the coordinate bench as referred above we allow the ground of appeal of the assessee.”

Observation of the court

We heard the rival submissions. During the course of hearing the ld AR drew our attention to the submission made before the Assessing Officer (Annexure C to letter dated 20.12.2003) to substantiate that own funds of the assessee are more than the investments. On perusal of the same we notice that own funds of the assessee as at 31.03.2001 stands at Rs. 2,042.06 crores and dividend earning investments stands at Rs.332 crores. Therefore we see merit in the contention that no disallowance is warranted towards borrowing cost. With regard to disallowance of indirect expenses we notice that in A.Y. 2000-01, the co-ordinate bench of the Tribunal considered an identical issue and held that an amount of 0.5% on the income claimed as exempt would be reasonable to consider as expenditure incurred for earning exempt income under section 14A. The facts and circumstances for the year under consideration being identical, we direct the Assessing Officer to work out the disallowances at 0.5% of the income claimed exempt. This ground contended by the assessee is partly allowed.

Allowing deduction under section 10B for Pune & Kidderpur units – Ground No. 4 69.

The assessee had acquired the tea export business of Lipton India Exports Ltd (LIEL) with effect from 01/04/2000. Business comprised of certain industrial undertaking which included EOUs at Pune and Kidderpur which commenced the commercial production in financial years 1992-93 and 1997-98, respectively. LIEL had claimed exemption under section 10B in respect of profits derived by these EOUs. After the acquisition of business by the assessee, the assessee claimed exemption under section 10B with respect to these EOUs for the unexpired period. The Assessing Officer held that the assessee cannot claim exemption under section 10B with respect to these units as per the Explanation to sub section (9) which is inserted to section 10B Inserted by the Finance Act, 2001, w.e.f. 1-4-2001. The assessee preferred further appeal before the CIT(A). The CIT(A) allowed the claim of the assessee on the ground that Explanation to sub section (9) of section 10B provides that the section is not applicable to companies in which public are substantially interested. Since the assessee as well as LIEL are companies in which public are substantially interested, the CIT(A) held that the Assessing Officer has incorrectly applied the provisions of section 10B(9).

In this regard, the Ld.AR submitted that sub section (9) is omitted by the Finance Act, 2003 without any saving clause and, therefore, the disallowance made by the Assessing Officer by invoking sub section (9) is no longer valid. The Ld.AR submitted that when a section is omitted without any saving clause, then it has to be taken that the section never existed and accordingly, the disallowance made is not tenable. The Ld.AR in this regard relied on the decision of the Hon’ble Karnataka High Court in the case of GE Thermometrics India Pvt. Ltd (ITA No.876 of 2008 C/W ITA No.877 of 2008) judgement dated 25th November, 2014 for A.Y. 2002-03. The Ld.AR submitted that in the above decision, the Hon’ble Karnataka High Court has held that sub section (9) of section 10B is not applicable to the assessee for A.Y. 2002-03 which is prior to the Finance Act, 2003 which omitted the said sub section (9). The Ld.AR therefore submitted that in assessee’s case for A.Y. 2001-02, the ratio laid down by the Hon’ble Karnataka High Court is squarely applicable.

The Ld.DR, on the other hand, submitted that the CIT(A) is not correct in deleting the disallowance and supported the order of the AO.

We heard the parties and perused the material on record. We notice that the Hon’ble Karnataka High Court in the case of GE Thermometrics India Pvt. Ltd (supra) has considered a similar issue in which the question of law raised and the decision of the Hon’ble High Court is as extracted below-

“Whether the Tribunal was correct in holding that in view of the omission of sub section (9) to Section 10B of the Act, w.e.f. 01.04.2004, it should be understood that the said section never existed in the statute book and therefore the benefit claimed by the assessee u/s 10B should be allowed?”

Admittedly, in the instant case, there is no saving clause or provision introduced by way of an amendment while omitting nub-section (9) of Section 10B. Therefore, once the aforesaid section is omitted from the statute book, the result is it had never been passed and be considered as a law that never exists and therefore, when the assessment orders were passed in 2006, the Assessing Officer was not justified in taking note of a provision which was not in the statute book and denying benefit to the assessee. The whole object of such omission is to extend the benefit under Section 10B of the Act irrespective of the fact whether during the period to which they are entitled to the benefit, the ownership continues with the original assessee or it is transferred to another person. Benefit is to the undertaking and not to the person who is running the business. We do not see any merit in these appeals. The substantial question of law is answered in favour of the assessee and against the revnue. Accordingly, the appeals are dismissed.”

Respectfully following the above decision of the Hon’ble Karnataka High Court, we hold that the assessee is entitled for claiming deduction with respect to the EOUs acquired from LIEL for the unexpired period since sub section (9) is omitted without saving clause, and therefore, is not applicable in assessee’s case. Even otherwise, Explanation (1) to sub section (9) of section 10B states that the sub-section is not applicable to companies in which public are substantially interested. The assessee and LIEL being companies in which public are substantially interested, the Assessing Officer is not correct in making the disallowance by applying sub section (9) of section 10B. This ground of the Revenue is dismissed.

In the result, both the appeal of the assessee and the revenue are partly allowed.

Order pronounced in the open court on 18/08/2023.