IN THE ITAT MUMBAI BENCH ‘C’
Capital Foods Exports (P.) Ltd.
Assistant Commissioner of Income-tax
IT Appeal No. 5137 (Mum.) of 2010
[Assessment year 2007-08]
August 8, 2012
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Rajendra Singh, Accountant Member
This appeal by the assessee is directed against the order dated 16.4.2010 of CIT(A) for the assessment year 2007-08. The assessee has raised disputes on two different grounds which relate to disallowance of deduction under section 10A and disallowance of depreciation.
2. We first take up the issue relating to deduction under section 10A of the Income tax Act. The assessee was engaged in the business of manufacturing and export of processed food products. The assessee claimed deduction under section 10A in respect of export of products. The AO noted that there were three remittances of the export proceeds with aggregate value of Rs. 14,78,565/- which had not been received within the stipulated period of six months in India in convertible foreign exchange as required under law. The assessee submitted that the buyer Raja Foods Chicago had sent the remittances which were not traceable by bankers. The assessee was in regular touch with the bankers to trace the payment received. Since the remittances had been received in India, assessee should be allowed deduction under section 10A in relation to said remittances. The AO however observed that the assessee provided no concrete proof to substantiate that the remittances had been received in India. He, therefore, disallowed the claim and added the sum of Rs. 14,78,565/-to the total income as unrealized debts.
2.1 The assessee disputed the decision of AO and submitted before CIT(A) that remittances had been received but could not be credited to the assessee’s bank account as the same were not traceable by the bankers. The assessee had not applied for extension beyond the period of six months as provided under section 10A(3) as remittance had been received. It was accordingly urged that the claim should be allowed. Alternatively it was submitted that deduction under section 10A is limited to net profit from export proceeds and not on entire sale proceeds and, therefore, it was submitted that the disallowance should be limited to 8% of the invoice amount being estimated profit. CIT(A) however, did not accept the contentions raised. It was observed by him that copy of the certificate submitted by the assessee from SBI did not prove that the amount had been credited to the account of the assessee. Therefore, the claim could not be allowed under section 10A. CIT(A) also rejected the alternate claim of disallowance of only net profit @ 8% on the ground that the assessee had already claimed the entire expenses in the P&L Account. CIT(A) confirmed the order of AO aggrieved by which assessee is in appeal before the Tribunal.
2.2 Before us the ld. AR reiterated the submissions made before lower authorities that the remittances had been received by the bankers in India and, therefore, the statutory requirement was fulfilled and claim should be allowed. He referred to the copy of certificate dated 24.1.2012 issued by SBI to point out that DD issued by foreign party was dated 13.11.2006 which had been received by bankers and therefore, claim should be allowed. He, also reiterated the alternate claim that disallowance if any should be limited to net profit from the remittances and not the entire remittances.
2.3 The ld. DR on the other hand submitted that bank certificate did not prove that the remittances had been credited in the account of the banker and, therefore it could not be said that the remittances had been received in India in convertible foreign exchange. He also supported the orders of authorities below for adding the entire amount as assessee had already claimed all expenses relating thereto in the P&L Account.
2.4 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of deduction under section 10A in relation to export proceeds aggregating to Rs. 14,78,565/- on the ground that the same had not been received in convertible foreign exchange in India within a period of six months as stipulated under the statutory provisions. Section 10A allows exemption of profit and gain derived from export of certain articles or things and computer software. Sub section(4) of section 10 provides that profit derived from export of articles or things shall be the profit of the business of the undertaking in the ratio of export turnover to total turnover. Export turnover has been defined in Explanation-2 to section 10A as consideration in respect of export of article or things received by the assessee or brought into India in convertible foreign exchange. Therefore, if certain export proceeds have not been received in or brought in India in convertible foreign exchange within a period of six months or within such period as extended by the competent authority under sub section-3, such receipts shall not form part of export turnover. In the present case, the case of the assessee is that the foreign remittances had been sent by the foreign buyer to the banker who misplaced the same and, therefore, since remittances were received in India, claim of deduction should be allowed. In our view unless the foreign remittances are credited in the account of assessee or at least credited in the account of the bank, it can not be said that the export proceeds have been received in or brought into India. The assessee has placed on record a certificate dated 24.1.2012 from State Bank of India which only states that the proceeds of the foreign remittances had been credited to the account of the assessee on 20.1.2011. The certificate does not even state that the foreign remittances had been credited in the account of the Bank within the period of six months so that it could be considered as having brought into India. Thus export proceeds to that extent had not been received in or brought in India within a period of six months. This period had not been extended by the authorities as assessee had not applied for any such extension. Therefore, such export proceeds have to be excluded from export turnover, while computing deduction under section 10A. However, these have to be considered as part of total turnover as the assessee was following mercantile system of accounting. It is not clear whether these remittances have been included in the total turnover in the P&L account. We, therefore, direct the AO to re-compute deduction under section 10A by including the said remittances in the total turnover and by excluding the same from export turnover and excess claim if any will be disallowed. The profit of business will be computed excluding the remittances in the total turnover. This will also take care of the alternate claim of the assessee
3. The second dispute is regarding disallowance of depreciation on plant and machinery. The assessee had received grant from Ministry of Food Processing Industries totaling Rs.49,00 lacs. 50% of which i.e. Rs. 24,54,000/- was received on 12.1.2007 and balance 50% on 19.3.2008 in the next year. Since the assessee had received subsidy the AO reduced depreciation corresponding to the subsidiary account @ 15% amounting to Rs. 7,35,000/-. The assessee disputed the decision of the AO and submitted before CIT(A) that though 50% of subsidy had been received in the next year the assessee had made provision for the entire amount in this assessment year. Assessee referred to the Accounting Standard-12 issued by ICAI as per which only capital subsidy received relating to specific assets is required to be reduced from the assets and no general subsidy. It was pointed out that the assessee had not received subsidy towards any specific asset and, therefore, the same could not be reduced from the asset. CIT(A) noted from the letter dated 22.12.2006 of Ministry of Food Processing Industry that capital subsidy had been given for setting of unit for ready-to-eat foods at Gandhidham, Gujarat. CIT(A) also observed that the entire amount was paid towards plant and machinery and not towards any civil work. He, therefore, confirmed the disallowance made by AO, aggrieved by which assessee is in appeal before the Tribunal.
3.1 Before us ld. AR for the assessee reiterated the submissions made before the lower authorities that the subsidy granted was a general subsidy and the same could not be reduced from the cost of assets. The ld. DR on the other hand placed reliance on the orders of authorities below.
3.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding treatment of subsidy received by the assessee from the Government in the computation of depreciation on plant and machinery. The AO reduced the subsidy amount from the cost of plant and machinery and accordingly depreciation was disallowed to that extent. CIT(A) confirmed the order of AO. On careful perusal of record we find that there is nothing on record to show that subsidy had been granted by the govt. towards any specific asset or plant and machinery. The letter dated 22.12.2006 referred to by the ld. CIT(A) only shows that subsidy was for setting up of a unit for manufacture of ready to eat foods. The letter does not show that the subsidy had been given specifically to acquire any asset. Therefore, merely because amount received had been utilized for acquisition of plant and machinery, it can not be said that subsidy was to meet cost of any asset. It is a settled legal position that only subsidy granted specifically towards a particular asset has to be reduced from cost of that asset while computing depreciation. Since there is no material to show that the subsidy in this case had been granted to meet cost of plant and machinery the disallowance of depreciation corresponding to subsidy can not be upheld. The order of CIT(A) is, therefore, set aside and claim of the assessee is allowed.
4. In the result appeal of the assessee is partly allowed.