Assessee was eligible 100% deduction when substantial expansion was made in 10th year tax holiday: ITAT

The assessee firm is engaged in manufacturing printed embossed book binding cover material made of cotton and fibre. The assessee claimed deduction under section 80IC to the extent of 100% of the eligible profits for the five years period starting from A.Y. 2006-07 to 2010-11. After assessment proceedings, the AO denied the assessee’s claim of substantial expansion and the assessee was allowed to claim deduction under section 80IC to the tune of 25% of eligible profits for the impugned assessment year as the benefit of substantial expansion is available only to the existing and operational units.

Appeal before CIT(A): Being aggrieved, the assessee carried the matter in appeal before the ld. CIT (A). The ld. CIT(A) decided the issue against the assessee.

Appeal before ITAT: Against the decision of the ld. CIT (A), the assessee appealed before the tribunal. The tribunal applied the legal proposition laid down in the case of PCIT vs Aarham Softronics that an error has occurred in the said decision wherein the definition of “initial assessment year” as contained in section 80IC(8)(v) has not been considered. It was held that the assessee had carried out substantial expansion in the financial year 2011-12 and the year under consideration being the 10th year of the claim of tax holiday, it was eligible for claim of deduction at 100% and not 25% of profits and gains. Hence, the findings of the ld CIT(A) were set-aside and the matter was decided in favour of the assessee.

With regards to the disallowance of claim of deduction under section 80-IC on account of exchange rate fluctuation. In support reliance was placed on the Coordinate Chandigarh Bench decision in the case of DCIT vs. Ansysco, 184 TTJ 1 (Chd) wherein it was held that where the foreign exchange fluctuations relate to the export activity carried out by the assessee, the foreign exchange fluctuations are to be treated as trading receipts/receipts from manufacturing activity and which is eligible for claiming deduction under section 80-IC of the Act. Regarding the disallowance of expenditure amounting to Rs. 6,53,907, it was observed that assessee has been allowed at 100% instead of 25% u/s 80IC of the Act, the profits so enhanced and adjusted taking into consideration the disallowance will be eligible for 100% tax holiday and thus, the assessee shall be eligible for relief. Therefore, the ground of appeal was allowed.