Income Tax Appellate Tribunal - Ahmedabad
Jay Chemical Industies Ltd.,, ... vs Assessee on 29 December, 2006
1
IN THE INCOME TAX APPELLATE TRIBUNAL,
C-BENCH, AHMEDABAD.
Before: Shri T.K. Sharma, Judicial Member and
Shri D.C.Agrawal, Accountant Member.
ITA No. 875/Ahd/2007
ITA No. 1177/Ahd/2007
(Assessment Year 2003-2004)
Jay Chemical Industries Ltd. DCIT, Circle 4,
Jay House, Ahmedabad.
Panchvati Circle,
Ambavadi,
Ahmedabad.
DCIT, Circle 4, Versus Jay Chemical Industries Ltd.
Ahmedabad. Jay House,
Panchvati Circle,
Ambavadi,
Ahmedabad.
(Appellant) (Respondent)
PAN: AAACJ 7628 J
For the appellant: Shri Nimish Vayawala, AR
For the respondent Shri
[
Shelly Jindal, CIT DR
ORDER
Per Shri D.C. Agrawal: These are the cross appeals, one filed by the Revenue and other filed by the assessee against the order of the Ld. Commissioner of Income Tax(Appeals) dated 29-12-2006 for the assessment year 2003-2004. The assessee is an exporter, manufacturing and exporting dyes and chemicals. The assessee has raised the ground in respect of deduction under Section 80 HHC on DPB licenses which was denied by the lower authorities. The grounds raised by the assessee are as under:
"1) The learned CIT(A) has erred in disturbing the method of accounting followed by the assessee consistently, only with a view to make Income Tax amendment Act 2005 applicable.2 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007
(Asst. Year 2003-2004)
2) The learned CIT(A) ought to have held that only the profit arising on transfer of DEPB and not the total DEPB receipts shall be disregarded for the purpose of calculation of deduction u/s. 80HHC.
3) The learned CIT(A) ought to have arrived at the profit arising on transfer of DEPB, by arriving at the cost of DEPB on some proper basis and ought not have considered the total sales consideration received on transfer of DEPB as profit arising on transfer of DEPB."
2. We have heard the learned AR and learned DR. Issue is now fully covered by the decision of ITAT, Special Bench in Topman Exports Vs. ITO (2009) 125 TTJ, Mumbai, Special Bench, Ahmedabad in ITA No. 17/A/2007 and ITA No. 619/Ahmedabad/2007 for the assessment years 2004-2005 and 2003-2004 and matter was restored to the file of the Assessing Officer for computing deduction under Section 80HHC in accordance with the judgment in the Topman Exports Case. For the sake of convenience, we reproduce operative part of the judgment as under:
"11. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In our considered view, the issue is squarely covered by the decision of ITAT Mumbai Special Bench in the case of M/s.Topman Exports(supra). For the sake of convenience, we reproduce the operative part of the judgement as under:-
"43. The major controversy before us is to interpret section 28 (iiid) in which the expression "any profit on the transfer Duty Entitlement Pass Book Scheme" has been used. From the facts of the cases under consideration it is noted that the AO treated the entire sale proceeds as covered under section 28(iiid), as against the case of the assessee that only the premium or the profit element on the transfer of DEPB be considered. To put the controversy in simple words, if, for example, the assessee received DEPB worth the face value of Rs.100/- and then sold it for Rs.110/-, the assessee is contending that only a sum of Rs.10/- is to be included under clause (iiid), whereas, the 3 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) Revenue's contention is that the entire amount of Rs.110/- be considered.
44. Thus we have to interpret the word 'profit' as fielded in section 28(iiid). As noted supra section 28 has clauses (i) to (vi). On a careful circumspection of the language of clause (iiib) and (iiie), it is noted that the reference is to the gross sum of cash assistance and duty drawback etc. On the contrary clauses (iiia), (iiid) and (iiie) use the word "profit" on sale/transfer of licence/DEPB/DFRC. From here, it can be easily inferred that the employment of the words "any profit of transfer" in clauses (iiid) and (iiie) of section 28 in contradistinction to the omission of such word profit in clauses (iiib and iiie) is not without any object.
45. The principle rule of interpretation is that meaning is to be given to each and every word in the language of section. No word can be claimed as superfluous. Each comma, full stop or every sign of punctuation has significance. In our considered opinion the need for interpretation with the aid of some external aids of construction of a section arises only when there is some ambiguity in the language of section and the intention of the legislature is not properly conveyed with the words so used. It has been held by the Hon'ble Supreme Court in numerous judgments including the case of Federation of Andhra Pradesh Chambers of Commerce & Industry & Ors Etc. Vs State of Andhra Pradesh & Ors. Etc. Etc. (2001) 165 CTR (SC) 672 (2001) 247 ITR 36 (SC) that the taxing statute has to be strictly construed and nothing can be read in it. Identical view has been taken in the case of Padmasundara Rao (Decd.) & Ors. Vs. State of Tamil Nadu & Ors (2002) 176 CTR (SC) 104 : (2002) 255 ITR 147 (SC) holding that "while interpreting a statute legislative intention must be found in the words used by the legislature". In the like manner it has been reiterated in the case of Commr. Of Agrl, IT vs. Plantation Corporation of Kerala Ltd. (2000) 164 CTR (SC) 502 : (2001) 247 ITR 155 (SC) that : "So long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible".
46. Coming back to the issue under consideration we note that the language of clause (iiid) and (iiie) of section 28 is crystal clear which talks of "any profit on the transfer of DEPB/DFRC. The reference is not to the sale proceeds but to the profit on the transfer of DEPB/DFRC. A line of demarcation needs to be drawn between the provisions in which gross amount is considered and the provisions in which only the profit demerit has been the subject matter of consideration. We need not wander here and there in search of such distinction, which is highlighted from 4 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) section 28 itself . Apart from clauses (iiib) and (iiic) to section 28, clauses (iv) and (vi) also refer to the inclusion of the gross amount, and not the profit element thereon, further the legislature is not oblivious to such distinction between the gross amount and the profit element inasmuch as it has used the appropriate words wherever it intended so. It is amply demonstrated from the language of section 54 which grants deduction from the capital gains by providing that it the amount of capital gain' is greater than the cost of the residential house so purchased or constructed, the differential amount shall be charged under section 45; as against section 54E which provides deduction in respect of long term capital assets by providing that if the cost of the new asset, is not less than the net consideration' in respect of the original asset, the whole of such capital gain shall not be charged under section 45. If we carefully peruse the language of section 54 in juxtaposition to section 54E it can be seen that whereas the former section provides deduction with reference to the investment of the amount of capital gain, the later section grants deduction with reference to the extent of investment of the net consideration and not the capital gain. Thus, it can be visualized that the legislature is not unmindful of the distinction between "sale consideration and 'profit' and has used the appropriate expression to exhibit its intendment. Reverting to the language of (iiid) of section 28 we observe that it refers to any profit on the transfer of DEPB. The words used in the provision indicate that only the profit element on the transfer of DEPB is to be considered under this clause and not the sale proceeds itself. Thus in order to fee covered with the scope of this clause, two things are essential. First, there should be transfer of the DEPB and second, such transfer should result into any profit. Unless both the conditions are cumulatively satisfied, the transaction cannot form part of section 28 (iiid).
47. This leaves us with the determination of the meaning of the word 'profit'. In common dialect the word profit' refers to excess of sale proceeds over the cost of goods. The word profit' has another shade also, which involves a comparison between the state of business at two specific dates and the excess of the value of asset on one date over the other, constitutes profit. Their Lordships of the Hon'ble Supreme Court in E.D. Sassoon & Company (supra) has laid down to this effect.
"The word 'profits' has in my opinion a well defined legal meaning, and this meaning considers with the fundamental conception of profits in general parlance although in mercantile phraseology the word may at lime bear meanings indicated by the special context which deviate in some respects from this 5 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) fundamental signification. 'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates".
48. Going by the concept of comparison of the assets of business on two dates, it can be seen that at the stage of receipt of DEPB on its accrual the face value of Rs.100/- constituted an asset in the hands of the exporter which could be utilized by him in any of the ways open to him. If the exporter chooses to sell the DEPB for Rs. 110 at a subsequent date, then the prevailing market rate at the time of sale, that is Rs. 110 shall represent the value of asset on such date of sale. Accordingly, the difference of Rs 10 between the value of two dates, viz, on the date of its sale (Rs.110/-) and the date when it was acquired on accrual (Rs.100/-), will constitute profit. Even going by the meaning of "profit' as commonly understood representing excess of sale proceeds over cost, we find that similar result will follow. No doubt the exporter does not directly purchase the DEPB from the market by incurring any cost, but when we see the scheme of section 28 in which the face value of DEPB, at the time of making application, results into the accrual of income as includible u/s 28(iiib) and the corresponding amount represents the value of DEPB, such value, which is in the nature of an asset, shall constitute its cost when DEPB is made the subject matter of sale at a later date. The following accounting entry shall be passed in this situation.
Cash/Bank Dr Rs. 110
To DEPB Rs. 100
To Profit on sale of DEPB Rs. 10
[At the time of sale, the income of Rs. 10 shall arise to the assessee u/s 28(iiid) as income of Rs. 100 had already accrued u/s 28(iiib) at time of application]
49. The absurdity in the result can be seen from the consequences following the reasoning of the Department, that the entire sale proceeds shall be taxable u/s 28(iiid) at the time of sale. In such a situation there will be double taxation of the face value of DEPB, firstly, when application for DEPB is made resulting in to accrual of income u/s 28(iiib) if the extent of us face value at Rs. 100 and subsequently when DEPB is sold for Rs. 110, the entire sale consideration of Rs. 110 shall stand included u/s 28(iiid) resulting into total income of Rs. 210 on 6 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) account of the transaction of DEPB, as against, the real income only to the tune of Rs.110.
.....
.....
53. From the above it can be noted that DEPB credit sale is different from the premium on the DEPB and such profit or the premium, is not export profit Since it does not arise out of export activity or import activity and arises because of trading in a "License" which has a premium in the marker such premium or profit cannot to be counted as exempted export profit and should be added back as taxable profit. The speech of the Finance Minister, as extracted above, divulges the intention of the scope of section 28(iiid) as covering only the premium on sale of DEPB and not the face value.
....
....
72. Reverting to the main question posted before this special bench for consideration as to whether the entire amount received on sale of DEPB entitlements represents profit chargeable u/s 28 (iiid) or some artificial cost is to be interpolated, we find that the relevance of this question is only in the context of the computation of deduction u/s 80HHC. We have held above that sub-section (3) dealing with the computation of the profits derived from export of goods or merchandize is a complete code in itself, thus the computation of eligible profits is to be made firmly as per this sub- section with the aid of Explanation as interpreted by the Hon'ble Supreme Court in the case of Hero Exports (supra) and K. Ravindranathan (supra). The AO has denied the deduction u/s 80HHC by holding that the entire sale proceeds of DEPB fall under section 28(iiid) and since in that view of the matter, there is no positive income, the deduction is impermissible. On the contrary the view point of the assessee is that the face value of DEPB should be reduced from the cost of purchases as it is given by the Government of India only to neutralize the incidence of custom duty. On the import content of the exports. We have examined the format of DEPB Scheme and come to the conclusion that the face value of DEPB is nothing but partial reimbursement of the purchase price of goods. Our this view is based on the understanding of the scheme of DEPB in commercial sense and in the tight of the Foreign Trade Policy of the Government of India. But when we come to the computation of deduction and the placement of the face value of DEPB in the scheme of section 80HHC, the general view based on the foreign Trade Policy about the reduction of such amount from the purchase cost, fails. We have seen above the sub-section (3) of section 80HHC is complete code in itself in so far as the computation of the eligible profits 7 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) derived from export are concerned. The mandate of sub-section (3) has to be religiously followed for determining the amount of eligible profits for deduction and as such the general view about the understanding of the nature of DEPB will be subdued and the one based on the prescription of this provision will come to fore. In that view of the matter we hold that the face value of DEPB cannot be reduced from the cost of purchases and has to be considered as a separate species of" Business 'income'. Thus all the contentions put forward on behalf of the assesses and the interveners about the reduction of the face value of DEPB have become academic in the context of section 80HHC. Similarly the comparison of DEPB with MODVAT, which is an off-shoot of the basic contention of reduction of the DEPB value from the purchases and also the arguments by the ld. AR towards the reduction of the face value of DEPB from the purchase cost on the strength of certain decisions rendered in the framework of section 80IB, lose their relevance in the present context of section 80HHC and hence need not be examined.
73. If the intention of the legislature had been to allow the reduction of the face value of DEPB from the cost of purchases, as has been, contended before us, then there was no need to have clauses (iiia) to (iiie) of section 28 and also the first to fifth provisos to section 80HHC(3) along with the necessary ingredients of Explanation below section 80HHC(4C). We have held that the face value of DEPB under the scheme of the Income- tax Act, 1961 falls under section 28(iiib) and the profit element t on the sale of DEPB, that is the excess of sale proceeds over the face value of DEPB falls u/s 28(iiid). 'Profits of business' as per Explanation (baa) provides for the Exclusion of ninety per cent of any sum referred to in section 28(iiia to iiie). Then first proviso to sub-section (3) states that the profits computed under clauses (a) or (b) or (c) shall be further increased by the amount which bears to the ninety per cent of any sum referred to in section 28(iiia, iiib and iiie).
It means that the ninety cent of the face value of DEPB which was reduced while computing the 'profits of the business' shall stand included when effect is given to first proviso. If we go with this argument that the fact value of DEPB is to be reduced from the cost of purchase then in the case of merchant exporter with turnover of less than Rs.10 crores, an anomalous situation will crop up inasmuch as the amount of eligible profit will far exceed the actual profit as demonstrated below.
Export turnover Rs.
1,000
8 ITA No. 875/Ahd/2007
ITA No. 1177/Ahd/2007
(Asst. Year 2003-2004)
Cost of goods sold - Direct costs (without DEPB) Rs. 800
- No indirect costs Face value of DEPB Rs 100
74. Going by sub-section (3)(b) the profits derived from such export shall be export turnover minus the direct and indirect costs attributable to such export. Going by the contention of the ld. AR, the direct cost will come al Rs.700 (800 - 100) as against the export turnover at Rs.1,000 resulting into profits derived from export as per clause (b) of sub-section (3) coming, to Rs.300 i.e. Rs.1,000 minus Rs.700. When we further give effect to the first proviso to sub-section (3), the profit of Rs.300 as computed above would require to be further increased by the ninety per cent of the face value of DEPB. The amount of Rs.90 (i.e. 90% of Rs.100 i.e face value of DEPB could, therefore, be added and the profit as determined in clause (b) of 80HHC(3) will come at Rs.390. As against that we find the real profit from export after giving effect to the DEPB benefit is only Rs.300 [1000 700 (800 - 100)]. Thus it can be easily ascertained that whereas the total business from export is Rs.300 but if we accept the contention that the face value of DEPB be reduced from the cost of purchases then the amount of profits derived from export as per section 80HHC(3)(b) will come at Rs.390. Obviously this calculation defies all logics and is incapable of acceptance due to awkward situation created by determining the profits derived from export at a figure higher than the actual business profit, the former amount, in no case can be higher than the later. We find that the logic behind introducing clauses (iiia) to (iiie) to section 28 is to de link the export incentives from the business profits while continuing them to be governed by Chapter IV-D at the same time. The natural outcome following the prescription of clauses (iiia) to (iiic) of section 28 along with section 80HHC(3) is that all the export incentives including the DEPB and DFRC etc. be considered as separate business income and not to reduce them from the cost of purchases.
75. We will now endeavor to evaluate the stand point of the AO from another angle that the entire amount of sale proceeds is covered under clause (iiid) and; not only the profit element. Continuing with the above example, where we supposed that the exporter made export turnover of Rs. 1000/- and he earned Rs.200/- from the export transaction in addition to Rs.100/- towards the face value of DEPB. The amount of profits derived from exports shall come at Rs.300 as per clause (baa) of Explanation below 80HHC(4C) read with sub-section (3) including the first proviso. Further suppose that the said DEPB is held as 9 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) such at the close of the year and is then sold in the succeeding year for Rs. 110. If we agree with the view point of the Department that at the time of sale of DEPB, the entire amount of Rs . 110/- is includible in section 28 (iiid) then it would mean that in order to give effect to sub-section (3), firstly the sum of Rs.100/- will require inclusion in the profits and gains of business or profession" in the year of sale, because the question of 90% exclusion shall arise only if 100% is included in the profits of the business as computed under the head Profits and gains of business or profession'. That obviously cannot be the done because the sum of Rs.100/- had already been included in the Profits and gains of business or profession' for the last year when such income accrued to the assessee u/s 28(iiib). The further inclusion of Rs.110/- in succeeding year at the time of sale in the "Profits and gains of business or profession" would lead to obvious incongruity and an impossible situation because the inclusion of face value of Rs.100/- in the profits of the second year also will amount to double taxation of Rs.100/- firstly in the year one when the income on account of the face value of DEPB accrued u/s 28(iiib) and there in the year two at the time of sale u/s 28(iiid).
....
....
79. The second proviso to section 80HHC provides that in the case of an assessee having export turnover not exceeding Rs. 10 crores during the previous year, the profits computed under clause (a) or clause (b) or clause (e) of this sub-section or after giving effect to the First proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) or clause (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. In other words, in the case of an assessee with export turnover not exceeding Rs. 10 crores, even the profit element of Rs.10/- in the above example on the sale of DEPB for Rs.110/- will also be considered as eligible for deduction despite the fact that it is out of the trading of DEPB entitlement in India only. But for this proviso no profit on sale of DEPB or DFRC could have been considered for deduction under this section. In contrast to it the third and fourth provisos are applicable to the case of the assessee having export turnover exceeding rupees ten crores in which case the profit computed under clause (a) or clause (b) or clause (c) of sub section (3) or after giving effect to the first proviso, shall be further increased by the amount which bears 90% of any sum referred to in section 28(iiid) or (iiie) in proportion to the export turnover to the total turnover only if the further two 10 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) conditions stipulated therein are fulfilled and also the assessee has suffered evidence to prove the fulfillment of such conditions. It is this category of exporters which has been statutorily discriminated vis a vis the small exporters having turnover not exceeding Rs. 10 crores. They shall not be entitled to increase in the quantum of deduction by profit at transfer of DEPB/DFRS which is otherwise available to small exporters, unless the two conditions as set out in these provisos are fulfilled. In the cases under consideration it is an admitted position that the two conditions as so specified in third and, fourth provisos are not capable of compliance and hence the further increase as suggested in these two provisos cannot be made to the computation of deduction u/s.80HHC. Thus, it is apparent that the statutory discrimination is between the exporters having export turnover not exceeding Rs. 10 crores and those having exceeding Rs. 10 crores. Whereas the benefit of deduction in respect of the profit of sale of DEPB realized from the Indian market is also available to small exporters having export turnover, it is not so in the case of the large exporters having export turnover exceeding Rs. 10 crores. This appears to be the only reason for inserting clauses (iiid) and (iiie) to section 28 by the Taxation, Laws (Amendment Act, 2005), simultaneous with the insertion of section 3rd and 4th provisos.
.....
.....
89. The question raised before the special bench has two parts. In so far as the first part: 'Whether the entire amount received on sale of DEPB entitlements represents profit chargeable under section 28(iiid) of the Income Tax act, is concerned, we answer it in negative and the second part of the question or the profit referred to therein requires any artificial cost to be interpolated is replied in affirmative to the extent that the face value of DEPB shall be deducted from the sale proceeds. As regards the grounds based in these appeals against the denial of deduction u/s 80HHC, in full or part, we find that the computation of profits derived from exports and the resultant amount of deduction under this section can be made only when the decision is taken on the amount and the timing of taxability of the face value of DEPB and the profit on its sale. On this issue we hold that the face value of DEPB is chargeable to tax u/s 28(iiib) at the time of accrual of income, that is, when the application for DEPB is filed with the competent authority pursuant to exports and profit on sale of DEPB representing the excess of sale proceeds of DEPB over its face value is liable to be considered u/s 28(iiid) at the time of its sale. Whatever is said about DEPB shall also hold good for DFRC, on both its components, viz the face value of DFRC and profit on its transfer, except for the fact that the profit on sale of 11 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) DFRC shall be charged to tax u/s 28(iiie). There is no dispute about the duty drawback, which shall be chargeable to tax at time of accrual of income u/s 28(iiic) when application is filed with the competent authority after making exports. Since the necessary facts for the determination of the quantum of deduction u/s 80HHC, as discussed above, are not available on record, we, therefore, set aside the impugned orders and direct the AO to compute the amount of relief in accordance with the view expressed by us here in above."
12. Respectfully following the above judgment of the Tribunal, we hold that profit element on DEPB licence will be covered by section 28(iiid) and, accordingly, by third proviso to section 80HHC(3) of the I.T. Act, 1961 as the turnover of the assessee exceeds Rs.10 crores This amount shall be excluded for the purpose of computing deduction u/s.80HHC of the I.T. Act, 1961, if condition laid down in that proviso are not satisfied . The face value of the DEPB licence will be covered u/s.28(iiib) of the I.T. Act, 1961 and, therefore, 90% thereof would be added to the export profits as per first proviso to section 80HHC(3) of the I.T. Act, 1961.
13. In order to compute deduction u/s.80HHC of the I.T. Act, 1961 in accordance with the decision of ITAT Special Bench in the case of M/s.Topman Exports(supra), we restore the matter to the file of Assessing Officer.
3. Respectfully following above decision, we restore the issue of claim of deduction under Section 80HHC in respect of DPB Entitlements to the file of the Assessing Officer for calculating deduction under that section in accordance with the judgment in Topman Export's case(supra). This ground is according allowed, but for statistical purposes.
4. In Revenue's appeal, grounds are as under:
"1. The Ld.CIT(A) erred in law and on the facts of the case in directing the A.O. to exclude Sales tax and
2. Excise duty elements from the total turn over in computing the deduction u/s. 80HHC of the I.T. Act, ignoring the decision of the Hon'ble I.T.A.T., Ahmedabad in the case of ACIT Vs. Harsha Engineers Ltd. for A.Y. 2002-03 in ITA No. 12 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) 2042/Ahd/2005 dated 21.07.2006 and further ignoring the fact that the turn over always included the elements of taxes, as held in the cases of Chowranghee Sales Bureau Vs. CIT (87 ITR 547 (SC), Sinclair Murray & Company. P. Ltd. Vs. CIT (97 ITR 615 (SC) & MC Dowell & Company. Ltd. Vs. CIT (154 ITR 148 (SC).
3. The learned CIT(A) has erred in law and on the facts of the case in directing the Assessing Officer not to exclude 90% of Excise Duty refund and Sales tax refund for computation of profits of the business for working out deduction u/s. 80HHC of the I.T. Act.
4. The learned CIT(A) has erred in law and on the facts of the case in directing the Assessing Officer not to exclude the late payment receipts received from, customers/trade parties from profits of the business for computation of deduction u/s. 80HHC of the I.T. Act.
5. The learned CIT(A) has erred in law and or the facts of the case in directing the Assessing Officer not to exclude the commission and clearing charges in the computation of business for computation of deduction u/s. 80HHC of the I.T. Act.
6. The learned CIT(A) has erred in law and on the facts of the case in directing the Assessing Officer to recompute the profit of the business and decide on the allowance or rejection of deduction u/s. 80HHC relatable to profit on transfer of DEPB entitlements/DEPB income after following certain specific directions given by him in para 2.2(f) at page 4 and 5 of his order, and ignoring the fact that assessee's claim that the income on the DEPB accrues only when the same is transferred is not backed by any revised return nor such claim was made during the assessment proceedings and thus the learned CIT(A) erred in entertaining the assessee's said claim applying the ratio of the Hon'ble Supreme Court decision in the case of Goetze (India) Ltd. CIT(2006) 284 ITR 323 (SC).
7. The learned CIT(A) has erred in law and on the facts of the case in directing the Assessing Officer to delete the addition of Rs. 8,24,122/- made to closing stock of finished goods by the Assessing Officer on account of excise duty element related to finished goods not added by the assessee.13 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007
(Asst. Year 2003-2004)
8. The learned CIT(A) has erred in law and on the facts of the case in deleting the disallowance of Rs. 45,85,729/- out of house keeping charges made by the Assessing Officer u/s. 40A(2)(b) of the Act after holding that the payment disallowed was neither excessive nor could be treated as not genuine.
9. On the facts and in the circumstances of the case, the ld CIT(A) ought to have upheld the order of the Assessing Officer."
5. Ground No. 1 and 2 relate to exclusion of sales tax from total turnover for calculating deduction under Section 80HHC. This issue is not covered in favour of the assessee by the decision of Hon'ble Supreme Court in CIT Vs. Catapharma India Private Ltd. (2007) 292 ITR 641 (SC), CIT Vs. Laxmi Machine Works (2007) 290 ITR 667 (SC) and of the Hon'ble Punjab and Haryana High Court in CIT Vs. Mahavir Spring Mills Limited (2009) 308 ITR 445 (P & H). Accordingly excise duty and sales tax are not included in total turnover. Accordingly, this ground of Revenue is rejected.
6. Ground No. 3 relates to excise duty and sales tax refund and decision of learned Ld. Commissioner of Income Tax(Appeals) in directing the Assessing Officer not to exclude 90% of the refund for computation to profits of the business.
7. We have heard the learned AR and learned DR. Similar issue has arisen before the Tribunal in the assessment year 2001-2002 in the case of the assessee in ITA No. 513/Ahmedabad/2005 decided on 09-01-2009. The operative part of that order is reproduced as under:
14 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007(Asst. Year 2003-2004) "3. In respect of Ground No. 2, the CIT(A) disposed of the issue by observing as under:
"3.5 It is submitted that 2 items of excise duty refund credited in the profit and loss account, namely Rs. 2,61,86,008/- and Rs. 35,43,570/- in respect of the Manufacturing Division and Merchant Division. It is submitted that said refund is in respect of excise duty debited in the profit and loss account for the period ending 31st March 2001 and is contra entry as far as profits from the business are concerned for the purpose of section 80HHC and explanation (baa). Before me, it is pleaded that excise duty which is received back is taken as part of business stock and expenses are debited in the profit and loss account and thereafter application is made to the excise department for refund of due paid Relevant audited balance sheet and profit and loss account and supporting schedules are referred to before me in this respect. On verification it is found that the contention in this respect is correct. Since, the net profit of business and profession will not get affected. If the item of excise duty which is first debited in the profit and loss account and then refunded back are both excluded. As such the Assessing Officer is directed not to exclude the same while working out deduction u/s 80HHC.
3.6 ---
3.7 It is submitted that this item is wrongly excluded. Having regard to the decision of ITAT, Ahmedabad in the case of Gujarat Alkalies & Chemicals Ltd. V. DCIT 82 ITD 135, this item is not required to be excluded for computation u/s 80HHC and the Assessing Officer is directed to follow the same accordingly."
After hearing the rival submissions and going through the order of the tax authorities below, in our opinion, the CIT(A) has rightly directed not to exclude the Excise Duty Refund and Insurance Claim while computing the deduction u/s 80HHC. We accordingly confirm the order of the CIT(A) on this ground.
8. Respectfully following the above decision, we dismiss this ground of the Revenue.
15 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007(Asst. Year 2003-2004)
9. Ground No. 4 relates to including the late payment receipt from customers/trade parties in the business profit of the assessee for the purposes of computation of deduction under Section 80HHC.
10. We have heard the learned DR and learned AR. Interest received from the customers/parties, for late payment of dues/outstanding, are part of business receipts and therefore would be included as business profit. However, we do not uphold the argument of the learned AR that netting should be allowed. There is no evidence that any interest expenditure was incurred for earning such interest income from the customers/clients. Accordingly, following the decision of Special Bench of Ahmedabad- ITAT, in ACIT Vs. Ashima Syntex Ltd. 100 TTJ 557, we upheld the inclusion of interest receipts from customers as business receipts but do not allow the claim of netting. Accordingly, this ground of the Revenue is also rejected.
11. The 5th ground relates to including commission and clearing charges in the computation of business profit for the purposes of deduction under Section 80HHC. We have heard the learned DR and learned AR. These receipts are part of trading activity and directly relates to the business of the assessee. Hon'ble Supreme Court in CIT Vs. Cata Pharma India Limited (2007) 292 ITR 641 (SC) has held that interest commission etc. do not emanate from the turnover like excise duty and sales tax, hence they are not part of the turnover. But they add to the profit so therefore there are includable in profit. Accordingly, we confirm the order of the Ld. Commissioner of Income Tax(Appeals) and dismiss this ground of the Revenue.
16 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007(Asst. Year 2003-2004)
12. Ground No. 6 relates to income arising from DEPB Entitlements. This issue has been considered in the appeal filed by the assessee, and Assessing Officer has been directed to recompute deduction under Section 80HHC in respect of DEPB Entitlements in accordance with decision in Topman Exports Case (supra). This ground of the Revenue is therefore allowed, but for statistical purpose.
13. Ground No. 7 relates to deleting addition of Rs. 8,24,122/- made to the closing stock of finished goods on account of excise duty element.
14. The Ld. Commissioner of Income Tax(Appeals) decided the issue as under:
"3. Ground No. 2 relates to addition of Rs. 8,24,122/- to closing stock. The Assessing Officer made the above addition to the closing stock on finished goods holding that the excise duty element relatable to finished goods was not added by the appellant.
3.1. Before me, it was contended that the stock lying in the factory were not cleared and excise duty liability was not incurred and hence the closing stock valuation was not inclusive of excise duty. Alternatively, it was claimed before the Assessing Officer that if excise element was to be considered as an outstanding liability then the said liability having been discharged before the due date for filing of return could be allowed and hence no addition was called for. The explanation of the assessee was not accepted by the Assessing Officer and the addition was made holding that the appellant accrued the excise liability the moment the goods were manufactured. The Assessing Officer also cited the provisions of section 145A and the decision of the Hon'ble Apex Court in the case of CIT v. British Paints India Limited 188 ITR 44. The appellant further contended that when there was no liability and when nothing was provided in the profit and loss account towards any liability, the Assessing Officer was not correct in adding the above sum to the value of closing stock.17 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007
(Asst. Year 2003-2004) 3.2 I have considered the arguments of the appellant and also perused the reasoning given by the Assessing Officer in making the above addition. I am convinced that on the facts brought on record by the appellant and as already explained to the Assessing Officer, the goods lying at the factory were just finished but no excise duty having been incurred and no provision for such liability having been debited to the profit and loss account, the reasoning given by the Assessing Officer relying on the Hon'ble Apex Court decision is out of place. First of all, no cost by way of excise duty liability has been either incurred or debited to the profit and loss account. Further, excise duty liability is incident only at the time of removal of goods and not prior to that. Section 145A provides for inclusion of elements of cost in the valuation of closing stock with reference to liability already incurred and not with reference to a future liability. Any adjustments otherwise would be unjustified either on the regular method of accounting on a matching principle or within the meaning of section 145A. In this case, the assessee having neither incurred any liability on the finished goods before clearance nor debited any item of expenditure in connection with the future liability, the action of the Assessing Officer is not tenable and the addition in this regard is directed to be deleted. In view of the above findings, no deduction u/s. 43B is available in view of payments before the due date for filing of return relatable to the said amount of excise duty liability incurred and paid subsequently."
15. The Ld. Commissioner of Income Tax(Appeals) thus, held that no excise duty is payable on finished goods lying in factory. No liability relating to finished goods has been debited in the profit and loss account.
16. After hearing the parties, we confirm the order of the Ld. Commissioner of Income Tax(Appeals) as no contrary material has been shown to us proving that any excise duty has been debited in the profit and loss account relating to the finished goods. It is also not shown by the Revenue that cost of finished goods as worked out by the assessee did not contain the element of excise duty paid by it on the raw material 18 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) consumed in the making of the finished goods. On the other hand, the learned AR for the assessee has submitted that excise duty component of raw material has been duly debited in the profit and loss account and considered in the costing of closing stock. This ground of Revenue is therefore also rejected.
17. Ground No. 8 relates to house keeping charges added under Section 40(A)(2)(b). Ld. Commissioner of Income Tax(Appeals) deleted the addition by observing as under:
"4. Ground No. 3 relates to disallowance of Rs. 45,85,729/- u/s 40A(2)(b) out of house keeping charges. The Assessing Officer disallowed the above sum holding it as excessive payment referable to services provided by Jay Infra Trade Pvt. Ltd. to the appellant company. He invoked the provisions of section 40A(2)(b). He totally relied on his decision in the case of Jay Infra Trade Pvt. Ltd. for A.Y. 2003-04. The Assessing Officer also arrived at a sum of Rs. 4,10,279/- as reasonable expenditure payable to Jay Infra Trade Pvt. Ltd. by the appellant company for this year.
4.1 Before me, the learned counsel for the appellant drew my attention to the appellate order for A.Y. 2003-04 (Appeal No. CIT(A)-VIII/DC-4/262 05-06 dated 16.10.2006) in the case of Jay Infra Trade Pvt. Ltd. wherein the entire receipts of Rs. 76 lacs from group concerns were held to be in connection with provisions of various business services assessable as business receipts. Accordingly, it was contended that the Assessing Officer without proper appreciation of entirety of services, including the main aspect of office accommodation worked out a meager sum as reasonable and disallowed the balance of Rs. 45,89,729/- as excessive. In view of the appellant order cited above, it was contended that the action of the Assessing Officer be reversed.
4.2 I have perused the relevant portion of the assessment order with the reasoning there of and also the arguments of the appellant carefully. In the appellate order in the case of Jay Infra Trade Pvt. Ltd., the service provider. I have clearly held that the amount paid as service charges were for composite business support services 19 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) and assessable under business receipts only. The action of the Assessing Officer in treating excess, according to him, as receipts under other sources in the hands of service provider was not upheld for the reason that the Assessing Officer did not take into account the accommodation cost for the floor space occupied by the appellant and the action of the Assessing Officer in the case of Jay Infra Trade Pvt. Ltd. having been rejected. The disallowance in the case of the appellant cannot be sustained. Merely, that the payments were made to an associate concern does not mean automatically that the payment was excessive. Taking into account the nature of business support services and the value of services and the market value of office accommodation, as held by me in the appellate order for the A.Y. 2003-04 in the case of service provider. I am of the opinion that the Assessing Officer has not proved the excessive payment with facts and figures and his attempt was only perfunctory. However, as the Assessing Officer has not made holistic analysis of the entire service provided, the disallowance made is not sustainable. Mere assessment of part of income in the hands of the recipient under different head does not prove the unreasonableness in the hands of the recipient of service. The genuineness of the transactions being not in dispute, it is a mere difference of opinion according to the Assessing Officer that caused the disallowance and for the above reasoning. I am to hold that the payment in respect of which disallowance is made by the Assessing Officer is neither excessive nor can be treated as not genuine. In this view of the matter, the disallowance is not sustainable and hence directed to be deleted.
18. We have heard the learned DR and learned AR. The contention of the Assessing Officer and that of learned DR is that assessee has paid less then the normal rates in respect of various house keeping services to M/s. Jay Infra Trade Private Limited. He arrived at reasonable expenditure of Rs. 4,10,279/- and thus disallowed an expenditure of Rs. 45,85,729/-.
19. We agree with Ld. Commissioner of Income Tax(Appeals) that Assessing Officer has not proved that excessive payment has been made 20 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) to M/s. Jay Infra Trade Private Ltd. being an associate concern of the assessee. The genuineness of the transactions is not in dispute. The further reliance by the Assessing Officer on the order of J. Infra Trade Private Limited is not proper as that order has been reversed by the Ld. Commissioner of Income Tax(Appeals) and confirmed by the Tribunal. The assessee had provided calculation of fair value of services before the Ld. Commissioner of Income Tax(Appeals) which was sent to the Assessing Officer during remand proceedings. There is no material to justify the disallowance made by the Assessing Officer. Further, Tribunal in the case of Jay Infra Trade Private Limited ITA No. 261/Ahmedabad/2007 decided on 30-09-2009 held that there is no excessive payment for services provided by Jay Infra Trade Private Limited. Thus, once factum of excessive payment for services are not proved, there is no case of any addition even in the case of the assessee. Thus, we reject this ground of the Revenue also.
20. Other two grounds are general in nature and they do not require any specific adjudication.
21. As a result, appeal filed by the Revenue is dismissed.
This order is pronounced in open Court on Dated 6th November, 2009.
Sd/- Sd/- (T.K. SHARMA) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated: 06/11/2009 Ankit* Copy of the Order forwarded to: 21 ITA No. 875/Ahd/2007 ITA No. 1177/Ahd/2007 (Asst. Year 2003-2004) 1. The Appellant 2. The Respondent 3. The CIT(A) Concerned 4. The CIT, 5. The DR, Ahmedabad Bench 6. The Guard File. BY ORDER, ASSTT. REGISTRAR/ DEPUTY REGISTRAR ITAT, Ahmedabad Benches, AHMEDABAD.