Income Tax Appellate Tribunal - Delhi
Alp Overseas Pvt. Ltd., New Delhi vs Assessee on 18 March, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI 'C' BENCH
BEFORE SHRI R.P. TOLANI, JM & SHRI A.N. PAHUJA, AM
ITA No.3007/Del/2010
Assessment year:2004-05
A.L.P. Overseas Pvt. Ltd., V/s. DCIT,Circle 12(1),
[Formerly known as M/s GTP New Delhi
Overseas Pvt. Ltd.],
25/31, East Patel Nagar,
New Delhi-110060
[PAN No.: AAACG 6366 L]
ITA No.4445/Del/2010
Assessment year:2004-05
Income Tax Officer, V/s. A.L.P. Overseas Pvt. Ltd.,
W ard-1(3),Room no. [Formerly known as M/s
380B,3 r d Floor,CR GTP Overseas Pvt. Ltd.],
Building,IP Estate 25/31, East Patel
New Delhi Nagar,New Delhi
(Appellant) (Respondent)
Assessee by Shri Baljit Singh,AR
Revenue by Shri Salil Mishra,DR
Date of hearing 08-02-2012
Date of pronouncement 10-02-2012
ORDER
A.N.Pahuja:- These cross appeals- filed on 15th June, 2010 by the assessee and on 5th October, 2010 by the Revenue against an order dated 18.03.2010 of the ld. CIT(A)-XII, New Delhi, raise the following grounds:-
I.T.A. No.3007/D/2010[Assessee]
1. "The Ld.CIT(A) erred in confirming the action of the Ld. AO in adding the custom duty and freight inward to the closing stock of the branch at Sharjah, even though there is no custom duty in Sharjah.
2 ITA nos.3007&4445/Del./2010
2. The Ld. CIT(A) erred in confirming the action of the Ld.AO calculating the indirect expenses and excluding 90% of the DEPB for deduction u/s 80HHC and adding an amount of ``31,50,552/- to the total income of the assessee.
3. The order of the Ld. CIT(A) is bad in law and on the facts of the case and is based on surmises and conjectures only.
4. That we be allowed to add fresh grounds of appeal at the time of hearing.
5. That appellant prays that the addition be deleted.
I.T.A. No.4445/D/2010[Revenue]
1. The Ld. CIT(A) has erred on facts and in law in deleting addition of ``13,07,292/- on account of notional foreign exchange fluctuation loss ignoring that:
a) As per the provisions of section 43B of the Income-tax Act, 1961,as amended by the Finance Act,2002 with effect from 01.04.2003, the foreign exchange fluctuations are to be considered only at the time of payment and there is no scope for booking any notional loss on this account.
b) The decision of Hon'ble Supreme Court in the case of CIT Vs. Wood Word Governor India P. Ltd. (2009) 312 ITR 254 (SC) relied upon by learned CIT(A) has since been reversed by the Apex Court in ONGC Ltd. Vs. CIT 322 ITR 180 (SC) wherein cognizance has been taken to the amendment to section 43B Income-tax Act, 1961 with effect from 01.04.2003.
2) That appellant craves leave for reserving the right to amend, modify alter, add or forgo any ground(s) of appeal at any time before or during the hearing of this appeal.
2. Adverting first to ground no.1 in the appeal of the assessee, facts, in brief, as per relevant orders are that return declaring income of `45,28,876/- filed on 29.10.2004 by the assessee, engaged in export of automobile products 3 ITA nos.3007&4445/Del./2010 and other items, was selected for scrutiny with the service of notice u/s 143(2) of the Income-tax Act, 1961 (hereafter referred to as the Act) issued on 12.08.2005. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee excluded loss incurred in its branch office at Sharjah while computing deduction u/s 80HHC of the Act. The closing stock inventory of branch office revealed that the custom duty paid by the assessee was not considered for the valuation of closing stock nor freight inwards. Since the custom duty and freight inwards paid by the assessee was incurred in relation to the goods in the branch office, the AO was of the opinion that valuation of closing stock should have been done after including proportionate custom duty and freight inward. After considering the reply of the assessee, the AO added proportionate expenses towards custom duty and freight inward expenses resulting in addition of ``885765/-.
2.1 The AO further noticed that the assessee had reflected loss of ``28,43,743/- on account of foreign exchange fluctuation. This included foreign exchange loss of ``13,07,292/- due to reinstatement of its accounts as on 31.3.2004. To a query by the AO, the assessee explained that loss on account of exchange fluctuation was trading loss and should be allowed. However, the AO did not accept the submissions of the assessee on the ground that such loss was notional and, therefore, not allowable, there being no evidence that such loss related to revenue transactions. Inter alia, the AO relied upon two decisions in the case of Indian Overseas Bank 246 ITR 206 (Mad) and Karam Chand Thapar & Bros (1969).
2.2 The AO also noticed that the assessee claimed deduction u/s 80HHC of the Act on the profit of `1,95,14,787/- while the details revealed profit relating to India office of only ``1,38,77,141/-. Since the assessee did not attribute indirect cost of exports correctly, the AO while referring to the definition of indirect cost under section 80HHC(3) of the Act and the fact that indirect cost of the Indian operations was ``3,46,07,600/- while export turnover of trading goods was ``14,65,09,881/- vis-a-vis total turnover of ``15,79,51,683/-, worked 4 ITA nos.3007&4445/Del./2010 out indirect cost of export of trading goods at ``3,21,00,673/- in accordance with formula laid down u/s 80HHC(3)(b) of the Act and recomputed the deduction u/s 80HHC of the Act.
2.21 The AO further noticed that the assessee sold DEPB benefits for ``11,11,397/-. Since export turnover of the assessee exceeded ``10 crores, the AO asked the assessee to explain why DEPB benefits should not be excluded while computing deduction u/s 80HHC of the Act. In response, the assessee explained that there was no profit on sale of DEPB benefits while rate of duty draw back was not available in respect of the goods exported by it and, therefore, third proviso to section 80HHC(3) of the Act was not applicable. However, the AO did not accept the submissions of the assessee on the ground that the assessee did not fulfill the conditions stipulated under the third proviso to section 80HHC(3) of the Act. Accordingly, deduction u/s 80HHC of the Act was worked out to ``29,82,932/- as against claim of `61,33,484/-, resulting in disallowance of ``31,50,552/-.
3. On appeal, the ld. CIT(A) adjudicated the aforesaid issues in the following manner:-
"5. The first ground of appeal pertains to an addition of ``8,85,765/- on account of custom duty and freight inward, to the amount of closing stock AR has pleaded that there is no custom duty in Sharjah and this amount represents an amount charged in the sales invoice but is collected from the customers. AR has pleaded that the addition should be on proportionate basis for the closing stock and not on the whole amount.
While making the said disallowance, Assessing Officer has brought on record that the assessee excluded the loss of branch office at Sharjah from the computation of deduction u/s 80HHC. He has brought on record that:-
"It is seen from the details of branch office filed by the assessee that custom duty paid by the assessee has not been included for the valuation of closing stock. Moreover, the freight inward i.e. 5 ITA nos.3007&4445/Del./2010 the expenses incurred for procuring the goods, has also not been included for the valuation of closing stock. In the branch office, only trading of goods is done by the assessee. Since, custom duty and freight inward paid by the assessee are the expenses incurred by it for procuring the goods in the branch office, the valuation of the closing stock should have been done after including the custom duty as well as the freight inward paid by the assessee. Therefore, the closing stock of the branch office is to be computed after including the custom duty and freight inward paid by the assessee. During the year under consideration, the assessee has shown purchases of ``30,46,960/- on which custom duty amounting to `4,57,696/- and freight inward expenses amounting to ``3,78,600/- were paid by the assessee. The closing stock as on 31.03.2004 is shown at ``32,27,194/-. After including the custom duty and freight inward on proportionate basis, the expenses relating to the closing stock on account of custom duty and freight inward expenses works out to `8,85,765/-. Therefore, the closing stock a well as the income of the branch office, will increase by ``8,85,765/-.
In view of the above facts, the stand of the Assessing Officer is confirmed however, Assessing Officer is directed to make the addition on proportionate basis for the closing stock."
6. The 2nd ground of appeal pertains to notional addition of ``13,07,292/- pertaining to foreign currency fluctuation.
During the course of appellate proceedings, the AR has pleaded that these were expenses of revenue in nature. The Hon'ble Apex Court in CIT Vs. WoodWord Governor India P. Ltd. (2009) 312 ITR 254(SC) has held that foreign exchange fluctuation on revenue item is a allowable. Following the said case, the said addition is deleted.
7. The 3rd ground of appeal pertains to calculation of indirect and 90% of the DEPB for deduction u/s 80HHC leading to addition of ``31,50,552/-. While making the said disallowance, Assessing Officer has brought on record that :-
....................................................................................................................
AR has pleaded that AO has erred in not making a deduction for freight, charity, donations, deferred revenue expenditure, prior period expenses, exchange rate fluctuation and addition of depreciation. The contention of the AR cannot be accepted in view of the specific provisions of Section 80HHC pertaining to direct cost 6 ITA nos.3007&4445/Del./2010 as enumerated in the Act.AR has pleaded that indirect cost have t be cost which are attributable to export. Since the same is taken as FOB value, cost have also to be taken on the same principle. It has been pleaded that foreign exchange fluctuation should be taken as cost and not attributable to export sales. However, this contention of the assessee cannot be accepted in view of the specific provisions of the said section and reasoning given by the AO in the assessment order.
4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee submitted that only the nomenclature used is customs duty, but actually it is local sales tax within UAE.
Custom duty was not payable even on exports made from Sharjah. There was no stock on which customs duty could be charged. Besides, goods were imported on CIF basis and the ocean freight was borne by the head office. The branch office did not have any freight expenses, the ld. AR argued. While referring to details at page 16 of the paper book, the ld. AR contended that the custom duty amount could not be added to closing stock. In respect of freight, the ld. AR contended that freight was paid on delivery of goods to the customers and by mistake it was shown as freight inwards. It could not be added to the valuation of the closing stock, the ld. AR submitted. As regards issue raised in ground no.2 in the appeal of the assessee, the ld. AR while referring to page 62 of the paper book contended that the entire indirect cost attributable to trading goods could not be considered while computing deduction u/s 80HHC of the Act. Only indirect cost attributable to trading goods exported could be reduced. Since foreign exchange fluctuation was not an expenditure but only loss, the ld. AR contended that foreign exchange fluctuation could not be considered while computing deduction u/s 80HHC of the Act. As regards freight, the ld. AR relied upon decision of Hon'ble Calcutta High Court in CIT Vs. H.M. Exports Ltd. (2005) 276 ITR 299 (Cal). Regarding deduction u/s 80HHC in relation to DEPB benefits, the ld. AR did not make any submissions while in respect of ground raised in the appeal of the Revenue, the ld.AR pointed out that foreign exchange fluctuation related to export made by the assessee.
7 ITA nos.3007&4445/Del./2010
5. On the other hand, learned DR supported the conclusion the ld. CIT(A) on the inclusion of custom duty and freight inwards while valuing closing stock . The ld. DR further submitted that in the event foreign exchange fluctuation related to exports made during the year, the said amount had to be considered while determining deduction u/s 80HHC of the Act. While carrying us through para 5.3 of the assessment order, the ld. DR submitted that the AO was justified in reworking the indirect cost .As regards DEPB benefits, the ld. DR pointed out that the assessee having not fulfilled the conditions stipulated in 3rd proviso to sec. 80HHC(3) of the Act, the AO rightly denied deduction in relation to DEPB benefits. Inter alia, learned DR relied upon the decision of Hon'ble Bombay High Court in Commissioner of Income Tax Vs. Kalpataru Colours and Chemicals, 328 ITR 451 (Bom). Regarding deduction on account of notional foreign exchange loss, the ld. DR pointed out that without ascertaining the nature of foreign exchange fluctuation, the ld. CIT(A) was not justified in following the decision of Hon'ble Supreme Court in CIT Vs. WoodWord Governor P. Ltd. 312 ITR 254 (SC).The ld. DR argued that neither the AO nor the learned CIT(A) examined the nature of foreign exchange fluctuation.
6. We have heard both the parties and gone through the facts of the case as also the aforesaid decisions relied upon both the sides. As regards inclusion of custom duty and freight inward in the valuation of closing stock, the AO added the proportionate amount of these expenses towards closing stock of branch office at Sharjah. The ld.CIT(A) without recording any findings as to the nature of custom duty or freight inwards upheld the findings of the AO. The learned AR now contended before us that only the nomenclature used is customs duty, but actually it is similar to Sales Tax. Regarding inclusion of freight, the ld. AR submitted that the head 'freight inwards' was wrongly mentioned in the accounts and actually the amount was on account of freight paid for delivery of goods to the customers. However, we find that there is no whisper in the impugned order on these aspects nor the ld. AR explained that plea now being taken before us was raised before the lower authorities. In any 8 ITA nos.3007&4445/Del./2010 case, neither the AO nor the ld. CIT(A) recorded any findings on the nature of custom duty or freight added towards valuation of closing stock. In respect of deduction u/s 80HHC of the Act, the AO recomputed indirect cost and excluded DEPB benefits, the assessee having not fulfilled conditions stipulated under third proviso to section 80HHC(3) of the Act. The ld. CIT(A) without recording any findings on exclusion on DEPB benefits from the computation u/s 80HHC of the Act nor recording any findings as to how indirect cost of expenses mentioned in schedule 14 to 17 of the balance sheet related to export turnover and whether or not foreign exchange loss was in relation to exports and was not a cost and merely a loss, as contended by the learned AR, upheld the findings of the AO. Likewise, in following the decision of Hon'ble Apex Court in WoodWord Governor P. Ltd. (supra), the ld. CIT(A) did not even analyse the nature of foreign exchange fluctuation nor adverted to the applicability or otherwise of the amended provisions of sec. 43A of the Act and nor even recorded any findings as to whether or not the amount related to exports made during the year. A copy of ledger account of foreign exchange fluctuation placed before us at the fag end of the hearing, does not reveal the nature of fluctuation. In nutshell, a mere glance at the impugned order reveals that the order passed by the ld. CIT(A) is cryptic and grossly violative of one of the facets of the rules of natural justice, namely, that every judicial/quasi-judicial body/authority must pass reasoned order, which should reflect application of mind by the concerned authority to the issues/points raised before it. The application of mind to the material facts and the arguments should manifest itself in the order. Section 250(6) of the Act mandates that the order of the CIT(A) while disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the reasons for the decision. The requirement of recording of reasons and communication thereof by the quasi-judicial authorities has been read as an integral part of the concept of fair procedure and is an important safeguard to ensure observance of the rule of law. It 9 ITA nos.3007&4445/Del./2010 introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision-making process. Hon'ble jurisdictional High Court in their decision in Vodafone Essar Ltd. Vs. DRP,196 Taxman423(Delhi) held that when a quasi judicial authority deals with a lis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter and further, the same also facilitates appreciation when the order is called in question before the superior forum. W e may point out that a 'decision' does not merely mean the 'conclusion'. It embraces within its fold the reasons forming basis for the conclusion.[Mukhtiar Singh Vs. State of Punjab,(1995)1SCC 760(SC)].As already observed, the impugned order suffers from lack of reasoning and is not a speaking order on any of the three issues adjudicated by the ld. CIT(A). In view of the foregoing, especially when the ld. CIT(A) have not passed a speaking order on various issues raised in the appeal before him, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the aforesaid issues, afresh in accordance with law in the light of various judicial pronouncements including those referred to above, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the appeal, the ld. CIT (A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act. W ith these observations, ground nos. 1 & 2 in the appeal of the assessee as also ground no.1 in the appeal of the Revenue are disposed of.
7.. Ground nos.3 and 5 in the appeal of the assessee, being general in nature nor any submissions having been made before us on these grounds, do not require any separate adjudication while no additional ground having been raised before us in term of residuary ground no.4 in the appeal of the assessee 10 ITA nos.3007&4445/Del./2010 as also ground no.2 in the appeal of the Revenue, accordingly, all these grounds are dismissed.
8.. No other submission or argument was made before us.
9.. In the result, both the appeal the assessee as also of the Revenue are allowed but for statistical purposes.
Order pronounced in open Court
Sd/- Sd/-
(R.P. TOLANI) (A.N. PAHUJA)
(Judicial Member) (Accountant Member)
NS
Copy of the Order forwarded to:-
1. A.L.P. Overseas Pvt. Ltd.,(Formerly known as M/s GTP Overseas Pvt. Ltd.,25/31, East Patel Nagar,New Delhi
2. Income Tax Officer, W ard (3),New Delhi
3. CIT(A)-XII, New Delhi.
4. CIT concerned.
5. DR, ITAT,'C' Bench, New Delhi
6. Guard File.
BY ORDER, Deputy/Asstt.Registrar ITAT, Delhi