Income Tax Appellate Tribunal - Mumbai
Anil L. Shah vs Assistant Commissioner Of Income Tax ... on 20 January, 2005
Equivalent citations: (2005)95TTJ(MUM)216
ORDER
K.K. Boliya, A.M.
1. These four appeals involving common issues are disposed of by this common order as under:
Appeal No. 4784 :
2. This is assessee's appeal arising from the order dt. 21st May, 1998, of CIT(A), Central-II, Mumbai. Since the original grounds of appeal are not in conformity with Rule 8 of the ITAT Rules, revised grounds of appeal have been filed. Ground Nos. 1 and 2 pertain to estimated addition of Rs. 3,60,000 on account of alleged unaccounted sales of rags, fents, chindis, etc. The facts are that the assessee is engaged in the manufacturing of readymade garments and the sales of the garments are in the form of exports as well as local sales. The AO has examined this issue elaborately at pp. 2 to 11 of the assessment order, He has pointed out several defects in the books of account and came to the conclusion that the turnover shown by the assessee at Rs. 40,000 in respect of rags, fents, etc. was inadequate having regard to the gross turnover of the assessee, which amounts to more than Rs. 6 crores. The AO also referred to a, comparable case of M/s Highland Garments (P) Ltd., where an addition of Rs. 3 lakhs was sustained by the CIT(A) vide order dt. 5th March, 1997 on the same grounds. The AO assumed that the sales of wastage in the form of rags, fents, etc., was not fully accounted by the assessee in the books of account. For these reasons, an addition of Rs. 3,60,000 was made. For similar reasons, the said addition has been confirmed by the CIT(A).
3. The learned counsel appearing for the assessee contended before us that the addition has been made on presumption and without any material or evidence to suggest that the sales of waste material were understated by the assessee. It is submitted that the case of Highland Garments (P) Ltd. is not comparable to the assessee's case as elaborately explained by the assessee before the CIT(A). The learned counsel also invited our attention to p. 140 of the paper book containing details of raw material consumed and the sale proceeds of rags, fents, etc. for the assessment year under appeal as compared to the preceding and succeeding assessment years, These details are as under :
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Asst. yr. Raw material consumed Sale proceeds of
Yarn (Kgs.) Fabrics (Mts.) Chindis/Rags (Rs.)
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1992-93 239911.41 573221.50 68,455.00
1993-94 270083.60 442824.15 54,260.00
1994-95 291532.59 101824.00 40,000.00
1995-96 311895.00 259102.00 (Not known)
1996-97 310241.00 461534.00 92,000.00
1997-98 276928,00 243500.00 4,56,262.00
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It is submitted that the sales shown by the assessee at Rs. 40,000 is reasonable and should have been accepted. It is also contended that the profit arising on such sales is eligible for deduction under Sections 80HHC and 80-I as this income is directly connected to the business of the assessee. The learned Departmental Representative supported the orders of the Revenue authorities.
4. We have given a careful consideration to the submissions made by both the parties and have gone through the facts. It must be mentioned that the assessee has not maintained any stock register and no details of waste material generated during the course of manufacturing of garments, The sales of rags, fents, etc. has been shown by the assessee at a round figure of Rs. 40,000. It is also notable that during the asst. yrs. 1992-93 and 1993-94, the sale proceeds shown in the books of account in respect of rags amounts to Rs. 68,455 and Rs. 54,260, respectively, Interestingly, in the asst. yr. 1997-98, the sales of such material shot to Rs. 4,56,262. Considering the entire facts and circumstances, we hold that it would be fair and reasonable to sustain the addition of Rs. 3,60,000 to the extent of Rs. 2 lakhs only. Accordingly, the addition stands reduced to Rs. 2 lakhs. These sales, for the purpose of Sections 80HHC and 80-I, will have to be treated as local sales and not export sales. Obviously, the waste generated during the manufacturing process will be sold only locally and cannot be exported. However, it is in the nature of income derived from the industrial undertaking and, therefore, the assessee will be entitled to deduction under Section 80-I. For the purposes of Section 80HHC, the addition will be treated as business profits and the same will also be included in the total turnover while computing deduction under Section 80HHC. The AO is accordingly, directed to recompute the deduction under Sections 80HHC and 80-I.
5. The ground Nos. 3 and 4 are as under:
"The learned CIT(A) erred in confirming the action of the AO in treating the interest receipts of Rs. 12,31,068 as income from other sources without appreciation the facts and circumstances of the case.
Without prejudice to the above, the CIT(A) erred in not allowing the appellant set off of financial expenses of Rs. 13,62,713 against the interest receipts."
These grounds are not pressed by the learned counsel for the assessee and, therefore, on these issues, the order of the learned CIT(A) stands confirmed,
6. The ground No. 5 is as under :
"The learned CIT(A) erred in confirming the action of the AO in computing the deduction under Section 80HHC, including the quota premium of Rs 4,50,578 and service charges of Rs. 1,02,500 in the total turnover."
7. The learned counsel for the assessee contended that the amount received by the assessee by way of quota premium and service charges are not includible in the total turnover for the purpose of Section 80HHC, as these receipts are similar to profit on sale of import entitlement, etc. The learned counsel submitted that the assessee's claim is directly covered by CBDT's Circular F.No. 133/131/97-TPL dt. 23rd Feb., 1998 (copy at p. 142 of the paper book). This circular is reproduced below :
"Sub : Clarification sought by Apparel Export Promotion Council (AEPC) as to whether the premium received for the transfer of export quotas would be treated as a part of export profit eligible, for deduction under Section 80HHC of IT Act or not--reg.
1. The undersigned is directed to refer to PMO's D.O. No. 247/JS(S)98 dt. 2nd Feb., 1998 on the subject cited above. In the representation enclosed therein a clarification has been sought by AEPC as to whether the premium received for the transfer of the export quotas would be treated as a part of export profit eligible for deduction under Section 80HHC of the IT Act or not.
2. Deduction under Section 80HHC is allowed on export profits with a view to encourage earning in convertible foreign exchange. Since the premium payment on export quotas under Electronic Transfer System does not involve any earnings in foreign exchange, this amount does not qualify for deduction under Section 80HHC.
3. Technically export premium can be equated with the items mentioned in Section 28(iiia) (profit on sale of import licences), Section 28(iiib) (cash assistance) and Section 28(iiic) (duty drawback).
4. Therefore, the present item; viz., the premium on sale of export quotas statutorily receive the same treatment, as profit on sale of import licences, cash assistance and duty drawback."
The learned Departmental Representative supported the order of the Revenue authorities on this issue.
8. We have considered the rival submissions vis-a-vis the provisions of law and have gone through the relevant circular issued by the CBDT. The phrase 'total turnover has been defined under Clause (ba) of the Explanation under Section 80HHC(4C). This definition is as under:
"(ba) 'total turnover' shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) :
Provided that in relation to any assessment year commencing on or after the 1st April, 1991, the expression 'total turnover, shall have effect as if it also excluded any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28."
From the above, it is seen that for the asst. yr. 1991-92 and subsequent assessment years, any receipt referred to under Clauses (iiia); (iiib) and (iiic) of Section 28 shall be excluded from the 'total turnover'. The circular issued by the CBDT clarifies that the premium received for the transfer of export quota will be equated with the aforesaid items of receipts. It is, therefore, clear that such premium cannot be included in the turnover. However, with regard to the service charges, in our view, the situation is different. As per the definition of total turnover, service charges cannot be excluded. Accordingly, the AO is directed to exclude the amount of quota premium from the total turnover and recompute the deduction allowable under Section 80HHC.
9. The ground No. 6, which is the last ground of appeal, is as under;
"The learned CIT(A) erred in confirming the action of the AO in excluding the quota premium, REP licence premium, interest, service charges, sales-tax refund from the profits eligible to deduction under Section 80-I."
10. We have heard both the parties on this issue and have gone through the facts and also the relevant provisions of law, In our view, the various receipts mentioned in the grounds of appeal cannot be said to be in the nature of profits derived from the industrial undertaking. Such receipts may be incidental to the industrial undertaking, but they have no direct nexus with the actual activity of the industrial undertaking. In our view, the assessee is not entitled to deduction under Section 80-I in respect of these receipts. Accordingly, the order of the learned CIT(A) on this issue is confirmed, Appeal No. 4650 :
11. This is Departmental cross-appeal arising from the same order of the learned CIT(A). The only grievance of the Department is reflected from the following grounds of appeal raised :
"On the facts and circumstances of the case and in law, the learned CIT(A) erred in
(a) directing the inclusion of the profits/gains in respect of duty drawback amounting to Rs. 59,26,669, insurance and commission amounting to Rs. 21,732 and export freight recovered amounting to Rs. 9,57,608 while calculating the admissible deduction under Section 80-I of the Act;
(b) ignoring the fact that duty drawback insurance and export freight are the incentives granted as a consequence to export sales, i.e., the trading activity of the assessee and hence cannot be termed as income received out of industrial activities."
12. The learned Departmental Representative relied on the Supreme Court decision in the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC) for the proposition that the receipts mentioned in the grounds of appeal raised by the Department, cannot be said to be profits derived from the industrial undertaking. In this case, it was held by the Supreme Court that profits from sale of import entitlement are not profits derived from the industrial undertaking and, therefore, not eligible for deduction under Section 80HH. The learned counsel for the assessee argued before us that the Supreme Court decision is not applicable at all to the facts of the assessee's case. It is submitted that this issue is squarely covered in assessee's favour by the following Tribunal decisions :
(i) Dy. CIT v. Metro Tyres Ltd. (2001) 79 ITD 557 (Del)
(ii) Andhra Pradesh Industrial Components Ltd. v. Dy. CIT (2002) 74 TTJ (Hyd) 272 The learned counsel invited our attention to the ratio of the case of Metro Tyres Ltd. (supra) relevant portion of which is reproduced below from the headnote :
"There must be direct nexus between the income and the industrial undertaking meaning thereby, the source of income must be the industrial undertaking. If the source of the income is other than the industrial undertaking then it cannot be said that such income is derived from the industrial undertaking.
With regard to the issue of duty drawback, perusal of Section 75(1) of Customs Act, 1962, clearly shows that the duty drawback is given by way of incentive to boost the export of goods manufactured in India. If any imported goods on which custom duty has been levied, has been used in the manufacture of any goods of any class or description and such manufactured goods have been exported out of India, then custom duty paid on imported goods is given back to the manufacturer by way of rebate. This duty drawback is given only to manufacturers making export as is apparent from Sub-section (2) of Section 75. In other words, it is nothing but reimbursement of duty already paid. Whenever such duty is paid, it directly affects the profits of industrial undertaking inasmuch as it is debited to manufacture and P&L a/c. Such payment of custom duty increases the cost of manufacturing but when the same is received back as drawback, it nullifies the effect of aforesaid increase in the cost of manufacturing. Therefore, the duty drawback is inextricably linked with the production cost of the goods manufactured by the assessee. Accordingly, duty drawback is the trading receipt of the industrial undertaking having direct nexus with the activity of such industrial undertaking and accordingly, the same forms part of the income derived from such industrial undertaking. The order of the CIT(A) was, therefore, upheld with reference to this item.
For similar reasons, the assessee was entitled to succeed in respect of claims received from insurance company and transporters. The payment of freight charges to the transporter as well as the premium to the insurance company is directly connected with the activity of the industrial undertaking affecting the profits of the business and consequently, refund thereof has a direct nexus with such business activity. The details furnished before the Tribunal clearly showed that amount received from transproters was on account of shortage of rubber and tyres transported. Further the claim from insurance company was on account of the damage of stock due to flood. So, there was direct nexus between the amount received from the transporter/insurance companies and the activity of the industrial undertaking. Accordingly, it was to be held that such receipts formed part of the profits derived from industrial undertaking."
Similar view has been adopted by the Tribunal in the case of the Andhra Pradesh Industrial Components Ltd. (supra). The learned counsel submitted that in both the cases, the Supreme Court decision in the case of Stealing Foods (supra) has been duly considered and distinguished by the Tribunal.
13. We have considered the rival submissions vis-a-vis the provisions of law in the light of precedents cited before us. In our view, the Supreme Court decision with regard to import entitlement cannot be considered as applicable to the receipts in the nature of duty drawback, insurance, recovery of export freight, etc. These items have direct nexus with the industrial undertaking and Tribunal decisions relied upon by the learned counsel for the assessee are clearly applicable. Therefore, the order of the learned CIT(A) on this issue is confirmed."
Appeal No. 4793:
14. This appeal has been filed by the assessee against the order dt. 25th May, 1998, of CIT(A), Central-II, Mumbai. The assessee has filed revised grounds of appeal as the original grounds were narrative and argumentative. The ground Nos. 1 and 2 pertain to estimated addition of Rs. 1,20,000 on account of alleged unaccounted sale of rags, fents, chindies, etc. This issue has already been considered by us while deciding similar ground of appeal in ITA No. 4784 above. In our view, it would be fair and reasonable to restrict the addition to a sum of Rs. 75,000 only. The AO is directed to allow consequential relief. The AO shall also recompute deduction under Sections 80HHC and 80-I in the light of observations made above in our order in ITA No. 4784.
15. The ground No. 3 is as under:
"The learned CIT(A) erred in confirming the action of the AO in computing the deduction under Section 80HHC including the quota premium of Rs. 94,654 and service charges of Rs. 26,500.
16. Similar issue has also been dealt with and decided by us while disposing of ITA No. 4784. For the same reasons, the AO directed to exclude quota premium from the total turnover and recompute deduction under Section 80HHC.
17. The ground No. 4 is as under :
"The learned CIT(A) erred in confirming the action of the AO excluding the quota premium, REP licence premium, interest service charges, sales-tax refund from the profits eligible to deduction under Section 80-I."
18. This issue has also been decided by us while disposing of ITA No. 4784. For the same reasons, the order of the learned CIT(A) on this issue stands confirmed.
Appeal No. 4648
19. This is Departmental cross-appeal arising from the same order of the learned CIT(A). The grounds of appeal are as under :
"On the facts and circumstances of the case and in law, the learned CIT(A) erred in :
(a) directing the inclusion of the profits/gains in respect of duty drawback amounting to Rs. 13,33,256, export freight recovered amounting to Rs. 6,24,134 while calculating the admissible deduction under Section 80-I of the Act.
(b) ignoring the fact that duty drawback and export freight are the incentives granted as a consequence to export sales, i.e., the trading activity of the assessee and hence cannot be termed as income received out of industrial activities."
20. Similar issue has been dealt with and decided by us while dealing with the Departmental appeal in ITA No. 4650 above. For the same reasons, the order of the learned CIT(A) on this issue is confirmed.
21. In the result, while the assessees' appeals are party allowed, both the Departmental appeals are dismissed.