Income Tax Appellate Tribunal - Ahmedabad
Amoli Organics Pvt.Ltd.,, Vapi vs Department Of Income Tax on 15 March, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A", AHMEDABAD
Before Shri T.K. Sharma,JM & Shri A.N. Pahuja, AM
ITA No.3096/Ahd/2007 - AY 1999-00
ITA No.3097/Ahd/2007 - AY 2004-05
ACIT, Vapi Circle vs Amoli Organics Pvt. Ltd.
Vapi GIDC, Plot No.322/4
Vapi 396 195
[PAN : AACCA3990Q]
(Appellant) (Respondent)
C.O. No.252/Ahd/2007
(Arising out of ITA No.3096/Ahd/2007)
(Assessment year 1999-2000)
&
ITA No.2744/Ahd/2007
(Assessment year 2004-05)
Amoli Organics Pvt. Ltd. vs ACIT, Vapi Circle
Vapi 396 195 Vapi
(Cross Objector/Appellant ) (Respondent)
Revenue by : Shri Rajeev Agarwal, DR
Assessee by : Shri SN Soparkar, AR
ORDER
A.N. Pahuja : These cross appeals for the AY 1999-2000 and cross-objection by the assessee for the AY 1999-2000 and appeal of the Revenue for the AY 2004-05 against two separate orders dated 15.3.2007 of the ld. CIT(A)-Valsad, raise various grounds on certain common issues . Accordingly, these appeals in the case of same assessee were heard simultaneously for the sake of convenience and are being disposed of through this common order.
2. Adverting first to ground no. 1 in the appeal of the Revenue and ground no.2 in the CO of the assessee for the AY 1999-2000, facts ,in brief, as per relevant orders are that return declaring income of Rs.25,18,000/- under the normal provisions and Rs. 50,72,600/ - u/s 115JA of the Income-tax Act,1961[hereinafter referred to as the 'Act'] filed on 31.12.1999 by the assessee, 2 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 engaged in the business of manufacturing and marketing of active pharmaceutical ingredients, was processed u/s 143(1) of the Income-tax Act,1961[hereinafter referred to as the 'Act'] . Later the assessee filed revised return, declaring income of Rs. 33,45,000/- in terms of the provisions of sec. 115JA of the Act on 30.11.2000.Subsequently, assessment was reopened u/s 147 of the Act on the ground that profit on sale of import license acquired from other person was not entitled to the deduction u/s 80HHC of the Act. Accordingly, a notice u/s 148 of the Act was served upon the assessee on 10.5.2005.In response, the assessee submitted that return already filed may be treated as return in response to notice u/s 148 of the Act. During the course of assessment proceedings, the Assessing officer[AO in short] noticed that the assessee had payments of Rs. 16,87,181/- towards PF and ESI, beyond the dates stipulated under the relevant enactments. To a query by the AO, the assessee replied that payments towards PF and ESI were made within the grace period allowed under the relevant enactments and therefore, the same could not be disallowed. However, the AO was of the view that payments made beyond the due dates and within the grace period were not admissible .Accordingly, relying on decisions in the case of CIT vs. Madras Radiators & Pressing Ltd.,264 ITR 620(Mad) and CIT vs. Standard Tiles & Clay Works P Ltd.,265 ITR 525(Ker) the AO disallowed the claim for deduction u/s 43B of the Act.
3. On appeal, the ld. CIT(A) relying on the decision of the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd (2005) 149 Taxman 15 (Guj) and of special Bench in the case of Quality Milk Foods Ltd. vs. ACIT,102 TTJ53 (Chennai(SB) directed the AO to allow deduction of payments towards PF & ESIC in regard to employer's and employees' contribution only if paid/deposited within the grace period allowed under the relevant statute.
4. The Revenue is now in appeal against the aforesaid findings of the ld. CIT(A) on the ground that the ld. CIT(A) erred in holding that payments of PF & ESI amounting to Rs. 16,87,181/- made before filing the return are eligible for 3 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 deduction even when due dates under the relevant Acts were 15th & 21st of every month. On the other hand, the assessee in the CO raised a ground that the ld. CIT(A) erred in not holding that amendment to sec. 43B is retrospective and therefore even if the payment of PF and ESIC was made before the due date for filing the return, the same can not be disallowed u/s 43B of the Act. The ld. DR appearing before us without specifying the actual dates of payments or even the amount of employer's and employees' contribution submitted that employees' contribution is not deductible u/s 43B of the Act and in this connection relied upon decision in the case of JCIT vs. ITC Ltd.,115 ITD 45(Kolkatta)(SB) . On the other hand, the ld. AR on behalf of the assessee relied upon a decision in CIT vs Alom Extrusions Ltd 319 ITR 306 (SC) and contended that payments towards PF & ESI made before the due date of filing of return are deductible u/s 43B of the Act. He added that in view of decision of Delhi High Court in CIT v. P.M.Electronics Ltd., 220 ITR 635 (Delhi) , both employer and employees' contribution was deductible.
5. We have heard both the parties and gone through the facts of the case. As already mentioned above, the Revenue in their ground stated that the ld. CIT(A) erred in holding that payments of PF & ESI amounting to Rs. 16,87,181/- made before filing the return are eligible for deduction even when due dates under the relevant Acts were 15th & 21st of every month. Neither the date of actual payments are evident from the impugned orders nor the issue of employer and employees' contribution emerged from the findings of the ld. CIT(A). Even the relevant details in regard to date(s) of actual payment as also amount of employer and employees' contribution were not placed before us. We find that the ld. CIT(A) only directed the AO to allow deduction of payments towards PF & ESIC in regard to employer's and employees' contribution only if paid/deposited within the grace period allowed under the relevant statute. Hon'ble Madras High Court in CIT Vs. Salem Cooperative Spinning Mills Ltd. ,284 ITR 621 (Mad)following their own decision in CIT v. Shri Ganapathy Mills Co. Ltd. [2000] 243 ITR 879, held that the payments towards provident fund and employees' 4 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 State insurance having been made within the grace time allowed under the relevant statute, those amounts were required to be deducted in the computation of the taxable income of the assessee . In the light of these decisions, especially when the Revenue did not place before us any contrary decision ,we have no alternative but to uphold the findings of the ld. CIT(A).
5.1 Moreover, recently, Hon'ble Apex Court in the case of CIT vs Alom Extrusions Ltd 319 ITR 306 (SC) held that the omission of the second proviso to section 43B of the Act by the Finance Act, 2003, operated, retrospectively, with effect from, April 1, 1988 and not prospectively from April 1, 2004. Hon'ble Court observed that earlier under the second proviso to section 43B as amended by the Finance Act, 1989, assessees were entitled to deduction only if the contribution stood credited on or before the due date given in the Provident Funds Act. This created further difficulties and on a representation made to the Finance Ministry one more amendment was made by the Finance Act, 2003. Though this amendment was made applicable with effect from April 1, 2004, the amendment was curative in nature and applied retrospectively with effect from April 1, 1988.It was clarified that when a proviso in a section is inserted to remedy unintended consequences and to make the section workable, the proviso which supplies an obvious omission therein is required to be read retrospectively in operation, particularly to give effect to the section as a whole.
5.2 We further find that the Hon'ble Delhi High Court in the case of CIT v. P.M.Electronics Ltd., 220 CTR 635 (Delhi), following the decision of Hon'ble Apex Court in the case of Vinay Cement Ltd.(supra), allowed the claim of the assessee for deduction of the employees' contribution towards PF.
5.3 In view of the foregoing discussion, we have no alternative but to dismiss ground no. 1 in the appeal of the Revenue and allow ground no.2 in the CO of the assessee for the AY 1999-2000.
5 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007
6. Ground no.2 in the appeal of the Revenue for the AY 1999-2000 and ground no. 3 in their appeal for the AY 2004-05 pertains to exclusion of excise duty and sales tax from total turnover while computing deduction u/s 80HHC of the Act. The AO while computing deduction u/s 80HHC of the Act excluded sales tax and excise duty from the total turnover, relying, inter alia, on the decisions in the case of Chowringhee Sales Bureau,87 ITR 542(SC),Sinclair Murray & Co.,97 ITR 615(SC) & McDowell & Co.,154 ITR 148(SC). On appeal, the ld. CIT(A) following the decision in the case of Sudarshan Chemical Industries Ltd.,245 ITR 769(Bom.) decided the issue in favour of the assessee.
7. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee relied upon the order of the AO in view of judgment of the Hon'ble Supreme Court in the case of CIT vs Lakshmi Machine Works 290 ITR 667 (SC).
8. We have heard both the parties and gone through the facts of the case. We are not inclined to accept the plea raised in the ground of appeal that the provisions of sec. 145A were applicable to the concept of total turnover even while determining the deduction u/s 80HHC of the Act in view of the following observations of the Hon'ble Apex Court in the case of Laxmi Machine Works(supra), wherein it was held as under:
".........We have to read the words "total turnover" in section 80HHC as part of the formula which sought to segregate the "export profits" from the "business profits". Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover + total turnover which constitutes section 80HHC concession (deduction). Income in the nature of "business profits" was, therefore, apportioned. The above formula fixed a ratio in which "business profits" under section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words "total turnover" but also to the words "export turnover", "total export 6 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 turnover" and "business profits". That is the reason why we have quoted hereinabove extensively the illustration from the Direct Taxes (Income-tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words "total turnover" in the above formula with reference to the definition of the word "turnover"
in other laws like Central Sales Tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under section 80HHC. They were not eligible even without the clarification introduced by the Legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the Income-tax Act, profits and gains were required to be computed with reference to the books of account of the assessee. However, as can be seen from the Income-tax Rules and from the above Form No. 10CCAC in the case of deduction under section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing section 80HHC deduction was "business profits"
as computed under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the Legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under the Excess Profits Tax Act, it existed in the Business Profits Tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of "turnover", excise duty and sales tax also cannot form part of the "turnover". Similarly, "interest" emanates from exports and yet "interest" does not involve an element of turnover. The object of the Legislature in enacting section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, "turnover" was the requirement. Commission, rent, interest, etc. did not involve any turnover. Therefore, 90 per cent. of such commission, interest etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in section 80HHC(3) for the simple reason that they did not emanate from the" export turnover", much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the" turnover". Just as interest, commission etc. did not 7 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 emanate from the "turnover", so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake of the character of turnover and" therefore, they were not includible in the "total turnover". The above discussion shows that income from rent, commission, etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No. 4409 of 2005, the above proposition has been accepted by the Assessing Officer, if so, then excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of "turnover" which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. The view which we have taken is in the light of the amendments made to section 80HHC from time to time."
8.1 Section 80HHC of the Income-tax Act, 1961 is a beneficial section and was intended to provide incentive to promote exports. The intention was to exempt profits relatable to exports. As observed by the Hon'ble Apex Court, one cannot interpret the words "total turnover" with reference to the definition of the word "turnover" in other laws like the Central sales tax or as defined in accounting principles. The words "total turnover" in section 80HHC have to be read as part of the formula which sought to segregate the "export profits" from the "business profits . Therefore, we are of the opinion that excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3) of the Act.
8.2 Recently in the case of Sony India Pvt. Ltd. Vs. DCIT, in ITA no. 1181/Del/2005 dated 23/9/2008 for the AY 2001-02 ,ITAT Delhi Bench ,following the aforesaid decision of the Hon'ble Supreme Court directed to exclude excise duty while working out total turnover for the purpose of deduction u/s 80HHC of the Act.
8 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 8.3. In view of aforesaid decision of the Hon'ble Supreme Court, the ld. CIT(A) was justified in directing the AO to exclude excise duty and sales tax while working out total turnover for the purpose of deduction u/s 80HHC of the Act. Thus, ground no.2 in the appeal of the Revenue for the AY 1999-2000 and ground no. 3 in their appeal for the AY 2004-05 are dismissed.
9. Ground no.3 in the appeal of the Revenue for the AY 1999-2000 relates to exclusion of the export benefits of Rs. 1,08,55,035/- form the manufacturing profits while computing deduction u/s 80IB of the Act. The AO noticed that the assessee included the following amounts while computing deduction u/s 80IB of the Act:
Advance Licence Sales Rs. 62,07,163/-
Special Import Licence Rs. 9,632/-
Sale of DEPB Rs. 42,35,340/-
Duty Draw back Rs. 4,02,900/-
Since the aforesaid amounts were not directly derived from the manufacturing activities carried out by the assessee company, relying on the decisions of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd 262 ITR 278 (SC) and CIT vs Sterling Foods 237 ITR 579 (SC) as also on the decisions in the case of CIT Vs. Eastern Sea Food Exports P Ltd.,215 ITR 62(Mad.), the AO excluded the aforesaid amounts while computing deduction u/s 80IB of the Act.
10. On appeal, the ld. CIT(A) relied upon decision in the case of CIT vs India Gelatine & Chemicals Ltd (2005) 275 ITR 284 (Guj) and JCIT vs. M/s Suditi Industries Ltd.(Mum.) in ITA no.3490/Mum./2000 and decided the issue in favour of the assessee in the following terms:
"A.11 I have perused the submission of the appellant company. The observation of the Honorable Mumbai Tribunal are as under:-
9 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 "Undisputedly, the export incentives are the part of profit and gains of business of the Industrial Undertakings in view of the provisions of Sec.28(iiia) and of the Industrial Undertakings in view of the provisions of Sec.28(iiia) (iiib) and (iiic) of the Act. As such, the same are eligible for deduction under sec.80IA of the Income-tax Act."
A.12 The above observation of the Honourable Mumbai Tribunal also adds strength to the appellant company's argument that export incentives received form part of the profits and gains of the eligible business of the Industrial Undertaking. This decision has been rendered by the Mumbai ITAT after considering the Apex Court in the case of Sterling Foods (237 ITR 579 (SC), Hindustan Lever Limited (239 ITR 297) and also Pandian Chemicals (262 ITR 278).
A.13 The Taxation laws (Second Amendment) Act, 2005 has now clearly closed the whole issue by laying down specifically that profit on sale of DEPB and DFRC benefits are eligible for deduction U/s 80HHC subject to certain conditions. The A.R. of the appellant company argued that though the amendment is relating to Section 80HHC, it is squarely applicable to Section 80-IB as well, since both the sections are drafted in a similar pattern and were enacted to foster economic development. The decision of the Apex Court in Sterling Food's case relied upon by the assessing officer has excluded only profit from sales of import entitlements and licenses as being not derived from the Industrial Undertaking. Considering that the export benefits received by the appellant company are by way of DEPB credits, advance license, special import license and duty draw back all of which are given by the Government to neutralize duties and taxes on imports and keeping in view the above discussed facts and law and also by following the findings of Honorable Gujarat High Court, I accept the contention of the A.R. of the appellant company and delete the disallowance made by the assessing officer in this regard. The appellant company succeeds in this ground of appeal on this issue."
11 The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). At the outset, both the parties agreed that the issue is squarely covered by the decision dated 31.8.2009 of the Hon'ble Apex Court in the case of M/s Liberty India Vs. CIT in a civil appeal arising out of SLP no. 5827 of 2007 reported in 317 ITR 218(SC).
10 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007
12. We have heard both the parties and gone through the facts of the case. On a similar issue as to whether the profit from Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme are "derived from the business of the Industrial Undertaking" and consequently, eligible for deduction u/s 80-IB, the Hon'ble Apex Court observed that the Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A essentially belongs to the category of "profit linked incentives"
while ss. 80-IA/80-IB refer to profits derived from eligible business; it is not the ownership of that business which attracts the incentives but the generation of profits (operational profits) and each of the eligible business in sub-sections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. It was further held that Ss. 80-IB/80-IA are a Code by themselves as they contain both substantive as well as procedural provisions. S. 80-IB allows deduction of profits and gains derived from the eligible business. The words "derived from" is narrower in connotation as compared to the words "attributable to". By using the expression "derived from", Parliament intended to cover sources not beyond the first degree. Though the object behind DEPB etc is to neutralize the incidence of customs duty payment on the import content of export product DEPB credit/duty drawback receipt do not come within the first degree source as the said incentives flow from Incentive Schemes enacted by the Government or from s.
75 of the Customs Act. Such incentives profits are not profits derived from the eligible business u/s 80-IB. They are 'ancillary profits' of such undertakings and even as per AS-2 and the ICAI Guidance Note, duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods but have to be shown as an independent source of income beyond the first degree nexus between profits and the industrial undertaking. Therefore, the Hon'ble Apex Court concluded that "16. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as 11 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc.. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from Section 75 of the Customs Act,1962, hence, incentives profits are not profits derived from the eligible business under Section 80-IB. They belong to the category of ancillaryprofits of such Undertakings.
17. The next question is - what is duty drawback? Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944 empower Government of India to provide for repayment of customs and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum-manufacturer. Sub-section (2) of Section 75 of the Customs Act requires the amount of drawback to be determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported. Basically, the source of duty drawback receipt lies in Section 75 of the Customs Act and Section 37 of theCentral Excise Act.
18. Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Scheme(s) framed by the Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression "profits derived from industrial undertaking" in Section 80- IB.
19. Since reliance was placed on behalf of the assessee(s) on AS-2 we need to analyse the said Standard.
20. AS-2 deals with Valuation of Inventories. Inventories are assets held for sale in the course of business; in the production for such sale or in form of materials or supplies to be consumed in the production.
21. "Inventory" should be valued at the lower of cost and net realizable value (NRV). The cost of "inventory" should comprise all costs of purchase, costs of conversion and other costs including costs incurred in bringing the "inventory" to their present location and condition.
22. The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from taxing authorities), freight 12 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 inwards and other expenditure directly attributable to the acquisition. Hence trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, duty drawback, rebate etc.should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly (see: page 44 of Indian Accounting Standards & GAAP by Dolphy D'souza). Therefore, for the purposes of AS-2, Cenvat credits should not be included in the cost of purchase of inventories. Even Institute of Chartered Accountants of India (ICAI) has issued Guidance Note on Accounting Treatment for Cenvat/Modvat under which the inputs consumed and the inventory of inputs should be valued on the basis of purchase cost net of specified duty on inputs (i.e. duty recoverable from the Department at later stage) arising on account of rebates, duty drawback, DEPB benefit etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets etc. Therefore, we are of the view that duty drawback, DEPB benefits,rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking.
............................................................................................................
24. In the circumstances, we hold that Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I/80-IA/80-IB of the 1961 Act."
12.1. In the light of view taken in the aforesaid decision of the Hon'ble Apex Court, we hold that the aforesaid export incentives profits in the form of DEPB, duty drawback and advance licenses as also special import licenses are independent sources of income beyond the first degree nexus between profits and the industrial undertaking and are ,thus, not profits derived from the eligible business under Section 80-IB of the Act. Therefore, ground no.2 in the appeal of the Revenue for the AY 1999-2000 is allowed.
13. Ground no. 4 in the appeals of the Revenue for AY 1999-2000 and AY 2004-05 pertains to exclusion of an amount of Rs. 1,04,52,135/- & Rs. 3.49.38.291/- respectively on account of sale of DEPB from the profits of the business while computing deduction u/s 80HHC of the Act. The said amount of Rs. 1,04,52,135/- in the AY 1999-2000 comprises:
13 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 Advance Import Licence sale Rs. 62,07,163/-
Special Import Licence Rs. 9,632/-
Sale of DEPB Rs. 42,35,340/-
Since the aforesaid amounts were not directly derived from the
manufacturing activities carried out by the assessee company while the
assessee did not submit any evidence, fulfilling the conditions stipulated in the third proviso to sec. 80HHC(3) of the Act, inserted by the Taxation Laws (Second Amendment )Act,2005 w.e.f. 1.4.1998 , the AO excluded the aforesaid amounts from the profits of the business while computing deduction u/s 80HHC of the Act.
14. On appeal, the ld. CIT(A) found that the assessee did not earn any profit on sale of DEPB, special import license or advance license and as per details filed by the assessee, total loss of Rs.22,16,719 in the AY 1999-2000 & Rs.
8,44,309/- in the AY 2004-05 was incurred. In the light of these facts, the ld. CIT(A) concluded that receipts of DEPB benefits,special import license and advance license can be considered as profits of the business within the meaning of sec. 80HHC of the Act.
15. The Revenue is now in appeal before us. At the outset, both the parties agreed that the issue needs to be restored to the file of the AO for readjudication in the light of Special Bench decision in the case of M/s Topman Exports vs ITO reported in 318 ITR (AT) 86(SB)(Mum).
16. We have heard both the parties and have gone through the facts of the case as also the decision relied upon. We find that in the aforesaid decision dated 11.8.2009 in the case of M/s Topman Exports,318 ITR(AT) 87(Mumbai) (SB)., the following question was referred to the Special Bench:
Whether the entire amount received on sale of DEPB entitlements represents profit chargeable under section 28(iiid) of the Income Tax Act 14 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 or the profit referred to therein requires any artificial cost to be interpolated?
16.1 Accordingly, the Special Bench adjudicated the aforesaid question in following terms:
i) The argument of the Revenue that DEPB is a post export event and has no relation with the purchase of goods cannot be accepted. There is a direct relation between DEPB and the customs duty paid on the purchases. For practical purposes, DEPB is a reimbursement of the cost of purchase to the extent of customs duty;
(ii) The DEPB benefit (face value) accrues and becomes assessable to tax when the application for DEPB is filed with the concerned authority.
Subsequent events such as sale of DEPB or making imports for self consumption etc are irrelevant for determining the accrual of the income on account of DEPB;
(iii) Though s. 28 (iiib) refers to a "cash assistance against exports", it is wide enough to cover the face value of the DEPB benefit;
(iv) S. 28 (iiid) which refers to the "profits on transfer of the DEPB" obviously refers only to the "profit" element and not the gross sale proceeds of the DEPB. If the Revenue's argument that the sale proceeds should be considered is accepted there would be absurdity because the face value of the DEPB will then get assessed in the year of receipt of the DEPB and also in the year of its transfer;
(v) Consequently, only the "profit" (i.e. the sale value less the face value) is required to be considered for purposes of s. 80HHC.
16.2 In the light of aforesaid findings of the Special Bench, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to the file of the AO for deciding the issue relating to claim for deduction u/s 80HHC of the Act in relation to the aforesaid amounts on account of sale of DEPB benefits including sale of advance import licenses, afresh in accordance with law, after allowing sufficient opportunity to the assessee and keeping in view the aforesaid decision of the Special Bench. With these directions, ground no. 4 in the appeals of the Revenue for the AY 1999-2000 & AY 2004-05 are disposed of.
15 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007
17. Now adverting to ground no.1 in the cross-objection filed by the assessee for the AY 1999-2000 relating to the claim for deduction u/s 80IB of the Act on the amount of interest and miscellaneous income of Rs.2,58,495/- , There is no discussion on this issue in the assessment order nor the ld. CIT(A) seems to have adjudicated this issue raised in ground no. 4 of the appeal filed before him by the assessee. Since the issue has not been adjudicated by the ld. CIT(A) nor the relevant facts have been placed before us nor even mentioned in the assessment order, we have no option but to restore the matter to the file of the ld. CIT(A) with the directions to record his specific findings on the issue raised in ground no. 4 of the appeal filed before him after allowing sufficient opportunity to both the parties. With these directions , ground no. 1 in the CO is disposed of.
18. Ground 3 in the cross objection relate to claim for deduction u/s 80HHC & 80IB of the Act on the same amount of gross total income. There is no discussion on this aspect in the assessment order nor the ld. AR on behalf of the assessee pointed out before us that any such ground was raised by the assessee before the ld. CIT(A). In these circumstances, especially when no specific ground has been raised by the assessee before the ld. CIT(A), this issue does not emerge from the order of the ld. CIT(A) and therefore, ground raised by the assessee before us has to be dismissed on that score alone. In any case , even otherwise ,both the parties agreed before us that issue is squarely covered against the asssessee by a decision dated 23.6.2009 of the ITAT Special Bench, Delhi [5 members] in the case of ACIT Vs. M/s Hindustan Mint & Agro Products Pvt. Ltd.,Chandausi,119 ITD 107. With these observations, ground no. 3 in the CO is dismissed.
19. Next ground no.1 in the appeal of the Revenue for the AY 2004-05 relates to disallowance of Rs.82,109/- on account of foreign travel expenses. During the course of assessment proceedings, the AO noticed that the assessee claimed deduction of Rs.4,10,543/- on account of foreign travel expenditure. To a query by the AO,seeking details of countries visited, the names of persons for whom 16 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 expenses were incurred etc., the assessee replied that the visits were for business purposes. Since the assessee did not furnish any evidence that the expenditure was incurred wholly and exclusively for the purpose of business while the reply by the assessee was general in nature and did not contain any justification for the visits made by its employees to various foreign destinations as well as for the number of days stayed there, the AO disallowed Rs.82,109/-. on estimate basis, being 1/5th of the expenditure claimed by the assessee.
20. On appeal, the assessee while relying upon the judgments in the case of Sayaji Iron & Engineering Co Ltd vs CIT 96 ITR 240,CIT vs Elecon Engg 132 ITR 752 (Guj) and CIT vs McGaw Ravindra Lab Ltd 132 ITR 401, contended that the disallowance was not justified. In the light of these submissions, the ld.CIT(A) deleted the disallowance with the following observations:
"10.5 I have perused the findings of the assessing officer in the assessment order and went through the submission and the judicial findings relied upon by the A.R. carefully. After analyzing the facts, I am of the view that the assessing officer did not bring any material / evidence on record in support of her findings that 1/5th of such expenditure incurred under the head foreign travels were not incurred for business purposes at all. It is seen that the Assessing Officer has made the disallowance of 1/5th of the expenditure under this head by concluding that the appellant company did not give specific reply for each and every trips made by the directors / executives of the company. After going through the submission and the details of the traveling expenditure as submitted by the A.R. it is seen that very categorically the statement has been prepared in this regard and the purpose for the visit by each employee has also been mentioned therein. I am also of the view that it is the duty of the assessing officer to analyse each and every trip to prove her contention and give a definite finding to that and for how many days in a particular trip, a director / executive of the appellant company overstayed other than for business purpose at a particular destination. It is also seen that the judicial findings and ratios laid down therein as relied upon by the A.R. are squarely applicable to the facts of the case.
17 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 10.6 The Hon'ble ITAT Ahmedabad in the case of M/s Vikshara Trading & Investment., appeal No.5122/Ahd of 1996 dated 30.03.1998, held as under:
"There was no merit in the finding that the directors overstayed in each country. There could not be any presumption as assumed by the authorities below that the directors had gone for some sort of pleasure trip. Whether the assessee was benefited by foreign travel or not was a subsequent event and was not relevant. Hence, the foreign travels were undertaken by the directors for business purpose and there no justification for disallowing the foreign tour expenses at the rate of 50% on pure estimate. Accordingly the addition is deleted."
10.7 It is also seen that the ratio as laid down by the Hon'ble high court of Gujarat in the case of Sayaji Iron & Engineering Co and other decision as relied on by the appellant company is also giving enough strength to the argument as taken by the A.R. I, therefore, in view of the above referred facts and the judicial citations relied upon by the A.R. hold that the addition as made by the assessing officer is not sustainable in the eyes of law as the same is without any merit, and without any concrete findings. Accordingly, the addition as made by the assessing officer on account of foreign travel expenses is deleted and in the result, the appellant company succeeds in this ground of appeal."
21. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the findings of the AO while the ld. AR on behalf of the assessee supported the order of the ld. CIT(A)
22. We have heard both the parties and gone through the facts of the case. We find that in Chandulal Keshavlal and Co.'s case [1960] 38 ITR 601, Hon'ble Supreme Court held that"in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee." In order that an expenditure should qualify for deduction as contemplated by section 37(1) of the Act one of the requirements of the provision is that the expenditure must have been laid out wholly and exclusively for the purpose of business. Hence, it is for the assessee who claims deduction of the expenditure under this sub-section to satisfy the Department of the purpose for which the amount is spent. Where an assessee seeks to deduct 18 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 from his or its business profits, certain items of expenditure, the onus of proving that such deductions are permissible is on the assessee. This is particularly so when the claims are based on facts which are exclusively within the knowledge of the taxpayer . In the case in hand, the ld. CIT(A) after anlysing the facts of the case in the light of relevant decisions concluded that foreign travels were undertaken for business purpose and there was no justification for disallowing the foreign tour expenses at the rate of 25% on pure estimate. The ld. DR appearing before us did not point out any infirmity in these findings of facts recorded by the ld. CIT(A) . In these circumstances and in the absence of any material, we are not inclined to take a different view in the matter. Thus, ground no. 1 of the appeal of the Revenue for the AY 2004-05 is dismissed.
23.. Ground no. 2 in the appeal of the Revenue for the AY 2004-05 relates to disallowance of Rs.2,11,390/- on account of telephone expenses. The AO th disallowed 1/10 of the total telephone expenses incurred by the assessee on the ground that employees and directors were provided phones at their residences and these amounts were admittedly not considered towards perquisites nor personal use of telephones/mobiles was ruled out. On appeal, the ld.CIT(A) deleted the disallowance on the ground that there was nothing to suggest that expenses were personal in nature.
24. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the findings of the AO while the ld. AR on behalf of the assessee supported the order of the ld. CIT(A)
25. We have heard both the parties and gone through the facts of the case Before us, the ld. DR did not place any material, suggesting that expenses incurred on telephones by the assessee included expenses of personal nature . Since the company is a separate legal entity distinct from its directors / executives, no disallowance can be made in the hands of the company for personal use of facilities by the directors / employees. In these circumstances, 19 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 we endorse the view taken by the ld. CIT(A) and uphold the deletion of said disallowance in the light of decision of Hon'ble Gujrat High Court in the case of Sayaji iron & Engg. Co. Vs CIT,253 ITR 749 .
26. Ground no. 1 in the appeal filed by the assessee for the AY 2004-05 pertains to disallowance of Rs.41,43,891/- u/s 80HHC of the Act while computing book profits u/s 115 JB of the Act. The AO noticed during the course of assessment proceedings that the assessee claimed deduction of Rs.41,43,891/- u/s 80HHC of the Act without setting off brought forward business loss of Rs.43,88,277/- for the AY 2001-02, unabsorbed depreciation of Rs.92,99,740/- for the AY 2000-01 & Rs.3,35,69,770/- for the AY 2001-02. Relying on the decision in the case of CIT Vs. Shirke Construction Equipment Ltd.,112 Taxman,311(Bom.) and following his own decision for the AY 2003-04 , the AO concluded that the assessee shall not be eligible for any deduction u/s 80HHC of the Act. However while determining book profits u/s 115JB of the Act, the AO allowed deduction of Rs.10,62,238/- u/s 80HHC of the Act.
27. On appeal, the assessee submitted that the deduction u/s 80HHC is to be calculated on current year's business income including export income and that carry forward losses in no way related with calculations of deduction u/s 80HHC on current year's profit. In the light of these submissions, the ld. CIT(A) concluded in the following terms:
"5.3 I have perused the facts of the case. Deduction U/s 80HHC is calculated on current year's profit in the ratio of export turnover upon total turnover. The appellant has raised a contention that deduction shall be granted in the manner provided in Section 80HHC on the current year's profit. The Honourable Supreme Court has held in the case of IPCA Laboratories Limited V/s DICT (2004) 266 ITR 521 (SC) that deduction U/s 80HHC is subject to the provisions of Section 80AB. According to the provisions of Section 80AB the deduction under Chapter VI-A shall be granted only with reference to the income included in the Gross Total income in view of the above decisions of honourable Supreme Court, the appellant company is not eligible for deduction U/s 20 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 80HHC for an amount in excess of profit from business included in the Gross Total Income. This ground of appeal is dismissed."
28. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).Before us, the learned counsel on behalf of the assessee while referring to clause (iv) of the explanation to sec. 115JB of the Act relied on a decision dated 04-09-2009 of the Ahmedabad "D" Bench of the Tribunal in the case of JK Paper Ltd in ITA No.790 & 979/Ahd/2006 & Ors. While relying on another decision in the case of CIT Vs. Rajanikant Schnedler & Associates P Ltd., 302 ITR 22(Mad) followed by a co-ordinate bench in their decision dated 26.2.2010 in the case of M/s Aarvee Denims & Exports Limited vs. ITO in ITA no.158 & 159/Ahd./2007, wherein matter was restored to the file of the AO for recomputing book profits in accordance with law subject to fulfillment of conditions stipulated u/s 80HHC of the Act, the learned counsel submitted the Hon'ble Apex Court vide their order dated 27-11-2009 have dismissed the Department's special leave petition no. 32735 against the judgment dated April 13, 2009 of the Madras High Court in the case of CIT vs. SPEL Semiconductor Ltd.in T.C.A. No.480 of 2008,wherein the aforesaid decision in 302 ITR 22 was followed. The ld. AR added that in the light of view taken in the case of M/s Kanel Oil & Export Inds Ltd vs. JCIT(TM) in ITA no. ITA No. 2667/Ahd/2002 for the Assessment Year: 1998-99, decision of Special Bench judgment shall prevail over non-jurisdictional High Court judgment. On the other hand the ld. DR supported the findings of the ld. CIT(A) and further relied upon the decision of Hon'ble Bombay High Court in CIT vs. Ajanta Pharma Ltd.,223CTR 441(Bom.)
29. W e have heard both the parties and gone through the facts of the case as also the decisions relied upon. As is apparent from the impugned order, the AO and the ld. CIT(A) without analyzing the relevant provisions of clause (iv) of explanation to sec.115JB of the Act , simply disallowed the claim ,relying on the decision in the case of in the case of CIT Vs. Shirke Construction Equipment Ltd.,112 Taxman,311(Bom.) and IPCA Laboratories Limited V/s DICT (2004) 266 ITR 521 21 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 (SC). There is nothing to suggest in the impugned orders nor any material has been placed before us as to whether or not pleas now raised before us , were taken before the ld. CIT(A). In any case there is no such finding or even discussion on this aspect in the impugned orders.
29.1 As pointed out by the ld. AR on behalf of the assessee before us, in their decision dated 04-09-2009 of the Ahmedabad "D" Bench of the Tribunal in the case of JK Paper Ltd in ITA No.790 & 979/Ahd/2006 & Ors, held in the context of deduction u/s 80HHC as follows:
"10.1.4 We have heard both the parties and perused the record. It is not disputed that Hon'ble Kerala High Court in the case of GTN Textiles Ltd 248 ITR 372 (Ker) Hon'ble Madras High Court Madras High Court in the case of Megha Electro Casting Ltd (2009) TIOL-212/HC/Mad/IT in Tax Case appeal No.247 of 2009 & cit VS Futura Polyester Ltd (2009) tiol-199-hc-Mad-IT in tax case appeal No.216 to 219 dated 16.4.2009 have held that deduction u/s 80HHC should be computed on the basis of book profit computed as per the provisions of the Companies Act and not as per normal provisions of the I.T. Act. This is also undisputed fact that those judgments were rendered in the context of Section 115J and we are dealing with the provisions of Section 115JB. In order to find out substantive difference in the applicability of two provisions, we reer to clause (iii) of Explanation to Section 115J as under and clause (4) in Explanation 1 to Section 115JB as under:
"clause (iii) of Explanation to Section 115J:
[(iii) the amounts [as arrived at after increasing the net profit by the amounts referred to in clauses (a) to (f) and reducing the net profit by the amounts referred to in clauses (i) and (ii) attributable to the business, the profits from which are eligible for deduction under section 80HHC or section 80HHD; so, however, that such amounts are computed in the manner specified in sub-section (3) or sub- section (3A) of section 80HHC or sub-section (3) of section 80HHD, as the case may be; or]
iv) the amount of profits eligible for deduction under section 80HHC, computed under clause (a) or clause (b) or clause
(c) of sub-section (3) or sub-section (3A), as the case may 22 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 be, of that section, and subject to the conditions specified in that section; or 10.1.5 In both the provisions it is laid down "that deduction u/s 80HHC should be computed in the manner specified in sub section (3) or sub-section 3(a) of Section 80HHC". In other words a prima facie reading of these words indicates that computation of deduction u/s.80HHC should be done in accordance with the provisions of Section 80HHC. These terms have been interpreted by Hon'ble Kerala High Court and Madras High Court in the decisions referred to above and for this computation the book profit has to be taken as base and not the profit computed under the normal provisions of account. Since these are the two judgments in favour of the assessee and no contrary decision is cited or referred to by the learned DR, we respectfully follow the same, as they are binding on the Tribunal in view of the decision of Hon'ble Bombay High Court in CIT v. Godavri Devi (1978) 113 ITR 589 (Bom). As a result this ground of the assessee is allowed."
29.2 In the case of M/s Aarvee Denims & Exports Limited (supra), the ITAT while adjudicating the claim for deduction u/s 80HHC of the Act in determining book profits u/s 115JB of the Act, disposed of the matter in the following terms:
"13. Thus, it is observed that the language employed by the Legislature in section 115JB is exactly the same as is employed in section 115JA of the Act. Thus, in our considered view, the above quoted decision of the Hon'ble Madras High Court is fully applicable in respect of computation of book profit u/s 115JB also. We, therefore, respectfully following the above decision of the Hon'ble Madras High Court, are of the view that for computing deduction under clause (iv) of sec. 115JB the calculations are to be made with reference to the adjusted book profit and not with reference to income assessable under the head "Profits and gains of business or profession". We, therefore, set aside the orders of the lower authorities and remit the matter back to the file of the Learned Assessing Officer for computing deduction admissible under clause
(iv) of Explanation to section 115JB(2) of the Act in light of the discussions made above afresh and thereafter re-compute the book profit and total income of the assessee as per law. The Learned Assessing Officer is also directed to ensure that the conditions of section 80HHC are satisfied in the instant case while computing the deduction allowable to the assessee out of adjusted book profit.
23 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 The Learned Assessing Officer shall allow reasonable opportunity of hearing to the assessee before completing the assessment afresh. Thus, this ground of appeal of the assessee is allowed for statistical purpose."
29.3 Earlier while adjudicating a claim for deduction u/s 80HHC of the Act from the book profits determined u/s 115JB of the Act ,the Mumbai Special Bench of ITAT in the case of DCIT v. Syncome Formulations (I) Ltd.(106 ITD 193), held as under:
"66. The deduction under section 80HHC in a MAT scheme is from the taxable income, which is otherwise the adjusted book profit. If no deduction is available to an assessee, the gross total income itself is the taxable income of the assessee. MAT scheme does not provide for deductions. Therefore, the interpretation is that the adjusted book profit of a company itself is the gross total income of that assessee-company. The deduction under section 80HHC is in that way given out of gross total income in a case falling under MAT. This in turn means that section 80HHC should be computed on the adjusted book profit. Sections 115J, 115JA and 115JB come into operation, as the regular profits has been substituted by the book profit. Once the substitution is over, there is no way to go back to the normal computation process of statutory profit, which has already been overwhelmed by sections 115J, 115JA and 115JB. This reconciles the alleged incompatibility pointed out by the Revenue that the deduction available to an assessee under Chapter VI-A is subject to section 80AB.
Therefore, we find that the deduction under section 80HHC in a case of MAT assessment is to be worked out on the basis of the adjusted book profit and not on the basis of the profit computed under the regular provisions of law applicable to the computation of profit and gains of business or profession."
29.31 However, subsequently, Hon'ble Bombay High Court in their aforesaid decision in Ajanta Pharma Ltd.(supra) overruled the aforesaid decision in the case of Syncome Formulations (I) Ltd.(supra), holding as under:
23. Until s. 115JB was introduced, the whole of the profits computed under s.
80HHC were eligible for reduction for computing the book profits. Pursuant to sub-s. (1B) of s. 80HHC the deduction available to the extent provided in s. (1B) and after 1st April, 2005 the deduction of export profits is discontinued. The assessee's argument is that only in case of companies not covered by s. 115JB to then sub-s. (1B) of s. 80HHC would apply. Insofar as MAT companies are concerned, the profits eligible for deduction are as computed under sub-s. (3) or 24 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 (3A) of s. 80HHC without applying sub-s. (1B). This argument is based on the expression "computed under sub-s. (3) or sub-s. (3A) as the case may be".
24. For that purpose, we will have to examine the true scope and effect of s. 80HHC. In s. 80HHC, the relevant provisions to which we have earlier reproduced is sub-s. (1), which provides, that in computing the total income of the assessee, a deduction is to be made to the extent of profits referred to in sub- s. (1B) derived by the assessee from the export of such goods. The section as amended has brought in the words "deduction to the extent of profits" referred to in sub-s. (1B) by Finance Act, 2000 w.e.f. 1st April, 2001. If the construction sought to be given by counsel for assessee is accepted it would make sub-s. (1B) irrelevant for the purpose of s. 115JB. Sub-s. (1B) provides for deduction in terms set out therein. Sub-s. (3) sets out the method of computation of profits. The computation of profits is, therefore, for the purpose of working out the deduction of profits available under s. 80HHC(1B). Earlier it was in terms of sub- s. (1). Now s. 80HHC(1) in term refers to sub-s. (1B). All the provisions are inter- related and cannot be read de hors one and other. If sub-s. (1B) is not read in sub-s. (1) then the expression "no deduction shall be allowed in respect of the assessment beginning on the 1st day of April, 2005 and any subsequent year", shall be rendered otiose.
25. Insofar as s. 115JB(2), Expln. 1(iv) is concerned, in computing the book profits the export profits under s. 80HHC had to be reduced. The object of s. 115JB was to impose tax on companies which are known as zero tax companies. These companies though making huge profits and paying handsome dividends, were not paying any tax. The object of the section was, therefore, that they pay tax not in a manner of total income computed by other companies, but on the book profits which had to be calculated in terms of s. 115JB(2). The assessee's do not dispute this. Their argument is that reduction must be of the whole of the book profits computed under sub-s. (3) or (3A) of s. 80HHC. The object of s. 80HHC as originally introduced was to exempt the whole of the export profits. By virtue of sub-s. (1B) introduced w.e.f. 1st April, 2001 the deduction is only a percentage of the export profits as allowed therein and no reduction after 1st April, 2005. This benefit of reduction was initially not made available to MAT companies, but the benefit was extended from 1st April, 1989.
26. It is then sought to be contended that the expression "conditions" in cl. (iv) of Expln. 1 of s. 115JB cannot be referable to sub-s. (1B) of s. 80HHC as sub-s. (1B) is not a condition but in the nature of computation. We have referred to the dictionary meaning of the word "conditions". Even if we accept that sub-s. (1B) of s. 80HHC is not a condition and proceed on that footing, nevertheless it is impossible of reading s. 80HHC(3) or (3A) independent of s. 80HHC(1B). To our mind, the language is clear. The literal meaning does not in any way defeat the object of the section and/or lead to an absurdity. The object of s. 115JB is to allow even MAT companies to avail of the benefit of deduction. If we consider the assessee's arguments that MAT companies are entitled to full deduction of 25 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 export profits it will lead to anomaly, whereby the companies which are paying tax on total income under the normal rules, for them the deduction of export profits will be lesser than what MAT companies are entitled to. Is this a possible view? When s. 115J was originally introduced, MAT companies were not entitled to deduction of profits under s. 80HHC while working out the book profits. That came to be introduced by Direct Tax Laws (Amendment) Act, 1989 w.e.f. 1st April, 1989 a year later. Parliament, therefore, initially had even denied to MAT companies deduction under s. 115J. When s. 115JA was introduced w.e.f. 1st April, 1997, s. 80HHC benefits were once again not available for MAT companies. The amendment by Finance Act, 1997 to give the benefit was w.e.f. 1st April, 1998. Can it now be argued that MAT companies considering s. 115JB(2) Expln. 1 (iv) are entitled to be placed in a better position than the other companies entitled to the export deduction under s. 80HHC though earlier they constituted one class? No rule of construction nor the language of the s. 80HHC r/w s. 115JB, in our opinion, will permit such construction. If such construction is not possible then both the classes of companies will be entitled to the same deduction. This would contemplate that both would be entitled to deductions of profits in terms of s. 80HHC(1B). So read, it would be a harmonious construction. A class of companies covered by s. 80HHC cannot be sub-classified into two classes, when more so, for intermittent periods Parliament had even denied the benefit of s. 80HHC to MAT companies. If the argument of the assessee is to be accepted, what then is the mischief, that s. 115JB sought to avoid? What s. 115JB did was to continue the deductions also to the MAT companies. The only difference was that instead of calculating tax at 30 per cent of the book profits as in the case of ss. 115J, 115JA, it was made 7.5 per cent and from 1st April, 2007 it is 10 per cent. The language used in cl. (iii) to Expln. 1 to sub-s. (2) of s. 115J or cl. (vii) to Expln. 1 of s. 115JA(2) or cl. (iv) of Expln. 1 of s. 115JB(2) is "eligible for deduction".
27. The argument of the assessee is basically based on the memorandum of understanding in the Finance Bill, 2000 which we have earlier reproduced. It only says that export profits under s. 80HHC and others are kept out of the purview of the provision during the period of phasing out of deductions available under the provisions. At the same time, in the Notes of Clauses it is clearly stated that the profits will be as reduced by the certain adjustments which are eligible for deduction under s. 80HHC. The profits eligible for deduction are export profits in terms of s. 80HHC(1B). There is nothing in the Finance Minister's speech of 29th Feb., 2000, [(2000) 159 CTR (St) 1 : (2000) 242 ITR (St) 1] to hold otherwise. We have earlier referred to rules of construction as set out in the judgments earlier quoted. The Notes of Objects and Reasons is only an aid to construction. That aid to construction is only when the literal reading leads to ambiguous result or absurdity. To our mind considering the literal language there is no absurdity or ambiguity being caused or any mischief sought to be remedied. The language used in s. 115JB is deduction available under s. 80HHC. It is difficult to conceive of any rational reason as to why the legislature should have thought to give MAT companies additional benefits than the other companies who are paying tax on 26 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 total income and not the tax based on book profit as calculated under s. 115JB. Is it possible to conceive of any degree of fairness and/or justice that MAT companies, who for some periods were denied the benefit of s. 80HHC, because of the introduction of s. 115JB Expln. 1(iv) are entitled to have their entire export profits reduced? The object of s. 115JB or for that matter s. 115J or s. 115JA was to impose tax on those companies which otherwise considering various exemptions or deductions available under the Act, though making huge profits and paying large dividends were not paying any tax. It is therefore, not possible to accept the construction as sought to be advanced on behalf of the assessee, that they should be treated on a different footing in computing export profits under s. 80HHC, for the purpose of s. 115JB.
28. We have had the benefit of going through reasoning and the orders of Tribunal in Syncome as also in the case of Dy. CIT vs. Govind Rubber (P) Ltd. It is not possible to agree with the view taken by the Benches. Those decisions in view of this judgment stand overruled.
29. Our attention was also invited to the judgment of the Kerala High Court in the case of CIT vs. GTN Textiles Ltd. In the first instance, the Kerala High Court was considering the provisions of s. 115J. Sec. 115JB was not under consideration. The High Court noted that original s. 115J of the Act did not contain exemption under s. 80HHC. That section as we have noted, did not originally include exemption allowed to exporters under s. 80HHC. By the virtue of the Explanation and cl. (iii) thereto, which came into effect from 1st April, 1989, the reduction under s. 80HHC became available. The issue before the Kerala High Court was, what is profit that should be taken into consideration considering the accounting system that have to be followed while working out the book profits. Therefore, the judgment would be of no assistance in considering the question framed for consideration.
30. It was also sought to be then contended that if two views are possible then the construction of s. 115JB, Expln. 1(iv) considering the decided law, the view in favour of the assessee should be accepted. The question is whether there are two views possible. In our opinion, no two views are possible. The only view as explained earlier is that the MAT companies are entitled to the same deduction of export profits under s. 80HHC as any other company involved in export in terms of s. 80HHC(1B). Once that be the case, this argument is also devoid of merit.
29.4 In view of the foregoing, especially when the ld. CIT(A) did not record any findings on the pleas now raised before us on the claim for deduction u/s 80HHC of the Act while determining book profits u/s 115JB of the Act nor had the benefit of the views in the aforecited decisions, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his 27 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007 file for deciding the issue of claim for deduction u/s 80HHC of the Act in terms of clause (iv) of the explanation to sec. 115JB of the Act in accordance with law in the light of our aforesaid observations, after allowing sufficient opportunity to both the parties and keeping in mind the various judicial pronouncements including the aforecited decisions. Needless to say that while redeciding the appeal, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act and ensuring that the conditions of section 80HHC are satisfied in the instant case while computing the deduction allowable to the assessee .With these directions, ground no. 1 in the appeal filed by the assessee for the AY 2004-05 is disposed of.
30. Ground no. 5 in the appeals of the Revenue for the AY 1999-2000 and AY 2004-05 as also ground no. 4 in the CO filed by the assessee , being general in nature ,do not require any separate adjudication while no additional ground having been raised in terms of the residuary grounds raised in the appeals of the Revenue/assessee as also cross-objection filed by the assessee and ground nos. 2 & 3 in the appeal of the assessee for the AY 2004-05 having not been pressed before us by the ld. AR appearing on behalf of the assessee , all these grounds are dismissed.
.
31. As regards ground no. 5 in the CO filed by the assessee for the AY 1999- 2000 relating to levy of interest u/s 234B ad 234C, the ld. AR on behalf of the assessee admitted that these are consequential in nature. The levy of interest u/s 234B & 234C of the Act being mandatory [Commissioner Of Income Tax. vs Anjum M. H. Ghaswala And Others,252 ITR 1(SC), affirmed by Hon'ble Apex Court in the case of CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449(SC) and in the case of CIT v. Sant Ram Mangat Ram Jewellers [2003] 264 ITR 564(SC)], this grounds is dismissed. However, the AO may allow consequential relief ,if any, while giving effect to this order.
28 ITA no.2744-3096-3097/Ahd/2007 CO no.252/Ahd./2007
32. Ground no. 6 in the CO filed by the asssessee for the AY 1999-2000 pertains to initiation of penalty proceedings u/s 271(1)(c) of the Act. Since no appeal lies against mere initiation of penalty proceedings , this ground is dismissed.
33. In the result, all these appeals of the Revenue and the assessee as also the CO are partly allowed, but for statistical purposes.
Order pronounced in the open court, on this 12h day of March, 2010.
Sd/- Sd/-
(T.K. Sharma) (A.N. Pahuja)
Judicial Member Accountant Member
Ahmedabad,
Dated: 12thMarch, 2010
Pk/-
Copy to:
1. The assessee
2. ACIT, Vapi Circle,Vapi
3. CIT(A), Valsad
4. CIT, concerned By order
5. DR, "A" Bench
Deputy Registrar, ITAT, Ahmedabad