Income Tax Appellate Tribunal - Ahmedabad
P. Navinkumar & Co. vs Income Tax Officer on 8 July, 1998
Equivalent citations: (1998)62TTJ(AHD)620
ORDER
R. K. Bali, A..M. This is appeal by the assessee against the order, dated 12-12-1997, passed by the Commissioner (Appeals)-H, Surat. The assessee has taken the following substantial grounds :
1. "On the facts and circumstances of the case the learned Commissioner (Appeals) has erred in confirming the action of the assessing officer in treating the sum of Rs. 45,28,899 representing the licence premium as income from other sources instead of business income and thereby confirming the action of the assessing officer in disallowing the deduction under section 80HHC in regard to the receipt of licence premium of Rs. 45,28,899.
2. On the facts and circumstances of the case the learned Commissioner (Appeals) has erred in confirming the action of the assessing officer in making the disallowance of Rs. 25,000 out of telephone expenses.
3. On the facts and circumstances of the case the Commissioner (Appeals) has erred in not entertaining the claim of the assessee with regard to charging of interest under section 234B."
2. Briefly the facts are that the assessee filed return on 30-11-1994, declaring income of Rs. 10,620 after claiming deduction of Rs. 2,00,32,020 under section 80HHC of the Act. The business of the assessee is importing rough diamond and after getting the rough diamonds cut and polished, exporting polished diamonds. The turnover of the assessee declared Rs. 1,274.67 lakh consists of export turnover of 1,273.77 lakh and local turnover of Rs. 90 lakh.
3. The facts concerned with the main addition as projected in ground of appeal No. 1 are that before 1-3-1992, the exchange rate of foreign currency was controlled by the government through Reserve Bank of India (RBI) and accordingly the export proceeds and import payments were converted into rupee by the exchange rate fixed by the RBI. However, with effect from 1-3-1992 the government decided that 40 per cent of foreign exchange shall be purchased and sold at fixed rate and 60 per cent of foreign exchange shall be purchased and sold at market rate which resulted into partial convertibility of the rupee. With effect from 1-3-1993, the government introduced full convertibility of rupee. Accordingly 100 per cent foreign exchange was purchased and sold at market rate. On introduction of full convertibility of rupee the government announced that the exporters who have completed their exports and have realised the export proceeds before introduction of full convertibility but have not completed their imports would be given a cash amount equivalent to 8 per cent of their un-utilised import licences. The government further announced that in the case of those exporters who have completed their exports before 1-3-1992 and who have not exchanged their REP/Exim scripts before 27-2-1993 will be given 20 per cent premium on surrender of license. In order to facilitate the implementation of the scheme of announcement of premium the government issued Circular No. 11/90 dt. 6-5-1993. The above circular have been reproduced by the assessing officer at pp. 7 to 15 of the assessment order.
4. In the case of the assessee only clause (c) of para 3(l)(c) is relevant which provides that "REP Licences issued to the Gem & Jewellery sector on the exports made prior to 1-3-1993, for which the exports proceeds have also been realised prior to 1-3-1993, 8 per cent premium may be paid for the unutilised CIF value as indicated on the exchange control copy of the licence as on 1-3-1993. "
5. REP import licence for Gem & Jewellery sectors are issued to the person against exports made by them. The validity period of such licence is only one year and these licences are freely transferable. Accordingly, the importer can make import on licence issued to him against export made by him or he can make import on licence purchased from third parties who were issued licence on exports made by those persons. Premium of 8 per cent on licences were payable to the holder of the licence and not to the original exporter who have been issued the licence. The assessee received total 8 per cent premium amounting to Rs. 45,28,899 comprising of Rs. 39,35,699 and Rs. 5,93,200 on licences purchased from open market and self-generated licences respectively on full convertibility of rupee. In the course of the assessment proceedings the assessing officer issued a letter, dated 19-11-1996, to the assessee observing that 8 per cent premium received on account of licence purchased from open market being un-utilised cannot be said to be business income. The assessing officer also observed in this very letter that 8 per cent premium received on account of self generated licence also cannot be said to be sale and, therefore, cannot be taxed as business income. Accordingly the assessing officer observed in the letter issued to the assessee that the entire 8 per cent premium received by the assessee cannot be treated as business income within the meaning of section 28(iiia) and accordingly the assessee is not eligible for deduction under section 80HHC in respect of this income.
6. In response to the above letter/show- cause notice the assessee filed a detailed reply, dated 17-3-1997, wherein it is contended that the receipt of 8 per cent premium come within the ambit of cl.ause (iiib) of section 28 because section 28 (iiib) states "any cash assistance (by whatever name called) received or receivable by any person against export under any scheme of the government". Accordingly it was contended before the assessing officer that the receipt of 8 per cent premium is eligible to deduction under section 80HHC because clause (baa) of Explanation to section 80HHC requires to reduce the business profit by 90 per cent of such receipt covered under section 28(iiib) and the export profit computed under section 80HHC is required to be increased as per proviso to section 80HHC by 90 per cent of such receipt in proportion to export turnover divided by total turnover. Alternatively it was submitted before the assessing officer that these receipts in fact are not income but essentially they reduce the cost of import by the assessee because 8 per cent premium was given by the government to the holder of import licences to compensate the increase in import cost due to devaluation of rupee and hence 8 per cent premium received should be deducted from the cost of imports .
7. The assessing officer however was not satisfied by the above explanation of the assessee and he treated the sum of Rs. 45,28,899 comprising of Rs. 5,93,200 being 8 per cent premium on self-generated import licence and Rs. 39,35,699 being 8 per cent premium received on licences purchased by the assessee from the open market as the income of the assessee from other sources instead of business income and thereby denied the assessee the deduction under section 80HHC in respect of this income.
8. Aggrieved with the order of the assessing officer the assessee filed appeal before the Commissioner (Appeals) who upheld the action of the assessing officer for the reasons given in the impugned order.
9. Before us Rasesh Shah, the learned representative of the assessee reiterated the submissions earlier made before the departmental authorities and further submitted that 8 per cent premium on import licence was paid by the government on full convertibility of rupee to compensate the loss suffered by the assessee in making import payments at a higher rate and as such the same should be held as business income. It was submitted that the import licences were issued against exports made either by the assessee or by persons who made the export and who sold the licence to the assessee. It was pleaded that the premium was payable in respect of REP licences issued on the exports made prior to 1-3-1993, for which export proceeds have also been realised prior to 1-3-1993, but no imports were made prior to 1-3-1993, or if imports were made before 1-3-1993, the payments of imports were not made before 1-3-1993. It was submitted that the assessee mostly made the imports before 1-3-1993, against licences on which he received 8 per cent premium but the assessee did make the import payments before 1-3-1993. To compensate the loss arising from full convertibility of rupee in respect of import payments to be made after 1-3-1993, the assessee received 8 per cent premium. It was submitted that since the premium was received on change of policy of government of full convertibility effected from 1-3-1993, in respect of imports made prior thereto for which the payments had to be made at 100 per cent market rate, it is clearly business income of the assessee. It was further pleaded that the licences even purchased from open market cannot be held as investment as the validity period of the licence is only 12 months. The REP licence is issued against exports which can be sold or which can be utilised by the person who has acquired originally or the person who has purchased it has to utilise the licence before the validity period expires. Accordingly it was pleaded that the entire 8 per cent premium of Rs. 39,35,699 on licence purchased from open market and Rs, 5,93,200 on self-generated licence on full convertibility of rupee should be assessed as business income and not as income from other sources as held by the assessing officer as well as the Commissioner (Appeals).
10. Dilip Shivpuri, the learned departmental representative supported the order of the Commissioner (Appeals) and submitted that the 8 per cent premium received by the assessee on sale of import licences is income from other sources and not income from business because anybody can purchase the import licences from the open market and sell them for earning profit. It was submitted that merely because the validity period of the import licence is 12 months, it cannot be held that people having surplus funds cannot acquire these licences as a short-term investment and earn profit assessable under the head "income from other sources" on sale of these licences, who have no connection whatsoever with the import-export business. Alternatively, it was submitted that even assuming, though not admitting that the 8 per cent premium received on licences self- generated or purchased by the assessee from the open market is business income the same is not eligible for deduction under section 80HHC because grant of 8 per cent premium by gGovernment is independent of any export made by the assessee. Reliance was placed on the decision of Brooke Bond India & Co. Ltd. v. CIT (1987) 162 ITR 373 (SC).
11. Rasesh Shah, the learned authorised representative in rebuttal submitted that the reliance of the learned departmental representative on: (1986) 162 ITR 373 (SC) (supra) is misplaced, it rather supports the case of the assessee. Alternatively, it was pleaded that this 8 per cent premium received by the assessee goes to reduce the cost of import made by the assessee and as such it ought to have been a part of the trading account of the assessee.
12. We have considered the rival submissions and have also gone through the order passed by the assessing officer as well as the Commissioner (Appeals). As per scheme of section 80HHC, deduction is allowed to the assessee in proportion to export turnover divided by total turnover as per section 80HHC(iii) so that even if the export is at a loss and local sales is at profit, the assessee is eligible to deduction under section 80HHC. The computation under section 80HHC(iii) is subject to Expalnation (baa) to section 80HHC read with proviso to section 80HHC(3) and the definition of total turn. The total turnover has been defined under clause (ba) to Explanation to section 80HHC which excludes from its ambit the receipts referred in clause. (iiia) to (iiic) of section 80HHC(3). The profit and gains of business has been defined under Explanation (baa) to section 80HHC. Under Explanation (baa) to section 80HHC the profits of the business as computed under the head "profits and gains of business or profession" are reduced by 90 per cent of the sum referred to in clause (iiia), (iiib) and (iiic) of section 28 of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. However, the export profit calculated as per section 80HHC(3) by taking business profit as above is required to be increased as per proviso to section. 80HHC(3). According to this proviso, if this receipt is considered to be of nature falling under clause (iiia) to (iiic) the profit shall be reduced by 90 per cent under Explanation (baa) but the deduction under section 80HH shall be increased by 90 per cent of such receipts in proportion to export sale and total sale as per proviso to section 80HHC(3). Now if we look at the case of the assessee in terms of the provisions of section 80HHC it is seen that the assessee had received the premium not on sale of licence which was acquired from other person, but premium on licences acquired by way of either self-generation or by way of purchase from open market as compensation for loss on full convertibility. These licences were not surrendered but the imports were made and the payments at increased exchange rate for imports were also made. On purchase of licences from the open market it cannot be said that the licences now ceased to be granted under Import Control Order made under Import & Export Control Act. The import is allowed on the licences purchased from the open market and it is only deduction under section 80HHC which is not allowable on the profit on sale of licences which had been purchased by the assessee from the open market as per proviso to section 80HHC. In the case before us undisputedly the assessee has not sold any licences, which has been acquired by him from any other person. The licences purchased by the assessee from open market were utilised by him for making import of diamond. None of the licences has been surrendered accordingly it has to be held that the 8 per cent premium received by the assessee from government will fall under clause (iiib) to section 28 because of the use of the words "cash assistance by whatever name called". In fact the reliance of the Commissioner (Appeals) as well as the learned departmental representative on the decision of the Hon'ble Supreme Court in the case of Brooke Bond & Co. v. CIT (supra) rather supports the case of the assessee wherein it was held that the nature and character of income are the deciding factor for holding the income as income from business or income from other sources. The nature and character of 8 per cent premium received indicates that it is either a business income or a wind fall because the licences were issued against exports made by either the assessee or any other person from whom the licences were purchased. Therefore 8 per cent premium has held to be cash assistance received against export made by any person so as to come within the ambit of clause (iiib) of section 28. Thus, keeping in view the totality of the facts and circumstances of the case we will hold that the 8 per cent premium received by the assessee on licences either self-generated or purchased from open market from the government is business income and not income from other sources as held by the departmental authorities and accordingly the assessee is entitled to deduction under section 80HHC in this regard .
13. Coming to the ground of appeal No. 2 it is seen that the assessing officer has made a disallowance of Rs. 25,000 out of telephone expenses claimed by the assessee at Rs. 1,35,524. The bifurcation given at p. 20 of the assessment order indicates that the telephone expenses in respect of office telephone were Rs. 65,496 and for residential telephone it was Rs. 70,028. The assessing officer made a disallowance of Rs. 10,000 out of office telephone and Rs. 15,000 out of residential telephone on account of personal user by the partners and the family members. The Commissioner (Appeals) confirmed the said addition.
14. After hearing the parties to the dispute we are of the opinion that it will not be proper to make disallowance out of official telephone installed at the office premises for the alleged personal use by the partners. However, since the personal user of the telephone at the residence by the partners and the family members is not denied we will uphold the action of the departmental authorities for disallowing Rs. 15,000 on account of personal user of the telephone installed at the residence. Accordingly the addition is sustained to the extent of Rs. 15,000 only.
15. As regard the ground related to the charging of interest under section 234B no specific arguments were advanced in support of the ground which is accordingly dismissed. The assessing officer however should recalculate the interest chargeable under the various provisions of section 234B after giving the appeal effect.
16. In the result, the appeal is partly allowed.