Income Tax Appellate Tribunal - Ahmedabad
The Assistant Cit vs Rang International on 29 July, 2004
Equivalent citations: [2004]91ITD499(AHD), [2005]277ITR148(AHD), (2005)97TTJ(AHD)221
ORDER
R.P. Garg, Vice-President
1. This is an appeal by the Revenue against the order of the CIT(A) for AY 1995-96. The grounds raised are :-
1. The ld CIT(A) has erred in law and on facts in allowing deduction Under Section 80HHC on benefits on licences of Rs. 6,26,674/-.
2. The ld CIT(A) has erred in law and on facts in allowing deduction Under Section 80HHC on interest and Misc receipts of Rs. 56, 701/-
2. The ld CIT(A) has erred in law and on facts in allowing deduction Under Section 80HHC on interest of Rs. 1,20,975/-
3. The facts in brief are that the assessee is a 100% Export trading Co. It earned benefits of import licences of Rs. 62,66,740/-. While computing deduction Under Section 80HHC, 10% of total sum of benefits on licences of Rs. 62,66,740/- i.e. Rs. 6,26,674/- was considered as expenditure towards the said benefits. In the course of assessment proceedings the assessee also claimed 10% expenses at Rs. 56,701/- in respect of interest receipts of Rs. 5,57,113/- and Misc receipts of Rs. 9,904/- totaling Rs. 5,67,017/-. The AO held that the assessee being 100% trading goods exporter is to be granted deduction on profit derived from export computed Under Section 80HHC(3)(b). According to him the definition of the profits of the business as per Explanation (baa) below Sub-section (4B) Section 80HHC wherein 10% are to be excluded which are meant for expenses is not relevant for 100% trading exporter. He also observed that the assessee has not actually incurred any such expenditure and the rebate of 10% of income as claim of expenses resulted in minus figure at indirect expenses. The AO therefore rejected the claim of the assessee of Rs. 6,26,674/- as expenditure towards benefit of licences. For the same reasoning the SO rejected the claim of the assessee in respect of expenses relatable to interest receipts and misc receipts also. The relevant observations on the issue are contained in paragraphs 404 to 4.6 of his order and they read as under :-
"4.4 While the assessee has furnished the audit report in Form No. 10CCAC as required Under Section 80HHC(4A) of the IT Act, along with its return of income, the same is not found correct as regards the computation of indirect cost of the trading goods. The computation has been wrongly done which itself is very clear because the indirect costs has been worked out as negative(-) 4,31,696). The indirect costs for exporting of goods cannot become negative in any case taking the logical view. Further, as mentioned in its above said reply, the assessee is fully relying on the inference of the Section 80HHC derived by the auditor of the assessee that as per the definition of profits of business in Explanation (baa) to Section 80HHC, as 90% of the import entitlement benefits etc. are to be taken for computation purposes, therefore, remaining 10% of the same is to be considered as the cost of acquisition of the same. This inference derived by the assessee (or the auditor on his behalf) is completely wrong and nowhere provided by the IT Act, directly or indirectly. The provisions of Section 80HHC are very clear, if one goes through step by step of the same. In his above reply the assessee has at several places mixed up the provisions of Section 80HHC regarding the traders and the manufacturers. In fact, in the section itself separate provisions for claiming exemption for the business income has been provided for the traders and the manufacturers. As the assessee is a 100% trading firm, so the appropriate provision of Section 80HHC are applicable to it.
4.5 Section 80HHC(3)(b) clearly provides "where the export out of India is of trading goods, profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to export". Therefore, the crucial words are profits derived from such exports which is to be computed as provided in the section itself. There is no need of working out profits of the business which is not at all relevant for a trader, and therefore, the definition of the "profits of the business" as per the Explanation (baa) of Section 80HHC is not at all relevant for our purposes. It is to be noted that the computation of "the profits of the business" is to be made for a manufacturing unit carrying out either wholly or partly the manufacturing activities.
4.6. From the above detailed discussion it is clear that Rs. 6,26,674/- which the assessee claimed as expenditure against benefits on licences is not allowable as per IT Act. Further, this expenditure has no-where been incurred by the assessee. On being asked to explain the assessee admitted that there is no such expenditure incurred. This is just an imaginary expenditure and the claim of the assessee is not tenable. Therefore, Rs. 626674/- claimed as expenditure against benefits on licences are disallowed and indirect costs attributable to the exports have been worked accordingly, as per Annexure-1 of the order."
3. He further noticed that the interest income of Rs. 5,57,113/- was net income. The gross income was Rs. 7,27,915/- and interest expenditure of Rs. 1,70,802/- was deducted by debiting to interest receipts. He found that only Rs. 49,827/- was relating to earning of interest income and the balance was to be debited against earning of profit from export business. His observations on this issue are as under :-
"On going through the particulars furnished by the assessee and in depth study of the various depositors accounts, it is found that the funds of Rs. 5178511/- fall under the category (ii) as stated above, and the remaining funds fall under the category (i) above. Thus, Rs. 51,78,511/- are the funds which have been taken by the assessee on 18% interest from the outsiders and the same has been advanced to the various parties & has earned the interest @ 18%. The amount of such type of interest works to Rs. 49,827/-. Because the rate of interest is uniform at 18% for receipt as well as payment, therefore, there is no disallowance to the total income of the assessee for the equivalent amount i.e. Rs. 49,827/-. This is particularly so, because the assessee has paid equal mount of interest of Rs. 49,827/- to the various parties and has also earned the same amount of interest of Rs. 49,827/- by advancing these funds to other parties. Therefore, out of the total interest payment of Rs. 1,70,802/-, the amount of Rs. 49,827/- is excluded and the remaining amount of Rs. 1,20,975/- is discussed in the following paragraphs.
5.4 Thus, out of total interest received at Rs. 7,27,915/-, the net interest amounting to Rs. 5,57,113/- has already been offered for taxation by the assessee by treating the same as income from other sources and has been accordingly credited in the trading and P&L A/c. Further, out of the remaining Rs. 1,70,802/-, the amount of Rs. 49,827/- is to be excluded as explained in the earlier paragraphs. Therefore, Rs. 1,20,975/- represents the amount which is the interest which has been earned by the assessee by advancing its own surplus business funds to outsiders and the assessee should have offered this amount of Rs. 1,20,975/- also for taxation under the head income from other sources.
5.5 The assessee has also paid Rs. 1,20,975/- on the funds which has been borrowed for the purposes of business. Here it is to be noted that the assessee in his above referred reply to show cause notice has tried to take a view that a major part of these funds have been borrowed by the partners of the firm and which the assessee had sought for allowable exemption. This is not tenable and is incorrect because, the funds borrowed by the partners of the firm are nothing but funds borrowed by the firm itself, when the same are found entries in the books of the firm.
5.6 As is clear from the above said, Rs. 1,20,975/- represents the interest paid for the amounts borrowed for the purposes of business and the same is an indirect expenditure incurred by the assessee in his business. Thus, this interest payment of Rs. 1,20,975/- is to be included in the indirect costs attributable to the export of the assessee and thereafter the profits derived from the business are to be computed accordingly. This computation has been done in the Annexure-1 to this order. Therefore, Rs. 1,20,975/- is automatically added to the total income of the assessee in Annexure-1."
4. He accordingly computed the deduction to be allowed Under Section 80HHC at Rs. 58,03,683/- as against assessee's claim of Rs. 65,51,332/- in the return of income.
5. Before the CIT(A), the assessee objected to the lower deduction allowed by AO. After considering the submissions and arguments of the learned counsel and also extracting relevant provisions of the IT Act as well as circular No. 621 dated 19-12-91, the CIT(A) held that 10% of the amounts being Rs. 6,26,674/- towards benefit of licences and Rs. 56,701/- towards interest & misc receipts should be considered as adhoc expenses and consequently the assessee will be entitled to 100% deduction on profit on trading exports as increased by these amounts of expense of 10% relatable to import licence benefit, interest income and misc receipts. In other words after reducing the expenses of Rs. 6,26,674/- from import entitlement of Rs. 62,66,740/- and Rs. 56,701/- from the total sum of such interest and other Misc receipts of Rs. 5,67,015/- the resultant figure would be allowable as deduction under the provisions of Section 80HHC of the IT Act. For the sake of brevity his order is reproduced below:-
"Clause (b) of Sub-section (3) of Section 80HHC provides the method of calculation of profits derived from export of trading goods. The profit derived is defined as export turnover of trading goods as reduced by direct cost and indirect cost which are attributable to such export turnover and therefore it is clear that only the cost attributable towards such export turnover are to be reduced. It is also natural & apparent that for any element of income or receipt there is bound to be cost, less or more, depending on the facts of the case of any enterprise but the AO has considered whole of the cost as per profits & loss account only towards export turnover and in his order he has not considered any amount as expense towards benefits on licences, interest and misc receipts which is incorrect and in consistent with facts and provision of law. Now coming to the point as to whether exercise of bifurcating cost towards export turnover and towards benefits of licences, interest and misc receipt should be done and if so what can be such cost attributed towards each of these two items or as claimed by the appellant 10% adhoc expenses should be considered. The Circular No. 612 clarify in para 32 thereof the intention behind the amendment introduced to mitigate genuine difficulties & to avoid misinterpretation and whereby the adhoc 10% is provided as common expenses towards such receipts in Explanation (baa) to Section 80HHC. If intention would have been to provide adhoc expenses in case of manufacturing export goods only and not where trading export goods are there, then the circular would have specifically clarified. It is held by the courts that the provisions of law should be interpreted in a manner that it do not distinguish two or more persons with the same facts and circumstances and therefore, if with 10% manufactured goods exports 100% deduction is available then why with 100% trading exports 100% of deduction should be not available. I do not find any reason why the 10% should not be treated as expenses in case of 100% trading exports also otherwise it would be unjustified for the person having business making 100% trading export. It has also been held by courts that if main provision or section i.e. Sub-section (1) herein allows deduction then the computation section i.e. Sub-section (3) cannot take way the right or deduction available under the main Section 80HHC also incorporate the words profit derived from such exports like the Sub-section (1) of Section 80HHC. In view of the circular and position of law, I hold that 10% being Rs. 6,26,674/- towards benefit of licences and sum of sum of Rs. 56,701/- towards interest and misc receipts should be considered as adhoc expenses and consequently the appellant will be entitled to 100% deduction on profit on trading exports and in case of interest and misc receipts after reducing the expenses of 10% i.e. Rs. 56,701/- from the total sum of such receipt of Rs. 5,67,015/-, the balance only would be taxable under the provisions of Section 80HHC of the IT Act."
6. As regards the interest income he observed in para-3(b) as under:-
"3(b) I have considered the submission of the appellant and order of the AO. On whole of owned funds of the partners, the total interest attributable is already part of interest income in the profit & loss account and further on owned funds Rs. 4,63,299/- being interest on generated profits earned during the year also has formed part of profit and loss account as interest income. On the facts and circumstances of the case I am of the view that the whole of interest of Rs. 1,70,802/- paid should be reduced out of interest received Rs. 7,27,915/- and balance Rs. 5,57,113/- only is interest income specially in view of the fact that the appellant has received interest @ 18% on advances made as well as paid interest @ 18% on borrowings and therefore there would not be a net interest income out of the funds borrowed also. The AO is directed not to treat sum of Rs. 1,20,975/- as interest income and consequently allow deduction Under Section 80HHC of the IT Act."
7. We have heard the parties and considered their rival submissions. Section 80HHC provide for deduction of 100% of 'profit derived from exports'. Relevant portions of this section as they stood at the relevant time, read as under:-
" 80HHC(1) - Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, [a deduction to the extent of profits, referred to in Sub-section (1B), derived by the assessee from the export of such goods or merchandise:
Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereafter in this section referred to as an Export House or a Trading House, as the case may be) issues a certificate referred to in Clause(b) of Sub-section(4A) that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods."
"------------------------------
'(3). For the purposes of Sub-section (1)-
(a) where the export out of India is of goods or merchandise manufactured [or processed] by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee;
(b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;
(c) where the export out of India is of gods or merchandise manufactured [or processed] by the assessee and of trading goods, the profits derived from such export shall-
(i) in respect of the goods or merchandise manufactured [or processed] by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and
(ii) in respect of trading good, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods:
Provided that the profits computed under Clause (a) or Clause (b)or Clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiia) (not being profits on sale of a licence acquired from any other person), and Clause (iiib) and (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.
'Explanation--For the purposes of this sub-section--
(a) "adjusted export turnover" means the export turnover as reduced by the export turnover in respect of trading goods;
(b) "adjusted profits of the business" means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in Clause (b) of Sub-section (3);
(c) "adjusted total turnover" means the total turnover of the business as reduced by the export turnover in respect of trading goods;
(d) "direct costs" means costs directly attributable to the trading goods exported out of India including the purchase price of such goods;
(e) "indirect costs" means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods;
(f) "trading goods" means gods which are not manufactured [or processed] by the assessee.' "--------------------------"
"(4B)- For the purposes of computing the total income under Sub-section (1) or Sub-section (1A), any income not charged to tax under this Act shall be excluded"
Explanation - For the purposes of this section ,-
"(a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder;
[(aa) "export out of India" shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962);
(b) "export turnover" means the sale proceeds [received in, or brought into, India] by the assessee in convertible foreign exchange in accordance with Clause (a) of Sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does 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);
(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 day of 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;
(baa) "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by-
(1) ninety per cent of any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India ;]
(c) ------------------------------------
(d) ------------------------------------"
8. The assessee is 100% export company and therefore its case is governed by Section 80HHC (3)(b). Its "profit derived from the export" accordingly has to be the export turnover in respect of the trading goods as reduced by the direct costs and indirect costs directly attributable to trading of goods export including cost price for purchase of such goods. Indirect costs as per Explanation (e) means cost other than direct costs which is to be allocated in the ratio of export turnover to total turnover. Again by virtue of the Proviso below Sub-section (3) of Section 80HHC the profits are to be increased by the amount which bears to 90% of any sum referred to in Clause (iiia), (iiib) and (iiic) of Section 28 in the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee ostensibly because these sums referred in Clauses (iiia), (iiib) and (iiic) of Section 28 are not "profits derived from export" by judicial pronouncement of the supreme Court. It seems that the Legislature intends to give deduction on these benefits and that is why they are made entitled to deduction by inserting the proviso below Section 80HHC(3) of the Act.
9. The term "export turnover" is defined in Explanation (b) below Sub-section (4B) of Section 80HHC to mean the sale proceeds recovered or brought into India by the assessee in convertible foreign exchange of any goods or merchandise which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1952 and for AY 1991-92 onwards the expression "total turnover" is not to include any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 i.e., export benefit. It thus excludes export benefits from the amount of "total turnover".
10. The Explanation (baa) below Sub-section(4B) of Section 80HHC defines profits of the business to mean the profits of the business computed under the head "profits and gains of business or profession" as reduced by (i) ninety per cent of any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (ii) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India. This is the Explanation on which assessee rests his case and got accepted by the CIT(A). The reference and reliance on this Explanation (baa) in our opinion is misplaced in this case and is not relevant and is also besides the issue. This explanation only defines what is the "profit of the business" and what is to be excluded therefrom? In view of the specific provisions contained in Clause (b) of Sub-section (3) of Section 80HHC referred to above, defining the 'profit derived from export' itself specifically to mean export turnover in respect of such goods as reduced by the direct costs and indirect costs attributable to such export and that is what is required by Section 80HHC(1) of the Act for computing and allowing deduction thereof, it may not be necessary to go to the term "profits of the business"
11. The assessee has relied upon certain during the course of hearing. They are discussed hereunder. In the case of Hindustan Fashion Ltd. v. ACIT 61-TTJ (Ah) 734 the Tribunal held that it is net amount of interest which is to be taken as part of the turnover by following the decision of the Supreme Court in the case of Keshavji & Co. v. Cit 193-ITR-1.
12. In the case of Pink Star v. DCIT 72-ITD-137. the first dispute was whether the premium from Government on import licences as well as licences purchased from open market were incentives within the meaning of Section 28(iiib) and therefore shall not form part of turnover within the meaning of Clauses (a) and (b) of Section 80HHC and whether the premium received on surrender of same would form part of the turn over. The Tribunal held in negative. Further question was whether such premium received by the assessee would increase the profit of business under the proviso to Sub-section (3) and the answer was given in affirmative. Similar was the view of the Tribunal for cash in assistance. Another issue was whether 90% of the gross receipts on labour charges should be reduced for the purpose of working out the profit of the business and the Tribunal held that it is net receipt of labour charges that would go to reduce the profit of the business and that being NIL there would be no question of any reduction on that account. The Tribunal also considered the question as to whether while computing the profits for business for the purpose of Section 80HHC, revenue receipts can be adjusted against revenue expenditure of like nature and it held that since expenditure on interest was higher than interest income, no interest income augmented profits of business which needed to be reduced as envisaged by Section 80HHC(ba) of the Act.
13. Similarly in the case of Sharda Gums and Chemicals 66-TTJ(Jd) 256 the Tribunal held that since the interest receipt which has a direct nexus with interest payments, should be adjusted against each other and only the net amount can be said to have been included in the amount of net profit. That was a case for determining the profits and gains of business or profession under Explanation (baa) of the Act.
14. The decision in the case of Mahalaxmi Calchem (p) Ltd. (ITA No. 2120/Ahd/1999) dated 18-8-2003 the Tribunal held that reduction of 90% of interest income as required under the Explanation (baa) to Section 80HHC of the Act can only be of net interest income and not of the gross interest income.
15. A very heavy reliance is placed by the assessee on the Special Bench decision of the Tribunal in the case of Surendra Enginering Corporation, 78-TTJ (Mum) 347. In this case the Tribunal held as under:-
"Held, in the case of an exporter of trading goods the export profits shall be the export turnover in respect of such trading gods as reduced by (1) the direct costs, and (2) the indirect costs. Both these costs should, however, be "attributable to such export", which means the export of trading goods. By using these words in Clause (b) of Sub-section (3) and thereby introducing a condition that both the direct and the indirect costs must be attributable to the export of trading goods, the legislation has manifested and intention that any costs which are attributable to receipts other than the export turnover of trading goods must be left out of reckoning at the threshold itself. This condition thus forms the substratum or bedrock of the computation of the export profits. Therefore, it any part of the direct or indirect costs are attributable not to the export of the trading goods in other words, the export turnover--that part should be left out of consideration. The definition of "direct costs" is a little articulate in the sense that it expressly says that these are "costs directly attributable to the trading goods exported out of india including the purchase price of such goods". The definition of "indirect costs" is, however, not so articulate and merely says that these are "costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover". It is thus couched in a somewhat negative from, contrasted with "direct costs". That is to say, all costs which are not direct costs are to be considered as indirect costs. If an assessee is engaged in both export of trading goods and local sales of trading goods, there shall be an allocation on the basis mentioned in the definition. But the definition also implies that only those costs are to be considered as indirect costs which are attributable to the trading goods exported out of India, for the purposes of Clause (b) of Sub-section (3). when the direct costs, by definition, are those costs attributable to the trading goods exported out of India, including the purchase price of such goods, and when the indirect costs the indirect costs should also be attributable to the trading goods exported out of India, including the purchase price of such goods. The basic idea which runs through Clause (b) of the Sub-section and Clauses (d) and (e) of the Explanation below the Sub-section is that the indirect costs should be attributable to the export turnover in respect of the trading goods.
While explaining the amendment made by the Finance (No. 2) Act, 1991 by which Clause (baa) of the Explanation below Section 80HHC was introduced, the Memorandum recognized that some expenditure might be incurred in earning the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature and that such expenditure is generally part of common expenses. IN recognition of this position, it was stated that it would be proper to provide adhoc 10 per cent deduction from such incomes to account for these expenses. Accordingly, Clause (baa) of the Explanation excluded 90 per cent of such receipts from the exports. It did not exclude the entire receipts. Similarly, when it came to the proviso to Sub-section (3), by which the deduction for export profits was to be increased by the export incentives, the legislature restricted the increase to 90 per cent of the export incentives. Here, the entire 90 per cent of the export incentives was not given as additional deduction by the same was restricted to the proportion which the export turnover bears to the total turnover of the business. By restricting the additional deduction impliedly recognized that 10 per cent of the export incentives would have been incurred by the assessee as expenses as expenses to earn the same. It is Section (3), the export incentives of a particular type have been specifically mentioned. All these provisions strengthen the view that the legislature itself thought that 10 per cent of such receipts must be assumed to be expenses incurred for earning the same. Exclusion of such receipts from the export business or export turnover or export profits lends credibility to the contention of the assessee that the entire indirect costs cannot be attributed to export of trading goods and a part thereof, which must be taken at 10 per cent of such receipts, because that is the standard applied other than receipts by way of export of trading goods. It must be clarified at this juncture that in the present case the claim of the assessee has been put forth only on the basis that even the legislature has recognized than export of trading goods may be considered as expenditure for earning them. an assumption can very well be made to the effect that the Parliament considers that 10 per cent of the receipts unconnected with the export activity would have been incurred by the assessee as expenditure to earn the same. It is possible to justify the assessee's claim on this basis also.
If indirect costs are interpreted to mean also those costs which are not attributable to the export of trading goods, that would be clearly contrary to the express language used in Clause (b) of Sub-section (3), which is not permissible. Again, it is no doubt true, that the Circular No. 621, dated 19th December, 1991, does not lay down that the indirect costs of export turnover are required to be reduced by 10 per cent. But, it is equally true that the circular, which explains the definition of "profits of the business" as per Clause (baa) of the Explanation below Section 80HHC, takes note of the possibility that some expenses, which it fixes at 10 per cent ad hoc, are necessary to earn such income. The assessee is only trying to take inspiration from that logic and wants the same to be extended to the interpretation of Clause (b) of Sub-section (3). The assessee can be permitted to do so. Jamnadas G Husdalani's case (ITA No. 5348/Mum/2001), Chemocid Impex (P) Ltd. "S case (5348/Mum/2001), S Mansukhlal & Co.'s case (ITA No. 1521/Mum/2001) and Gill & Co. Ltd.'s case (ITA No. 8749/Mum/1995) approved; Vishal Creations (ITA No. 37-9/Mum/2000, Raj Impex (ITA No. 951/Mum/2001) and Gemini International (ITA No. 1995/Mum/1999) overruled."
16. On the basis of aforesaid decision the assessee submits that the amount arrived at by 10% of receipts is a notional figure and an assumption is be made to the effect that the Parliament considers that 10 per cent of the receipts unconnected with the export activity would have been incurred by the assessee as expenditure to earn the same. In our opinion there is a fallacy in assessee's claim inasmuch as it wants to attribute the expenditure of Rs. 6,83,358/- to earning of import entitlement and interest, which expenditure it has not incurred at all. The assessee had incurred only Rs. 1,16,224/- as the expenditure as is evident from the P & L Account of the assessee which is reproduced hereunder:-
Previous PARTICULARS CURRENT PREVIOUS PARTICULARS CURRENT
year Rs. Year Rs. Year Rs. Year Rs.
3,070,069 To purchases 26,152,000 5,433,999 By Sales 26,141,106
314,964 "Freight & 165,290 343,150 Duty Drawback --
Forwarding Exp
2,487 "General Exp 1,238 -- Import Entitlment 6,266,740
Benefit
4,445 "Postage & 3,340 -- Interest 557,113
Stationery Exp
12,000 "Telephone Exp 9,000 -- "Misc Income 9,904
36,250 "Salaries & Bonus 24,000 -- "Closing Stock 577,000
8,181 "Ins charges --
5,501 "Legal & 41835
Consultancy
Charges
194,054 "Interest --
5,020 "Membership 2,000
and Sub
29,705 "Bank Commission 13,386
and charges
1,330 "Pking charges --
2,500 "Audit Fee 4,000
4,285 "Travelling Exp 5,425
12,000 "Rent 12,000
2,074,358 "Net Profit tsrfd 7,118,349
to partner's A/c
5,777,149 33,551,663 5,777,149 33,351,663
17. When the total indirect expenditure incurred by the assessee is only Rs. 1,16,224/- how can the aforesaid sum of Rs. 6,83,358/- being 10% of Import Entitlements be said to have been incurred out of that? The assessee wants resultant minus expenditure to add to the profit for computing 80HHC deduction. That cannot, in our opinion be warranted on either legal principles or principles of accountancy, A part of expenditure on salary under the administrative these days the export benefits claims are settled by independent agencies in this line of business by charging only 1% as their charges. Be that as it may, by no stretch of imagination it can exceed the actual expenditure incurred by the assessee for all the activities. A notional expenditure can not be attributed to earning import benefits or interest and other income and thereby increase the export profit by such minus figure.
18. Section 80HHC(3)(b) which is applied in this case and which provides for as to how the profit derived is to be computed. It provides for a specific method for arriving at the profit derived from export. As per this provision the export profit is the amount which is arrived at by reducing direct and indirect costs from the export turnover of the assessee. When the total expenditure after direct costs is Rs. 1,16,324/- how can a higher amount thereof be attributed to the earning of other income resulting in a negative figure of expenditure for earning export profit. Even if one assumes that the entire expenditure incurred by the assessee as indirect costs is relatable to earning the other income it can at best be a NIL expenditure to be reduced for working out the export profit and certainly not a minus figure arrived at by notional figure of 10% of the other income.
19. The Tribunal in Surendra Engineering Corporation (supra) has taken the aid of memorandum explaining the introduction of Explanation (baa) providing for computing "Profits from business" excluding 90% of export benefits and other receipts and thereby concluding that 10% expenses are assumed by the Legislature for earning such income. But that does not appear to be so in all cases. Let us examine the facts of this case. In this case as aforesaid the assessee has incurred only a sum of Rs. 1,16m224/- or say Rs. 2,36,699/- by including interest expenditure not pertaining to directly to earn the interest income. 10% expenses on the export benefits & other income works to Rs. 6,83,358/- which is much more than the actual expenditure incurred by the assessee for all the activities of export and other including earning of export benefits and interest income. Thus the theory of 10% assumed expenditure fails in this case. The Special Bench decision of ITAT therefore cannot be said to have universal application.
20. The assessee's submission that it is an assumed figure and benefit should be given in all circumstances, cannot be accepted because it would be exotic to say that minus figure should be allowed in arriving at the export benefit. It would be artificially increasing the export profit of the assessee by the minus figures of expenditure which as aforesaid by no principle of accountancy or statutory provisions of law can be supported. Clause (b) of Section 80HHC(3) provides for computation "profit derived from export" to the amount of export turnover as reduced by the direct and indirect costs. It is this profit which is computed Under Section 80HHC(3)(b) in case of 100% export company, which is eligible to deduction Under Section 80HHC(1) of the Act. It does not anticipate any hypothetical or minus figure of costs direct or indirect and thereby increase the profit by that minus expenditure and grant deduction Under Section 80HHC(1) of the Act.
21. The interest and other misc income would be part of "total turnover" and the proportionate expenses would be allocated by the fact that of adopting the formula of determining indirect expenses given in Explanation (e) below Section 80HHC(3) and therefore separate deduction of 10% pm that account in any case is not warranted. It may be stated here that in view of the Tribunal decision in the case of Hindustan Fashion Ltd (supra) the net amount alone is to be taken as part of turnover. Therefore the indirect expenses got taken care of and allowed by the very formula given in the Explanation (e) below Section 80HHC(3) in so far as income from interest and misc income, other that export benefits mentioned in Section 28(iiia), 28(iiib) and 28(iiic), is concerned. The assessee's claim for reduction of further 10% expenses relatable to this other income is not warranted and therefore the CIT(A)'s order in this regard is reversed for this reason as well.
22. The decision of the Special Bench of the Tribunal is to be therefore limited to the expenditure relating to export benefit Under Section 28(iiia), 28(iiib) and 28(iiic) of the Act. It has to be taken as laying down a proposition for allowing upper limit of indirect expenses at 10%. An exercise is to be made first to find out as to how much is or could be the expenditure relating to export benefits by some accountancy principle. That in our opinion could be a proportionate basis allocating the expenditure on the basis of total receipts to export turnover on one hand and the benefits Under Section 28(iiia), 28(iiib) and (28(iiic) and other receipts on the other. The amount so arrived at and as relating to export benefits can be reduced from the total indirect expenditure. this is of course a passive and a negative method of arriving at indirect expenses attributable to export profit. The direct and positive method is to arrive at the indirect expenses by comparing total receipts to export sale. The difficulty has arisen because of excluding export benefits Under Section 28(iiia), 28(iiib) and 28(iiic) from the term "total turnover" which has created the conflicting position of provision of law--Section 80HHC(3)(b) vis-à-vis Section 80HHC(3)(a) and 80HHC(3)(c).
23. The ratio of the Special Bench decision of the Tribunal for assumed expenditure of 10% of income therefore cannot be extended to estimate the expenditure more than what the assessee had actually incurred and that too for combined activities of export and other income. This Special Bench decision and other decisions of the Tribunal may be authorities for outer limit but when the aggregate expenditure incurred itself is of a lesser amount no higher expenditure can be attributed to other income so as to increase the export profit by notional expenditure relatable to other income.
24. On the basis of the aforesaid Profit and Loss Account, the amount of profit attributable to export would be Rs. 2,84,582/- without allocating indirect expenses of Rs. 1,16,224/- debited therein, namely, profit as per P & L A/c Rs. 71,18,349/- Less(i) Income other than derived from export Import Entitlement Rs. 62,66,740/- (ii) Interest (Net) Rs. 5,57,113/-, and (iii) Misc Receipts Rs. 9,904/- = Rs. 2,84,592/-
25. The assessee however has debited the interest payment of Rs. 1,70,802/- directly to interest receipt and if that is taken out the gross receipt of interest works to Rs. 7,27,915/- (Rs. 5,57,113 + Rs. 1,70,802). The interest which is directly relatable to earning of interest income is worked out by the AO at Rs. 49,827/- which alone has to be allowed as deduction and supported by the decision of Special Bench in the case of Lalsons and thus the interest income which is to be taken out from the total income to arrive at export profit, as per Special Bench decision would be Rs. 1,63,617/- (2,84,582-1,70802 + 49,827), the interest income would be Rs. 6,78,088 (7,27,915 - 49,827) and misc income Rs. 9,940/-. From the aforesaid, one has to reduce indirect expenses attributable to export business. The indirect expenditure which is to be allowed in arriving at the export profit is the amount arrived at by excluding from the total indirect expenditure incurred by the assessee, a part of the expenditure attributable to the earning of import entitlement, interest and misc income.
26. In terms of Explanation (e) to Section 80HHC(3) the amount of indirect expenditure has to be arrived at by allocating total indirect expenditure based on export turnover and total turnover. Because the term "total turnover" does not include export benefit Under Section 28(iiia), (28iiib) and (28iiic), no expenditure in that case would be allocable to such benefits by the said formula. If on the other hand, the ratio of the Special Bench decision is adopted, it works to be a minus figure and no expenses could be allocated to export activities. That also would be absurd and unwarranted to say that no expenditure at all was incurred by the assessee for earning export profit or in connection with the export activity. On the facts and in the circumstances of the case, we are of the opinion that the fair and reasonable view would be to allocate the indirect expenditure on proportionate basis viz. export sales on one hand to arrive at the export profit, import entitlement, interest and mis income on the other to arrive at the other profit vis-à-vis the total receipts. The formula would be:-
Export Turnover = Aggregate Indirect Expenditure x ---------------
Total Receipts
27. The balance amount alone would be relating to the earning of other income. This should be the expenditure which can be attributed to earning of other income and not the adhoc 10% of the receipts which gives a negative figure for earning export profits. the total of the indirect expenditure as debited in the P & L A/c is Rs. 1,16,224/- adding therein the interest which is debited to interest receipt account but not relatable to earning of income of Rs. 1,20,475/- (1,70,302 - 49,827) the figure of indirect expenses would be Rs. 2,36,699/- (Rs. 1,16,224 + Rs. 1,20,475). Applying the aforesaid formula the allocable expenditure of indirect cost to export actrivity would be Rs. 1,84,420/- as under:-
2,61,41,406 2,36,699 x --------------- = 1,84,420 3,35,51,863
28. The balance Rs. 52,279/- (2,36,699 - 1,84,420) as related to other income. The income entitled to 80HHC deduction including export profit would be thus worked out as under:-
The total turnover 2,60,54,570
Direct Costs 2,55,75,000
--------------
4,79,590
Indirect Costs 1,84,420
--------------
Balance 2,95,170
Add: 90% of Export
Entitlement i.e. 56,40066
--------------
Total amount eligible
for 80HHC deduction 59,35,236
--------------
29. We direct that this figure of Rs. 59,35,236/- should be substituted for deduction Under Section 80HHC as against the claim of the assessee determined by the AO at Rs. 58,38,630/- and a higher claim of Rs. 65,51,332/- worked out and claimed by the assessee and allowed by the CIT(A).
30. In the result, the appeal is partly allowed.