Income Tax Appellate Tribunal - Ahmedabad
Rubamin Limited, Baroda vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A"
[CAMP AT BARODA]
(BEFORE S/SHRI P K BANSAL AND D T GARASIA)
ITA Nos.144 and 1327/Ahd/2008
(Assessment Years:- 2004-05 and 2005-06)
M/s Rubamin Limited, V/s The Deputy Commissioner
2 n d Floor, Synergy House, of Income-tax, Circle-
Subhanpura, Baroda 4(1), Baroda
[Appellant] [Respondent]
ITA Nos.720 and 1618/Ahd/2008
(Assessment Years:- 2004-05 and 2005-06)
The Deputy V/s M/s Rubamin Limited,
Commissioner of Income- 2 n d Floor, Synergy House,
tax, Circle-4, Baroda Subhanpura, Baroda
[Appellant] [Respondent]
Assesese by :- Shri Milin Mehta, AR
Respondent by:- Shri Raja Ram Sah, Senior DR
ORDER
Per Bench: These cross appeals two by the assessee and two by the Revenue have been filed against two separate orders of the CIT(A) dated 03-10-2007 and 28-02-2008 for Assessment Years (AY) 2004-05 and 2005-06 respectively. Since certain grounds involved in these cross appeals are common, the appeals were heard together and are being disposed of by this common order. The grounds taken by both the parties are as under:
1 ITA Nos.144/Ahd/2008 for AY 2004-05 By the Assessee:1 The learned CIT(A) erred in fact and in law in confirming the disallowance made by the AO invoking provision of section 40A(2)(b) of the Income-tax Act, 1961 in excess of commission computed @ 2% paid to M/s Soft Genie Ltd. and thereby confirming addition to the extent of Rs.34,05,978/-.
2 The learned CIT(A) erred in fact and in law in confirming the action of the AO in computing deduction u/s 80HHC of the Income-tax Act, 1961 by making various adjustments to the claim of the appellant.
a. The learned CIT(A) erred in fact and in law in confirming action of the AO by including the Scrap sales amounting to Rs.12,42,843/- in the total turnover.
b. The learned CIT(A) erred in fact and in law in confirming action of the AO in excluding 90% of following sums from profits of business for computing deduction u/s 80HHC of the Income-tax Act, 1961.
DEPB entitlement 1,29,65,569/-
Duty drawback 16,96,546/-
Excise duty refund 7,51,133/-
Interest from employees 53,227/-
Interest from customers 8,85,081/-
Interest on margin money deposit 3,56,567/-
Interest from Income-Tax Refunds 74,252/-
c. The learned CIT(A) erred in fact and in law in reducing the following amount from profit of undertaking on the ground that the same does not constitute income of undertaking.
2 Particulars Amounts
Interest from employees 31,839/-
Interest from Margin Money Deposits 3,55,501/-
Interest from Income Tax Refund 74,252/-
Rent 30,000/-
3 The learned CIT(A) erred in fact and in law in reducing deduction
available u/s 80IB of the Act from profits of business for the purpose of calculating deduction u/s 80HHC of the Act.
ITA No.1327/Ahd/2008 for AY 2005-06 by the Assessee:1 The CIT(A) erred in fact and in law in confirming the disallowance made by the AO invoking provision of section 40A(2)(b) of the Income-tax Act, 1961 to the extent of 3% of commission paid to one M/s Softgenie Ltd. and thereby confirming the addition to the extent of Rs.60,88,179/-.
2 The CIT(A) erred in fact and in law in confirming the action of the AO for charging interest u/s 234B of the Act.
ITA No.720/Ahd/2008 for AY 2004-05 By the Revenue:1 On the facts and in the circumstances of the case, the learned CIT(A) erred in directing the AO to scale down disallowance of commission payment to its associate concern M/s Softgenie Ltd. from Rs.56,76,632/- to Rs.34,05,978/-, though the commission recipient had no infrastructure and had not rendered any services to procure export orders.
2 On the facts and in the circumstances of the case, the learned CIT(A) erred in directing the AO to reduce 90% of the net interest from the profits of the business while working out adjusted profits, in computing deduction u/s 80HHC.
33 On the facts and in the circumstances of the case, the learned CIT(A) erred in directing to exclude interest from customers from the income derived from industrial undertaking while working out deduction u/s 80IB, following the Gujarat High Court's decision in Nirma Industries Ltd. disregarding the ratio laid down by the Supreme Court in Orissa State Warehousing Corporation Ltd. v/s CIT 237 ITR 589 (SC), CIT v/s Pandian Chemicals Ltd. (1998), 262 ITR 278 (SC).
ITA No.1618/Ahd/2008 for AY 2005-06 By the Revenue:1 On the facts and in the circumstances of the case, the learned CIT(A) erred in directing the AO to scale down disallowance of commission payment to its associate concern M/s Softgenie Ltd. from Rs.1,01,46,996/- to Rs.40,58,786-, though the commission recipient had no infrastructure and had not rendered any services to procure export orders.
2 Ground No.1 in assessee's appeals in ITA Nos.144 and 1327/Ahd/2008 for Assessment Years 2004-05 and 2005-06 respectively and Ground No.1 in the Revenue's appeals in ITA Nos.720/Ahd/2008 and 1618/Ahd/2008 for Assessment Years 2004-05 and 2005-06 respectively relates to confirmation of disallowance u/s 40A(2)(b) of the Income-tax Act, 1961 ["the Act" for short] partly by the CIT(A). Since the facts and issue are common in both the years, we are considering the facts for AY 2004-05.
3 The facts of the case are that the assessee is engaged in the business of manufacturing of various grades of zinc oxide, cobalt / nickel relates products, intermediates for pharmaceutical 4 products and drugs (find chemicals) and generating electricity through non-conventional energy devices (wind mills).
4 The case was selected for scrutiny u/s 143(3). In Annexure 6 to Form No.3CD, the assessee has shown to have made a payment of Rs.50,54,943/- being export commission to Softgenie Limited, an associate concern as specified u/s 40A(2)(b) of the Act. The assessee was requested to furnish justification for payment of this sum to its associate concern and also to file ledger account as well as other supporting evidence to substantiate its claim. After considering the submissions of the assessee, the AO held that Softgenie Limited had not done anything to procure orders from abroad on behalf of the assessee. All the efforts were done by the assessee to procure such orders. The AO observed that Softgenie Limited did not have any infrastructure to procure such huge export orders, but to avoid payment of taxes, the assessee resorted to a colourable device to divert its profit by way of paying huge commission to its loss making associate concern. Accordingly, the commission paid was disallowed and the same was added back to its total income. When the matter went before the CIT(A), the CIT(A) allowed commission @ 2% i.e. Rs.22,70,652/- and confirmed the disallowance of Rs.34,05,978/-by observing as under:
3.2 I have considered the submissions of the ld. AR and the facts of the case. The mere fact that certain payments have been made by the assessee to its associate concern is not sufficient to warrant disallowance of the said expenditure. It is necessary either to show that the entire payment was bogus and merely a device to reduce its taxable profits, or to show that some part or all of such expenditure 5 was excessive or unreasonable as compared to the market value of such services. The AO has made the disallowance on the ground that the payment of commission was made to its subsidiary company (which was a loss making company) and in this way its own tax liability has been reduced. This has been held to be a colorable device.
It has been stated that M/s Softgenie Ltd. and had done nothing to procure orders from abroad on behalf of the assessee. On the other hand, the assessee has furnished copies of correspondence to show that M/s Softgenie Ltd. had in fact procured export orders on behalf of the assessee. The fact that the export increased 10 fold in one year is undisputed. Whether the assessee would have been better off by deploying its own resources to procure export orders or whether it was better off by obtaining the services of another for this purpose, is a question best left to be answered by the assessee himself. It has been held by the courts in numerous cases that the assessing authority cannot step into the shoes of the assessee to decide the manner in which the business is to be conducted. However, the provisions of section 40A(2)(b) would be applicable in the instant case since the payment has been made to a concern which is a related party to the appellant. It is seen that in the past also the assessee was making exports. On inquiry, it has been ascertained that in the earlier years the export orders were obtained through another related company, M/s Rubamin Exports. The payment of commission to M/s Rubamin Exports has not been doubted. In the current year, the assessee has switched over from obtaining export orders through M/s Rubamin Ltd. to M/s Softgenie Ltd. The only issue is whether the payment of commission @ 5% is commensurate with the services provided. It is noteworthy that the commission was being paid @ 2% to M/s Rubamin Exports in the past. The appellant has not been able to show any reason(s) for paying higher rate of commission to M/s Softgenie Ltd. as compared to M/s Rubamin Exports despite the fact that the same nature of services were provided. Considering all the facts and circumstances of the case, I am of the opinion that the payment of commission @ 2% of FOB exports would be fair and reasonable looking to the past history and the facts. Accordingly, commission @ 2% i.e., Rs.22,70,652/- is allowed and disallowance of the balance amount of Rs.34,05,978/- is confirmed, on the ground that it was excessive."
5 The learned AR before us contended that the CIT(A) was not correct in law in sustaining the disallowance out of the 6 commission in part. M/s Softgenie Ltd. has surrendered sufficient services to the assessee and the assessee has paid the commission @ 5% towards the services rendered by Softgenie Ltd. In the AY 2003-04 the export sales of the assessee were only to the extent of Rs.105.11 lacs which has increased in AY 2004-05 to Rs.1057 lacs and in AY 2005-06 at Rs.2056.34 lacs. Even in the subsequent year also the export sales have been increased due to the services rendered by Softgenie Ltd. Referring to pages 80 to 84 of the paper book it was pointed out that the assessee has entered into the agreement with Softgenie Ltd. on 01-06-2003 by which the assessee has appointed Softgenie Ltd. as Commission Agent for overseas market as the assessee could not be able to achieve the exports as has been targeted by the assessee. M/s Softgenie Ltd. had sent the quotation for the products of M/s Rubamin Ltd. to overseas customers, held technical discussions with them in India and abroad through e-mail or through such means as has been deemed necessary by them. M/s Softgenie Ltd. also dealt with various queries raised by the customers and worked as a coordinator between M/s Rubamin Ltd. and overseas customers. Even M/s Softgenie Ltd. has provided its employees working for developing exports at the premises of the assessee although its infrastructure in the form of sitting place, computer and system assets, telephone, fax and other facilities were provided by the assessee so that M/s Softgenie Ltd. could have effectively discharge its function. The assessee recovered the cost of the infrastructure from M/s Softgenie Ltd. Our attention was drawn towards page-85 and it was pointed out that the assessee has duly submitted the list of the customers which were 7 introduced by M/s Softgenie Ltd. Ten new customers were added who have bought the goods from the assessee. The details of the export sales were brought to our knowledge by referring to pages 86 to 92 of the paper book. It was pointed out that M/s Softgenie Ltd. has dealt with the inquiries of the products of the assessee. For this, attention was drawn to pages 93, 94, 95, 96 and also invoice raised by the assessee. It was also pointed out that M/s Rubamin Ltd. has dispatched the material after informing M/s Softgenie Ltd. who have also followed up for the recovery of the payment of goods dispatched by the assessee. The export has increased by 905 % during the very first year when M/s Softgenie Ltd. was appointed as the Agent of the assessee. The rate of the commission was paid only @ 5% while the assessee has earned the income to the extent of Rs.7,55,62,968/-. The commission paid on an income of Rs.7,55,62,968/- is only for the sum of Rs.56,76,732/- in the AY 2004-05. Even during the AY 2005-06 the export sales have increased twice the export sales which the assessee did achieve during the AY 2004-05. It is not the case where the assessee has not incurred genuine expenditure. No comparative instance has been brought on record by the AO while valuing the market value of the commission paid by the assessee. The AO has merely presumed as if M/s Softgenie Ltd. has not rendered any services while this fact is on record that the export sales have increased by ten times only due to the efforts of M/s Softgenie Ltd. The commission paid to them is a genuine. The payment of the amount is not denied. The CIT(A) although agreed that it is the assessee who knows his affairs best. The AO can not enter into the shoes of the assessee to decide the manner 8 in which the business is to be conducted but since M/s Softgenie Ltd. is the person to whom section 40A(2)(b) applies, restricted the allowance of the commission to the extent of 2% only on the basis of the commission paid in the earlier year to some other concern by the assessee. If the services of that other concern is compared with the services rendered by M/s Softgenie Ltd., it is apparent that the export sales have increased by ten times. The income derived from the exports is entitled for the deduction u/s 80HHC. This fact is apparent from the assessment order. There will not be any tax saving to the assessee, if the assessee will not pay the commission and the income of the assessee from the exports will be exempt u/s 80HHC. Reliance was placed in respect of deductibility of the commission, on the following decisions:
1 DCIT v Microtex Separators Ltd. 293 ITR 451 (Kar) 2 S K Engg. v JCIT 103 ITD 97 (Bang) 3 Voltamp Transformers (P) Ltd. v CIT 129 ITR 105 (Guj) 4 ITO v Jagdish Prasad Gupta 123 ITR 813 (Del) 5 Marghabhai Kishabhai Patel & Co. v CIT 108 ITR 54 (Guj) 6 DCIT v Lab India Instruments (P) Ltd. 93 ITD 120 (Pune) 7 DCIT v Computer Graphics Ltd. 285 ITR 84 (Mad) 8 Keltron Component Comples Ltd. v DCIT 264 ITR 352 (Ker) 9 Gujarat Guardian Ltd. v JCIT 114 TTJ 565 (Del) 10 CIT v Gujarat Guardian Ltd. 177 Taxman 454 (Del) It was pointed out that in the case of DCIT v Microtex Separators Ltd. 293 ITR 451 (Kar) the payment of commission to sister concern rendering services as distributor even at the rate of 10% 9 of the sales turnover was not considered as unreasonable. It was pointed out that similarly the Hon'ble Gujarat High Court in the case of Voltamp Transformers (P) Ltd. v CIT 129 ITR 105 (Guj) held 5% commission paid to the persons as specified u/s 40A(2)(b) to be reasonable. Referring to the provisions of section 40A(2)(b) it was pointed out that the onus is on the Revenue to prove that the assessee has made excessive or unreasonable payment to the sister concern.
6 The learned DR, on the other hand, vehemently contended that the AO has rightly disallowed the commission paid by the assessee to M/s Softgenie Ltd. M/s Softgenie Ltd. has incurred the losses and therefore the assessee paid the commission to M/s Softgenie Ltd. The office of M/s Softgenie Ltd. was also situated at the same premises where the office of the assessee is situated. It was pointed out that even the assessee has debited the administrative expenses in its books of account in the account of M/s Softgenie Ltd. This clearly shows that M/s Softgenie Ltd. was not having any infrastructure. Referring to pages 3 and 4 of the assessment order it was pointed out that the objective of the assessee was only to set off the losses of M/s Softgenie Ltd. and with that purpose only the commission has been paid by the assessee. M/s Softgenie Ltd. has not contributed anything to procure the export orders. It has merely paid the salary of Rs.1,42,966/- to the employees which shows that they were not having much staff which could have contributed to the business of the assessee. The payment of commission was merely 10 a paper transaction. The AO has rightly disallowed the commission.
7 We have carefully considered the rival submissions and perused the material on record. We have gone through the order of the tax authorities below. We have also gone through the paper book consisting of the agreement entered into between the assessee and M/s Softgenie Ltd., the copy of which was filed before us. We have also gone through the correspondence of M/s Softgenie Ltd. with the parties to whom the assessee has made the export sales available in the paper book. This is an admitted fact that the assessee has paid the commission during the year on the FOB value of the exports @ 5% to M/s Softgenie Ltd.
amounting to Rs.56,76,632/-. The AO has held that M/s Softgenie Ltd. had not done anything to procure the export orders from abroad on behalf of the assessee. All the efforts were made by the assessee to procure such orders and therefore he disallowed the same. Even it was also observed that the assessee has provided its infrastructure to render the services as Agent. We find from page-3 of the agreement that it is one of the terms and conditions between the assessee and M/s Softgenie Ltd. that to have a proper coordination and smooth functioning, M/s Softgenie Ltd. will require its employees working with Rubamin Ltd. and will avail of the infrastructure of Rubamin Ltd. and Rubamin Ltd. was entitled to recover the cost from M/s Softgenie Ltd. for making such infrastructure available. The assessee has, we noted, recovered the cost of the infrastructure by debiting the expenses on 30-03-2004 through general voucher. Merely M/s 11 Softgenie Ltd. was not having much employees, in our opinion, will not make the services rendered by M/s Softgenie Ltd. to be non-genuine. This is the fact on record that the exports sales of the assessee have increased tremendously i.e. by approximately ten times as compared to earlier year. In AY 2003-04 the export sales were to the extent of Rs.105.11 lacs while in AY 2004-05 it has increased to Rs.1057 lacs. The assessee has also got the deduction u/s 80HHC in respect of profit earned due to the exports. If the assessee would have not paid the commission, the income of the assessee to that extent for the purpose of deduction u/s 80HHC would have also increased. This is the settled law that apparent is real. The onus is on the person who alleges that apparent is not real. The AO has merely presumed that the commission has been paid by the assessee to M/s Softgenie Ltd. for avoiding the payment of tax. If the assessee is eligible for deduction u/s 80HHC, even, in our opinion, this plea of the Revenue does not have any leg to stand. The AO although presumed the arrangement to be bogus, but has not brought any evidence on record which may prove that M/s Softgenie Ltd. has not rendered any services. We have gone through the correspondence of M/s Softgenie Ltd., the copy of which is available at pages 85 to 128 of the paper book. This correspondence clearly shows that M/s Softgenie Ltd. has rendered the services to the assessee for procuring the export orders. Merely M/s Softgenie Ltd. is related to the assessee can not be the basis that M/s Softgenie Ltd. would have not rendered the services to the assessee. M/s Softgenie Ltd. as well as the assessee both are limited companies duly incorporated under the 12 Companies Act having separate entity. The AO has not lifted the corporate weigh / way but simply disallowed the commission on presumption basis. The CIT(A) although agreed with the contention of the assessee that M/s Softgenie Ltd. has rendered the services for the assessee but presumed the commission to be higher as compared to the earlier year ignoring the fact that in the earlier year, the export sales of the assessee have not increased and were only Rs.105.11 lacs only while during the year it has increased to Rs.1057 lacs i.e. by 10 times. We, therefore, do not agree with the CIT(A) that the commission @ 2% is reasonable in the case of the assessee.
8 We have also gone through the various decisions as have been relied upon by the learned AR. We noted that the Hon'ble Karnataka High Court in the case of DCIT v Microtex Separators Ltd. 293 ITR 451 (Kar) held 10% commission to the sister concern to be reasonable. Similarly, in the case of S K Engg. v JCIT 103 ITD 97 (Bang), the Bangalore Bench of this Tribunal has clearly held that while invoking the provisions of section 40A(2), the onus lies upon the AO to prove that payment is excessive or unreasonable having regard to fair market value of the goods or legitimate needs of business. There is no presumption that whatever was paid in earlier year only becomes reasonable and anything in excess becomes unreasonable. The Hon'ble Supreme Court in the case of Shahzada Nand & Sons v CIT (1977) 108 ITR 358 (SC) clearly laid down that reasonableness of the payment is to be judged from the point of view of businessman and not by the view point taken by the AO.
13The Hon'ble Gujarat High Court in the case of Voltamp Transformers (P) Ltd. v CIT 129 ITR 105 (Guj) has also taken the similar view and held 5% of the commission to the persons specified u/s 40A(2)(b) to be reasonable. Similarly, the Hon'ble Madras High Court in the case of DCIT v Computer Graphics Ltd. 285 ITR 84 (Mad) held that the onus is on the Revenue to prove that the assessee has made excessive and unreasonable payment to the sister concern for making the disallowance u/s 40A(2)(b). We, therefore, hold that there was no justification in disallowing the commission paid by the assessee @ 5%. We, therefore, delete the disallowance and accordingly allow Ground No.1 of assessee's appeals and dismiss Ground No.1 of the Revenue's appeals.
9 Ground No.2 (a) in the assessee's appeal in ITA No.144/Ahd/2008 for AY 2004-05 relates to the computation of deduction u/s 80HHC. Firstly, the assessee objected that the CIT(A) was not correct in confirming the action of the AO in including the scrap sales amounting to Rs.12,42,843/- in the total turnover while computing the deduction u/s 80HHC.
10 We have heard the rival submissions and carefully considered the same. In our opinion, this issue is duly covered by the decision of the Hon'ble Supreme Court in the case of CIT v K Ravindranathan Nair (2007) 295 ITR 228 (SC), and accordingly we confirm the order of the CIT(A) on this issue.
11 The second issue [Ground No.2 (b)] relates to exclusion of 90% of the Excise Duty Refund from the profits of 14 the business while computing the deduction u/s 80HHC. Even though the assessee has taken in the Grounds of Appeal exclusion of 90% of the DEPB Entitlement, Duty Drawback, Interest from employees, Interest from customers, Interest on margin money deposit and Interest from Income-tax Refunds but at the time of hearing, the learned AR pressed the ground only relating to exclusion of 90% of Excise Duty Refund from the profits of the business for the purpose of computing the deduction u/s 80HHC. After hearing the rival submissions, we are of the view that this issue is also covered by the decision of the Hon'ble Supreme Court in the case of CIT v K Ravindranathan Nair (2007) 295 ITR 228 (SC) in which it was held that under clause (baa) of the Explanation only 90% of the receipts constituting independent income having no nexus with exports are required to be deducted from business profits for the purpose of computing the deduction u/s 80HHC. The Excise Duty Refund, in our opinion, is not an independent income and has direct nexus. In the business of the assessee it has arisen during the course of export business only. We accordingly direct the AO not to exclude 90% of the Excise Duty Refund from the income under the head 'business' for the purpose of computing the profit of the business eligible for deduction u/s 80HHC of the Act.
12 The third issue [Ground No.2 (c)] relates to reducing the rent and interest income from the profit of undertaking while computing the deduction u/s 80HHC. After hearing the rival submissions, we noted that this issue has not been pressed by the 15 assessee in appeal before the CIT(A). We accordingly dismiss the same.
13 Ground No.3 in the assessee's appeal ITANo.144/Ahd/2008 relates to reduction in the deduction available u/s 80IB of the Act from the profit of the business for the purpose of calculating the deduction u/s 80HHC. After hearing the rival submissions, we noted that this issue is duly covered by the decision of the Special Bench of ITAT in the case of ACIT v Hindustan Mints & Agro Products (P) Ltd. [2009] 119 ITD 107 (DELHI) (SB), in which it was held as under:-
"In view of the above submissions the first question to be decided was as to whether the decision in the case of SCM Creations (supra) has impliedly overruled the Special Bench 's decision of Rogini Garments' case (supra), notwithstanding provision of section 80- IA(9).
Perusal of the decision of SCM Creations (supra) showed that applicability of section 80-IA(9) or similar provision under section 80- 18 was not considered by the High Court in the said case. Though the case pertained to an assessment year after 1-4-1999, yet the pre- amended law was applied.
In such circumstances, it cannot be said that decision of the Madras High Court in SCM Creations (supra) is an authority for the proposition as to how provisions of section 80-!A(9) made applicable with effect from the assessment year 1999-2000 are to be applied. Effect and implementation of above provisions were neither raised, nor examined nor decided by the Madras High Court. In the later decision of the Madras High Court in the case of General Optics (Asia) Ltd. v. DCIT(A) decided on 2 7-12-2008 wherein similar question was raised, the Tribunal, after following the decision of the Special Bench in the case of Rogini Garments (supra), had allowed deduction under section 8OHHC after deducting relief allowed under section 80-IA(9). [Para 20.1] I 16 t is clear from above that application of restrictions as upheld by the Special Bench in the case of Rogini Garments (supra) was held to be applicable from the assessment year 1999-2000 onwards. In the light of above discussion, it was to be held that decision of the Madras High Court in the case of SCM Creations (supra) did not impinge upon the ratio of the Special Bench in the case of Rogini Garments (supra). It was, accordingly, held that the Benches of the Tribunal, which have taken a view contrary to the view of Rogini Garments' case (supra) did not correctly appreciate the legal position.
On consideration of provisions of section 80-IA (9), it is found that there are two restrictions in the statutory provision under consideration. These are
(a) where an assessee is allowed deduction under this section (i.e., 80- IA or 80-IB), deduction to the extent of such profit and gain shall not be allowed under any other provision of this Chapter (Heading 'C - Deduction in respect of certain incomes '), and
(b) deduction shall in no case exceed the profit and gain of the undertaking or hotel, as the case may be.
The contention of the assessee was that total deductions under various sections should not exceed profits and gains of an undertaking. It was not possible to accept this contention. It is seen that the CBDT Circular No. 772, dated 23-12-1998 clarified and only dealt with (b) above and did not deem it necessary to make reference to restriction
(a). In order to accept the contention of the assessee, one has to exclude portion of the provision covered by (a) and ignore the restriction placed therein. Why such course should be adopted when words used by the Legislature, 'claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions are quite clear and unambiguous and are to be given effect to as rightly contended by the revenue. The profits or gains of an industrial undertaking, which has already been allowed as a deduction under section 80- IA, such profit (to the extent) cannot be taken into consideration for allowing deduction under any other provision of this Chapter 'C If profit, which has already been allowed as a deduction, is again taken into consideration for computing deduction under any other provision referred to above, then restriction (a) above is disregarded and ignored. It cannot be done without doing violence to 17 the language of the provision. There is no justification for adopting a course prohibited by the Legislature. it is not possible to ignore the restriction placed as (a) nor it is possible to accept that in Circular No. 772, there is a suggestion to ignore restriction (a) mentioned above. As per the settled law, the courts and the Tribunals must see the mandate of the Legislature and give effect to it, as rightly argued by the revenue. Therefore, restriction (a) above has to be respected and followed.
The statutory provision of section 8OAB, no doubt, provides that deduction under each section of Chapter VI-A is to be computed independently. But, not only the total scheme of the statute but scheme of every section is to be read and interpreted and every word is to be given proper meaning. In several sections under Chapter VI-A, it is provided that if deduction is allowed under that section, then no deduction under any other section under Chapter VI-A would be allowed. Thus, where deduction under such specific section has been claimed and allowed, there is no need to compute deduction permissible under other sections of Chapter VI-A. It would be a futile and useless exercise. Therefore, no question of computing deduction in above circumstances would arise and section 8OAB would have no application. The said section provides no solution to the problem where deduction is to be computed under more than one section of Chapter VIA. It cannot follow that other sections providing modification or change in manner or mode of computation are to be ignored. There are several sections like sections 8OHHA, 8OHHA(5), 8OHHA(6) providing manner of deductions or preferential treatment to one deduction over another when the assessee is entitled to deduction under more than one section of Chapter VI-A. It is provided that effect shall first be given to a particular section. All the sections are to be read together harmoniously. The fact that section 8OAB starts with a non obstante clause does not make any difference, as there is no conflict in various provisions. Restriction placed on double deduction of same eligible profit cannot be read as an absurdity or conflict. Having regard to above provisions, putting ban on allowability of deduction under other sections, computation of deduction under those sections would serve no purpose. It cannot follow from above that restriction of those sections are not to be given effect to as scheme in those sections is different from scheme of section 8OAB which starts with a non obstante clause 'Notwithstanding anything.....' 18 Arguments of the assessee, if accepted, would lead to complications not envisaged by the Legislature. Therefore, in a case where deduction under section 80-IA has been allowed, then in the light of provisions of sub-section (9), such profits and gains (to the extent) shall not be allowed under any other provision of the relevant Chapter. For example, if total profit of undertaking is Rs.100 and 20 per cent is allowed as a deduction under section 80-IA or 80-IB, then for purposes of other provisions like section 8OHHC, on such 20 per cent of profit, no deduction can be allowed. The deduction under other sections has to be computed after reducing such profit of 20 per cent. In other words, it will be computed with reference to 80 per cent of the profit. Such deduction cannot be governed by section 8QAB alone, as it is a case in which deductions under more than one section of Chapter VI-A are to be allowed; adjustment of deductions under various sections is to be made. It is not a case where provision before making any deduction under Chapter VIA is applicable. Therefore, provision of section 8OAB is of no assistance in resolving the problem in hand.
The assessee further contended that where the Legislature intended to deduct the amount of deduction out of some other deduction, a different phraseology was used. By referring to subsection (5) of section 8OHHB; sub-section (4) of section 8OHHBA; and sub-section (4) of section 80-IE, the assessee further submitted that in all these provisions, the Legislature has specifically used non-obstante clause whereas no overriding effect has been given in section 80-IA or 80-lB. The difference in language clearly pointed out that the Legislature did not in tend that deduction allowed under above provisions should be deducted from relief permitted by other sections.
There was no substance in the above argument. it is a settled law that Legislature adopts different ways and means in order to achieve its goal and there is no justification for insistence on identical language. What is required to be seen is the language employed, which, if clear and unambiguous, is to be given effect to.
It was contended that provision of section 8OHHC was a special provision providing an incentive to exporters earning precious foreign exchange for the country whereas section 80-IA or 80-lB covers a totally different field. Therefore, reading of provision of section 80- IA(9) in section 8OHHC would only lead to an apparent conflict.
19There was no force in above submissions. Of course all the provisions should be read together and given a harmonious construction. All provisions are inter-related and cannot be read de hors, one and other. The Special Bench in the case of Rogini Garments (supra) has held that the restriction imposed by subsection (9) on account of section 80-IA is to be read in all the provisions of Chapter VI-A and it is not possible to ignore the restriction that profit and gains claimed and allowed as exempt under sub-section (9), (to the extent allowed) cannot be allowed under any other provision of Chapter 'C Above construction in reading restriction in all relevant provisions under Chapter 'C' is leading to no contradiction or absurdity and is reasonable. It is the legislative policy not to allow repeated deduction of same profit under sections of deductions in Chapter VI-A. Therefore, there is no conflict or contradiction in giving effect to the legislative mandate. Doing otherwise would, no doubt, be doing violence to the clear language. The argument was, accordingly, to be rejected.
The assessee also laid stress to notes of objects and reasons pertaining to introduction of sub-sections (9) and (13) in sections 80-IA and 80- lB. Attention was also drawn to Circular of the CBDT No. 772, dated 23-12-1998 to emphasize that the legislature only intended to limit deduction under all the provisions to 100 per cent of eligible profit. It was not intended to impose restriction or deduct profit allowed under section 80-IA /80-lB from deduction permissible under section 8OHHC.
The notes on objects and accompanying reasons are only aids to construction. Such aids to construction are needed when literal reading of provision leads to ambiguous results or absurdity. Where language is clear and there is no ambiguity or absurdity, notes on clauses need not be referred to. Therefore, on facts, there was no support for the assessee from notes on clauses of the Finance Act. As regards Circular No. 772, dated 23-12-1998, as already held that the said Circular was dealing with restriction (b) which provided that deduction (under other provision with heading 'C'), 'shall in no case exceed profits and gains of business or hotel, as the case may be The above portion of the section is separated from the other portion of the sub-section by word 'and it is, therefore, clear that there are two restrictions in the sub- section and circular of the Board is dealing only with the second restriction. it is difficult to accept that circular was issued to do away with first restriction incorporated in the provisions. There is absolutely 20 no justification for allowing repeated deductions on profit and gain on which deduction has been allowed under section 80-IA or 80-lB of the Act.
The language used in section 80-IA (9)/80-IB(9A) is clear and unambiguous and is required to be given effect to. Deduction of profits and gains allowed under section 80-IA /80-lB is not to be allowed again under any other provision. There is then further restriction on total deduction not exceeding eligible profit of the undertaking.
Further restriction contained in section 80-IA or 80-lB not to allow repeated deductions are applicable to same profit. This is more than clear from use of words 'such profit' in section 80-IA/ 80-lB. In other words, there has to be identity of profits on which deduction under more than one provision under sChapter VI-A is claimed by the assessee. The provisions are applicable where on the profit of the undertaking or enterprise, deduction is claimed under section 80-IA or 80-18 and then on the same profit of the undertaking deduction under other provisions like 8OHHC is claimed. In such cases, restriction contained in above provisions would apply. If profits are derived from separate undertakings, restriction contained in above provision would not be applicable.
The assessee further contended that section 80-IA(9) cannot control the mechanism of computing the deduction under section 8OHHC(3). It further submitted that where it was found that provision allowing deduction on assumption is applicable, then those provisions are to be interpreted liberally.
Said contention could not be accepted as all statutory provisions are inter-related and are parts of one scheme. This cannot be read de hors one and other. Restriction imposed in section 80-IA(9)/ 80-IB(9.4) is to be read in all sections and given effect to. This would only give a harmonious reading.
Thus, deduction to be allowed under any other provision of Chapter VI-A with the heading 'C (which includes sections 80H, 8OHHC, etc.) is to be reduced by an amount of deduction allowed under section 80-IA/80-IB."
21Respectfully following the said decision, we are of the view that no interference is called for in the order of the CIT(A). Thus, this ground stands dismissed.
14 Ground No.2 in the assessee's appeal - ITANo.1327/Ahd/2008 for AY 2005-06 relating to confirming the action of the AO for charging the interest u/s 234B of the Act, is consequential in nature. The AO is directed to re-compute the interest leviable u/s 234B after giving effect to this order.
15 Ground No.2 in the Revenue's appeal in ITANo.720/Ahd/2008 for AY 2004-05 relates to the CIT(A)'s direction for reducing 90% of the net interest from the profits of the business while working out the adjusted profits, in computing the deduction u/s 80HHC. After hearing the rival submissions, in our opinion, the CIT(A) has rightly directed the AO to reduce 90% of the interest income if the assessee proves the nexus between the interest paid and interest earned in view of the decision of the Hon'ble Delhi High Court in the case of CIT v Shri Ram Honda Power Equip 289 ITR 475 (Delhi). The relevant portion of the Head Note of the said judgment is reproduced below:
Export--special deduction under section 80HHC--computation OF SPECIAL DEDUCTION --MODE OF COMPUTATION --PROFITS ASSESSABLE AS INCOME FROM OTHER SOURCES NOT PART OF PROFITS FOR PURPOSES of section 80HHC--interest in clause (baa) of Explanation REFERS TO NET INTEREST --INCOME-TAX ACT, 1961, S. 80HHC.22
Section 80HHC of the Income-tax Act, 1961, was first inserted by the Finance Act, 1983, with effect from April 1,1983, and has since undergone several changes. While ascertaining the true scope of a provision in a statute, attention must necessarily be paid not only to the text, viz., the words employed in the relevant provision, but also the context. The idea of section 80HHC is to ensure that the exporter gets the benefit with reference to profits derived from export.
Where surplus funds are parked with the bank and interest is earned thereon it can only be categorised as income from other sources. This receipt merits separate treatment under section 56 of the Act which is outside the ring of profit and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC. To give effect to this position, the Assessing Officer while computing profits of the export business will have to remove from the debit side of the profit and loss account the corresponding interest expenditure that has been "laid out" to earn such income from other sources. Otherwise this will depress the profits by an amount which is out of the reckoning of section 80HHC, a consequence not intended to be brought about.
The other category is where the exporter is required to mandatorily keep monies infixed deposit in order to avail of credit facility for the export business. Interest earned on fixed deposits for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income. However, this will apply only where there is a specific finding by the Assessing Officer that the interest income is not business income. If in a given case the Assessing Officer has held that the interest income is business income, and this has not been challenged by the Department thereafter'/ that question cannot to be permitted to be reopened and the only question then will be if netting should be allowed.
Clause (baa) of the Explanation to section 80HHC envisages a two- step process in computing profits derived from exports, first, the Assessing Officer is required to apply sections 28 to 44 in order to compute the profits and gains of business or profession. In doing so, the Assessing Officer may find that certain incomes, which have no nexus to the export business of the assessee, are not allowable and therefore ought to be treated as income from other sources. Once the Assessing Officer computes what is business income then he proceeds 23 to the next step of deducting 90 per cent, of the receipts referred to in clause (baa) of the Explanation to section 80HHC in order to arrive at the profits derived from export. The expression ''by way of" which qualified the word "income" in section 80M is similar to the words "receipts by way of" occurring in Explanation (baa) of section 80HHC of the Act. Further the words "included in such profits" occurs in both the provisions. Just as in Distributors (Baroda) where it was explained by the Supreme Court that the words "such" profits can only be understood as "computed in accordance with the provisions of the Act", similar words in clause (baa) should partake of the same meaning. The underlying principle of netting appears to logically get attracted as no prudent businessman would allow taxation of the interest income de hors the expenditure incurred for earning such income. The words "included any such profits" following the words receipts by way of interest, commission, brokerage, etc., is a clear pointer to the fact that only net interest would be includible in arriving at the business profit. Once business income has been determined by applying accounting standards as well as the provisions contained in the Act, the assessee would be permitted, in terms of section 37 of the Act, to claim as deduction, expenditure laid out for the purposes of earning such business income. Support for this proposition is to be found from Circular No. 621 dated December 19,19911, of the Central Board of Direct Taxes.
The idea of section 80HHC is to ensure that the exporter gets the benefit of the profits derived from export and not to depress the pro fit further. Therefore, it can only be the net interest which can be included in the profits. If netting were not to be permitted the result would be that the profits of the exporter would be depressed by an item that is expenditure incurred on earning interest, which does not form part of the profit at all. This could not have been the intention of the Legislature.
Explanation (baa) is relatable only to clause (a) of section 80HHC(3) and not to clause (b) thereof. These operate in distinct areas and no inter-mixing is contemplated. Hence the word '"interest" in clause (baa) to the Explanation in section 80HHC is indicative of "net interest", i.e., gross interest less the expenditure incurred by the assessee in earning such interest.
To summarise the conclusions : (i) In computing what the profits derived from exports for the purposes of section 80HHC(1) read with 24 section SOHHC(3) are, the nexus test has to be applied to exclude that which does not I partake of profits that can be said to have been derived from the business of exports, (ii) In the specific context of clause (baa) of the Explanation to section 80HHC, while determining the "profits of the business", the Assessing I Officer has to undertake a two-step exercise in the following sequence. He has I to first "compute" the profits of the business under the head "Profits and gains of business or profession." In other words, he will have to compute business profits, in terms of the Act, by applying the provisions of sections 28 to 44 thereof. (Hi) In arriving at the profits of the business by the above method, the Assessing Officer will exclude all such incomes which partake of the char-I Jeter of "income from other sources" which in any event are treated under I sections 56 and 57 of the Act and are therefore not to be reckoned for the purposes of section 80HHC. (iv) Where surplus funds are parked with the bank I and interest is earned thereon it can only be categorised as income from other sources. This receipt merits separate treatment under section 56 of the Act which is outside the ring of profits and gains from business and profession. It entirely out of the reckoning for the purposes of section 80HHC. (v) earned on fixed deposits for the purposes of availing of credit facilities the bank, does not have an immediate nexus with the export business therefore has to necessarily be treated as income from other sources and business income, (vi) Once business income has been determined by applying accounting standards as well as the provisions contained in the Act, the assessee would be permitted, in terms of section 37 of the Act, to claim as deduction, expenditure laid out for the purposes of earning such business (vii) In the second stage, the Assessing Officer will deduct from the of the business computed under the head "Profits and gains of busier profession" the following sums in order to arrive at the "profits of the business" for the purposes of section 80HHC(3) : (a) 90 per cent, of any sum to in clauses (iiia), (iiib) and (iiic) of section 28, i.e., export incentives; (b) 90 per cent, of any receipts by way of brokerage, interest, rent, charges or any other receipt of a similar nature included in such profits; and (c) profits of any branch, office, warehouse or any other establishment of the assessee situate outside India, (viii) The word "interest" in clause (baa) of the Explanation connotes "net interest" and not "gross interest". Therefore, in deducting such interest, the Assessing Officer will take into account the net interest, i.e., gross interest as reduced by expenditure incurred for earning such interest, (ix) Where, as a result of the computation of profits and gains-of business and profession, the Assessing Officer 25 treats the interest receipt as business income, then deduction should be permissible, in terms o/Explanation (baa) of the net interest i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from section 37, will require to be shown by the assessee for application of the netting principle.
Rani paliwal v. CIT [2004] 268ITR 220 (P & H) dissented from.
Respectfully following the aforesaid decisions, we accordingly dismiss this ground.
16 Ground No.3 in the Revenue's appeal in ITANo.720/Ahd/2008 for AY 2004-05 relates to direction of the CIT(A) to the AO to exclude interest received from the customers from the income derived from the industrial undertaking for the purpose of computing the deduction u/s 80IB of the Act. In our opinion, this issue is duly covered by the decision of the Hon'ble Jurisdictional High Court in the case of Nirma Industries 283 ITR 402. We accordingly are of the view that no interference is called for in the order of the CIT(A). Accordingly, we dismiss this ground.
2617 In the result, both the appeals filed by the Revenue are dismissed. The appeal filed by the assessee [ITA No.144/Ahd/08 for AY 2004-05] is partly allowed while the assessee's appeal for AY 2005-06 is allowed.
Order pronounced in the open court today on 27-11-2009 Sd/- Sd/-
(D T GARASIA) (P K BANSAL)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date : 27-11-2009
Copy of the order forwarded to :
1. M/s Rubamin Limited, 2 n d Floor, Synergy House, Subhanpura, Baroda
2. The DCIT, Circle-4(1), Baroda
3. CIT concerned
4. CIT(A)-III, Baroda
5. The DR, ITAT, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABA 27