Income Tax Appellate Tribunal - Kolkata
R.R. Sen And Brothers vs Joint Commissioner Of Income Tax on 30 April, 2003
Equivalent citations: (2005)95TTJ(KOL)398
ORDER
M.K. Sarkar, A.M.
1. The assessee is in appeal in this case on the following grounds :
"1. For that the learned CIT(A) erred in law as well as in fact in not allowing the benefit under Section 80HHC of the Act in respect of the profit derived by exporting the surplus foreign currency notes to abroad and selling such foreign currency in the foreign country and bringing the sale proceeds in convertible foreign exchange.
2. For that the learned CIT(A) failed to appreciate that the appellant under the licence issued by the RBI carries on the business not only of purchasing and selling the foreign currency notes in India but also is allowed under the permission of the RBI to export the surplus foreign currency notes in the foreign countries abroad and such foreign currency notes are being sold in the foreign countries and the sale proceeds also are realised in convertible foreign exchange and brought into India in such convertible foreign exchange.
(3) For that the learned CIT(A) erred in holding that the foreign currency notes cannot be said to be goods for the purpose of Section 80HHC and as such the deduction under Section 80HHC in respect of profits derived by export of foreign currency notes and bringing into the country the sale proceeds of such foreign currency notes in convertible foreign exchange is not eligible for deduction under Section 80HHC.
4. For that the learned CIT(A) failed to appreciate properly the true scope and effect of the several decisions set out in the representation before him in support of the contention that foreign currency notes are to be treated as goods for the purpose of allowing the deduction under Section 80HHC of the Act.
5. For that the learned CIT(A) erred in fact as well as in law in upholding the disallowance of 5 per cent of (1) tea and tiffin expenses and (2) telephone expenses."
2. The major ground is in respect of disallowance of claim of deduction under Section 80HHC which was confirmed by the CIT(A).
3. The facts of the case are that the assessee is a money changer within the meaning of Section 7 of the Foreign Exchange Regulation Act, 1973, and is authorised to deal in foreign currency. The activity of the assessee consists of purchasing foreign currency from various sources like public, authorised dealers of RBI, other full-fledged money changers, etc. in Kolkata and Delhi. The bulk of the foreign currency purchased by the assessee was sold to M/s National West Minister Bank, London, U.K. The remittances of the sale proceeds were received from the said National West Minister Bank through credit advisors to the assessee's bankers in US dollars being convertible foreign exchange.
4. The AO denied the claim of deduction under Section 80HHC for the reason that the assessee had not exported any manufactured or processed goods or merchandise and hence, did not qualify for consideration of deduction under Section 80HHC.
5. The CIT(A), on the other hand, was of the view that foreign, currency could not be considered as goods or merchandise at all. According to him, foreign currency could not be said to be goods for the purpose of Section 80HHC, inasmuch as, currency is not understood by a common man in the same sense as goods. The CIT(A) also observed that currency is normally understood to be money which is a medium of exchange, a standard and a store of value which is utilised for procuring goods and services whereas, on the other hand, goods normally signifies objects which can be enjoyed, consumed, utilised for specific purposes by reason of their intrinsic value.
6. Learned Authorised Representative, appearing on behalf of the assessee, submitted that the finding of the AO that Sub-section (I) of Section 80HHC, which is the basic sub-section covering this case, speaks of "business of export out of India of any goods or merchandise". The said sub-section does not distinguish between trading goods, on the one hand, and manufactured or processed goods, on the other. According to him, Sub-section (3) of Section 80HHC does not give any idea that in order that some goods to be of the nature of "trading goods", the same must be manufactured or processed by some other parties. Actually, trading goods means goods, which is not manufactured or processed by the assessee himself. The said definition of "trading goods" for the purpose of Sub-section (3) of Section 80HHC is provided in Clause (f) of the Explanation to aforesaid Sub-section (3). In fact, there may be goods of the type, which is neither manufactured nor processed by anybody which would qualify for deduction under Section 80HHC. According to learned counsel, if the construction as put forward by the AO is to be accepted, then export of primary agricultural product or primary mineral goods would not be covered by Section 80HHC. Actually, Section 80HHC may not cover some of such products which are barred by Schedule XII of the IT Act. According to him, other than those items barred by Schedule XII, all other trading goods should be considered for deduction under Section 80HHC as long as the export proceeds are received by convertible foreign exchange.
7. Regarding the objection of learned CIT(A), learned counsel submits that the expression "goods" or "merchandise" has not been expressly defined either in Section 80HHC or anywhere else in IT Act. He, however, referred to Section 2(22)(d) of the Customs Act which defines 'goods' to include the currency and the negotiable instrument. Therefore, export of foreign currency, according to Customs Act, is export of goods. It is submitted that when goods has been defined in Customs Act and such definition includes currency for the purpose of Customs Act, there is no reason why in IT Department, being another sister Department, the connotation of the term should be different.
8. The learned Authorised Representative has drawn our attention to the meaning of the word "merchandise" as stated in Webster's New International Dictionary where "merchandise" has been meant for "commodities or goods that are bought and sold in the business, the wares of commerce". From this, he proceeded to establish that according to the dictionary meaning also, 'merchandise' should include commodities that are bought and sold. In accordance with the interpretation of statutes, where a word or an expression is not specifically defined in any Act, recourse should be taken to the dictionary meaning of the said word. In the instant case, the foreign exchanges which are ready for sale and purchase in the market should be considered to be in the nature of commodities and hence includible within the definition of the word "merchandise". To expand his argument further, he has referred to the case of Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC) where the Hon'ble Supreme Court has held that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. While deciding this issue, the Hon'ble Supreme Court had relied on principle laid down by the Court of Appeal in the case of Imperial Tobacco Co. v. Kelly (1943) 25 Tax Cases 292 (CA) holding that dollars must be held as commodities and hence the profit or loss arising out of transactions made in foreign currency has to be treated on the same footing as the purchase and sale of any other business commodities. He has also drawn our attention to the decision of the Karnataka High Court in the case of Kirloskar Asea Ltd. v. CIT (1979) 117 ITR 82 (Kar) in which the Hon'ble High Court quoted from the above judgment of the Court of Appeal in the case of Imperial Tobacco Co. (supra) to arrive at the decision that dollars being a commodity, foreign currency held by an Indian company in foreign bank is property and constitutes capital asset and furthermore that the profits derived on transfer due to devaluation is assessable to capital gains tax. Reference has also been made to the decision of the Hon'ble Calcutta High Court in the CIT v. Oil India Ltd. (1983) 143 ITR 848 (Cal) as also the decision of the said Court of Appeal in the case of Imperial Tobacco Co. (supra) has been received. It has further been submitted that the Tribunal, Bangalore Bench, in the case of Comfund Financial Services (I) Ltd. v. Dy. CIT (1998) 67 ITD 304 (Bang) referred to the abovementioned judgment of the Court of Appeal holding the view that dollar was a commodity and that shares and securities as also units of UTI should be considered as commodity.
9. With these arguments, learned counsel sought to establish that foreign exchange dealt in by the assessee-firm has all the characteristic of goods or merchandise and since all the ingredients of export of goods or merchandise were satisfied and the assessee had made export earnings in dollars in convertible foreign exchange, the assessee should be considered to be entitled to deduction under Section 80HHC of the IT Act.
10. Learned Departmental Representative relied upon the orders of the authorities below. He also submitted that foreign currencies were neither goods or merchandise nor were they manufactured and processed and hence, profit from such activities cannot qualify for deduction under Section 80HHC.
11. We have considered the rival submissions. We find that it is necessary to arrive at a finding as to whether foreign currency could be considered to be either goods or merchandise. Since the foreign currency has not been defined in the IT Act, we have to go to the general dictionary meaning and other considerations to find out its real meaning with reference to eligibility of deduction under Section 80HHC. According to Chamber Dictionary "merchandise" means "commodities or goods that are bought and sold in business" and the "goods bought and sold for gain". According to Webster Dictionary, 'commodities' means "something useful and valuable" and "an economic good and article of commerce". According to English Readers' Dictionary by Hornby Parnwell (Oxford) "commodity" means "trade goods". Having understood the meaning of the word "commodity", if we apply the decision quoted by learned counsel in the case of Imperial Tobacco Co. (supra), we find that the Hon'ble Judges there were seized with the question whether dollar would be a commodity. We find the reply to be positive. For the purpose of clarity, we quote the relevant paragraph from the order in the case of Imperial Tobacco Co. (supra) which reads as under :
"That being so, what is the true analysis of the position ? A manufacturer has provided himself with a commodity, namely, dollars. I call dollars a "commodity" not for the reason that they are not currency in this country but because they have a characteristic which is common to other commodities and is not shared by sterling, namely, that their value from day-to-day varies in terms of sterling, just in the same way as coal, or bricks, or anything else may do."
12. From the above analysis, it seems that foreign currency has been legally accepted as 'trade goods' or 'merchandise'. We got support of this view both from the order of the Court of Appeal as well from the decision in the case of Kirloskar Asea Ltd. (supra) decided by the Hon'ble Karnataka High Court as well as the case of Hon'ble Calcutta High Court in the case of Oil India Ltd. (supra). We have also considered the decision of the Tribunal, Bangalore Bench, in the case of Comfund Financial Services (I) Ltd. (supra) in which also 'dollar' has been considered as commodity. The finding of the AO that foreign currency was not a manufactured or processed item and, therefore, does not qualify for deduction under Section 80HHC does not appear to hold good in view of the provision of Section 80HHC(3)(b). Whereas Section 80HHC(3)(a) considers availability of deduction under this section of goods or merchandise manufactured (or processed) by the assessee, Sub-clause (b) of Section 80HHC(3) provides conditions in respect of export out of India of trading goods for the purpose of deduction under Section 80HHC. It is now clear that foreign currency is to be considered as "goods" and these are "traded goods". The provision of Section 80HHC applies to a resident of India engaged in the business of export out of India of any goods or merchandise to which this section applies. The kind of-export qualifying under Section 80HHC(3) is elaborated in Sub-clauses (a), (b) and (c) of Section 80HHC(3). In Sub-clause (b) of Section 80HHC(3), it is provided that "where the export out of India is 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". A case has neither been made out by the AO nor has it been discussed in the appellate order that the assessee has not complied with the requirements of this sub-clause. Therefore, the AO was wrong in not allowing deduction under Section 80HHC in the instant case and the CIT(A) was also in error in confirming such order when trading in foreign currency assumes the meaning of trading in goods and merchandise and is eligible for deduction under Section 80HHC(3)(b) of the Act. In reversing the orders of the authorities below, we allow this ground taken by the assessee.
13. The next ground relates to CIT(A) upholding the disallowance of 5 per cent of tea and tiffin expenses and telephone expenses. It has been argued by learned Authorised Representative, on behalf of the assessee, that tea and tiffin expenses are of the nature of expenses incurred for the welfare of the employees and should, therefore, be allowed. It has further been submitted that telephone expenses are required to be made solely for the purpose of business of dealing in foreign exchanges requiring large number of telephone calls being made inside the country and abroad. Hence, such expenses are eligible for complete deduction.
14. We, however, find from the order of CIT(A) that he has observed that the tea and tiffin expenses are mostly self-vouched and leave some possibility of non-genuine or non-business expenditure getting mixed up with genuine business expenses. For these reasons, he confirmed 5 per cent of the expenses incurred under the above head. Similarly, regarding telephone expenses also, he was of the view that the partners must have made certain telephone calls for their personal purposes also out of the telephones given to them.
15. We find that the occasion for personal use by the partners in a business like the assessee cannot be ruled out. Therefore, the nominal disallowance confirmed by the CIT(A) may not be interfered with. In agreeing with the content of the order of the learned CIT(A), in regard to these two disallowances, we dismiss this ground taken by the assessee.
16. In the result, the appeal of the assessee is partly allowed.