Income Tax Appellate Tribunal - Jodhpur
Assistant Commissioner Of Income Tax vs Sharda Gums & Chemicals. (Sharda Gums & ... on 17 December, 1999
ORDER
B. M. Kothari, A.M.
1. These cross-appeals, one by the Revenue and the other by the assessee are directed against the order dt. 24th March, 1993, passed by the CIT(A) for asst. yr. 1989-90.
2. The assessee has raised the following grounds in its appeal :
"1. Under the facts and circumstances of the case learned CIT(A), Jodhpur, has erred in not considering the interest receipts of Rs. 1,27,446 as part of business income while computing deduction under s. 80HHC of IT Act, 1961, under the facts and circumstances of the case.
2. He has further erred in allowing the deduction under s. 80HHC on the business profits after deducting the claim under s. 32AB.
3. Under the facts and circumstances of the case, the learned CIT(A) has erred in confirming the disallowance to the following extent on account of personal user :
(a) Out of car and vehicle expenses to the extent of 1/5th of total claim i.e. Rs. 12,125.
(b) Out of depreciation on motor car to the extent of 1/5th of total claim.
(c) Out of telephone expenses to the extent of Rs. 20,306."
4. The Revenue has raised the following ground in its appeal :
"On the facts and in the circumstances of the case, the learned CIT(A) has erred in directing to consider the receipts from sale of export license commission from sale of STC export counter, commission of shipping freight and processing charges of job work for working out the quantum of deduction under s. 80HHC, ignoring the provisions of s. 80HHC(1) which approves deduction only on profit derived from export of goods and merchandise only."
3. The assessee claimed deduction under s. 80HHC at Rs. 7,25,881. Such a claim was made for the first time while filing the revised return which was revised on account of treating the amount of CCS as revenue receipt. The assessee submitted auditor's report in the prescribed form. The AO disallowed the aforesaid claim on the ground that following items of income/receipt will not form part of "profits and gains of business" for purposes of deduction under s. 80HHC :
Rs.
(a) (i) Receipts from sale of import licence 5,55,081
(ii) Commission from STC on export counter
trade 2,19,190
(iii) Commission on shipping freight, audit
claims and octroi refund 51,241
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8,25,512
(b) Processing charges 71,174
(c) Interest receipts (Gross) 1,27,446
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Total 10,24,132
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The Asstt. CIT had further deducted Rs. 2,43,535 out of the profits of the business being the amount of deduction under s. 32AB, This had resulted as under :
Rs.
Profit of the business including donation, penalty, tax, etc. 12,45,075 Less : Sale of import licence, commission, progressing charges and interest (a to c) 10,24,132 ------------- 2,20,943 Less : Deduction under s. 32AB of the IT Act 2,43,535 ------------- (-) 22,592
The CIT(A) allowed the assessee's appeal in respect of items mentioned at "(a) and (b) amounting to Rs. 8,25,512 and Rs. 71,174. The Revenue is in appeal against those items of income/receipts which were accepted by the CIT(A) as items of income assessable under the head "profits and gains of business" for purposes of grant of deduction under s. 80HHC.
4. The CIT(A), however, did not accept the assessee's contention in respect of interest receipts of Rs. 1,27,446 and also in respect of reduction of the profits of business by the amount of deduction allowable in s. 32AB to tune of Rs. 2,43,535. The assessee in appeal against the confirmation of the action of the AO in respect of these two items.
5. Shri Jhanwar, learned counsel for the assessee, submitted that as far as the ground No. 2 of assessee's appeal is concerned, it has no merit as deduction allowable under s. 32AB, will have to be deducted for computing the profits and gains of business as per the provisions of IT Act, 1961. He, therefore, expressed that he would not like to press ground No. 2 of assessee's appeal. Hence ground No. 2 of assessee's appeal is rejected.
5.1. As regards ground No. 1 relating to non-consideration of interest receipts of Rs. 1,27,446 as part of business income, for purposes of computation of deduction under s. 80HHC of IT Act, 1961, the learned counsel contended that the view taken by the AO and confirmed by the CIT(A) is clearly contrary to the provisions of law. He drew our attention towards the details of financial expenditure/interest expenditure appearing in the audited P&L a/c for the previous year and which as on 31st March, 1989 shows that total financial expenses of Rs. 13,06,081 was incurred by the assessee for the year under consideration. The details of financial expenses have been given at p. 11 of the paper book which is reproduced hereunder :
Interest paid :
Rs.
(a) To relatives 2,70,980.55
(b) To others (including Rs. 35,000 on its demands)
9,90,582.12
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12,61,562.67
Bank commission 1,71,965.65
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14,33,528.32
Less : interest received 1,27,446.40
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Total 13,06,081.92
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Shri Jhanwar submitted that there was no interest income as such but the interest receipt had a direct nexus with interest expenditure incurred during the year. The appellant had incurred a net interest expenditure of Rs. 13,06,081. Therefore, the gross amount of interest received by the assessee to tune of Rs. 1,27,446 has to be adjusted against the total interest expenditure including bank commission of Rs. 14,33,528. The net amount of interest has to be taken into consideration. The interest income received by the assessee on investment of surplus funds for a temporary period was to reduce the burden of interest expenditure, which is a part of computation of profits and gains of business.
6. Shri Jhanwar also invited our attention towards Expln. (baa) appearing below sub-s. (4B) of s. 80HHC, which provides that profits of business for purposes of s. 80HHC means the profits of business as computed under the head "profits and gains of business" as reduced by 90% of the sums referred to in s. 28(iiia), (iiib) and (iiic) or of any receipt by way of brokerage, commission, interest, rent charges, etc. included in such profits. He submitted that 90 per cent of such income was required to be excluded for computing the profits of business eligible for grant of deduction under s. 80HHC by an amendment made by Finance (No. 2) Act, 1991, w.e.f. 1st April, 1992. This clearly and necessarily implies that prior to asst. yr. 1992-93 the interest receipts and the amount of import entitlements and export incentives, etc. were considered as part of profits of business eligible for grant of deduction under s. 80HHC of the Act. He submitted that the present appeal relate to asst. yr. 1989-90. The amendment so made from asst. yr. 1992-93 also clearly supports the assessee's contention with regard to interest receipt. Such interest received by the assessee should be treated as part of the profits and gains of business as contemplated in sub-s. 3 of s. 80HHC.
7. The learned counsel drew our attention to s. 80HHC(1) which provides that assessee engaged in the business of export is entitled to deduction of the profits derived by the assessee from the export of goods. Such profits from exports are required to be computed in accordance with and subject to the provisions of s. 80HHC. He pointed out that such is the mandate of s. 80HHC(1).
7.1. Sec. 80HHC(3) prescribes the mode of computation of profit derived from export business. The provisions of s. 80HHC(3) as it existed prior to its amendment by the Finance Act, 1990, and which existed in the relevant year under consideration was brought to our notice by the learned counsel, Shri Jhanwar. He pointed out that if the entire turnover of an assessee exclusively consist of exports, the whole of the profits of the business as computed under the head "profits and gains of business" will be treated as profits derived by the assessee from export of such goods. If the business carried on by the assessee does not consist exclusively of export out of India of the goods to which s. 80HHC applies, the profit derived from export on goods shall be the proportionate amount which bears to the profits of the business as computed under the head "profits and gains of business" in the same proportion as the export turnover bears to total turnover of the business carried on by the assessee. The provision as it existed in the relevant year did not exclude any item of income assessable under the head "profits and gains of business" on the ground that it did not directly relate to the activity of exports. He, therefore, contended that the assessee's appeal with regard to interest receipt to be considered for grant of s. 80HHC should be allowed and the Revenue's appeal with regard to other items of business income credited in the P&L a/c should be rejected.
7.2. Shri Jhanwar submitted that interest income is required to be adjusted against interest expenditure and only the net interest income could be taken into consideration even after introduction of Expln. (baa) in s. 80HHC. Such a view is fortified by the decision Khimjee Hunsraj vs. Dy. CIT (1999) 65 TTJ (Cal) 322 and also the decision of Tribunal, Mumbai Bench in the case of Pink Star vs. Dy. CIT in ITA No. 6031/M/97 for asst. yr. 1994-95. A copy of the said decision has already been placed on records.
8. With out prejudice to the aforesaid submissions, he drew our attention to the details of interest receipts submitted on pp. 7 and 8 of the paper book. He pointed out that interest income to the tune of Rs. 68,534 directly relate to the export business as such excess interest earned was credited by the bank on early payment of foreign bills of exchange. The assessee has furnished billwise details of such interest credited by the bank which have a direct nexus with the export business. The learned counsel submitted that if any disallowance is possible, it should be confined to the balance amount of interest receipt after deducting Rs. 68,534 out of total interest receipt of Rs. 1,27,446. But that amount is also assessable as business income. The AO has, in fact, assessed, the entire income under one head i.e., "income from business". The learned counsel also contended that the ratio of judgment of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1987) 227 ITR 172 (SC) will not apply to the facts of the case as there the interest income relates to period prior to commencement of business and the question for consideration before the Hon'ble Supreme Court was entirely different as to whether interest income in that case was of revenue nature liable to tax or it could be set off against the liability to pay interest on funds borrowed for the purpose of acquiring the capital asset before commencement of the business of the assessee. The issue was not relating to computation of exports profits eligible for grant of deduction under s. 80HHC.
9. The learned Departmental Representative submitted that interest earned by the assessee on temporary deposit on surplus funds is assessable as income from other sources as held by the Hon'ble Supreme Court in (1997) 227 ITR 172 (SC) (supra). The view taken by the CIT(A), is therefore, perfectly valid and justified. He relied upon the elaborate reasons mentioned in the assessment order as well as in the order of the CIT(A) in respect of interest income not being eligible, to be considered for purposes of grant of deduction under s. 80HHC of the Act.
10. As regards the ground raised by the Revenue in its appeal, the learned Departmental Representative drew our attention to the amendment made in s. 80HHC(1) wherein the word "profits" derived by the assessee from the export of such goods, was substituted for expression "whole of the income" derived by the assessee from the export of such goods w.e.f. 1st April, 1989. The learned Departmental Representative pointed out that the appeal under consideration relate to asst. yr. 1989-90 an the amended provisions of s. 80HHC(1) are also applicable from the year. Earlier, whole of the income assessable under the head "profits and gains of business" had to be taken into consideration for computing deduction under s. 80HHC but from asst. yr. 1989-90, deduction can be allowed only in respect of the profits derived by the assessee from export of such goods. He submitted that sub-s. (3) of s. 80HHC cannot override the main provisions contained in s. 80HHC(1). The learned Departmental Representative pointed out that receipts by way of sale of import licences, commission received from STC on exports made by them, commission on shipping freight and processing/job charges received by the assessee, had no direct nexus with the exports of goods made by the assessee. Such receipts, although assessable under the head "profits and gains of business" cannot be treated as profits derived from export business. During the course of hearing a reference was also made by the Bench to the judgment of Hon'ble Supreme Court in the case of CIT vs. Sterling Foods wherein it was held that sale consideration of import entitlements cannot be held to constitute "profits" and "gains" derived from assessee's industrial undertaking for the purpose of computing deduction under s. 80HH of the Act. Shri Januaryir, the learned Departmental Representative submitted that s. 28(iiia), (iiib) and (iiic) records the income from export incentives as business income but what is eligible for deduction under s. 80HHC is not whole of the income assessable as "profits and gains of business" but applies to only the profits derived by the assessee from exports of eligible goods. He, therefore, strongly urged that order of the CIT(A) should be set aside in relation to the ground of appeal raised by the Revenue.
11. We have considered the submissions made by the learned representatives of the parties and have examined the relevant provisions of law. We have also carefully gone through the orders of the learned Departmental authorities as well as the judgments, which were cited by the learned representatives of both sides.
12. In order to appreciate the rival contentions, it is imperative to reproduce the relevant provisions of s. 80HHC. Sec. 80HHC(1) and (3) as it existed in relevant year are reproduced below :
"(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 of the (profits) derived by the assessee from the export of such goods or merchandise."
"(3) For the purpose of sub-s. (1), profits derived from the export of goods or merchandise out of India shall be :
(a) in a case where the business carried on by the assessee consists exclusively of the export out of India of goods or merchandise to which this section applies, the profits of the business as computed under the head "Profits and gains of business or profession.
(b) in a case where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which this section applies the amount which bears to the profits of the business (as computed under the head "Profits and gains of business or profession" the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee."
Expln. (baa) of s. 80HHC which was inserted by Finance (No. 2) Act, 1991 w.e.f. 1st April, 1992, reads as under :
"(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 cl. (iiia), (iiib) and (iiic) of s. 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 situated outside India."
The Expln. (baa) was inserted in s. 80HHC by the Finance (No. 2) Act, 1991 w.e.f. 1st April, 1992, and is applicable for and from asst. yr. 1992-93. Strictly speaking the said Explanation may not be applicable for the year under consideration namely asst. yr. 1989-90. But the insertion of that provision from asst. yr. 1992-93 and the decisions where the said Explanation has been considered by various Benches of the Tribunal, will provide valuable guidance for arriving at a proper conclusion in the present case also.
12.1. Sec. 80HHC(1) provides that an assessee engaged in the business of export of eligible goods shall be entitled to grant of deduction in respect of profit derived from export of such goods. Such deduction in respect of profits derived by the assessee from exports will have to be computed in accordance with and subject to the provisions contained in s. 80HHC. This is clear mandate given in s. 80HHC(1). Sub-s. (1) further provides that the profits eligible for deduction under s. 80HHC will have to be computed in accordance with the provisions of this section, which take us to sub-s. (3) of s. 80HHC. Sec. 80HHC(3) as it existed in asst. yr. 1989-90 provides that in a case where the business carried on by the assessee consist exclusively of the export out of India of the eligible goods, the entire profits of business as computed under the head "profits and gains of business" shall be eligible for deduction under this section. In a case where the assessee's business did not consist exclusively of export out of India of eligible goods, the same shall be the amount which bears to the profits of the business (as computed under the head "profits and gains of business"), the same proportion as the amount of the export turnover of business bears to the total turnover. In other words, the amount of deduction allowable under s. 80HHC in a case where the assessee's business partly consist of exports shall be worked out as under :
Export turnover Profits derived in the business X ---------------- Total turnover The above referred sub-s. (3) clearly indicates that first of all profit of the business should be computed under the head "profits and gains of business or profession" in accordance with the provisions of IT Act, 1961. Once the profits and gains of business are computed in accordance with the provisions of the Act, the assessee will be entitled to grant of 100 per cent deduction in respect of such profits derived from the business of the export of goods in a case where the business carried on by the assessee consisted exclusively of the export of eligible goods. In cases where the assessee's business did not consist exclusively of export of such goods out of India, the assessee will be entitled to grant of deduction of proportionate amount of such income from business computed under the head "profits and gains of business" in the ratio of export turnover with the total turnover. The item of business income derived by the assessee engaged in the business of exports, which do not directly relate to export business could not be taken out or reduced from such profits and gains of business for purposes of working the deduction allowable under s. 80HHC(1).
13. The Expln. (baa) was inserted in s. 80HHC w.e.f. asst. yr. 1992-93 which provides that "profits and gains of the business" for the purposes of s. 80HHC means the profits of the business as computed under the head "profits and gains of business" as reduced by 90 per cent of export incentives referred to in s. 28(iiia), (iiib) and (iiic) or 90 per cent of receipts by way of brokerage, commission, interest, rent, etc. included in such profits. The said Explanation from asst. yr. 1992-93 provides for exclusion of inter alia 90 per cent of receipts by way of interest, The word used in the said explanation is "receipt" and not "income by way of interest". The various Benches of the Tribunal have examined the nature and scope of the said Explanation. After a careful examination of the aforesaid provisions and other relevant facts, it has been held by different Benches that the word "receipt" used in Explanation (baa) would mean the net receipts and not the gross receipts. It is clear from the plain language of the said Explanation (baa) that 90 per cent of interest receipt which is included in profits of business, will be excluded. What is included in profits is the net receipt of interest and not the gross receipt. Such a view has been taken by the Tribunal, Mumbai in the case of Pink Star vs. Dy. CIT in ITA No. 6031/M/97 a copy of the relevant pages of the said decision has been submitted by the assessee during the course of hearing. The said decision was rendered by the Hon'ble Shri Pradeep Parikh A.M., sitting with Hon'ble Shri M. A. Bakshi. This decision contains elaborate and convincing reasons in support of the conclusion that credits and debits of the same nature should be netted out against each other in order to avoid any distortion in the profits for the purposes of grant of deduction under s. 80HHC. In that case the assessee had shown net debit of Rs. 34,24,095 as interest paid to the bank. No credit on account of interest was reflected in the P&L a/c. The assessee submitted that details of interest to the AO which disclosed that debit in bank interest amounted to Rs. 36,21,595 and credit in bank interest was Rs. 1,97,500. The net amount of interest expenditure was thus shown at Rs. 34,24,095 in the P&L a/c. The AO reduced the profits of business by 90 per cent of Rs. 1,97,500 for purposes of computing deduction under s. 80HHC. The Tribunal held that the interest receipt of Rs. 1,97,500 has merely reduced the net interest burden of the interest from Rs. 36,21,595 to Rs. 34,24,095. Thus, in fact, there is no income on account of interest included in the profits of the business and hence no reduction whatsoever is called for as envisaged in cl. (baa) of the Explanation to s. 80HHC.
13.1. The Tribunal, Calcutta Bench in the case of Khimjee Hunsraj vs. Dy. CIT (supra) has also taken a similar decision in relation to interpretation of cl. (baa) of Expln. (ii) to s. 80HHC.
13.2. It may also be relevant here to refer to the decision of Tribunal Delhi in the case of B.H.P. Engineers vs. Dy. CIT (1998) 61 TTJ (Del) 503. The decision was rendered by Hon'ble Shri V. Dongzathang, Senior Vice President sitting with Hon'ble Shri U.B.S. Bedi, J.M. The headnote of the said decision is reproduced hereunder :
"The assessee furnished the P&L a/c in which 'other income' was shown at Rs. 17,42,968 which consist of miscellaneous income of Rs. 1,24,711 interest from banks (gross Rs. 6,44,587) and CCS received Rs. 9,73,670. Against this income the expenditure on account of financial expenses have been shown at Rs. 18,91,759. On the basis of these facts, it is seen that there is no income as such from interest which can be assessed as interest income as there is debit balance on account of interest. The order of the AO itself is a clear testimony in this regards as there is no income from interest from interest assessed under the head "Income from other sources". Since there is no income from interest assessed to tax in view of the net outflow being in excess of the inflow of interest, there is no reasonable ground for deducting the interest income while working out the deduction under s. 80-I. The AO is accordingly directed not to exclude this income as there is no income from interest from bank which is included in the total income of the assessee and assessable to tax."
13.3. The Hon'ble Kerala High Court in the case of CIT vs. Dr. V. P. Gopinathan (1997) 229 ITR 801 (Ker) has held as under :
"That the assessee was to be assessed on the interest received as reduced by the amount of interest paid on the loan taken on the security of such deposit, and that the Tribunal was right in holding : (a) that the act of making the deposit and the act of borrowing on such deposit could not be viewed as representing two different transactions; (b) that there was thus a nexus between the deposit and the borrowing; and (c) that the principle of mutual dealings could be inferred."
14. In the present case the total interest payments and bank commission was Rs. 14,33,528. The amount of interest received by the assessee was only Rs. 1,27,446. The assessee has debited the net amount of Rs. 13,06,081 as financial expenses in the P&L a/c. The AO has computed the entire income under only one head of income. He has not assessed the interest receipt of Rs. 1,27,446 under any separate head nor under the head "income from other sources". The necessity of netting the interest debit and interest credit or netting the receipt and expenditure of same nature can be more aptly explained by the following illustrations :
Manufacturing, Trading & P&L a/c Rs. (in lakhs) Rs. (in lakhs) Cost of goods 60 Export Sales 105 manufactured Interest payments 20 Interest payments 15 Other expenses 30 Net Profit 10
------- ------120 120
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If the gross receipt of interest is excluded from the amount of net profits, there will be a negative figure of Rs. 5 lakhs and the assessee will not be entitled to grant of any deduction under s. 80HHC although the assessee's turnover exclusively consisted of export sales, the assessee has earned foreign exchange from such exports and the assessee has derived net profit in its export business. Such a recourse will frustrate the object of granting incentive for promotion of exports. This can never be the intention of law-makers. Therefore, the only reasonable and harmonious construction of an incentive provision like s. 80HHC is that the interest receipt which has a direct nexus with interest payments, should be adjusted against each other and other the net amount can be said to have been included in the amount of net profit. In the aforesaid illustration, the interest payments are Rs. 20 lakhs and the interest receipts are Rs. 15 lakhs. No interest income, can therefore, be reduced from the amount of net profits eligible for grant of deduction under s. 80HHC of the Act.
15. We are aware about the decision of Hon'ble Supreme Court (1997) 227 ITR 172 (supra). The facts of that case are entirely different. In that case the interest income which was sought to be adjusted against interest expenditure of capital nature relating to the period prior to commencement of business was held to be liable to tax under the head "income from other sources". The interest expenditure pertaining to the period prior to commencement of business is required to be capitalised and such interest has to be added to the cost of assets like plant and machinery, etc. The interest income received during pre-production period, which is clearly of a revenue nature, cannot be adjusted towards such capital expenditure as it is adjusting with capital expenditure will result in grant of exemption from levy of income-tax of an income which is clearly of revenue nature. The business in that case had not commenced during the period when such interest income was earned. In the present case, the assessee is engaged in the business of export of goods. The meagre amount of interest receipts derived by the assessee, partly on export sales itself and partly by way of investment of surplus funds for temporary period, had a direct nexus with the interest expenditure. The amount of interest receipt simply reduced the burden of interest cost to that extent. It cannot, therefore, be said that such interest receipt can be assessee to tax under the head "income from other sources". Such interest receipt would only reduce the interest expenditure. Therefore, this item will also fall for consideration while computing the profits and gains of business in accordance with the provisions of IT Act, 1961.
16. On a careful consideration of the entire relevant facts and judgments, we are of the view that the CIT(A) has erred in directing the AO to reduce the profits of business by an amount of Rs. 1,27,446 representing interest receipt for purposes of computing deduction under s. 80HHC of the Act. The AO is directed to include such interest receipt while computing the profits of business for purposes of computing deduction allowable under s. 80HHC of the Act.
16.1. Ground No. 3(a) and 3(b) relating to confirmation of disallowance at 1/5th out of car and vehicle expenses and 1/5th on depreciation of motor-car were not pressed by the learned counsel at the time of hearing. Hence these grounds are rejected as not pressed.
17. Ground No. 3(c) is directed against the confirmation of disallowance of telephone expenses to the tune of Rs. 20,306. The learned counsel contended that the entire amount of telephone expenses of telephone installed at residence has been disallowed by the AO and the Dy. CIT(A) has confirmed such disallowance. He submitted that the residential telephone is normally used for business purposes in the night hours as STD charges are lower during night hours. He, therefore, submitted that the disallowance so confirmed by the CIT(A) should be deleted.
18. The learned Departmental Representative supported the order of the CIT(A) in relation to this ground.
19. After considering the submissions made by the learned representatives of both the parties, we are of the view that it will be just and proper to direct the AO to restrict the disallowance to Rs. 4,000 only out of telephone expenses claimed by the assessee. The AO is directed to grant relief accordingly.
20. We will now deal with the ground raised by the Revenue in its appeal. As a matter of fact the entire discussion relating to interpretation of s. 80HHC(1) r/w s. 80HHC(3) equally applies to the ground raised by the Revenue in their appeal. We have already held in the earlier part of this order while dealing with the ground No. 1 of assessee's appeal that for the purpose of computing deduction under s. 80HHC, the first requirement is to compute the profits of the business assessable under the head "profits and gains of business" in accordance with the relevant provisions of the Act. If the business of the assessee consists exclusively of export of eligible goods, 100 per cent deduction of such profits assessable under the head "profits and gains of business" will be allowed under s. 80HHC. If the assessee's business partly consist of export of such goods, proportionate deduction out of such profits and gains of business based on the ratio of export turnover to the total turnover, will be allowed. It is clear from the aforesaid discussion that if the various items of credits in the P&L a/c are assessable under the head "profits and gains of business", such items of income will form part of the profits of business for purposes of grant of deduction under s. 80HHC. Let us examine the various items of income under consideration in the light of aforesaid principles of law.
21. The receipt by way of sale of import licences to the tune of Rs. 5,55,081 are clearly assessable to tax under the head "profits and gains of business". During the course of hearing a reference was also made to the judgment of Hon'ble Supreme Court in the case of CIT vs. Sterling Foods (supra). In this case it has been held by the Hon'ble Supreme Court that sale consideration of import entitlements cannot be held to constitute profits and gains derived from assessee's industrial undertaking for the purpose of computing deduction under s. 80HH as the source of import entitlements is the export promotion scheme of the Central Government and not the industrial undertaking. The provisions of s. 80HH provide for grant of deduction at prescribed percentage out of income derived from assessee's industrial undertaking. Sec. 80HHC provides for grant of deduction in respect of export profits, which has been defined in sub-s. (3) of s. 80HHC as profits computed under the head "profits and gains of business" in accordance with the relevant provisions contained in IT Act. The source of import entitlements in the present case is the exports made by the assessee. The export promotion scheme of the Central Government provides that the exporter will be entitled to certain import entitlements in accordance with the relevant incentive scheme. The exporter can sell such import entitlements. Therefore, the sale consideration of import licences received by the assessee on account of exports made by them has a direct nexus with the export business carried on by the assessee. The amount of sale proceeds of import entitlements is clearly assessable as profits and gains of business. The amount in question will, therefore, form part of the export profits within the meaning of s. 80HHC(1) r/w s. 80HHC(3). The CIT(A) has rightly directed the AO to take the said income into consideration for working out deduction under s. 80HHC.
22. The next item of Rs. 2,19,190 being commission received from STC on export counter trade is also a part of business income of the assessee. Such commission was received by the assessee from State Trading Corporation in respect of export business carried out through the STC. Such a receipt is assessable as business income under s. 28. The CIT(A) has, therefore, rightly directed the AO to take this item also into consideration for purpose of computing deduction allowable under s. 80HHC.
23. Likewise the commission on shipping freight, aarth, claims and octroi refund to the tune of Rs. 51,241 are also receipts derived by the assessee in the ordinary course of business. Such receipts also form part of the business income and the same is required to be taken into consideration for computing the profits and gains of business under the relevant provisions of IT Act, 1961. The CIT(A), has therefore, rightly held that such receipt will also be taken into consideration for computing the deduction under s. 80HHC of the Act.
24. The processing charges of Rs. 71,174 received by the assessee is also assessable under the head "profits and gains of business". Such processing charges were received by the assessee for the job work done by them. The assessee had to incur various expenditure like electricity, repairs, maintenance etc. for earning such job charges. The job charges so received by the assessee are also assessable as profits and gains of business. In fact that AO has himself taken all the aforesaid income/receipts points into consideration while computing assessee's income under the head "profits and gains of business". The CIT(A) has, therefore, rightly directed AO to take this item also into consideration for computing the deduction allowable under s. 80HHC of the Act.
25. We may also clarify here that the AO will be entitled to check the working of deduction claimed under s. 80HHC of the Act. He will be entitled to examine as to what is the correct amount of export turnover and what is the correct amount of total turnover for purposes of working out the deduction allowable under s. 80HHC of the Act. He may also examine the question as to whether the sale of import licences, processing charges and other receipts referred to in the grounds of appeal raised by the Revenue, will form part of total turnover for purpose of determining the ratio of export turnover on the amount of total turnover for working out the proportionate amount of profits of business eligible for grant of deduction under s. 80HHC of the Act. However, on principle, we agree with the finding of the learned CIT(A) that the various items of receipts referred to in the ground of appeal raised by the Revenue are assessable under the head "profits and gains of business" and, therefore, all these items of income will also form part of the business profits eligible for grant of deduction under s. 80HHC(1) r/w s. 80HHC(3). We, therefore, do not find any merit in the Revenue's appeal.
26. In the result, the Revenue's appeal is dismissed and the assessee's appeal is partly allowed.