Income Tax Appellate Tribunal - Jaipur
Wolkem India Ltd. vs Deputy Commissioner Of Income-Tax on 10 September, 1998
ORDER
C.L. Bokolia, A.M.
1. This appeal is preferred by the assessee against the order passed by the CIT(A) taking various grounds of appeal, which are being discussed and decided as under :
1. The first ground of appeal is against the inclusion of sales-tax and excise duty in computation of total turnover for the purposes of allowing deductions under s. 80HHC.
1.1. The facts of this ground of appeal are that assessee-company derived income from the export of goods manufactured by it as well as from the sale of such goods in India. While claiming relief under s. 80HHC it did not include the amount of excise duty and sales-tax claimed by it in respect of sales made within India in the total turnover. The AO however, recomputed the relief by including its amount of excise duty and sales-tax in the total turnover which was confirmed by the CIT(A).
1.2. Being aggrieved against the order of the CIT(A), the assessee has come in appeal before us. The learned authorised representative submits that decision of the Tribunal Calcutta Bench in the case of Chloride India Ltd. vs. Dy. CIT (1995) 53 ITD 180 (Cal), wherein it has been held that sales-tax and excise duty cannot be included in the total turnover for the purposes of computing deduction under s. 80HHC. It was also submitted that the CIT(A) has erred in rejecting the submissions of the assessee that according to the method of accounting adopted by it, sales-tax and excise duty recovered from the customers was shown separately in the sales invoices and was credited separately to separate accounts relating to sales-tax and excise duty and that the amount paid to the concerned authorities was debited to these separate accounts and therefore they cannot form part of the total turnover as explained in the guide notes on the subject issued by the Institute of Chartered Accountants of India. It was also submitted that the CIT(A) has erred in placing reliance upon various decisions wherein it has been held that sales-tax excise duty is trading receipt but nowhere it has been held that these receipts form part of the total turnover for the purpose of s. 80HHC.
1.3. The learned Departmental Representative on the other hand, submits that sales-tax and excise duty were collected by the assessee during normal day-to-day business activities of the assessee. While strongly relying upon the orders passed by the authorities below, the learned Departmental Representative also relies upon the decision of the jurisdictional High Court in the case of CIT vs. Assam Roller & Flour Mills (1994) 209 ITR 835 (Raj) and also the decision of apex Court in (1985) 154 ITR 128 (sic) and Patna High Court in CIT vs. Motipur Sugar Factory (P) Ltd. (1985) 154 ITR 259 (Pat). It was also submitted that accounting principles cannot override the provisions of the law - Tuticorin Alkali Chemical & Fertilisers Ltd. vs. CIT (1997) 227 ITR 172 (SC). It was, therefore, submitted that the action of the AO confirmed by the CIT(A) is reasonable and justified.
1.4. We have examined the facts on this ground of appeal as well as the rival submissions and case law relied upon by them. From the study of the case law, it is clear that the issue has not yet been examined or covered by any of the decisions of the High Courts or the Supreme Court so far as deductions/ calculations for relief under s. 80HHC is concerned. This issue first came up for consideration before the Calcutta Bench of the Tribunal in the case of Chloride India Ltd. (supra). Since the export turnover excluded sales-tax, excise and octroi, the total turnover should also not include the same. It was stated that only if the section was interpreted in this manner, uniformity and harmony could be achieved and the intention of the legislature could be given effect to.
1.5. It appeared elementary that the numerator and the denominator in a particular formula should be of the same category or should comprise the same elements, or else there would be no uniformity or harmony. It stated that if the numerator is applied and the denominator consists of apples and oranges, there can be no uniformity or harmony and the denominator has also to be consist of apples. It observed that the interpretation suggested on behalf of the Revenue with regard to the expression "total turnover" would result in disharmony because the export turnover did not include these three ingredients. It observed that doing that would reduce the proportion of export profits to the total profit, and would not reflect the policy of the legislature.
1.6. The Tribunal relied upon the decision of the Supreme Court in the case of Bajaj Tempo Ltd. vs. CIT (1992) 196 ITR 188 (SC), to the effect that a provision intended for promoting growth had to be interpreted liberally so as to advance the objectives of the section and not to frustrate it and CIT vs. Straw board Manufacturing Co. Ltd. (1989) 177 ITR 431 (SC), to the effect that while interpreting a provision providing for concessional rates of tax for the purpose of encouraging industrial activity, a liberal construction should be put upon the statute. Having regard to the objectives of s. 80HHC, the Tribunal held that the expression "total turnover" could not include the octroi, sales-tax and excise duty on legal sales since the expression "export turnover" did not include these ingredients.
1.7. Since s. 80HHC is intended to encourage exports, it should be interpreted in a liberal manner which advances the objective of encouragement of exports, and not in a manner which defeats or frustrates the purpose. The two Supreme Court decisions of Bajaj Tempo Ltd. and Strawboard Manufacturing Co. Ltd. referred to in para 1.6. above provide a clear support for this view.
1.8. The only intention of the legislature in laying down the formula is to find out the profits derived from export. Therefore, the turnover should be restricted only to such receipts which have an element of profit therein. It is only the actual sales price which is relevant and, therefore, anything charged by way of statutory levels, such as excise duty and sales-tax, in addition to the sales price has to be ignored because these statutory levies collected by the assessee have no element of profit. This view has been accepted by the Tribunal in the case of Sudarshan Chemical Industries Ltd. vs. Dy. CIT (1997) 57 TTJ (Pune) 718 : (1997) 60 ITD 629 (Pune).
1.9. As regards the argument that there is no specific provision to exclude sales-tax, excise duty and octroi from the total turnover, the expression "turnover" has to be given a meaning in the context in which it appears. There are really no definition of the words "export turnover" and "total turnover" in the true sense, since the so-called definitions are at best only exclusive. It may be true that what has not been turnover, but this strict rule of interpretation must yield to the rules of purposive interpretation or the rules of contextual interpretation.
1.10. Adopting these rules of interpretation, it is impossible to visualise a situation where the export turnover does not include sales-tax, octroi and excise duty while the total turnover includes the same. The interpretation sought to be given by the Revenue leads to an absurd or unjust result, which has to be avoided as held by the Supreme Court in the case of K. P. Varghese vs. ITO (1981) 131 ITR 597 (SC).
1.11. In view of the matter from an overall perspective, the view based on the following decisions that sales-tax, octroi and excise duty on local sales should not form part of "total turnover" for the purpose of computation of deduction under s. 80HHC deserves to be accepted.:
(1) Chloride India vs. Dy. CIT (supra); (2) Sudarshan Chemical Industries Ltd. vs. Dy. CIT (supra); and (3) Avon Cycles Ltd. vs. Asstt. CIT (1997) 59 TTJ (Chd) 75.
2. The next ground taken by the assessee in regard to inclusion of Kherthala contract receipts in the computation of total turnover for purposes of rebate under s. 80HHC.
2.1. In this connection, the learned authorised representative submits that the CIT(A) has erred in holding that the AO was right in including Rs. 13,12,706 being receipts from Kherthala contract as forming part of the total turnover for the purpose of computing deduction under s. 80HHC. The AO included the receipts from contract business as part of total business receipt on the ground that assessee is indulging in contract business over the years regularly and showing income therefrom. This action of the AO is confirmed by the CIT(A).
2.2. The learned authorised representative however, argues that Kherthala contract was a separate activity and has nothing to do with the business of export of goods manufactured by the assessee and, therefore, that receipt should not be considered as part of the total turnover. It was also argued that CIT(A) erred in not appreciating that the income from this contract was shown in the audited accounts under the head "Other income" and not part of the sales turnover and, therefore, the receipt should not be considered as part of the total turnover.
2.3. The learned Departmental Representative on the other hand, drew our attention to the discussions made by the CIT(A) in para 1.6 of his order at pp. 4 and 5. The assessee had admitted before the AO that it had been doing this type of business of entering into contract in earlier years also. The AO, therefore, held that this was not an isolated event of the contract business of the assessee. He strongly relies upon the orders passed by the AO as well as the CIT(A).
2.4. We have examined the facts of this ground of appeal and are of the opinion that remarks of the AO as well as the observations of the CIT(A) regarding the fact that "the assessee has included the profits of the contract business while excluded the receipts". Under the circumstances the conclusion drawn by the CIT(A) that "since the profits to be allocated include total profits from both the businesses, therefore, the receipts, have to be taken from both the businesses" seems to be logical and reasonable. We, therefore, uphold the action of the CIT(A) on this account. This ground of the assessee therefore fails.
3. The next ground of appeal that CIT(A) erred in holding that the AO had rightly deducted Rs. 18,11,345 while computing export turnover as well as total turnover although it was shown by the appellant that the said amount represented foreign exchange rate difference in respect of advance received from the foreign customer in respect of the export made by the appellant.
3.1. The facts of this ground of appeal are that assessee entered into contract with a foreign buyer to supply goods to it and received US Dollars of 4,27,500 in the month of March, 1990. This amount received in US Dollars was to be adjusted while supplying the goods and prepared bill at the rate of US Dollar 50 PMT against the payment as per the purchase contract. This is very much clear from the bills prepared by the assessee and placed on record at pp. 92, 93 & 94 of the paper book.
It is a matter of common knowledge that all export transactions are contracted in US Dollars and bills are also prepared in US Dollars. This is also confirmed from the copy of the bills placed on record by the assessee. The assessee has used a clever method by applying conversion when it received the advance when it was Rs. 17 per US Dollar and when the goods were actually delivered, the conversion rate was Rs. 30 per Dollar. Therefore, the assessee claimed the loss due to change in conversion rate from Rs. 30 to Rs. 17 which worked to Rs. 18,11,345.
3.2. The first Appellate Authority has declined to accept the argument of the assessee. He has observed : "I find that this is only a notional loss and not the real loss. The appellant was supposed to credit the export turnover by advance adjusted @ 17 per Dollar plus the balance amount receivable by converting it @ Rs. 30 per Dollar. If this method is adopted then the export turnover as well as total turnover will be reduced by Rs. 18,11,345. Therefore, the action of the AO is justified."
3.3. After hearing both the parties, we are of the opinion that the assessee has contracted to supply the goods manufactured by it and valued the same in US Dollars. Advance received was also in US Dollars. Bills prepared by the assessee were also in US Dollars. While preparing the final bill, the assessee reduced the amount of bill by $ 25 in each consignment of 50 MT as per the agreement between them. There is, therefore, no loss on this account. Besides, if there is any loss, it would reflect in the total turnover. The methodology adopted by the assessee for claiming the loss is, therefore, held as unreasonable or unjustified. We, therefore, decline to interfere on this account.
4. The next ground of appeal is in regard to computation of business income under s. 80HHC on the ground that the CIT(A) has erred in holding that dividend income of Rs. 4,62,840 has been rightly excluded by the AO for the purposes of allowing deduction under s. 80HHC. It was argued by the learned authorised representative that the dividend income had direct nexus with the business of the assessee and, therefore, the same should form part of the business for calculating gross profit benefit under s. 80HHC.
4.1. The learned Departmental Representative on the other hand, drew our attention towards provisions of s. 56 of the IT Act. Sec. 56 is part of Chapter IV under sub-head "Income from other sources". Sub-s. (2) of s. 56 is very relevant on this account which reads :
"(2) In particular, and without prejudice to the generality of the provisions of sub-s. (1), the following income shall be chargeable to income-tax under the head "Income from other sources", namely :
(i) dividends."
It was, therefore, argued that whatever may be the circumstances income from dividends is assessable under the head "Income from other sources".
4.2. The learned Departmental Representative, therefore, strongly relied upon the order passed by the AO and the CIT(A).
4.3. We have examined the facts of this ground of appeal and are of the opinion that the assessee itself treated the income from dividend under the head "Other sources", which is very clear from copy of the audited accounts placed on record before us. Schedule 14 to the balance sheet described income from other sources and includes gross dividend received at Rs. 4,62,840. Under the circumstances, we hold that the action of the CIT(A) on this account is reasonable and hence no interference requires to be made on this account.
5. The next ground of appeal is disallowance of depreciation of Rs. 1,631 on weigh-bridge. It was argued that the CIT(A) has grossly erred in holding that the AO was right in calculating depreciation on the cost of foundation and structure for the weigh-bridge at the rate of 5 per cent applicable to buildings and not @ 12.5 per cent applicable to plant and machinery. It was also submitted that CIT(A) failed to appreciate that the total cost of the weigh-bridge was Rs. 2,58,371, which included Rs. 21,747 being cost of foundation and structures which were necessary to install and preserve the weigh-bridge and, therefore, the entire structure was an integral part of the weigh-bridge on which depreciation was allocable at the rate applicable to plant and machinery should have been allowed.
5.1. In this connection, the learned authorised representative also relies upon the decision of the Jurisdictional High Court in the case of CIT vs. Ispat Ltd. (1994) 210 ITR 1018 (Raj) wherein it has been held that cost of the structure required to make the cranes operative form part of the cost of crane and depreciation should be allowed at the rate of applicable to plant and machinery. Besides, the learned authorised representative also relied upon the decision CIT vs. Hotel Luciya (1998) 231 ITR 492 (Ker) (FB).
5.2. On the other hand, the learned Departmental Representative strongly relied upon the order of the CIT(A).
5.3. The facts of this ground of appeal reveal that AO considered the building and weigh-bridge two separate things and accordingly depreciation was allowed. The weigh-bridge shed was constructed to protect the weighing scale from vagaries of weather. The CIT(A), therefore, held that the shed has nothing to do with the functioning of the weigh-bridge. He also observed that had the shed not been there, the weigh-bridge could have also functioned in the same manner and that there is no doubt that one of the purposes of factory building is to protect the machinery against rain, weather etc. but the building will not become a part of machinery. He, therefore, held that the action of the AO was reasonable and justified.
5.4. After having gone through the facts of this case, we hold that the action of the CIT(A) in upholding the order of the AO is reasonable and hence we decline to interfere on this account also.
6. The next ground of appeal is on the ground that CIT(A) has erred in holding that the AO was right in disallowing Rs. 16,478 under s. 37(4) as the structure at the site of the mines at Sirohi Road was in the nature of guest house and, therefore, depreciation on buildings, furniture, etc. and certain estimated expenses were not allowable under s. 37(4) of the IT Act.
6.1. In this connection, the learned authorised representative submits that the appellant did not maintain any guest house at the site of the mines at Sirohi Road but maintained a structure to provide for certain common facilities to the staff and workers who had to be provided a shelter near the mines for the purpose of taking meals and recreation facilities during the working of the mines and also for providing safety zone during the period blasting in the mines. He, therefore, submitted that the expenditure cannot be considered as guest house expenditure which can be disallowed under s. 37(4). It was also submitted that in this area there is no hotel where the company executives and guests could stay.
6.2. On the other hand, the learned Departmental Representative strongly relied upon the order passed by the CIT(A). He also submitted that AO actually visited the guest house and came to the finding that the guest house was not maintained at the site of mines but actually maintained at the site of the factory. He, therefore, disallowed this claim of the assessee.
6.3. We have examined the facts of this ground of appeal and the arguments of the rival parties. In this connection, it is observed that disallowance under s. 37(4) can be made of expenses which are not specifically covered by the specific provisions of the Act. For example, s. 30 deals with rent, repairs and maintenance expenditure. Similarly, s. 32 deals with depreciation. If any one of the expenses are covered by these specific sections those cannot be disallowed under s. 37(4) of the IT Act. Under the circumstances, the AO is directed to allow depreciation on the assets of the company, though lying at the guest house including the guest house building, furniture, etc. The expenditure on account of running of the guest house in the form of providing food, etc. would, however, fall in the category of disallowance under s. 37(4). The AO is, therefore, directed to recalculate the disallowances accordingly. The view also gets support from the decision of Jurisdictional High Court Mangal Chand Tubes (P) Ltd. vs. CIT (1994) 208 ITR 729 (Raj). For statistical purposes, this ground is treated as partly allowed.
7. Ground No. 7 of grounds of appeal is general in nature and hence no specific directions are required on this account.
8. In the result, the appeal is partly allowed.