Income Tax Appellate Tribunal - Mumbai
Jamshri Rajitsinghji Spg. And Wvg. ... vs Inspecting Assistant Commissioner on 9 December, 1991
Equivalent citations: [1992]41ITD142(MUM)
ORDER
M.A. Ajinkya, Accountant Member 1 to 5. [These paras are not reproduced here as they involve minor issues.]
6. The fifth ground raises a very important and interesting issue. The ground is that the CIT(Appeals) erred in not granting deduction of Rs. 31,71,231 being the amount of material import entitlement, the above income not having been received, accrued or arisen should have been excluded from the computation of the total income. This ground was raised before the CIT(Appeals) by way of an additional ground. The appellant, which is a limited company, is a textile mill. It exported part of the goods manufactured by them. They were thus entitled to the benefits of what is known as duty exemption scheme under which certain categories of exporters were entitled to receive raw material free of import duty against export commitment. Under the procedure laid down in this scheme, the exporter could obtain advance licence for the import of raw material duty-free. The imports made against such licences and the exports, with reference to which such advance licences were issued, were noted in a pass book called DEEC Book. The value of the licence issued under the scheme was debited to REP entitlement and the licence holder was eligible for import replenishment licence as admissible from the balance value. During the previous year relevant to the assessment year under appeal, the appellant had exported certain quantities of goods manufactured by them against which they were entitled to import 36,674.705 kgs. of fibre. No portion of this quantity was actually imported during the year. In the accounts for the relevant year, the appellant company calculated that if 36,674.705 kgs. of fibre were imported, it would be entitled to exemption from customs duty otherwise chargeable amounting to Rs. 31,75,231. This amount was taken to the credit of profit & loss account by reducing the material consumption account and the corresponding debit was raised to the material import entitlement account which appeared on the assets side of the balance-sheet. In return of income, it was claimed that by making these entries the appellant had taken into account a notional profit which it actually had not earned and which was not exigible to tax. He claimed that the book profits should, therefore, be reduced by a sum of Rs. 31,75,231. This claim was rejected by the IAC for the reasons stated by him at page-6 of his order. The CIT (A) recorded the arguments advanced in this behalf by the appellant's Representative in paragraphs 23 and 24 and gave his finding in para-25 which reads as follows :
25. The right to import goods, whether duty free or on payment of duty is a benefit or perquisite within the meaning of Section 28(iv) of the Act as stated by the Bombay High Court in Metal Rolling Works (P.) Ltd. v. CIT 119831 142 ITR 170. The value of such a right has to be accounted for on accrual basis unless it is shown that the right was a contingent right and not a right in praesenti. As is clear from the salient features of the Duty Exemption Scheme noted above the right to import raw material, duty-free, arises as soon as the exports are made or even earlier under the advance licensing system. It could perhaps be argued with reference to the advance licences obtained that the benefit under such licences is contingent upon fulfilling the export obligation. Such a contingency is not there where the exports have been made, as in the present case where the duty exemption valuation of Rs. 31,75,231 is related to the exports actually made during the previous year. It may also be noted that the Duty Exemption Scheme consisting of advance licensing is part of the export benefit schemes and, as noted above, the exporters were eligible for import replenishment licences as admissible for the balance value. Thus, the right to import goods duty-free arose not later than the making of the exports and the value of such a right is, as held by the Bombay High Court in the case cited above, to be accounted for as business receipts of the year in which exports are made.
It is this order of the CIT (Appeals) that is challenged in the present appeal.
7. The counsel for the appellant first drew our attention to the various clauses of the Duty Exemption Scheme, a copy of which has been filed at pages 6 to 9 of the compilation. The three categories of licences covered by this scheme are (1) advance licences, (2) advance licences for supply of intermediate products, and (3) special imprest licences. In the present case, it is the licences of the first category, namely, advance licences, to which the appellant was entitled. The licence issued under this scheme to a manufacturer/exporter was to be subject to actual user conditions. The purpose and the scope of the three categories of licences was explained in para-2 of the scheme, Sub-clause (1) of which dealing with advance licences read as follows:
(1) Advance licences are issued to registered exporters for import of exempt materials specified in Annexure 1 to the Department of Revenue Notification No. GSR dated 5-4-1982 (Annexure 1 to this Appendix) and the resultant products have to be exported outside the country.
Para-4 dealt with the eligibility for securing licences under this scheme and Clause (2) of para-4 provided as follows :
(2) A registered manufacturer-exporter who is engaged in actual production and export during the preceding three financial years will be eligible to claim licences under this Scheme based on his average past export performance during the preceding three financial years. This facility may also be extended to Export Trading Houses.
Para-16 of the scheme related to Duty Exemption Entitlement Certificate and read as follows :
16. The licensing authority issuing a licence under this Scheme will also simultaneously issue the connected Duty Exemption Entitlement Certificate in the form given in Appendix XVI-E of the Hand Book. These certificates will be issued in two paras - one for imports and the other for exports. Both the parts of the DEECs duly completed in all parts by the Customs will have to be surrendered to the licensing authority concerned along with the prescribed documents in fulfilment of the export obligation imposed on them.
Para-30 of the scheme deals with utilisation of exempt materials and read as follows :
30. Exempt materials imported against a licence under this Scheme shall be utilised for the manufacture of the resultant products specified in the DEEC. Such materials shall not be loaned, sold or transferred or disposed of otherwise under any circumstances. However, in cases where the export obligation has been partially or fully met before the receipt of the licence (but made after the date of receipt of the application for the licence), the Advance Licensing Committee in the office of the CGI & E, New Delhi, may consider transfer at landed cost of the exempt materials imported subsequently on this licence as replenishment to the supporting manufacturer concerned whose name appears in the DEEC for further production and subject to Actual User conditions.
After referring to these clauses of the scheme, the counsel emphasized that under the scheme the appellant could make exports even before making imports and in return was entitled to get duty-free imports. The appellant had made its export commitments during the year but had not made any imports and this fact was specifically mentioned by the CIT (Appeals) in his order. The counsel thereafter pointed out that the question of how to treat advance licences received for import of duty-free raw materials against export commitments but not realised in the books of account was raised before the Export Advisory Committee of the Institute of Chartered Accountants. On this issue, the Committee expressed the following opinion :
(ii) Under the Advance Licence Scheme, the exporter who is holding the Advance Licence in his name, received duty exemption for import of raw materials required for the committed subsequent export of the finished goods. However, the exporter is permitted to commence the export of the goods manufactured from 'import duty paid'/'locally purchased' raw materials even before obtaining the Advance Licence, in which case the exporter should mention the File Number of his Advance Licence application on all the export documents. The exporter is then entitled to obtain credit in the Export side of the Advance Licence Pass Book, called the DEEC Book producing the documents of the goods exported. In cases where the export is made, but due to some reasons the applicant fails to obtain the Advance Licence - the benefit, of the duty exemption will not arise and the question of entitlement to credit in DEEC Book also does not arise.
(iv) The benefit of the export under the Advance Licence scheme can be quantified in terms of the estimated value of saving in import duty in importing the raw materials.
(ii) It is possible to consider the 'Estimated future duty benefit' as an incentive and treat it in the accounts as 'Other Income' just as cash incentives and duty draw-back and also can the amount appear as 'Amount recoverable in cash or in kind or for value to be received', under the head Current Assets - and be written off on actual utilisation (in such a case under which head to charge the amount written off in profit and loss statement is subsequent years)? In which year the 'Benefit' should be accounted if the export is made in the current year but the Advance Licence is actually received in the subsequent year?
2. As per the above definition of inventories, the Committee is of the opinion that the Advance Licences received for import of duty-free raw materials do not qualify for inclusion as inventories.
3. With regard to considering the 'estimated future duty benefit' as an income for the period in which the Advance Licences are received or the goods are exported against' file numbers', the Committee notes that one of the major considerations governing the selection and application of accounting policies is 'prudence', according to which profits are not anticipated but recognised only when realised in view of the uncertainty attached to future events. On the basis of the facts of the query, the Committee is of the opinion that in view of uncertainty attached to future events related to the earning of the duty benefit, no revenue should be recognised in respect of the advance licences received in the current period on the goods exported in that period as also in respect to the goods exported in the current period against 'File Numbers', the Advance Licences being received in a subsequent period. The Committee is further of the opinion that on the same considerations, it is not proper to defer a portion of the cost of locally purchased raw materials by accounting the difference between consumption of raw materials at the local price and the international duty-free price.
[Emphasis supplied] Placing reliance on this opinion, the counsel argued that the advance licences received for import of duty raw materials do not qualify for inclusion as inventories and profits are not anticipated but recognised only when realised in view of the uncertainty attached to future events. Further, no revenue could be recognised or the value of such licences could not be treated as income though received during the accounting period on the goods exported in that period because effectively these licences were received in a subsequent period. The counsel also placed reliance on the observations of the Committee that it is not proper to defer a portion of the cost of locally purchased raw materials by accounting the difference between consumption of raw materials at the local price and the international duty-free price. Finally, our attention was drawn to the order of E-Bench of the Tribunal for the assessment year 1971-72 in the case of Amar Dye Chem Ltd. [RA No. 336 (Bom.) of 1981 arising out of ITA No. 3897 (Bom.) of 1974-75, dated 19-8-1981], where the Tribunal had declined to refer the following question which, according to the counsel, raised a similar issue :
Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 15,50,543 on Import Entitlements should be allowed as a deduction in determining the profits of the business and that the value of the same need not form part of the value of raw materials or closing stock?
In this context, our pointed attention was drawn to para 2 of the aforementioned order. It would appear that the assessee used to acquire or purchase import entitlements from exporters who were allotted such entitlements against the exports and used to show the value thereon in the purchase of raw materials or opening stock, as the case maybe. Similarly, the assessee used to include the value of unutilised import entitlements as part of the closing stock till the year immediately preceding year which was under appeal. During the relevant year, the assessee did not include in the closing stock of raw materials this amount being the value of unutilised import entitlements as on the closing of the accounting year. The ITO added the amount to the profits keeping in view the practice followed by the assessee till the previous year. The AAC deleted the addition accepting the contention that the expenditure by the assessee for securing the import entitlements was entitled to deduction as an expenditure wholly and exclusively incurred for the purposes of the business. Before the Tribunal, it was not disputed by the department that the purchase of import entitlements was in the nature of revenue expenditure and was incurred for the purpose of facilitating the purchase of raw materials. The Tribunal held that the whole of such expenditure was entitled to deduction even if any portion of the entitlements is not utilised during the year. The Tribunal hold that this was a finding of fact and declined to grant reference of the aforementioned question. In sum, the counsel argued that the benefit that the appellant expected to obtain by virtue of advance licences in duty exempt would accrue to it only on the happening of an event which was the import of the fibres which event admittedly had not taken place during the relevant accounting year. Therefore, the duty exemption which was shown as benefit or income in the accounts in the form of material import entitlements under the head 'loans and advances' was not, in fact, an income because it had neither accrued nor had been received during the year.
8. The learned Departmental Representative, on the other hand, mostly relied on the observations of the Assessing Officer on page-5 of the assessment order.
9. Before deciding the issue, it is necessary to recapitulate some of salient aspects we have reproduced para-25 of the appellate order which contains the rationale of the decision of the CIT (Appeals). According to the CIT(Appeals), the right to import goods is a benefit or perquisite within the meaning of Section 28(iv) and the CIT relied on a decision of the Bombay High Court in Metal Rolling Works (P.) Ltd. v. CIT [1983] 142 ITR 170. According to the CIT (Appeals), the value of such right has to be accounted for on mercantile basis unless it is shown that the right was a contingent right and not a right in praesenti. The CIT(Appeals) has further observed that the duty exemption valuation of Rs. 31,75,231 is related to the exports actually made during the previous year and, therefore, the right to import goods duty-free arose not later than the making of the exports and the value of such right is, as held by the Bombay High Court in the case cited above, to be accounted for as business income which should be taxed on accrual basis in the year in which the exports are made. While rebutting these observations, it was argued by the appellant's counsel that the appellant was not at a contingent stage but at a stage prior to the contingent stage. Distinguishing the facts in Metal Rolling Works (P.) Ltd.'s case (supra), it was pointed out that in that case the import entitlements were obtained by the assessee directly in the course of business and the value of the same constituted profits and gains of business within the meaning of Section 28(iv) and, therefore, the amounts realised by the assessee by the sale of import entitlements were profits of the assessee in its business and were neither capital nor receipts of a casual nature. In the present case, the appellant had not imported any goods and, therefore, had not received any benefit during the year. The benefit could accrue to the appellant in the form of concession in excise duty in the event the appellant were to import goods which, as admitted by the CIT(Appeals), was not done during the relevant accounting year. The learned counsel has cited a host of cases, to some of which we may now make a reference. He relied firstly on the decision in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) to argue that what had to be brought to tax was the real income. He also relied on another decision of the Supreme Court in the case of Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 to argue that it was for the revenue to establish that the profits earned in a transaction is within the taxing provision and is on that account liable to be taxed. The counsel's main reliance was on a decision of the Madras High Court in the case of Indian Overseas Bank v. CIT [19901 183 ITR 200 : 51 Taxman 283 where reference was made to Shoorji Vallabhdas & Co.'s case (supra) by Their Lordships of the Madras High Court who held that the levy of income-tax is on income, and although the Income-tax Act has taken note of the twin points of time at which the liability to tax is attracted, namely, the accrual of income or its receipt, yet the substance of the matter is income, and if income does not result at all, there cannot be a tax even though for the purpose of book keeping an entry is made about a hypothetical income which does not materialise and the mere book keeping entry cannot be income unless income has actually resulted. Similar view was expressed by the Calcutta High Court in Sri Kewal Chand Bagri v. CIT [1990] 183 ITR 207 where, again, reliance was placed on a leading case of Shoorji Vallabhdas & Co.'s case (supra). The counsel also referred to another decision of the Supreme Court in CIT v. British Paints India Ltd. [1991] 188 ITR 44 : 54 Taxman 499 where the Supreme Court held that even if the assessee had adopted a regular system of accounting it was the duty of the Assessing Officer under Section 145 of the Income-tax Act to consider whether the correct profits and gains could be deduced from the accounts so maintained. In that case, the company had, as a consistent practice, valued its goods in process and finished products exclusively at cost of raw materials excluding overhead expenses. The ITO held that there was no justification to recognise a practice of valuing stock otherwise than in accordance with the well recognised principle of accounting which required the stock to be valued at cost or market price whichever was lower. He, therefore, calculated the value of opening and closing stock by adding overhead expenses. The AAC confirmed the order. The Tribunal held that there was no evidence to show that the goods in stock deteriorated in value and that there was no justification for excluding the overhead expenditure. The High Court, on a reference, reversed the decision of the Tribunal and, on appeal to the Supreme Court, the Supreme Court, inter alia, held that the question to be determined by the Assessing Officer in exercise of his powers under Section 145 is whether or not income can properly be deduced from the accounts maintained by the assessee even if the accounts are correct and complete to the satisfaction of the Officer and the income has been computed in accordance with the method regularly employed by the assessee. It is not only the right but the duty of the Assessing Officer to consider whether or not the books disclose the true state of accounts and the correct income can be deducted therefrom. It is incorrect to say that the Officer is bound to accept the system of accounting regularly employed by the assessee, the correctness of which had not been questioned in the past. There is no estoppel in these matters and the Officer is not bound by the method followed in the earlier years. Relying on this judgment, it was pointed out by the counsel that the mere fact that an entry was made in the accounts as was being made in the past was not enough for the revenue authorities to decide the issue against the assessee when on the facts it was clear that no real income had, in fact, accrued.
10. We have considered the submissions made by the learned counsel and the learned Departmental Representative and have gone through the papers filed as well as the case law cited. Factually, it is seen that the appellant had exported about 34,265 kgs. of goods, as a result of which it could have imported 36,674.705 kgs. of fibre on which it expected to earn duty exemption of Rs. 31,75,231 (as per details filed at page 5 of the compilation). As has been repeatedly stated hereinabove, no imports were effected during the year. Therefore, the contingency for getting exemption in respect of customs duty had not arisen during the year and in that sense no benefit had accrued to the appellant, whatever may be the entries in the books of account that might have been made by the appellant in this regard. It is not disputed that the appellant is a registered exporter and the advance licence that it had received on 19-10-1984 and 23-3-1985 in respect of goods exported (8,880 and 7,481.50 kgs. respectively) was in terms of clause 2.1 of the Duty Exemption Scheme. It is also not in dispute that the appellant was a registered manufacturer-exporter engaged in actual production and exported goods during the preceding several financial years and therefore was eligible to claim licence under the Scheme based on its average export performance during the preceding three financial years in terms of clause 4.2 of the Scheme (reproduced above). Duty Exemption Entitlement Certificate was to be issued in form of Appendix 16E of the Hand Book and these certificates were issued in two parts, one for imports and the other for exports. Since no imports were effected during the year, there was no question of issuing Duty Exemption Certificate. What the appellant had accounted for in its books was a future duty benefit which it would get in respect of imports of fibre if and when such imports were to be effected. Then again, the materials imported against licences under the scheme were to be utilised for the manufacture of the resultant products specified in the Duty Exemption Entitlement Certificate and clause 30 of the Scheme provided that such materials shall not be loaned, sold or transferred, disposed of otherwise under any circumstances. In the present case, the appellant had acquired advance licences on two occasions in respect of two instances of exports referred to above on 29-10-1984 and 23-3-1985 and had applied for further licences in respect of cloth exported and yarn exported; but the benefit by way of Duty Exemption in respect of advances, which are received or due to be received by the assessee, had not accrued to the assessee because no imports had been effected. The contingency on which such benefit could be said to have accrued was the import of the fibres which the appellant could effect duty-free as a consequence of the exports effected by it under this scheme. The fact that in the accounts this was shown as a material import entitlement does not ipso facto clothe it with the nature of income. The considerations which weighted with the company in making such entries in the books to show a figure of book profits may be different and we are not aware under what circumstances this item came to be included in the books. Judging purely from the point of view of liability to income-tax, we are of the view that this item of duty exemption was neither income on accrual basis nor had it actually been received nor did it afford any tangible benefit to the appellant in the form of concession of duty in the year of account for the simple reason that the liability to pay duty did not exist during this, year since no goods were imported. It can happen that even in cases where export is made, for some reason or the other, the appellant fails to obtain the advance licence or fails to effect imports in the accounting year. In such an eventuality, the benefit of duty exemption cannot be said to arise and there is, therefore, no question of taking credit for DEEC. The amount of Rs. 31,75,231 can at best be described as an estimated value of concession or saving in import duty that the appellant expected to earn at the time of importing raw material. Such concession or such benefit can only be accounted for in the year in which the imports are effected. It is not a benefit in praesenti but in future. No profit or reduction in liability has actually been earned by the appellant during this year. Such concession in duty or what is called duty exemption is anticipated but not actually realised. It can be realised only in subsequent years if and when the appellant effects imports. In our opinion, no income can be said to have accrued or arisen in respect of advance licences received in the current period on the goods exported because no income in real terms had accrued. The cases cited by the learned counsel, to which detailed reference has been made in the preceding paragraphs, would seem to support this view. We need refer to only one more case of the Madras High Court in the case of CIT v. Indian Overseas Bank [1985] 151 ITR 446. In that case, the Bank dealing in foreign currencies on behalf of its customers had certain foreign exchange contracts entered into by it which were not settled on the close of the accounting period ended December 31,1967. As the contracts were in different foreign currencies, the loss or profit arising on outstanding contracts was estimated based on the rate of exchange as on the closing day. In view of the devaluation of Sterling in November 1967, the loss arising on account of outstanding foreign exchange amounted to Rs. 9,20;125. The assessee-bank made provision for this in its accounts on the ground that this amount had to be provided for before ascertaining the profit. The ITO estimated the loss as purely anticipated and unascertained. The AAC reversed the order which was confirmed by the Tribunal. The Madras High Court, on these facts, held that only the actual loss incurred can be deducted but not any probable or possible loss. As there was no settlement of the outstanding contracts, the amount claimed could only be considered to be notional or anticipated loss and such notional or anticipated loss could not be allowed as a deduction. The same principle on a parity of reasoning would apply to the taxability of anticipated profit or concession in excise duty which the appellant expected to get in the event of import of raw material. Since such event had not taken place during the year of account, the benefit, if any, was inchoate, incapable of actual determination and had, in effect, not accrued during the year of account. We are, therefore, inclined to accept the stand of the appellant that this was not an income of the appellant during the year. All the principles laid down by the various judicial pronouncements, to which we have referred in the earlier paragraphs, have accepted the theory of real income and whatever has been stated in these judgments would seem to apply in a case of this type. No real income had accrued to the appellant by virtue of getting or expecting to get advance licences irrespective of the fact that such estimated benefit was accounted for in the books of the appellant. This fact, as we have pointed out earlier, is not determinative of the issue of the tax ability of this amount. We would, therefore, hold that the amount of Rs. 31,75,281, being the value of material import entitlement receivable by the appellant, does not constitute the income of the appellant for the year under appeal since it had neither accrued nor arisen during the year of account. This ground of appeal is, therefore, allowed.
11. In the result, the appeal is allowed in part.