Income Tax Appellate Tribunal - Hyderabad
Starchik Specialities Ltd. vs Dy. Commissioner Of Income-Tax on 22 July, 2003
Equivalent citations: [2004]90ITD34(HYD)
ORDER
MVR Prasad, Accountant Member
1. 1. These appeals are filed by the assessee. They are directed against similar, but separate, orders of the Commissioner (Appeals)-IV, Hyderabad dated 21.11.2002 for the assessment years 1998-99 and 1999-2000. As common issues are involved, these appeals are heard together for being disposed of, by a common order for the sake of convenience.
ITA No. 186/HYD/02 : Asstt. Year - 1998-992. Assessee filed return for the assessment year 1998-99, declaring a loss of Rs. 15,39,743 under the normal provisions of Income-tax Act, and deemed income of Rs. 2,67,039 under Section 115JA of the Income-tax Act. The assessing officer completed the assessment determining the deemed income under Section 115JA at Rs. 9,16,465. In terms of Section 115JA certain adjustments have to be made to the 'Book Profit'. So far as the present appeal is concerned, adjustment contained in Clause (viii) of Explanation to Section 115JA is relevant. Under this provision, the book profit has to be reduced by the profits eligible for deduction under Section 80HHC. The said Explanation to the extent relevant for our purpose reads as under-
"Deemed income relating to certain companies.
115JA. CD.......
Provided that.......
Provided further that........
Explanation- For the purposes of this section "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under Sub-section (2), as increased by-
(a) to (f)........
if any amount referred to in Clauses (a) to (f) is debited to the profit and loss account, and as reduced by-
(i) to (vii)....,,.
(viii)the amount of profits eligible for deduction under Section 80HHC, computed under Clause (a), (b) or (c) of Sub-section (3) or Sub-section (3A), as the case may be, of that section, and subject to the conditions specified in Sub-sections (4) and (4A) of that section;
(ix).....
(3).....
(4)....."
3. The assessing officer noticed that the assessee did not enclose the tax audit report in Form No. 1OCCAC alongwith the return as required under Sub-section (4) of Section 80HHC So, he held that the deduction under Section 80HHC is not admissible. He also observed that in terms of Section 80A(2), the aggregate of deductions under Chapter-VI, which includes the deduction under Section 80HHC shall not in any case exceed the gross total income of the assessee. He noticed that the gross total income of the assessee as computed under the normal provisions of the Income-tax Act is not a positive figure, and so, he held that the deduction under Section 80HHC to be considered for computation of book profit under Section 115JA is 'nil'. He also observed that if at all any deduction under Section 80HHC in the computation of book profit under Section 115JA is allowable, it has to be restricted to Rs. 10,25,264, as per the following computation-
"While quantifying the admissible deduction Under Section 80HHC, the assessee has taken the indirect costs at Rs. 8,10,820. But the indirect costs as per the P&L Account are as follows:
a)Salaries and Wages & Others 35,34,204
b)Auditors Remuneration 40,000
c)Conveyance & Vehicle Maintenance 1,25,996
d)Consultancy charges 2,05,748
e)General expenses 2,57,732
f)Postage & Telegrams 16,611
g)Printing & Stationery 1,57,524
h)Rates & Taxes 70,537
i)Rent 1,32,200
j)Subscription & Periodicals 15,150
k)Telephone charges 3,55,233
l)Directors' Sitting fee 8,000
m)Finance Charges 14,86,421
----------------------
64,05,356
----------------------
Proportionate indirect cost allowable to export turnover works out to-
64,05,356
--------------- X 1,61,15,941 = 14,57,292
7,08,35,724
Accordingly, the admissible deduction if any works out as under:
Export Turnover - Direct Costs - Proportionate Costs = 1,61,15,941 - 1,36,33,385 - 14,57,292 Admissible deduction u/s.80HHC, if any, = 10,25,264 ........"
In the above computation, Rs. 1,61,15,941 is the export turnover and Rs. 7,08,35,724 is the total turnover.
4. On appeal, the CIT(A) upheld the above findings of the assessing officer Hence, the assessee came up with the present appeal before this Tribunal.
5. Before us, the learned counsel for the assessee assailed all the above findings of the assessing officer. Firstly, it is claimed that the furnishing of the audit report along with the return is not mandatory and assessee had filed the audit report in form 10CCAC before the completion of the assessment, and so, in terms of the ratio of the decision of the jurisdictional High Court in the case of Hemsons Industries Ltd. (2001)-(251 ITR 693), the deduction under Section 80HHC cannot be denied. He also pleaded that the Revenue authorities erred in invoking the provisions of Section 80A(2) for the purposes of working out the deduction under Section 80HHC, in the process of computing the book profits under Section 115JA. It is claimed that the provisions of Section 80A(2) are relevant only for the purpose of computing the Income under the normal provisions of Income Tax Act, and they have no relevance for working out the deduction under Section 80HHC for computing the deemed profits under Section 115JA of the Act. In support of this plea, he relied upon the decision of the Hon'ble Kerala High Court in the case of CIT v. GTN Textiles (248 ITR 372). On the question of the restriction of the indirect costs in the computation of deduction under Section 80HHC, the learned counsel for the assessee explained that the assessee has a Sales Division and a Manufacturing Division, and he has worked out the deduction under Section 80HHC on the basis of the indirect costs relatable to the Sales Division. In other words, the indirect costs of the Manufacturing Division have been excluded for the purposes of working out the proportion of indirect costs attributable to the exports in the ratio of the export turnover to the total turnover. This is how the concerned Chartered Accountant has worked out the proportion in the audit report in Form 10 CCAC, which may be seen at pages 21 to 24 of the assessee's paper-book. So, he argued that the deduction under Section 80HHC worked out by the assessee is correct and the assessing officer erred in restricting the same, as done by him in the assessment order, the relevant portion of which has been extracted above.
6. The learned Departmental Representative, on the other hand, conceded that in the light of the decision of the Hon'ble A.P. High Court in the case of Hemsons Industries (supra), assessee could file the audit report in Form 10CCAC before the completion of the assessment. However, on the question of the applicability of the provisions of Section 80A(2) for working out the deduction under Section 80HHC, for being reduced from the book profit in terms of Section 115JA, it is pleaded that the decision of the Hon'ble Kerala High Court in the case of GTN Textiles(supra) relied upon by the learned counsel for the assessee is distinguishable in as much as it was rendered in the context of the erstwhile provisions of Section 115J and not under the provisions of Section 115JA. On the question of the restriction of indirect costs for working out the proportion relatable to the export profits, he invited our attention to the definition of the term 'indirect costs' given in Clause (e) of Explanation to Section 80HHC(3) and pleaded that there is no basis for taking into consideration, only the indirect cost of the Sales Division. So, it is stressed that the assessing officer was quite justified in taking into consideration, the indirect cost of the business as a whole for working out the proportion relatable to the export turnover.
7. We find that the deduction under Section 80HHC cannot be denied simply because the audit report was not enclosed to the return. Admittedly, the said report was filed before the completion of the assessment, and so, in terms of the ratio of the decision of the jurisdictional High Court in the case of Hemsons Industries(supra), the deduction under Section 80HHC cannot be denied, in the process of working out the book profits in terms of Section 115JA, On the second issue, viz. applicability of provisions of Section 80A(2) in the process of computing the book profit under Section 115JA, we find that the provisions of Clause (iii) of Explanation to Section 115J considered by the Hon'ble Kerala High Court in the case of GTN Textiles(supra) are pari materia with the provisions of Clause (viii) of Explanation to Section 1153A, which are applicable in the present case. We have already reproduced Clause (viii) of Explanation to Section 115JA hereinabove. The corresponding provisions considered by the Hon'ble Kerala High Court in the case of GTN Textiles(supra) read as under-
"Special provisions relating to certain companies:
1153(1).....
(1A)........
Explanation- For the purposes of this section, "book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under Sub-section (1A), as increased by-
(a) to (ha)............
If any amount referred to in Clauses (a) to (f) is debited or, as the case may be, the amount referred to in Clauses (g) and (h) is not credited to the profit and loss account, and as reduced by,-
(i)........ (ii)........
(iii)the amounts as arrived at after increasing the net profit by the amounts referred to in Clauses (a) to (f) and reducing the net profit by the amounts referred to in Clauses (i) and (ii) attributable to the business, the profits from which are eligible for deduction under Section 80HHC or 80HHD; so, however, that such amounts are computed in the manner specified in Sub-section (3) or Sub-section (3A) of Section 80HHC or Sub-section (3) of Section 80HHD, as the case may be; or
(iv)........
(2)......."
8. Under both the clauses, viz. Clause (viii) of Explanation to Section 115JA with which we are concerned in the present appeal, and Clause (iii) of Explanation to Section 115J considered by the Hon'ble Kerala High Court in the case of GTN Textiles(supra), what has to be reduced from the book profit is the amount of profits eligible for deduction under Section 80HHC. The said deduction has to be computed under the provisions of Sub-section (3) or (3A) of Section 80HHC. The slight differences in the expression like the words 'in the manner' used in Clause (iii) Of Explanation to Section 115J and absent in the other corresponding provision under Section 1153A do not make any material difference. Hon'ble Kerala High Court in the case of G.T.N. Textiles(supra), as per the relevant portion of the head-note, held as under-
"The assessee was engaged in the manufacture of goods most of which are exported outside India. Because of the substantial amount of depreciation and investment allowance, the assessee did not have taxable income and, therefore, the assessing authority made the assessment under Section 115J of the Act. The assessee claimed deduction of export profit in the computation of book profit as provided under Clause (iii) of Explanation to Section 115J of the Act. The assessee claimed deduction In the manner prescribed under Section 80HHC(3) of the Act by applying the formula:
Export turnover X Net Profit credited in profit and loss account. Total Turnover The assessing authority rejected the said computation and worked out the deduction by applying the formula:
Profit computed under the provisions of the
Income-tax Act,
Export Turnover X i.e. after setting off depreciation
----------------------------
Total Turnover and investment allowance of
current year and the unabsorbed
portion of it carried forward from
earlier years.
The Tribunal accepted the claim of the assessee. On a reference:
Held, that the Tribunal was correct in holding that under Section 115J, Explanation, Clause (iii) of the Act, profit to be taken into consideration was the profit as per the books of account and not as calculated under the Act."
9. It is evident from the above decision that in terms of Explanation to Section 115J or Section 115JA, the profit to be taken into consideration is the book profit, subject to specified adjustment and not the total income as computed under the normal provisions of the Income-tax Act. Actually, the contention of the Revenue goes against the provisions specified both in Section 115J and Section 115JA of the Act. Both these provisions levy what is known as the Minimum Alternative Tax, and are applicable to what are known as 'Zero Tax Companies'. These companies have substantial book profit and declare dividend to share holders, but they do not pay income-tax, by availing various deductions and exemptions which are available under the normal provisions of the Act. So, under both Section 115J and Section 115JA, tax is levied on the basis of the book profit subject to certain adjustments. These provisions come into picture when the total income of the assessee chargeable to tax under the provisions of the Act is Nil or less than the specified percentages of the book profit. So, the Invocation of Section 115J and Section 115JA Implies two distinct procedures -(1)determination of income under the normal provisions of the Act, which include Section 80A(2) and Section 80B(5) relied on by the Revenue and (2)determination of the book profit subject to the specified adjustments-and a comparison of the two results obtained by the two procedures. So, we are of the view that Section 80A(2) and Section 80B(5) which are applicable only in the first procedure, have no role to play in working out the deduction under Section 80HHC eligible for being reduced for arriving at the book profit in terms of Clause (iii) of Explanation to Section 115J or Clause (viii) of Explanation to Section 115JA. The Revenue have also contended that in terms of Section 115JA(4) all other provisions of the Act shall apply to every assessee in respect of whom provisions of Section 115JA are invoked, and so, Section 80A(2) and Section 80B(5) are also applicable for the purpose of determining the book profit under Section 115JA. We find no force in this contention. Section 115JA(4) itself makes it clear that other provisions apply only when it is not otherwise provided In the section. We find that the language of Section 115JA(1) and Explanation thereto rules out applicability of Section 80A(3) and Section 80B(5). At any rate, this issue is covered in favour of the assessee by the decision of the Kerala High Court discussed above, and no contrary decision has been brought to our notice. We accordingly decide this aspect of the matter in favour of the assessee.
10. Let us now consider the question as to the correctness of the action of the assessing officer in adopting the indirect costs at a figure of Rs. 64,05,356. The learned counsel for the assessee mentioned that the assessee had furnished the details of indirect costs at a figure of Rs. 8,10,820, which are as under-
Indirect Cost
Salaries & Wages 63,600
Directors Remuneration 1,44,000
Auditors Remuneration 40,000
Conveyance 48,045
Vehicle Maintenance 48,649
Consultancy Charges 89,750
Professional Charges 81,498
Directors Sitting Fee 8,000
Postage & Telegrams 11,879
Printing & Stationery 75,281
Rent 60,000
Subscriptions & Periodicals 15,150
Telephone & Trunk calls 1,24,968
--------------------
8,10,820
---------------------
It is explained that the above indirect costs of Rs. 8,10,820 relate to the Sales Division of the assessee, and so, the assessee determined the deductible indirect cost at Rs. 1,84,471 on the following basis-
"Proportionate indirect cost allocable to Export Turnover Indirect Cost
---------------------- X Export Turnover Total Turnover 810820
-----------------
70835724 X 16115941 =184471..."
11. It may be observed that the figure of indirect costs of Rs. 8,10,120 taken by the assessee has no relationship to the figure of indirect costs reflected in the Profit & Loss Account. In other words, the assessee has artificially ignored the indirect costs relatable to the Manufacturing Division. It is not a case where separate accounts are maintained for the Sales Division. Assessee has filed a consolidated Profit & Loss Account for both the divisions. In the circumstances, we see no reason for ignoring the indirect costs of the Manufacturing Division. The definition of the term 'indirect cost' which has to be taken into consideration for working out the deduction in terms of Section 80HHC(3) as given in the Explanation to the said sub-section reads as under-
"80HHC.........
(3)...........
Explanation-For the purpose of this sub-section,-
(a) to (d)............
(e) "Indirect cost" means costs, not being direct costs, allocated I in the ratio of the export turnover in respect of trading goods to h to the total turnover;
(f) ........."
12. It may be observed that the indirect costs to be taken into consideration are the proportion of the total costs which include the costs of Manufacturing Division and not a proportion of the costs relatable to the Sales Division alone. When the denominator in the formula for working out the relevant portion of indirect costs is the total turnover, we do not see why the specified proportion of the total indirect costs should not be taken into consideration. No serious argument to the contrary has been advanced before us. At any rate, even if only the indirect costs of the sales Division should be adopted as the correct basis, it Is not conceivable as to how the said figure of Rs. 8,10,820 is arrived at. In the circumstances, we see no reason for holding that the admissible deduction under Section 80HHC is anything more than Rs. 10,25,264 worked out by the assessing officer. We hold that the assessee is eligible for deduction of Rs. 10,25,264 while working out the book profit in terms of Section 115JA, and reject the plea of the learned counsel for the assessee, to the contrary, on this limited issue.
13. In the circumstances, we hold that the assessee is in principle eligible for deduction under Section 80HHC, while working out the deemed income based on book profit under Section 115JA. So far as the quantum of such deduction towards eligible amount In terms of Section 80HHC is concerned, we uphold the working given by the assessing officer in the assessment order at Rs. 10,25,264. Assessing officer is accordingly directed to modify the assessment, working out deemed profit under Section 115JA on this basis.
I.T.A. NO. 186A/HYD/02 ASStt. Year : 1999-2000 14 to 16...... (Not recommended for publication)