Income Tax Appellate Tribunal - Delhi
Impulse India (P.) Ltd. vs Income-Tax Officer on 29 August, 1991
Equivalent citations: [1992]40ITD36(DELHI)
ORDER
J. Kathuria, Accountant Member
1. These two appeals by the assessee for assessment year 1985-86 are directed against two separate orders passed by the Commissioner of Income-tax (Appeals)-X, New Delhi. Since the facts involved are interlinked, these appeals are disposed of by a combined order, for the sake of convenience.
ITA No. 5674 (Delhi) of 1988 :
2. This appeal raises three grounds, but the issue involved is one. The issue is whether the assessee was entitled to have deduction under Section 80HHC of the Income-tax Act in respect of the claim made by it.
3. Briefly stated the facts are these. The assessee-company derived income from export of ready-made garments and agency commission against export of readymade garments. For assessment year 1985-86 the assessee-company closed its accounts on 30-6-1984. In the computation of taxable income attacl ed along with the return the assessee claimed deduction under Section 80HHC as under:--
(a) 1% of export sales of Rs. 16,47,474 Rs. 16,474
(b) 5% of incremental export sales of Rs. 15,79,224
(Rs. 16,47,479 minus Rs. 68,250) Rs. 78,961
(c) 1% of export agency commission of Rs. 22,27,118 Rs. 22,271
5% of incremental export agency commission of
Rs. 18,03,337 Rs. 90,166
(Rs. 22,27,118 minus Rs. 4,23,780)
Total: Rs. 2,07,874
This was restricted to 70 per cent on pre-incentive total income of Rs. 1,18,978 [Rs. 1,13,227 (gross total income) plus Rs. 5,751 (investment allowance = Rs. 83,284]. Thus, reducing the aforesaid amount to Rs. 83,284 from the gross total income, the total income was shown by the assessee at Rs. 29,942.
4. The Assessing Officer allowed deductions of Rs. 16,474 and Rs. 78,961 under Section 80HHC as claimed by the assessee and restricted the same to 70 per cent of Rs. 1,20,812 under Section 80VVA to Rs. 84,568. The assessee's claim for deduction under Section 80HHC in respect of agency commission was negatived by the Assessing Officer.
5. The assessee appealed to the learned Commissioner of Income-tax (Appeals) who after examining the matter at great length held that the Assessing Officer was justified in rejecting the assessee's claim for deduction under Section 80HHC in respect of agency commission earned by it. The learned Commissioner of Income-tax (Appeals) further initiated penalty proceedings under Section 271 (1)(c) for making a false claim.
6. The assessee has come up in further appeal. Shri C.S. Aggarwai, the learned counsel for the assessee made valiant efforts to convince us that the assessee was entitled to deduction under Section 80HHC as claimed by it. It was submitted that, in all, exports amounting to Rs. 2,96,00,218 had been effected in the year under consideration which included the assessee's commission of Rs. 22,27,118. It was pointed out that the assessee had not claimed deduction under Section 80HHC on the entire amount of Rs. 2,96,00,218, but only on the amount of commission received by it amounting to Rs. 22,27,118. It was submitted that the provisions of Section 80HHC as it then stood required the assessee to export the goods and to get the sale proceeds in convertible foreign exchange to enable it to claim deduction under Section 80HHC. According to the learned counsel both the aforesaid conditions were satisfied in this case as the assessee had exported the goods and had earned the foreign exchange for the country. Inviting our attention to the marginal note of Section 80HHC as it then stood, it was explained that the deduction was admissible in respect of the export turnover and in the assessee's case the turnover was Rs. 22,27,118. It was submitted that the letter of credit was opened in the assessee's favour and the assessee acted as a principal in spite of the fact that there was a buying agency agreement with the foreign importers. Drawing our attention to the terms of buying agency agreement, a copy of which is available at pages 42 to 46 of the assessee's compilation, it was submitted that the assessee exported the goods to the foreign importers on principal to principal basis and not as an agent of the foreign importers. Relying on the Supreme Court decision in the case of Bhopal Sugar Industries Ltd. v. STO [1977] 40 STC 42, it was submitted that a mere formal description of a person in a contract as an agent was not conclusive and that one must look to the substance of transaction in order to determine the real nature of the arrangement. The learned counsel also relied on the Tribunal's decision dated 7-2-1990 in the case of Chinar Exports (P.) Ltd. [IT Appeal No. 2732 (Delhi) of 1988] for assessment year 1984-85 (copy of the decision is available at pages 54 to 73 of the assessee's compilation). It was submitted that, in fact, the facts in the instant case were on a better footing then those in the case of Mis. Chinar Exports Pvt. Ltd., in which the Tribunal had allowed deduction under Section 80HHC. Reference was also made to the reasoning given in an order passed by the Commissioner of Income-tax (Appeals) a copy of which is available at pages 74 to 84 of the assessee's paper book. It was vehemently argued that the assessee was entitled to deduction of the whole claim made by it under Section 80HHC.
7. The learned Departmental Representative, on the other hand, submitted that the facts in the cases decided by the Tribunal and the Commissioner of Income-tax (Appeals) were altogether different. It was pointed out that in those cases the assessees were the actual exporters whereas in the present case the assessee was a mere agent. The learned Departmental Representative emphasised that so far as its own exports were concerned the Assessing Officer had already allowed deduction under Section 80HHC and that deduction was refused only in respect of export agency commission which did not amount to export turnover. It was submitted that the export orders belonged to other parties, that the goods had been shipped by the other parties and that the sale proceeds, therefore, belonged to such parties. According to the learned Departmental Representative the letter of credit opened in the name of the assessee was transferable and that the assessee was not an exporter of goods in respect of which export agency commission was earned. It was also submitted that the buying agency agreement clearly showed that the assessee was only an agent of the foreign importers and was not acting as principal to the foreign principals. The learned Departmental Representative strongly supported the order of the first appellate authority.
8. We have carefully considered the rival submissions as also the the facts on record. On first blush, the arguments of the learned counsel for the assessee appeared to be attractive. However, on closer scrutiny, the arguments have been found to be devoid of merit. There is no dispute that the assessee had exported certain goods in its own right. As per the profit and loss account such export sales were shown at Rs. 16,47,474 on which the assessee has been allowed deduction under Section 80HHC.
As per copy of the profit and loss account for the immediately preceding year such export sales amounted to Rs. 68,250. The Assessing Officer has allowed 5 per cent deduction on incremental export sales as well. In the immediately preceding year the assessee had shown agency commission income of Rs. 4,44,610. First of all it was submitted by Shri Aggarwal that relief under Section 80HHC had been allowed to the assessee for assessment year 1984-85. However, when reference was made to the copy of the assessment order for assessment year 1984-85 it was found that there was no discussion about such a deduction and that in fact the assessee had incurred a loss in that year and the income had also been computed at a negative figure of Rs. 15,540.
9. Before proceeding further it would be necessary to examine the terms and conditions of the buying agency agreement, a representative copy of which is available at pages 42 to 46 of the assessee's paper book. In this agreement Esprit De Corp., an American Corporation, has been shown as principal and the assessee-company as an agent of the principal. Clause No. 1 of the agreement is regarding appointment of the agent and clearly stipulates that the assessee would be the principal's buying agent in India for the purchase of wearing apparel and such other merchandise for the principal's account. That means that the assessee-company would be purchasing goods on behalf of the principal and not in its own right. Clause 3 stipulates the services to be rendered by the assessee-company being the agent. Clause 4 authorises the assessee-company to retain the services of sub-agent or independent contractors as the circumstances may require but to remunerate such sub-agent or independent contractors from the commission paid to the Agent by the principal. Clause 5 deals with payments for the services rendered by the assessee which are @ 8 per cent as per this agreement. This payment has to be made at 8 per cent of the FOB value for all merchandise purchased for the account of the principal. This is very material because it will have a bearing on the issue at hand which will be discussed presently.
10. Clause 6 deals with payment for imported merchandise and related expenses. There are other clauses as well in this agreement which may not be very relevant for the purpose of our case. A careful perusal of the aforesaid terms of the agreement clearly leads to one and only one conclusion that the assessee-company was a mere agent of the foreign principal and was not acting as a principal. We, therefore, agree with the finding of the learned Commissioner of Income-tax (Appeals) in this regard that the assessee was only an agent and was not acting on principal to principal basis.
11. The facts of the case indicate that the quota of export entitlement for shipments of garments is fixed by Apparel Export Promotion Council which is sponsored by Ministry of Commerce, Government of India. Due to the control of the aforesaid Council, no party is allowed to make export in excess of the quota allotted to it by the Council on the basis of past performance. The assessee-company did not obviously have the export quota to export its own goods. It exported the goods worth Rs. 16,47,474 against its own quota rights. The goods amounting to Rs. 2,73,73,100 had been exported by various parties as per details placed at pages 91 and 92 of the assessee's compilation. Out of the total amount of foreign exchange earned amounting to Rs. 2,96,00,218, a sum of Rs. 2,73,73,100 belonged to suchparties who had the quota in their favour and who were the real exporters. The assessee merely acted as a conduit pipe or as an agent for facilitating such exports to the foreign principals. In the bargain the assessee-company earned commission of Rs. 22,27,118. Had the entire amount of Rs. 2,96,00,218 been the assessee's exports then it would have been entitled to claim deduction under Section 80HHC of the entire amount and not on the amount of commission income of Rs. 22,27,118. A perusal of record leaves us in no doubt that the real exporters in respect of export sales of Rs. 2,73,73,100 were various parties listed at pages 91 and 92 of the assessee's compilation who were entitled to deduction under Section 80HHC and who may have in fact, received such deduction in their assessments.
12. We have already referred to various clauses of the buying agency agreement. Clause No. 5 deals with the payments. It stipulates that for performing the services enumerated in para 3 of the agreement the principal shal 1 pay the Agent a commission of 8 per cent of the FOB value for all merchandise purchased for the account of the principal. Section 80HKC as it then stood defined "export turnover" which meant the sale proceeds of any goods or merchandise exported out of India, but did not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station. In other words, the assessee-company as an agent was entitled to 8 per cent commission on the export turnover. Thus, the commission received by the assessee would not be treated as part of the export turnover because by virtue of the definition itself it was based on the export turnover.
13. Before deduction under Section 80HHC could be claimed certain conditions have to be met. The assessee, in the first instance, has to be a resident in India. Secondly, the assessee has to export out of India any goods or merchandise to which the section applies. Thirdly, the sale proceeds of such goods or merchandise exported out of India are receivable by the assessee in convertible foreign exchange. These conditions clearly show that the assessee must export goods in his own right and must receive the consideration in foreign exchange as sale proceeds. The facts of the instant case, however, are that the assessee in respect of the export sales made by it had already been allowed deduction under Section 80HHC. In respect of the other export sales the assessee itself was not the exporter. The exporters were other parties who had quota rights in their names and who had received the sale proceeds of such export sales. The assessee merely acted as an agent in arranging the export of such goods to the outside principals and earned commission for the services rendered by it. By no stretch of imagination could such commission become export turnover of the assessee. The property in the goods exported outside India never vested with the assessee company and the amount of Rs. 22,27,118 never partook the character of export turnover. The case of Chinar Exports (P.) Ltd. (supra) relied upon by the learned counsel for the assessee turned on different facts. In that case not only was the letter of credit opened in the assessee's name, the process had confirmed in their agreements with the assessee that the exports made were the assessee's exports. The property in the goods vested with the assessee. The licence was in the assessee's name. The bill of lading was also in the assessee's name. On these facts the Tribunal held that deduction under Section 80HHC was allowable to the assessee. In the present case, however, the licence was not in the assessee's name. The quota did not belong to the assessee. The property in the goods exported did not vest with the assessee. The assessee was a mere agent who had facilitated the export of goods to its principals. No reliance, therefore, be placed on the decision in the case of Chinar Exports (P.) Ltd. (supra) so far as the facts of the present case are concerned. We are not obliged to discuss the case decided by the Commissioner of Income-tax (Appeals) the facts of which are also distinguishable.
14. Taking into consideration the entire facts and circumstances of the case, we hold that the assessee-company was not entitled to relief under Section 80HHC on export agency commission of Rs. 22,27,118.
15. In the result, the appeal is dismissed.
I.T.A. No. 6537 (Del.) of 1988 :
16. This appeal relates to penalty under Section 271(1)(c). As observed earlier the learned Commissioner of Income-tax (Appeals) had initiated the penalty proceedings under Section 271(1)(c) on the ground that the assessee had made a false claim with regard to deduction under Section 80HHC. The learned CIT (Appeals) imposed penalty of Rs. 61,840 by his impugned order which is the subject matter of appeal before us.
17. Shri C.S. Aggarwal submitted that the learned CIT (Appeals) had no jurisdiction to initiate the penalty proceedings for concealment of income when no concealment had been discovered by him. It was submitted that there was no enhancement of income by the learned Commissioner of Income-tax (Appeals) and that all the facts and circumstances of the case had been gone into by the Assessing Officer who had thought it fit only to reject the claim of the assessee, but not to initiate the penalty proceedings for concealment of income. The learned counsel submitted that the assessee had made a genuine claim and had placed all the cards on the table and that the Assessing Officer had negatived its claim by placing a particular interpretation on Section 80HHC. The learned counsel further submitted that even if the assessee did not claim deduction under Section 80HHC in respect of export agency commission of Rs. 22,27,118, it would have made no difference to the income assessed. It was submitted that the deduction under Section 80HHC had to be restricted to 70 per cent of pre-incentive total income of Rs. 1,18,978 and that even if deduction under Section 80HHC in respect of export agency commission was ignored the deduction allowable and actually allowed worked out to Rs. 95,435 which had to be restricted to Rs. 83,284 as was done by the assessee itself. According to the learned counsel there was no motive to conceal any income or to lodge a false claim and Explanations to Section 271 (1 )(c) were not applicable in the instant case. Reliance was placed on the Calcutta High Court decision inBurmah Shell Oil Storage & Distributing Co. of India Ltd. v. ITO [1978] 112 ITR 592 for the proposition that a mere rejection of a claim did not give rise to concealment of income. Reliance was also placed on the Madhya Pradesh High Court decision in Smt. Laxmibai v. CIT [1983] 144 ITR 82 for the proposition that where an assessee honestly believed that a transaction did not amount to sale and such amount was not taxable as income there could be no concealment of income. The learned counsel also relied on Madras High Court decision in CIT v. G.D. Naidu [1987] 165 ITR 63 for the proposition that a mere contention for a particular position by an assessee in the face of a contrary view taken by the Assessing Officer would not give rise to a penalty for concealment of income. Reliance was also placed on the Delhi High Court decision in CIT v. Rita Malhotra [ 1985] 154 ITR 550 for the proposition that where a claim was made which was partly allowed by the Revenue authorities there was no case for levy of penalty for concealment of income.
18. The learned Departmental Representative supported the order of the learned Commissioner of Income-tax (Appeals).
19. We have carefully considered the arguments of both the sides and perused the material placed before us. The fact clearly demonstrate that the assessee had made a claim for deduction under Section 80HHC. This included claim in respect of export agency commission as well. The claim was made in broad day light. The Assessing Officer examined the claim of the assessee and ultimately negatived it. The assessee pursued the matter in appeal in all earnestness. According to it the amount received by the assessee in foreign exchange qualified for deduction under Section 80HHC. The learned CIT (Appeals) confirmed the order of the Assessing Officer. In the quantum appeal we have confirmed the finding of the learned CIT (Appeals) and held that the assessee was not entitled to deduction under Section 80HHC in respect of export agency commission of Rs. 22,27,118. This confirmation, however, does not mean that the assessee's claim, in the first instance, was surreptitious or false. The Assessing Officer had the entire evidence before him before he rejected the assessee's claim, but did not find it necessary or proper to initiate penalty proceedings for concealment of income. In our opinion, on the same facts and without anything more and without making any enhancement to the income of the assessee the learned Commissioner of Income-tax (Appeals) could not initiate penalty for concealment of income by holding that the claim of the assessee was false. The assessee had offered an explanation which was not found acceptable by the Assessing Officer and has not even been accepted by us. That, however, does not mean that the assessee could not make a claim or the assessee's claim was based on false premises. In our opinion, the assessee had a bonafide belief that it was entitled to relief under Section 80HHC in respect of export agency commission of Rs. 22,27,118. It is a different matter that the assessee had not succeeded in its efforts even up to the Tribunal's level. Be that what it may, it cannot be said that the assessee's claim was bogus or false or that there was an attempt to conceal income. We agree with the learned counsel for the assessee that even if the assessee had not claimed deduction under Section 80HHC in respect of the export agency commission, it would have made no difference to the income returned or the income assessed because under Section 80VVA the deduction had to be restricted to 70 per cent on pre-incentive total income. In such a situation there could be no motive for claiming such a deduction. We, therefore, hold that the assessee was under a genuine belief that it was entitled to relief under Section 80HHC and that nothing more need be read into the assessee's claim which was made overtly and openly. Penalty for concealment of income cannot be levied simply because the assessee's claim was rejected finally. We hold that the learned Commissioner of Income-tax (Appeals) was not justified in levying the penalty that he did. We accordingly delete the penalty levied under Section 271(1)(c).
20. In the result, the appeal is allowed.