Income Tax Appellate Tribunal - Ahmedabad
Jay Chem, Ahmedabad vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A" AHMEDABAD
Before Shri Mahavir Singh, Judicial Member, and
Shri D. C. Agrawal, Accountant Member
IT A No.841/ Ahd/2006
Assessment Year:2002-03
Date of hearing:9.7.09 Drafted:10.7.09
M/s. Jay Chem, 803, V/s. ACIT, Circle-10,
Shilp Building, C.G. Ahmedabad
Road, Navrangpura,
Ahmedabad
PAN No. AACFJ1923F
(Appellant) .. (Respondent)
Appellant by :- Shri S.N.Soparkar, AR
Respondent by:- Shri K. Shridha, SR DR
ORDER
PER Mahavir Singh, Judicial Member:-
This appeal by the assessee is arising out of the order of Commissioner of Income-tax (Appeals)-XVI, Ahmedabad in appeal No. CIT(A)-XVI/AC.Cir.10/8/05-06 dated 24-11-2006. The assessment was framed by the Asstt. Commissioner of Income-tax, Circle-10, Ahmedabad u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 31-01-2005 for the assessment year 2002-03.
2. The first issue in this appeal of the assessee is against the order of CIT(A) confirming the action of the Assessing Officer in not granting deduction u/s.80IB of the Act. For this, the assessee has raised the following ground No.1:-
"1. The Learned CIT(A) has erred in law and on facts in confirming the action of ld. AO in not granting deduction u/s 80IB of the Act on following income:-ITA No.841/Ahd/2006 A.Y. 2002-03
M/s. Jay Chem v. ACIT, Cir-10, A'bd Page 2
(a) Foreign Exchange rate income Rs.25,07,274/-
(b) DEPB sales proceeds Rs.79,12,666/-
© Duty Draw back Rs.15,92,282/-
(d) Other income Rs. 53,273/-
(e) Income from trading activities Rs.10,70,654/-"
3. At the outset Ld. Counsel for the assessee stated that the issue as regards foreign fluctuation, DEPB, sale proceed, duty drawback is covered in favour of the assessee and against the Revenue in the case of Shah Originals v. ACIT/DCIT, Range 24(1), Mumbai (2008) 19 SOT 568 (Mum). The brief facts as regards the exchange rates difference, the Assessing Officer noted that export exchange rate difference of Rs.25,07,234/- has generated since there was difference on the rates of rupee in comparison to the currency of the country in which sale was made. This difference results some time in the form of income and at other as loss. But this income or loss arises due to valuation of currency in the international scenario. This income does not strictly arise due to sales but due to the circumstances prevailing in the international market. Therefore, this is considered as income not derived from the business and accordingly he disallowed the deduction u/s.80IB of the Act. Aggrieved, the assessee preferred appeal before CIT(A) and CIT(A) also agreed with the view taken by the Assessing Officer that the income on account of gain as a result of appreciation of foreign exchange so earned by the assessee subsequent to sales activities and in such income has not accrued to the assessee at the time of sales. This income may be incidental to or attributable to the business and certainly cannot be termed as derived from export activities of the assessee. Aggrieved, now assessee came in second appeal before us. The Bench has put only one query to the assessee's counsel that this foreign exchange is arising out of the current year's sales or of earlier year. The Ld. Counsel for the assessee replied in affirmative and stated that this sale of foreign exchange fluctuations pertains to the sale of current year and accordingly allowable. We find that on this issue, the Bench in the case of Shah Originals (supra) has clearly stated in para-35 as under:-
"35. As regards receipts from foreign exchange fluctuation is concerned, it has already been discussed above that the same forms a integral part of the export proceeds and would thus, have to be considered as derived from the industrial undertaking. We order accordingly and direct that 'foreign' exchange ITA No.841/Ahd/2006 A.Y. 2002-03 M/s. Jay Chem v. ACIT, Cir-10, A'bd Page 3 fluctuation be taken into consideration for allowing deduction under section 80-IB."
As the issue is very clear and the foreign exchange fluctuation receipts confirmed an integral part of the export proceeds and it should have been considered and derived from industrial undertakings.
4. Coming to DEPB sale proceed, duty drawback, we find that the Assessing Officer during the course of assessment proceedings noted that the assessee has earned income from these items, it has been found that the assessee has earned income from DEPB Licencse & export incentives of Rs.95,04,948/- which included Rs.79,12,666/- DEPB entitlements and Rs.15,92,282/- was from the duty drawback. The assessee was asked to explain the nature of this income. It was contended that the assessee has received duty free licenses since it is carrying on the export business activity, and this income has generated from the import entitlement and sales of licenses, therefore, this income is pertaining to manufacturing business of the assessee. But according to the AO this contention is misleading, since the income generated from the entitlements, incentive is not an income directly derived from the manufacturing activity of the assessee. The AO considered the contention raised by the assessee and the plea to treat the incentives and DEPB income as income from industrial undertaking is however not found acceptable. According to the AO it is product of the incentive given by Govt. of India and on this issue decision given by the Hon'ble Supreme Court in case of CIT v. Sterling Foods Ltd. (1999) 237 ITR 579 (SC) is relevant. Though this decision relates to Section 80HH of the Act but the ratio is identical that the export incentive cannot derive profit and gain from the manufacturing activity to be eligible for deduction, hence same is reduced for the purpose of computing deduction u/s.80-IB(3) of the Act. The CIT(A) also confirmed the action of the AO. Before us Ld. Counsel for the assessee relied on in the case of Shah Originals (supra). We find that the Mumbai Bench in the case of Shah Originals (supra) in para-31-34 & 38 has held as under:-
"31. Another issue raised by the assessee in its appeals for the different years is whether the action of the lower authorities in holding that receipts in the nature of duty drawback (export incentive), foreign exchange fluctuation, sale of import licence and interest on income-tax refund are not part of Income ITA No.841/Ahd/2006 A.Y. 2002-03 M/s. Jay Chem v. ACIT, Cir-10, A'bd Page 4 derived from Industrial undertaking and thereby not entitled to deduction under section 80-IB, is correct or not.
32. With regard to the 'duty drawback', the learned counsel for the assessee has submitted that duty drawback is nothing but a refund of excise duty or custom duty paid on input of raw material. He has argued that the finding of the Assessing Officer that such duty drawback is not 'derived' from business is not correct inasmuch as there is an inextricable link between the business carried on by the assessee and the receipts of these amounts. The learned counsel for the assessee has referred to the judgement of the Gujarat High Court in the case of CIT v. India Gelatine & Chemicals Ltd. [2005] 275 ITR 284, held that "the object of duty drawback scheme is to reimburse exporters for tariffs paid on the imported raw material and intermediates and Central Excise duties paid on domestically produced inputs which enter into export production. Custom duties and excise duties on inputs raise the cost of production in industries and thereby affect the competitiveness of exports. Therefore, exports need to be assisted for neutralizing the escalation in their costs, attributable to such customs and excise duties. Duty drawback is, therefore, intended to reduce the cost of production. Hence, duty drawback is an integral part of the pricing of the goods and, therefore, duty drawback has to be treated as 'derived from' industrial undertaking... duty drawback is derived from the industrial undertaking and, therefore, eligible for relief under section 80J".
33. The learned counsel for the assessee further pointed out that following the aforesaid decision, the Mumbai Bench of the Tribunal in the case of 1977 Klothings Unit No.1 v. ITO [IT Appeal No.3772 (mu9m) of 2005] for assessment year 2001-02 held that duty drawback received by the assessee forms part of profit derived from industrial undertaking. He also relied upon the decision of the Chandigarh Bench of the Tribunal in the case of Paramount Industrial Corpn. 109 TTJ 295, holding that income earned on account of duty drawback is income earned from industrial undertaking eligible for deduction under section 80-IB of the Act. So far as the decisions in the case of CIT v. Jameel Leathers and Uppers [2000] 246 ITR 97 and CIT v. Vishwanathan & Co. 261 ITR 737, as relied upon by the revenue is concerned. The learned counsel for the assessee submitted that the decision of the Hon'ble Gujarat High Court discussed above was arrived at after considering the said two decisions.
34. In view of the above legal position, we hold that 'duty drawback' is to be considered as derived from the industrial undertaking of the assessee and would, thus, have to be considered for the purpose of allowance of deduction under section 80-IB. &
38. For the assessment year 2004-05, there is another question on whether the profit on transfer of the Duty Entitlement Pass Book (DEPB) Scheme should be considered as income derived from the industrial undertaking and, hence, entitled to being reckoned for the purpose of computation of deduction under section 80-IB. We are of the view that DEPB Scheme is more akin to the scheme of allowing drawback amount on duty already paid by the ITA No.841/Ahd/2006 A.Y. 2002-03 M/s. Jay Chem v. ACIT, Cir-10, A'bd Page 5 assessee on import of raw material etc., than conferring import entitlement benefit on exports done by the assessee. In that way, treatment meted in the case of 'duty drawback' should be exercised in this case. Thus, the profits arising under the DEPB Scheme should be considered to be derived from the industrial undertaking and the assessee should be allowed deduction under section 80-IB on such profits. We order accordingly."
5. In view of the above discussion, the exchange difference, DEPB sales proceeds and Duty Draw Back are eligible for deduction u/s.80-IB of the Act. Accordingly we allow this issue of the assessee's appeal.
6. As regards to the other sub-ground (d) & (e) of ground No.1 as regards to other income and income from trading activity has not been pressed by the assessee's counsel and accordingly the same are dismissed as not pressed.
7. The ground No.2, 3 & 4 raised by the assessee has not been pressed by Ld. Counsel for the assessee. So we dismiss the ground No.2, 3 and 4 in this appeal of the assessee as not pressed.
8. The next issue in this appeal of the assessee is against the order of CIT(A) in confirming the action of the Assessing Officer in determining the total indirect cost attributable to the trading exports at Rs.3,57,281/- for the purpose of determining deduction u/s.80HHC of the Act.
9. We have heard the rival contentions and gone through the facts and circumstance of the case. We have also perused the case records including the assessment order as well as the order of CIT(A). We find from the orders of the lower authorities that Assessing Officer while computing deduction u/s.80HHC of the Act worked out the proportionate indirect cost for export turnover of a trading goods and worked out profit and therefore export of trading goods. The assessee has worked out the deduction on proportionate basis of indirect cost. But the assessee has not included certain items of indirect expenses in the total indirect cost. The CIT(A) confirmed the action of the Assessing Officer by stating that the AO has ITA No.841/Ahd/2006 A.Y. 2002-03 M/s. Jay Chem v. ACIT, Cir-10, A'bd Page 6 rightly worked out the indirect cost on proportionately basis of export turnover of trading goods. Before us also the assessee could not make out anything against the order of the lower authorities. Accordingly, we find no infirmity in the orders of the lower authorities and we confirm the same. This issue of the assessee's appeal is dismissed.
10. The next common issue in this appeal of the assessee is against the order of CIT(A) in confirming the action of the Assessing Officer in disallowing 1/7th out of the motor car expenses and telephone expenses.
11. After hearing the rival contentions and going through the case records, we find that the CIT(A) has restricted the disallowance on motor car expenses at 1/6th and not at 1/7th as claimed by the assessee. As regards the telephone expenses the Assessing Officer has disallowed 1/6th amounting to Rs.1,69,276/- on the ground of personal uses. The CIT(A) restricted at 1/7th being reasonable by stating that the disallowance is slightly excessive and we find that normally disallowance for personal user is made at 1/10th and Tribunal is consistently making estimated disallowance, accordingly, we restrict the disallowance on both the counts at 1/10th. This common issue in this appeal of the assessee is partly allowed.
12. The next issue in this appeal of the assessee is against the order of CIT(A) in confirming the action of the Assessing Officer disallowing foreign travel expenses at Rs.12,15,780/-.
13. After hearing the rival contentions and going through the case records, we find that the CIT(A) has partly disallowed and partly allowed the claim of the assessee by stating the reason that the Assessing Officer has rightly disallowed Rs.2,01,275/- because these expenses are for non-business purposes as it appears that Shri Canon Patel, who was newly married at that time has taken his wife abroad on a honeymoon and this cannot be termed as "business trip". Also in respect of foreign traveling expenses disallowed Rs.3,830 + Rs.45,703/- in para 11.5 and Rs.3,69,750/- in para-11.5 of the assessment order. The CIT(A) directed the ITA No.841/Ahd/2006 A.Y. 2002-03 M/s. Jay Chem v. ACIT, Cir-10, A'bd Page 7 Assessing officer to verify whether the said expenses pertains to the assessment year under consideration or it was incurred in the subsequent assessment year subject to its allowability. As per the CIT(A) the foreign traveling expenses of Rs.3,22,717/- in respect of gifts given by the assessee as mentioned in para-11.6 of the assessment order has been rightly disallowed by the AO. Finally, as per the CIT(A), the foreign traveling expenses of Rs.3,48,757/- in para-11.8 of the assessment order may be disallowed at 1/6th instead of 1/4th of such expenses as has been done by the AO to cover up any personal element involved therein. According to the CIT(A) the assessee gets a relief of Rs.1,16,252/-. We find that this issue has been set aside by the CIT(A) to the file of the Assessing officer, and accordingly we find no infirmity in the same. This issue of the assessee's appeal is dismissed.
14. The next issue in this appeal of the assessee is against the order of CIT(A) in confirming the action of the Assessing Officer in disallowing software expense amounting to Rs.2,02,140/- as capital expenses. The assessee has claimed deduction for computer software programme expenses of Rs.4,29,450/- as revenue expenses. The assessee was asked to explain as to how the expenses were revenue in nature and why the same should not be treated as capital expenditure. The assessee has furnished written submission in this regard contending as, it has purchased computer software programme worth of Rs.4,29,450/-. But according to the Assessing officer, the programme has set up to run business smoothly and maintenance of accountancy, it is crystal clear that the software purchased by the assessee will have an everlasting use and enduring benefits in future as the same would be useful for several years. The investment in software is definitely of an enduring nature and the same is capital expenditure in nature. According to the Assessing officer the income tax rules provides depreciation for computer software at 60% and this itself proves that the computer software is a capital expenditure but the income tax Act has provided depreciation on such capital assets at higher rates which the assessee is entitled for. Aggrieved, the assessee preferred appeal before CIT(A) and CIT(A) also treated the expenditure as capital and allowed depreciation. Aggrieved, now the assessee came in second appeal before us.
ITA No.841/Ahd/2006 A.Y. 2002-03M/s. Jay Chem v. ACIT, Cir-10, A'bd Page 8
15. At the outset before us, Ld. Counsel for the assessee fairly stated that the issue is covered by the decision of this Tribunal in the case of Amway India Enterprises v. DCIT (2008) 111 ITD 112 (Del) (SB), wherein the Tribunal has laid down certain guidelines relevant to determine whether the advantage is operated in the capital field or revenue field in para-58 & 59. Finally the Tribunal has decided the issue in para-60 as under:-
"60. Having laid down the criteria for determining the nature of expenditure incurred on acquisition of software, whether capital of revenue, we are of the view that these criteria need to be applied to determine the exact nature of expenditure incurred by the assessee in he present cases for acquiring different software. Since this exercise is required to be done in respect of each and every software independently having regard to the criteria laid down above, we are of the view that the matter needs to be restored back to the file of he Assessing officer for doing such exercise. The Assessing officer shall examine the question whether expenditure on computer software is capital or revenue in the light of the criteria laid down above after giving an opportunity of being hard to the assessee. If on such examination, the Assessing officer comes to the conclusion that the expenditure is capital expenditure, then the question regarding allowing depreciation will be decided in accordance with the principles laid down in the subsequent paragraphs."
Respectfully following the Delhi Special Bench in the case of Amway India Enterprises (supra), we also set aside this issue to the file of the Assessing officer to decide in terms of the guidelines laid down in para-58 and 59 of this Special Bench, as the facts are not available on record. This issue of the assessee's appeal is allowed for statistical purposes.
16. The next issue in this appeal of the assessee is against the order of CIT(A) in confirming the action of the Assessing Officer in not granting the deduction u/s.80-IB and 80HHC of the Act on the total income. For this, the assessee has raised the following ground:-
"10. The Learned CIT(A) has erred in law and on facts in not confirming the action of AO in not granting deduction u/s.80IB and 80HHC on the same amount of gross total income. Ld. CIT(A) has failed to appreciate that S. 80IB of the Act is an independent section and ed claimed therein does not affect the right to claim deduction under any other sections including deduction u/s.80HHC of the Act."ITA No.841/Ahd/2006 A.Y. 2002-03
M/s. Jay Chem v. ACIT, Cir-10, A'bd Page 9
17. At the outset, it is seen that the issue is squarely covered in favour of the Revenue and against the assessee by the decision of the Special Bench Special Bench of this Tribunal of Madras Benches in the case of ACIT v. Rogini Garments (2007) 294 ITR 15 (AT), (Chennai) (SB), wherein it is held as under:-
"From the above, it is clear that if restrictive clause not in the same section but in some other provision, is clearly showing the mens legis it has to be given full effect. Therefore, if restriction is placed on the claim of repetitive deduction in section 80IA(9) and is made applicable in respect of all deductions under Chapter VI-A, then this restriction is to be applied. Since the wordings used are "any other deductions under Chapter VI-A" full effect is to be given to this provision and whenever an assessee wants to claim deduction under section 80-IA(9) restriction is to be read in every other provision providing for deduction under Chapter VI-A. Apropos the argument that the provision is couched with ambiguities, and therefore the spirit of the Act is to be seen and justice be done we find that the freedom for the search of the spirit of the Act or the mischief at which it is aimed opens the possibility of liberal interpretation. This finer aspect cannot be narrowly watched. It is that delicate and important branch of judicial power, the concession of which is dangerous but the denial is disastrous. At one stream stands Lord Denning who said : "We do not sit here to pull the language of Parliament to pieces and make non-sense of it. That is an easy thing to do. We sit here to find out the intention of Parliament and carry it out. We do this better by filling in the gaps and making sense of the enactment than by opening to destructive analysis. Viscount Simonds called it 'a naked usurpation of the legislative function under the thing guise of interpretation'".
In our opinion, the intention of Legislature is a very slippery phase. When the language of the statute is transparently plain, it is wrong to give it colour according to the temper of time. When the language implied by the enactment is clear, there is no question of interpreting the provisions in any manner except by giving them their plain and obvious meaning. Nebulous concept of the legislative intent cannot be used to curtail the explicit provisions in a statute. A statute or any enacting provisions therein must be so construed so as to make it effective and operative on the principle expressed in the maxim, ut res magis valeat quam pereat. There is no scope for importing into the statute is the edict of the Legislature and the duty of the judicature is to act upon the sentetia legis. There is no estoppel against the statute.
We have gone through the circular relied on by learned counsel for the assessee. It nowhere suggests that more than 100 per cent deduction on the same profit can be granted to the assessee under various sections enumerated in Chapter VI-A. Section 80HHC is part of Chapter VI-A. The hon'ble jurisdictional High Court in the case of CIT v. Sharon Vaneers P. Ltd.[2007] 294 ITR 18 (Mad.) (T.C.(A) No.62 of 2004 dated February 26, 2007), has made it clear that it is not correct to say that section 80HHC of the Act is a self-contained provision. The deduction cannot be allowed ignoring ITA No.841/Ahd/2006 A.Y. 2002-03 M/s. Jay Chem v. ACIT, Cir-10, A'bd Page 10 the restrictive clause contained in section 80-IA(9). The restrictive clause in section 80-IA makes it abundantly clear that wherever deduction under any other sections of Chapter VI-A(C) is claimed, the computation will be subject to the restrictions laid down in section 80-IA(9). It precludes pro tanto, all the deductions of such profits and gains claimed under Chapter VI-A(C). Section 80HHC is a part of Chapter VI-A(C). It is not a self-contained provision. There is absolutely no ambiguity on this aspect. We are therefore of the opinion that relief under section 80-IA should be deducted from the profits and gains of the business before computing relief under section 80HHC of the Act."
Accordingly, this issue of the assessee's appeal is dismissed by following the decision of Chennai Bench (SB) in the case of Rogini Garments (supra).
18. In the result, assessee's appeal is partly allowed for statistical purposes.
Order pronounced in Open Court on 28/08/2009
Sd/- Sd/-
(D.C.Agrawal) (Mahavir Singh)
(Accountant Member) (Judicial Member)
Ahmedabad,
Dated : 28/08/2009
*Dkp
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT(Appeals)-XVI, Ahmedabad
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT, Ahmedabad