Income Tax Appellate Tribunal - Mumbai
Choudhary Garments vs Deputy Commissioner Of Income Tax on 19 September, 2002
Equivalent citations: [2003]86ITD779(MUM), (2003)80TTJ(MUM)774
ORDER
Behari Lal, A.M.
1. This appeal of the assessee has been directed against the order of the CIT(A)-XXIX, Mumbai, dt. 4th April, 1995, for the asst. yr. 1992-93. The assessee-firm runs 100 per cent export-oriented manufacturing unit of garments. During the year under consideration, the total turnover of the assessee was Rs. 9,92,29,794 which was only from exports. In order to meet exports commitment, assessee-firm purchased garments from local market and export on this account was Rs. 44,20,866 included in the total turnover.
2. The first ground of appeal is regarding the disallowance of Rs. 2,02,098 under Section 37(2) considering the sales promotion expenses as entertainment expenses. The assessee has offered an amount of Rs. 97,214 as entertainment expenses out of the sales promotion. The AO, however, was of the view that all the expenses totalling to Rs. 2,02,098 are in the nature of entertainment. The learned CIT(A) confirmed the findings of the AO on the basis that the assessee did not furnish any details before him regarding the sales promotion expenses.
3. The learned counsel for the assessee filed before, us, the details of sales promotion expenses (compilation p. 1). The learned counsel contended that out of the total amount of Rs. 2,02,098, the assessee has itself disallowed an amount of Rs. 7,670 separately. Out of the remaining amount of Rs. 1,94,428, he contended that 50 per cent should be considered as has been spent on staff and that amount should not be considered as has been spent on entertainment. The learned Departmental Representative placed his reliance on the findings of the tax authorities.
4. We have carefully considered the submissions made by the rival parties. The Tribunal is consistently following that 25 per cent of the amount should be considered as has been spent on staff members and the remaining amount should be taken into account for determining the disallowance under Section 37(2) of the Act. The AO, is therefore, directed to consider 25 per cent out of the amount of Rs. 1,94,428 as has been spent on staff members and determine the disallowance on the remaining amount as per the provisions of law.
5. The next ground of appeal pertains to the computation of deduction under Section 80HHC of the Act, It is submitted by the assessee that the learned CIT(A) has erroneously confirmed the computation of rebate allowable to the assessee made by the AO under Section 80HHC by reducing the business income by 90 per cent of interest received of Rs. 5,37,805 without considering the fact that the above interest had been received from the banks on fixed deposit made with the banks for the purpose of obtaining various bank facilities and hence, the receipt of the above interest is directly connected with the assessee's business of export. It is also submitted that the said fixed deposit had been made with the banks out of overdrawn, account with the said bank and the interest has been paid to the bank and there is net credit of interest received from the bank. Thus, according to the assessee, for the purpose of deduction under Section 80HHC, the net interest received, if any, is required to be considered and not the gross interest.
6. The AO found that during the year, the assessee received interest of Rs. 5,37,805 from the bank. This amount has not been credited to the P&L a/c but has been deducted from the interest paid and remaining of the interest is debited to the P&L a/c. The learned CIT(A) referred to the provisions of Clause (baa) of Expln. of Section 80HHC and has stated that 90 per cent of the sum by way of brokerage, commission, interest, rent charges or any other receipt of a similar nature included in such profits has to be reduced from the profits and gains for working out "Profits of business". Therefore, according to him, receipt by way of interest included in such profits would also apply to the amount of Rs. 5,37,805 which is the interest received from the bank. He, therefore, justified the action of the AO in reducing 90 per cent of the amount of Rs. 5,37,805 for working out the profits of business.
7. The learned counsel for the assessee contended that the assessee paid interest to the bank of Rs. 13,53,302 during the year and received bank interest on fixed deposits offered to the bank as a security against banking credit limit and bank guarantee at Rs. 5,37,805. Therefore, according to him, the AO has wrongly calculated the deduction at 90 per cent of Rs. 5,37,805 because the net interest earned by the assessee was NIL. He argued that only if the net interest earned is more than the interest paid, the question of 90 per cent deduction would arise. He further argued that the interest was received on the various fixed deposits made by the assessee with the banks. These fixed deposits have been placed with the bank for obtaining various facilities. As interest paid by the assessee is higher than the interest received, no addition was required to be made. The learned counsel relied on the following Court (sic) cases to support his contention that interest from fixed deposits kept in the bank out of business necessity is to be treated as business income and not income from other sources :
(i) CIT v. Paramount Premises (P) Ltd (1991) 190 ITR 259 (Bom);
(ii) CIT v. Nagpur Engg. Co. Ltd. (2000) 245 ITR 806 (Bom);
(iii) Sealink Construction Co. (P) Ltd. (ITA No. 4433/Mum/2000, dt. 5th Dec., 2001);
(iv) Neha Transmission (ITA No. 4877/M/1999, dt. 6th July, 2001) (Mum. Trib); and
(v) Dy. CIT v. Jagdish Electronics (P) Ltd. (1998) 66 ITD 542 (Pune).
To support his contention that net income and not gross income to be considered while calculating deduction under Section 80HHC, the learned counsel referred to the following Court cases :
(i) Advance Techno Devices (ITA No. 5722/M/2000, dt. 7th Feb., 2002) (Mum. Trib);
(ii) K.P. Sanghvi (ITA No. 3817/M/96, dt. 3rd July, 10 (sic)) (Mum-Trib);
(iii) Honda Seil Power Products Ltd. v. Dy. CIT (2000) 69 TTJ (Del) 97;
(iv) Pink Star v. Dy. CIT (2000) 66 TTJ (Mumbai) 885 : (2000) 72 ITD 137 (Mumbai):
(v) Concept Pharmaceutical (P) Ltd. v. IAC (2001) 72 TTJ (Mumbai) 486 : (2000) 73 ITD 174 (Mumbai);
(vi) Asstt CIT v. Sharda Gums & Chemicals (2000) 66 TTJ (Jd) 256;
(vii) Mangalya Trading & Investment Ltd. (ITA No.4696/M/97) (Mum. Trib);
(viii) Asstt. CIT v. Galium Equipments (P). Ltd. (2001) 73 TTJ (Del)(TM) 130 : (2001) 79 ITD 41 (Del)(TM); and
(ix) Kantilal Chotalal v. Dy. CIT (1999) 63 TTJ (Mumbai) 527 : (1999) 68 ITD 395 (Mumbai).
The learned Departmental Representative placed his reliance on the findings of the CIT(A).
8. We have carefully considered the submissions made by the rival parties. We have also gone through the various cases relied upon by the learned counsel. Clause (baa) of the Explanation below Section 80HH(4A) has defined the profits of the business for the purpose of deduction under Section 80HHC. As per this clause "Profits of the business" w.e.f. 1st April, 1992, means the profits of the business as computed under the head "Profits and gains of business or profession" minus the following;
(1) Ninety per cent of export incentives i.e., profits on sale of licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947, cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India and any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971, or ninety per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in such profits, and (2) Profits of any branch, office, warehouse or any other establishment of the assesses situated outside India, Thus, Clause (baa) of the Explanation is abundantly clear that the "Profits of the business" for the purpose of deduction under Section 80HHC has to be computed under the head "Profits and gains of business or profession" by deducting ninety per cent of the receipts mentioned in Clauses (iiia) and (iiib) of Section 28 along with receipts by way of brokerage, commission, interest, rent charges or any other receipt of similar nature included in any such profits. Clause (baa) under the Explanation below Sub-section (4A) of Section 80HHC has not made any distinction of the income earned from business and from other sources. Therefore, even if the receipts mentioned in Clause (baa) under the Explanation are of business nature or the income earned from the business operations carried on by the assessee, 90 per cent of that "income has to be deducted which is included in the profits determined under the head "Profits and gains of business of profession". Therefore, the contention of the learned counsel that interest is a business income has no relevance so far as the provisions of Clause (baa) under the Explanation are concerned. Whether the income is from business or from other sources, the deduction of 90 per cent has to be made from the profits computed for the purpose of deduction under Section 80HHC.
9. The provisions of Clause (baa) under Explanation below Section 80HHC(4A) are without any ambiguity and the same are not subject to more than one interpretation i.e., any receipts by way of brokerage, commission, interest, rent charges or any other receipt of similar nature included in profits to be considered for the purpose of allowing deduction under Section 80HHC such receipts might have been earned by the assessee from the business carried on by him or from any other source. In short, the, deduction of 90 per cent from the profits computed for the purpose of deduction under Section 80HHC has to be made of such receipts mentioned in Clause (baa) irrespective of the fact whether such receipts pertain to the business of the assessee or they have been earned from any other source.
10. Now, the next important issue is regarding the contention of the learned counsel, that net income and not gross income should be considered while calculating deduction under Section 80HHC. We do not find any substance in the contention raised by the learned counsel. The language of Clause (baa) is quite plain and without any ambiguity. Clause (baa) speaks only about the receipts by way of brokerage, commission, interest, rent, charges etc., and it does not say anything about net commission, net brokerage, net interest or net rent charges. If the contention of the learned counsel is accepted, then not only net interest is to be considered but other receipts like, brokerage, commission and rent charges have also be taken into consideration only on net basis. This can never be the intention of the legislature. The word used in Clause (baa) is "receipt" and not the net amount received. Receipt means actual amount received and not the amount received after deducting the expenditure incurred for earning the receipt. While preparing the P&L a/c, these receipts are taken into account i.e., such receipts are included in the profits determined under the head "Profit and gain of business or profession". Therefore, these receipts form part of the profits computed for the purpose of deduction under Section 80HHC. Therefore, while taking out these receipts from the profits so determined for the purpose of deduction under Section 80HHC, the legislature in their wisdom thought it fit to allow 10 per cent expenditure for earning such receipts. Therefore, only 90 per cent of such receipts are deducted from the profits so determined and thereby has allowed 10 per cent expenditure for earning these receipts. Now, if the contention of the learned counsel is accepted as correct, the purpose of deduction at 90 per cent would become redundant. If only net income was to be considered, there was no purpose for allowing further deduction of 10 per cent. Net income means that the expenditure for earning that income has already been allowed. This is quite contradictory to the language of Clause (baa) where the provisions of allowing 10 per cent has already been made. This makes it abundantly clear that only gross receipts have to be taken into consideration for the purpose of Clause (baa) because the provisions for allowing 10 per cent expenditure on such receipts is inbuilt in Clause (baa) itself.
11. It would also be relevant to mention over here that the assessee has borrowed funds for the purpose of its business and not only to invest for the purpose of earning interest. The total turnover of the assessee during the year under consideration is Rs. 9,92,29,794 whereas the turnover of the interest earned is only Rs. 5,47,805. Thus, the funds borrowed have been mainly invested for earning the business profits. Therefore, the interest paid of Rs. 13,53,302 is mainly for the earning of export profits and this expenditure is allowable out of the business profits as the funds have been borrowed for the purpose of the assessee's business. The interest paid for earning the interest income must be a very insignificant amount because it cannot be said that the entire deposits in the bank were made only out of borrowed funds. That is why the provision for allowing the expenditure against the receipts mentioned in Clause (baa) has been made therein by providing 10 per cent expenditure for earning that income. The contention of the learned counsel that the entire investment in the banks was made out of the borrowed funds is without any substance because the borrowed funds are mainly for the business purpose of the assessee and not for making investments in the banks.
12. The Courts strongly lean against a construction which reduced the statute to a futility. A statute or any enacting provision therein must be so construed as to make it effective and operative. It has also been held by the Courts that a statute is designed to be workable; and the interpretation thereof by a Court, should be to secure that object, unless crucial omission or clear direction makes that end unattainable. The Courts, therefore, will reject that construction which will defeat the plain intention of the legislature even though there may be some inexactitude in the languages used. It is also held that if the choice in between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation and would reduce the legislation to futility should be avoided. In the present case, the languages used in Clause (baa) is quite plain and without any ambiguity. If the contention of the learned counsel is accepted, it would reduce the provisions of Clause (baa) ineffective and non-operative. The object of the legislature for bringing the provisions of Clause (baa) on the statute is to reduce the profits computed for the purpose of deduction under Section 80HHC by 90 per cent of the receipts mentioned therein. If the 'contention of the learned counsel is accepted, it would make the provisions of Clause (baa) non-workable because if the interest paid is reduced from the interest received, there would be left no income on which percentage of 90 per cent would be applicable. The very purpose of allowing 10 per cent expenditure on such receipts would also become futile. Therefore, we are of the considered view that the principle of netting the interest would defeat the very purpose of the legislation and would reduce the provision to futility. We, therefore, uphold the findings of the tax authorities for taking into consideration the gross income from interest for the calculation of deduction under Section 80HHC.
13. In the case of Nanji Topanbhai & Co. v. Asstt. CIT and Ors. (2000) 243 ITR 192 (Ker) and Abad Enterprises v. CIT (2002) 253 ITR 319 (Ker), the Kerala High Court held that where the assessee-exporter had offered a fixed deposit in bank as security for a loan transaction connected with his export business, the interest earned on such deposit cannot be treated as income from export business for the purpose of allowing deduction under Section 80HHC. Similarly, the Kerala High Court in the case of CIT v. Jose Thomas (2002) 253 ITR 553 (Ker) held that "Interest from bank deposits and SBI Magnum are not allowable as deduction under Section 80HHC by treating them as business income on the ground that the deposits had been offered as security for availing packing credit facility and had, therefore, got a connection with the business activities of the assessee. The income generated from collateral security does not constitute business income unless the assessee is engaged in the activity of advancing money and receiving income in the form of interest." Keeping in view the discussion in the aforesaid paragraphs and also the decision of the Kerala High Court (supra), we decide this issue against the assessee. The findings of the learned CIT(A) are, therefore, upheld,
14. The next issue taken up by the assessee is regarding the entitlement of the assessee to account for CCS, duty drawback on the basis of receipt till the realisation of the said amount has become ascertained. The learned CIT(A) rejected the contention of the assessee. The AO has observed in his order that the assessee has changed the methods of accounting with respect to duly drawback and cash incentives. Till last year, these items were taken on accrual basis whereas in this year, these items have been taken on cash basis. The AO has further stated that both by this change, the profit for the year has gone down by Rs. 81,07,754. The AO, therefore, has not accepted the change of accounting system and added back the amount of Rs. 81,07,754 to the income of the assessee. The learned CIT(A) has confirmed the findings of the AO on the basis that there was no compliance before him and the assessee did not explain the reason for change in the method of accounting, The learned CIT(A) has further stated that it is also not known whether this method is being followed regularly by the assessee.
15. The learned counsel contended that the AO before applying the provisions of Section 145(1) should have examined the bona fide and permissibility of change in method of accounting. He contended that the change in accounting method was bona fide one and the same should have been allowed by the AO. He placed his reliance on the following Court (sic) cases :
(i) CIT v. Ganga Charity Trust Fund (1986) 162 ITR 612 (Guj);
(ii) CIT v. A.P. Industrial Infrastructure Corporation (1999) 236 ITR 648 (AP);
(iii) Jhalani & Co. v. IAC (1993) 45 ITD 67 (Del);
(iv) Shapoorji Pallaviji & Co. (Rajkot) (P) Ltd. v. ITO (1994) 49 ITD 479 (Bom);
(v) S.K. Somaiya v. ITO (1997) 58 ITD 322 (Mumbai); and
(vi) ITO v. Bajaj Auto (1984) 19 TTJ (Bom) 198 : (1984) 8 ITD 296 (Bom).
The learned Departmental Representative placed his reliance on the findings of the tax authorities.
16. We have heard the rival parties. We have also gone through the Court cases relied upon by the learned counsel. In the case of Reform Flour. Mills (P) Ltd. v. CIT (1978) 114 ITR 227 (Cal), the High Court held that "Section 145(1) does not postulate any agreement or contract regarding the method of accounting to be employed by a taxpayer. This section also does not lay any embargo on him to alter his method of accounting. An assessee can change the method of accounting unilaterally in respect of a source of income." Similarly, in the case of Snow White Food Product Co. Ltd. v. CIT (1983) 141 ITR 847 (Cal), the Court held that "The change in the method of accounting need not have the approval of the IT authorities nor need it be supported by cogent reasons showing the bona fidely by the assessee." The Bombay Tribunal in the case of ITO v. Bajaj Auto (supra), relied upon by the learned counsel for the assessee has held that the assessee can change the method of accounting of duty drawback and cash incentive from Government from mercantile to cash basis on ground that (i) it was not statutory but gratuitous concessions and amount could not be known beforehand with certainty and, (ii) amounts involved were received irregularly and was late from Government. In the present case, the AO has not pointed out any mala fide intention on the part of the assesee to change the method of accounting. From the facts of this case, it appears that the method of accounting has been changed by the assessee on the basis of receipt till the realization of the said amount has become ascertained. The bona fide of the assessee, therefore, cannot be doubted. In view of the Court cases discussed above and keeping in view the facts of this case, we decide this issue in favour of the assessee.
17. In the result, the appeal is partly allowed.