Income Tax Appellate Tribunal - Delhi
Samtex Fashions Ltd. vs Assistant Commissioner Of Income Tax on 4 November, 2004
Equivalent citations: [2005]92ITD535(DELHI), (2005)92TTJ(DELHI)59
ORDER
Pradeep Parikh, A.M.
1. These cross-appeals are directed against the order of the learned CIT(A), dt. 19th Aug., 2003, asst. yr. 2000-2001. We find it convenient to dispose of both these appeals by this combined order. The assessee is aggrieved against the denial of deduction under Section 10A of the IT Act, 1961 (the Act), in respect of income from sale of export quota. In the alternative, it is claimed by the assessee that deduction under Section 80HHC should have been allowed on the income arising from the sale of export quota. The Department in its appeal has raised the ground against allowance of deduction under Section 10A on interest earned from margin money.
2. The assessee-company manufactures readymade garments and is 100 per cent export oriented unit located in Noida Export Processing Zone (NEPZ), Noida. The assessee had claimed deduction under Section 10A of the Act on its entire income including miscellaneous income comprising of following items :
(Rs.)
(i) Interest on margin money deposited with bank 7,91,813
(ii) Duty drawback received 8,31,232
(iii) Sale of export quota 97,64,554
(iv) Sales-tax reimbursement 4,04,602
(v) Exchange fluctuations 6,58,316
(vi) Insurance claim 60,526
(vii) Commission 8,668 ___________ 1,25,19,711 ___________
3. Out of the above, the AO did not allow the deduction under Section 10A in respect of interest on margin money and on sale of export quota. The AO also did not allow the impugned deduction on sale of scrap. With regard to sale of scrap, the AO denied the deduction by observing that it was not a profit or gain from export of article or thing manufactured by the assessee. With regard to quota sales, the AO observed that the quota is allotted by the Government of India for export of article or thing but quota itself did not form an article or thing to be exported. Further, once quota for export was sold in the domestic market, the character of income changed. Similarly, since scrap sales in domestic market did not give rise to profit from export, the deduction was denied.
4. In the first appeal, with regard to interest on margin money, the CIT(A) noted that there was a direct nexus between the interest income and the business of the industrial undertaking, and that the income had been derived in the course of carrying on of the industrial undertaking. Accordingly, the interest income of Rs. 7,91,813 was held to be eligible for deduction under Section 10A. As regards quota sales, the CIT(A) held that the same cannot be said to be derived from the industrial undertaking as there was no direct nexus between the sale proceeds of export quota and the industrial undertaking. Thus, on this item the deduction was denied. He also allowed deduction of income arising from sale of scrap, as according to him it was directly linked with the business of the industrial undertaking. The CIT(A), however, rejected the claim of the assessee for deduction under Section 80HHC on sale of export quota by observing that there was no actual export of goods or things through sale of export quota.
5. With regard to allowing deduction on interest, income, the learned Departmental Representative placed reliance on the decision of the Supreme Court in the case of CIT v. Dr. V.P. Gopinathan (2001) 248 ITR 449 (SC). The contention of the learned counsel was that the fixed deposit was placed as margin money with the bank and it was by way of debit to the cash credit account only with the bank. Thus, in all respects it had a direct nexus with the business of the industrial undertaking and hence deduction under Section 10A should be allowed. Alternatively, it was contended that deduction under Section 80HHC should be given as per the decision in the case of Lalsons Enterprises, v. Dy: CIT (2004) 82 TTJ (Del)(SB) 1048. In his counter reply, the learned Departmental Representative stated that the source of the fixed deposit was not relevant and that interest thereon was an income falling under the head "Income from other sources" and there was no reason to change the head of the income.
6. We have duly considered the rival contentions and the material on record. It needs to be appreciated that the assessee needed funds to run the industrial undertaking. The bank provided the funds on the condition of depositing sufficient margin money with the bank in the form of fixed deposit. The assessee earned interest on the said fixed deposit. Under such a situation can it be said that the assessee had placed the fixed deposit only to earn interest therefrom ? In our opinion, the reply to this question has to be in the negative. The placing of the fixed deposit was a precondition and a precursor to the running of the industrial undertaking, and earning of interest therefrom was merely incidental. Therefore, the Interest income, in our considered view, has a direct nexus with the running of the industrial income. According to us, the fixed deposit at best can be considered to be a foster mother for the interest income, but the real mother is the industrial undertaking itself, moreso, when the funds for the deposit have also come from the credit facilities provided by the bank. The decision in the case of Dr. V.P. Gopinathan's case (supra) was in a different context. In the present case we are called upon to decide as to whether the interest income forms part of the profits of the industrial undertaking or not. In the light of the foregoing discussions, we have no hesitation in holding that it does not and hence is eligible to deduction under Section 10A of the Act. Since we are accepting the main contention of the assessee, the alternative contention of claiming deduction under Section 80HHC is not dealt with. Thus, the only ground raised in the Departmental appeal is rejected and hence the appeal stands disallowed.
7. Coming to the assessee's appeal, the main ground pertains to the allowability of deduction under Section 10A on the income earned on sale of export quota in the domestic market. The learned counsel contended that since the grant of quota was directly linked with the industrial undertaking, the assessee should get the benefit of Section 10A of the Act. However, keeping in view the decision of the Supreme Court in the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC), we are not inclined to accept the contention of the learned counsel. As a matter of fact, the learned counsel himself was not serious in this argument and hence we reject it. However, he was more serious and in fact vehement to contend that the assessee should get deduction under Section 80HHC on the sale of export quota. In this connection, he reiterated the fact that the assessee was a 100 per cent EOU, that the quota was granted to it by the Textile Ministry on its export performance and hence it was an export incentive as envisaged in the proviso to Section 80HHC(3) of the Act. In support of this contention, the learned counsel relied on the CBDT's Instruction dt. 23rd Feb., 1998 (p. 61 of the paper book), wherein it was clarified by the Board that premium received on transfer of export quota could be equated with the items mentioned in Clauses (iiia), (iiib) and (iiic) of Section 28 of the Act. Moreover, the learned counsel clarified that the quota which was sold by the assessee was not a quota bought from the market but it was a quota which was allotted directly to the assessee by the Textile Ministry. The learned counsel then drew our attention to the provisions of Section 10A(6)(iii) to contend that the said provision specifically prohibited the assessee to claim deductions under Sections 80HH, 80HHA, 80-I, 80-IA and 80-IB where it was claiming deduction under Section 10A of the Act. Thus, the argument was that since Section 80HHC was not mentioned in the said prohibitory provision, it was implicit that the assessee could get the deduction under Section 80HHC. The learned counsel placed reliance on the judgment of the Bombay High Court in the case of CIT v. Shirke Construction Equipments Ltd. (2000) 246 ITR 429 (Bom) and on the decision of the Delhi Bench of the Tribunal in the case of Jindal Exports (P) Ltd. v. ITO (1989) 31 ITD 217 (Del).
8. The main contention of the learned Departmental Representative was that deduction under Section 80HHC was available only with regard to the export of goods and merchandise whereas here the deduction was being claimed on an item which is neither. He supported the order of the CIT(A) on this issue.
9. We have given our due consideration to the alternative contention of the learned counsel. Let us first consider the decision in the case of Shirke Construction (supra). In that case, one of the issues before the High Court was whether Section 80AB was applicable to Section 80HHC or not. The High Court had held that Section 80AB did not control Section 80HHC. The Supreme Court held in the case of IPCA Laboratories Ltd. v. Dy. CIT (2004) 266 ITR 521 (SC) that Section 80HHC was governed by Section 80AB and that the decision of the Bombay High Court could not be said to be the correct law. Thus, the decision in the case of Shirke, Construction (supra) does not help the assessee in any way.
10. Next reliance is placed on the decision of the Delhi Bench of the Tribunal in the case of Jindal Exports (supra). In this decision, of course, the Tribunal did hold that deduction under Section 80HHC cannot be denied simply because the income of the industrial undertaking is exempt under Section 10A. Let us see the principal reasoning behind this decision. The Tribunal observed that Section 80HHC was cast in a different mould from the other sections like Sections 80HH, 80HHA, 80HHB, 80-I, etc. In all these sections income of a specified nature was deductible. Sec. 80HHC, however, did not refer to the inclusion of any income from the industrial undertaking in the gross total income of the assessee, but referred to the deduction being allowed on the basis of turnover while computing the total income of the assessee. The Tribunal then, referring to the provisions of Sections 80AA and 80AB, observed that the deductions specified in the aforesaid sections were to be calculated with reference to the net income as computed in accordance with the provisions of the Act and not with reference to the gross amount of such income. This reasoning mainly led the Tribunal to hold that deduction under Section 80HHC could not be denied simply because the income of the industrial undertaking was exempt under Section 10A. This decision was rendered in the context of asst. yr. 1985-86. How far is this reasoning valid for the year under consideration is to be seen. Firstly, the above reasoning proceeds on the premise that Section 80AB does not control Section 80HHC. Perhaps, the logic by which the Tribunal was guided was that though by virtue of exemption under Section 10A, the income of the undertaking was not to form part of the total income, yet deduction under Section 80HHC could be granted because Section 80HHC also did not refer to the inclusion of any income from the industrial undertaking in the gross total income of the assessee as it was not governed by Section 80AB. But as has been noted above, the Supreme Court has held Section 80AB to be governing Section 80HHC and hence the same logic is no longer applicable.
11. For another reason also the decision in the case of Jindal Exports (supra) is not applicable. As noted earlier, the said decision pertains to asst. yr. 1985-86. In that year deduction under Section 80HHC was available as a percentage of export turnover. It was not at all income based. Therefore, the Tribunal had rightly remarked that if the undertaking had incurred a loss, then the benefit of Section 10A was illusory and in that case why should the assessee be denied deduction under Section 80HHC which was turnover based. On the other hand, for the year under consideration, deduction under Section 80HHC is profit based. In other words, for the year under consideration, exemption under Section 10A is of the profits of the undertaking and deduction under Section 80HHC is also in respect of the profits earned by the assessee. Therefore, as per the provisions of Section 10A and Section 80HHC, as they stood for the assessment year in question, there is no question of allowing deduction under Section 80HHC in respect of the profits which are exempt under Section 10A and which do not form part of the total income of the assessee. Thus, on the face of it, it may appear that there is a binding precedent in the shape of the decision in the case of Jindal Exports (supra), but as we have seen above, the setting in which the said decision was rendered was totally different. The complexion of the provisions of Section 80HHC was totally different and the judgment in the case of IPCA Laboratories (supra) was also not there. Therefore, in the context of the provisions with which we are concerned in the present appeal, the decision in the case of Jindal Exports (supra) is no longer a binding precedent and in effect not at all applicable.
12. However, the crucial question still remains to be answered. Admittedly, the assessee before us is not claiming deduction under Section 80HHC in respect of profits and other income on which it has availed the benefit of Section 10A. It is claiming deduction under Section 80HHC on the income earned on sale of export quota on which benefit of Section 10A has been denied to it and which denial the assessee has not seriously challenged. The deduction is being claimed on the ground that grant of export quota is akin to the incentives mentioned in Clauses (iiia), (iiib) and (iiic) of Section 28, and hence proviso to Section 80HHC(3) will apply to it. We are disinclined to agree with the proposition for several reasons which we shall now see. Sub-section (7) of Section 10A reads as follows :
"Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under Sub-section (1) of Section 139, furnishes to the AO a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years".
Section 10A is a territorial benefit available to industrial undertakings set up in specified free trade or export zones. It is a special benefit not available to units located outside the specified zones. However, if the assessee feels that the general tax concessions which are available to the industries located in the rest of the country are more advantageous, the above sub-section gives an option to the assessee not to avail of the benefit under Section 10A and instead may avail of the benefit of other general tax concessions for any of the relevant assessment years. In other words, by necessary implication, if the assessee does not opt out of the benefit of Section 10A, then it cannot avail of the general tax concessions. It may be argued that the above sub-section is applicable only to the actual profits of the undertaking to which Section 10A applies and not to other income to which the benefit of Section 10A may not be available. But then the assessee never intended so before filing the return. The assessee filed its return claiming exemption under Section 10A on its entire income including that which was not derived from the industrial undertaking. If as per law, exemption under Section 10A was not available on such income, the assessee now cannot claim the benefit of general tax concessions by way of a back door entry.
13. Assuming that Sub-section (7) of Section 10A is not applicable, even then, in our view, the assessee cannot be granted deduction under Section 80HHC. The proviso to Section 80HHC(3) under which the deduction is claimed, can come into play only when deduction is claimed under the main provision of Sub-section (3) of Section 80HHC, The relevant proviso reads as follows :
"Provided that the profits computed under Clause (a) or Clause (b) or Clause (c) of this subsection shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiia) (not being profits on sale of licence acquired from any other person) and Clauses (iiib) and (iiic) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee."
The proviso contemplates that first there have to be profits under Clause (a) or Clause (b) or Clause (c) of Section 80HHC(3) and then only such profits have to be "further increased" by the amount of proportionate incentive income. Unless there are profits under Clause (a) or (b) or (c), there is no question of any "further increase". In our view, in the present case there are no profits under any of the clauses and hence the same cannot be increased further by the proportionate incentive income. At the instance of the Bench, the learned counsel has provided two alternative computations in support of the claim made. First, we take the first alternate.
(a) Total business income as computed by the AO (inclusive of income exempt under Section 10A) Rs. 2,39,65,131
(b) Total turnover Rs. 34,32,21,025
(c) Export turnover Rs. 34,32,21,025
(d) 90% of incentives Rs. 95,36,207 Based on the above, profits of business have been computed as follows :
Export turnove 2,39,65,131 - 95,36,207 = 1,44,28,924 x--------------
Total turnover 34,32,21,025 = 1,44,28,924 x ------------
34,32,21,025 = 1,44,28,924 (A) Similarly, 90 per cent of incentive is computed at Rs. 95,36,207 (B). Thus, adding (A) and (B), the total deduction under Section 80HHC works out at Rs. 2,39,65,131. The actual computation of income now follows :
Rs.
Business income as computed by the AO 2,39,65,131 Less : Deduction under Section 10A as allowed by AO and CIT(A) 1,42,00,577 ___________ Gross total income 97,64,554 ___________ Less : Deduction under Section 80HHC, Rs. 2,39,65,131 but restricted to gross total income 97,64,554 ___________ Total Income Nil ___________
14. The above computation is contrary to the provisions of Sub-section (3) of Section 10A which provides that the profits and gains of the industrial undertaking shall not be included in the total income of the assessee. Upto asst. yr. 2000-01, i.e., upto the year under consideration, Section 10A contemplated total exemption of the profits of the industrial undertaking which meant that the profits would not enter the computation at all. It is only from asst. yr. 2001-02 that deduction under Section 10A is contemplated in place of total exemption. Hence, so far as the assessment year under consideration is concerned, the above computation is contrary to the provisions of Section 10A of the Act.
15. We now take the second alternative for computing the deduction under Section 80HHC.
(a) Business income after availing exemption under Section 10A Rs. 97,64,554
(b) Profits of business :
97,64,554 - 95,36,207 (90% of incentives) =2,28,347 x 34,21,21,02 = RS. 2,28,347 ___________ 34,32,21,025
(c) Deduction eligible under Section 80HHC (2,28,347 + 95,36,207) Rs. 97,64,554
16. Thus, (a) and (c) will even out and the taxable income will be nil. However, the above computation is not in accordance with the provisions of Section 80HHC(3). The profits of the business computed at Rs. 2,28,347 are not amputed in accordance with any of the Clauses (a), (b) or (c) of Section 80HHC(3). Of course, Clauses (b) and (c) are not applicable because the assessee is neither a 100 per cent trader exporter, nor a mixed exporter. But, the profits of the business are not which are envisaged under Clause (a). What we have to ascertain as per Clause (a) is export profit. However, as per the above computation, the export profits are already taken out. The business of Rs. 97,64,554 is arrived at after carving out export income to avail the benefit under Section 10A. Hence, there is no question of carving out further export profits per Clause (a). The amount of Rs. 2,28,347 is not export profit to which further incentive income as per the proviso to Section 80HHC(3) can be added. In short, the machinery to compute deduction under Section 80HHC(3) fails and no deduction under the said provision can be granted to the assessee.
17. Lastly, the argument of the learned counsel that since the prohibitory Clause (iii) of Sub-section (4) of Section 10A does not make mention of Section 80HHC, deduction thereunder is allowable is also devoid of merit. The said clause provides that when benefit under Section 10A is availed of, the assessee shall not then be entitled to deduction under Sections 80HH, 80HHA, 80-I, 80-IA and 80J of the Act. If one takes a look at these provisions, they all pertain to industrial undertakings. Therefore, to ensure that no assessee claims any benefit over and above the benefit under Section 10A in respect of the same industrial undertaking, the said provision is enacted. The reason for not mentioning Section 80HHC is that deduction under Section 80HHC is otherwise also not available to the units claiming exemption under Section 10A and hence what is obvious and clear need not be provided for.
18. Thus, in the ultimate analysis, the assessee is not entitled to deduction under Section 80HHC, either in law or on facts, on the income earned from sale of export quota.
19. The only other ground in the appeal relates to levy of interest under Sections 234B and 234C of the Act. Consequential relief may be granted in this regard to the assessee.
20. In the result, the appeals of the Department as well as of the assessee are dismissed.