TaxTMI 
TaxTMI 
2003 (1) TMI 271
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....ebited as import duty benefit A/c under Raw materials a/c against the credit of Rs. 3,67,25,867, which was accepted by the CIT (A) IV, Hyderabad while considering the deduction permissible under sections 80HH and 80-I at paragraphs 4.7 and 4.8 of the order. 3. Alternatively, the CIT (A) IV, Hyderabad having held that the sum of Rs. 3,67,25,867 was notional entry ought to have given a clear finding that the entry being notional was not a taxable receipt and therefore ought to have directed it's exclusion from Total Income. 4. Alternatively, the Import entitlement benefit is to be treated as falling under receipts of the nature specified under section 28(iii)(a), iii (b) or iii(c) of the Income-tax Act, 1961 and 90% of such sums should be added to profits in the same proportion as the export Turnover bears to Total Turnover as laid down in proviso to section 80HHC of the Income-tax Act, 1961. 5. The ld. CIT (A) IV, Hyderabad erred in excluding the following receipts from the profits of the Industrial undertaking while computing the deductions under sections 80HH and 80-I of the Income-tax Act, 1961 on the ground that they are not profits derived from the industrial undertaking: - ....
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....he record are as follows. The assessee is a public Ltd. Company and is carrying on the business of manufacture and export of drugs. For the assessment year 1994-95, it filed its return of income on 14-12-1994 declaring 'nil' income. The Assessing Officer while completing the assessment, restricted the relief claimed by the assessee under section 80HHC of the Income-tax Act, 1961. For the assessment year 1995-96, the Assessing Officer rejected the revised claim of the assessee for enhanced deduction under section 80HHC. Aggrieved of the above, the assessee went in appeal without success and thus the matter is before us now. 5. Ld. counsel for the assessee, Shri K.C. Devdas made the following submissions first for the assessment year 1994-95. The first issue as per him is, whether the "Import Entitlement Benefit Account" amounting to Rs. 3,67,28,867 credited by the appellant firm forms part of "turnover" for the purposes of relief under section 80HHC of the Income-tax Act, 1961. He vehemently contended that this amount of Rs. 3,67,28,867 does not form part of "turnover". Alternatively, he argued, that in case this import entitlement benefit, which he admits as income is treated as '....
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....ted that the term "sales turnover" has been defined therein as the aggregate amount for which sales are effected or services are rendered by an enterprise. He thus, argued that by no stretch of imagination, the sum of Rs. 367.25 lakhs can form part of the turnover; He further argued that the export benefit/incentives are accounted for by the assessee company on accrual basis and such benefit of entitlement of customs duty as a result of export has been credited to the Profit and Loss Account and were shown under the Schedule of turnover under the caption "export incentives". He submitted that when imports are made, the customs duty benefit accrued is debited to the Purchase Account. Thus, its claim that out of the total receipt shown of Rs. 3.67 lakhs, an amount of Rs. 3.35 lakhs was debited to Purchase account, which results in a net credit of Rs. 31,99,431. The debit to purchase account, he argued is an integral and invisible part of the transaction. He further argued that the sum of Rs. 3.67 lakhs has been offered as income but at the same time, it cannot form part of the turnover as it has got nothing to do with the sale of pharmaceutical products. He argued that the entire ben....
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....hri K.C. Devdas contended that only the net amount of Rs. 31.99 lakhs alone ought to be considered as credit. He further relied on the published accounts of Indian Products Ltd. which is at page 46A of the paper book filed, to show that the net amount was credited to purchase account and therefore the sum of Rs. 3.67 crores should not form part of the turnover. 8. Shri K.C. Devdas has yet another alternative contention that the sum of Rs. 3.67 crores falls under clause 28(iiib) of the I.T. Act, 1961 and can be termed as cash assistance by whatsoever name called, and thus should be deducted and that 90% of this sum is to be added separately under the proviso to section 80HHC. For this proposition, he placed reliance on the judgment of the Ahmedabad Bench of the Tribunal in the case of Asstt. CIT v. Pratibha Syntax Ltd. [1999] 106 Taxman 32 (Ahd.) (Mag.) which is at pages 22 to 32 of the paper-book III. He submitted that the term whatever name called extended the meaning of cash assistance and thus it falls under section 28(iiib) of the Act. 9. Ld. Deptl. Representative on the other hand vehemently controverted the arguments advanced by the ld. counsel for the assessee and submitte....
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.... the Hon'ble Supreme Court in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148. It is his contention that the general meaning of the word "total turnover" should be given a wide connotation wherever it occurs in the Statute. He further submitted that the term "total turnover" defined under Explanation (ba) shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962. The expression "total turnover", he submitted also excluded any sum of export incentives referred to in clauses (iiia), (iiib) and (iiic) of section 28 of the I.T. Act, 1961. Thus, he argued that as the sums do not fall within the export incentives referred to in clauses (iiia), (iiib) and (iiic) of section 28, they should be considered in the figure of "total turnover". He urged that the order of the CIT (A) be upheld on this issue. 11. Arguing on ground Nos.5 and 6 of the appeal for the assessment year 1994-95,ld. counsel for the assessee submitted that the case of interest on deposits, the issue is covered in his favour by the judgment of this bench of the Tribunal in the case of Shiva Shankar Granites (P.) Ltd v. ITO [2....
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....as a percentage of exports from the figure of "total turnover" of the business of the assessee. The special deduction to an exporter under section 80HHC has to be computed on the basis of the following formula. Export turnover Profits of business x--------------- Total Turnover The benefit of deduction when worked out on the basis of this formula is not strictly confined to the profits derived from the export of goods or merchandise. The results of export business and the domestic business are not independently evaluated for arriving at the profits or loss of each segment for the purposes of this deduction. On the other hand, the export profits are determined as a part of the composite profits of the business. This position is well detailed by the learned Authors Chaturvedi and Pithisaria in the book on Income-tax Law, 5th Edition, II Volume at page 3547, paragraph 4 in Board Circular No.564 of dated 5th July, 1990 is given which is extracted below. "IV. Deduction under section 80HHC of the Income-tax Act, 1961-Clarifications regarding - Under the provisions of section 80HHC of the Income-tax Act, 1961, 100 per cent deduction is allowed to exporters in respect of profits der....
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....rom the export of goods or merchandise shall be the amount which bears to the profits of the assessee (as computed under the head "Profits and gains of business or profession") the same proportion as the "export turnover" bears to the "total turnover" of the business carried on by the assessee. 3. Several doubts have been expressed about how the deduction under section 80HHC is to be allowed. Representations received by the Board show that there is lack of uniformity amongst authorities in respect of allowing the aforesaid deduction. 4. Sub-section (3) of section 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of business under the head "Profits and gains of business or profession" irrespective of what could strictly be described as "profits derived from the export of goods or merchandise out of India". The deduction is computed in the following manner: - Export turnover Profits of the business x ---------------- Total Turnover 5. The Finance Act, 1990, has amended section 28 by inserting therein, clauses (iiia), (iiib) and (iiic) with retrospective effect with a view to ensuring that Cash Compensatory Support (CCS), Duty Drawba....
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....again will include the three export incentives). The operation of section 80HHC read with section 28, as amended by the Finance Act, 1990, can be illustrated by way of the following examples: ----------------------------------------------------------------------- Code I Code II Code III Code IV Exclus- 2/3 1/2 1/3 ively exp- export export export, ort busi- 1/3 1/2 2/3 ness domestic domestic domestic sale sale sale ----------------------------------------------------------------------- (Figures in lakhs of rupees) (i) Turnover (a) FOB exports 100 100 100 100 (b) Domestic sale - 50 100 200 (c) Total turnover (ia)+(ib) 100 150 200 300 (ii) Business profits before incentives (assumed figures) 10 15 20 30 (iii) CCS, DDK, I/L 10 10 10 10 Total profits of the business 20 25 30 40 (iv) Deduction under section 80HHC if entire export 100 100 100 proceeds i.e. 25 X ---- 30 X ---- 40 X --- 150 200 300 Rs. 100 lakhs is brought into India within the 20 = 16.67 = 15.00 = 13.33 stipulated period (v) Deduction under section 80HHC if only 50% of the export proceeds, i.e. Rs. 50 lakhs 50 50 50 50 is brought into 20 ....
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....dvance licences (ii) Value Based Advance Licences. Under (i) the quantities are specified and under (ii) the value of Raw Material to which we are entitled is determined on the basis of value Addition. The Company has adopted both the methods for evaluation. We may also add that right from the inception of the Business from 90-91 financial year and till date, none of the Import Entitlement have been sold. This is an Important Factor which seems to have escaped the attention of the D.C. inadvertently. As regards the accounting policy followed by the company from the inception without any change is: - (i) At the time of exports the value of import entitlement benefit is debited to "Import entitlement Benefit Account" and the Account is reflected under "Current Assets" in the Balance Sheet and the credit entered is given to "Import Entitlement Benefit Account" which is reflected as a separate item in the Schedule of Turnover. (ii) At the time of import of "Raw Material benefit received account" is debited and is credited to "Import Entitlement Benefit account". The raw material benefit received account is reflected in the accounts under "Raw Material Account" and is debited to ....
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....credit to the import entitlement benefit account. In other words, by this series of entries, the assessee company accounted for accrued benefits on account of import entitlement to the extent of Rs. 31,99,431 only. This figure is arrived at by netting off the entry both on the debit and credit side of the P&L Account, which is as follows: Credit Debit Import Entitlement Import Entitlement Benefit Account benefit A/c debited to Purchases Rs.3,67,25,867 Rs. 3,35,26,436 21. Thus, on exports being made, the right to receive import duty free raw material has been evaluated and taken as a credit. Contra to this entry is reflected in the current assets in the balance sheet as import entitlement benefit account. So, if the accrual system of accounting had not been adopted by this company, the export benefit would have been worked out in the following manner: 3,10,86,944 74,26,357 x ------------- =Rs. 19,47,707 11,85,30,524 i.e. the profits would have been less by Rs. 31,99,431, being the amount recognised only on account of accrual system of accounting from the profit taken at Rs. 1,06,25,788. Similarly, the "total turnover" would be less by Rs. 3,67,25,857 as the entr....
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....iples based on which they are excluded from total turnover hold good and the substance of the accounting entries have to be gone into for arriving at the truth of the matter and deduction should not be restricted to the assessee merely for following the opinion given by the ICAI on the method of accounting of the import benefits which recommended passing of certain notional entries. The truth of the matter is that only a net amount of Rs. 31,99,431 has been recognised as income by the assessee during this year as receivable under the accrual system of accounting and the profit of the import entitlements utilised by way of reduction in the cost of raw material imported due to elimination of an element of cost i.e., customs duty is already recognised in the P&L Account. Thus, one way of looking at the problem is, as profits of business is increased by Rs. 31,99,431 and this is also a numerator, the same figure should be added to the denominator "turnover" of Rs. 11,85,30,524. This is exactly the alternate claim of the assessee where he says that the net credit only should be taken into the "total turnover." In our considered opinion, this is the correct method of calculating the bene....
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.... the Legislature to have sub-clauses (iiia) or (iiic). Thus, this ground of the 'assessee fails, though the reason of exclusion of these export benefits from the term "total turnover" help in our arriving at a decision on ground No.2 of the assessee that only net benefit should be taken as part of "turnover." 23. Coming to ground No.5 of the assessee i.e., challenging the exclusion of the following receipts from the profits of the industrial undertaking, while computing the deduction under sections 80HH and 80-I of the Act, on the ground that they are not profits derived from the industrial undertaking, we hold as follows: 1. Import entitlement Benefit Rs. 31,99,431. This issue is covered against the assessee by the judgment of the Hon'ble Supreme Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579 (SC). Respectfully following the judgment of the Apex Court, the issue is decided in favour of the revenue and against the assessee. 2. Assessment year 1994-95 : Interest on Deposit Rs. 1,07,266 61,200 Assessment year 1995-96 : Interest on deposits Rs. 2,54,852 Interest on Loans Rs. 2,40,616 We find that the issue is covered in favour of the assessee by the jud....