TaxTMI 
TaxTMI 
2007 (6) TMI 242
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....ed is totally contrary to the provisions of law and facts on the record and hence the addition of Rs. 14,36,198 may kindly be deleted in full." 3. The solitary ground of the Revenue is that the learned CIT(A) has erred in deleting the trading addition of Rs. 80,97,842 by estimating G.P. rate of 22.5 per cent as against G.P. rate applied by the AO at 27.3 per cent. 4. We have heard the parties. The brief facts of the case are that the assessee is a partnership firm engaged in export of large types of PVC wires, which have been manufactured by the assessee. A comparative chart of the total turnover, gross profit and net profit for the year and immediately preceding years is as under: ------------------------------------------------------------- Asst. year Total turnover Total G.P. G.P. % Total N.P. ------------------------------------------------------------- 1999-2000 12,16,00,549 4,05,14.550.58 33.31% 3,71,80,058 2000-2001 12,37,16,134 3,74,90,793 30.30% 3,35,00,407 2001-2002 16,87,06,712 3,65,22,892 22.0....
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....item. This is a matter of technicalities as well as practice of trade. (F) With regard to variation in raw material consumption compared to the last previous year, it was explained that process of import of raw material, its consumption and sale is strictly under observation of customs authorities, hence no leakage is possible. No standard has been applied for input and output for taking licenses for consumption of raw material, which is on the basis of self-declaration and depends upon order to order as per requirement of buyer." Accordingly, it was claimed that merely on the basis of some technicalities books of account cannot be rejected. The AO was not satisfied with the explanation of the assessee for the reason that the production of electric cable is a technical and standard process where the consumption of copper, for one kilometer of cable even in weight will be the same. The power load for which a particular cable is to be used decides the thickness of the copper wire and accordingly insulation on the cable of a particular type will be the same. The EXIM policy of Government of India provides input output norms for duty exemption schemes is based on input output ....
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....f orders. (f) The import and export of assessee is on strict supervision and control of customs authorities. (g) The cost of copper is also controlled by LME (London Metal Exchange) Quotations of rate of copper at London Metal Exchange were also submitted to prove as there was an increasing trend in the value of copper." The AO was not satisfied with the explanation of the assessee and observed that at the most a fall in gross profit by about 3 per cent may be justified because of the reasons mentioned by the assessee hereinbefore. Accordingly, the AO estimated the gross profit at 273 per cent on a turnover of Rs. 16,87,06,712 at Rs. 4,60,56,932 as against gross profit declared by the assessee at Rs. 3,65,22,892, thus making a trading addition of Rs. 95,34,040. The learned CIT(A) confirmed the rejection of books of account vide para 3.4 of his order and by accepting the explanation of the assessee, directed the AO to apply a G.P. rate of 22.5 per cent on the declared turnover by the assessee, thus giving a relief of Rs. 80,97,842 and sustaining an addition of Rs. 14,36,198. 5. We have considered the facts of the case. The learned Authorised Representative at the outset ....
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....and certificate by the chartered engineers, is available in the paper book 9-14. (iv) The JDGFT on the basis of such an application and after evaluating the same, permits the assessee to import such items, who is bound to consume for its own production and then to finally export. (v) To ensure that such a duty-free imported raw material is not sold out in the market, a separate duty exemption entitlement certificate (DEEC) is issued by the JDGFT for the purposes of import and export as well. (vi) Notably, every entry of the imported duty-free raw material is made and all exports made against such an import, are further entered in these books. (vii) Further notably, these entries are made by a separate and independent Government agency, i.e. customs authorities under the Central Excise and Customs Department of the Ministry of Finance, The learned Authorised Representative further argued that the norms and standards of the consumption of raw material are fixed in advance by the concerned authorities and the assessee is bound to consume the raw material in the same ratio as permitted and licensed by the concerned authorities. The AO has not pointed out any specific def....
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....ponding increase in the selling prices to recoup this extra burden for the reason that purchases made earlier were consumed towards the old orders in hand. Being bound by the predetermined selling price, the assessee was not in a position to make a further increase on this ground, in the absence of any escalation clause. On this issue, the AO has cited certain examples at p. 11(e) to the effect that there has been increase in the prices of copper by roughly about 35 per cent, 25 per cent and 28.3 per cent and therefore, rejected the assessee's contention. However, the AO has not been fair inasmuch as the assessee filed various examples to support but were not considered. It is submitted that three instances cited by the AO were the only examples on which he could lay hands after deeply investigating the complete record for a long period of two years. However, in all rest of the items, the prices of raw material were found to be higher whereas, the sales bills were on a lower side for the reason that old orders already in hand at a predetermined prices were also executed. As against this, in the three cited cases, the higher sales prices from last year were for the reasons that the ....
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....year, the opening balance of duty difference indicates the availability of the duty-free raw material. Thus, this process goes on. The difference between the opening balance and the closing balance Rs. 98,78,483 (Rs. 2,99,98,616 and Rs. 2,01,20,133 respectively) is the cost, which the assessee exporter finally suffered. Thus, it cannot be disputed that such a difference is a part of the direct cost. Since there is a variation in the rates of import duties, there is always difference and consequential also, there will have to be a difference in the G.P. rate. 9. The Department has agreed in principle with regard to our claim that due to duty difference which was a part of direct cost and because of this reason the gross profit is coming down not only in this year but also in later years and has already assessed and allowed our claim on this ground in later years, even in the scrutiny assessment framed under s. 143(3), for asst. yr. 2004-05, wherein gross profit declared by the assessee at 7.81 per cent. 10. In the case of Emkay Exports also on exactly similar facts, addition made stood deleted. We refer assessment order for asst. yr. 2003-04 wherein gross profit declared by th....
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....nd facts on the record and hence, interest, income of Rs. 4,38,342 kindly be held assessable as 'Business income' and deduction under s. 80HHC be allowed accordingly. 2.2 Alternatively and without prejudice to above The learned CIT(A) also erred in law as well as on the facts of the case in not even allowing the benefit of netting against the payment of interest of Rs. 13,16,634 to the bank hence the same may kindly be directed now." 13. The brief facts of the case are that the assessee has received interest on FDRs amounting to Rs. 4,84,342 and assessee has paid interest amounting to Rs. 13,16,634 on the loans taken from the bank. The assessee has claimed the net interest expenses of Rs. 8,78,292. The AO treated the interest on FDRs amounting to Rs. 4,84,342 as income from other sources as against income from business claimed by the assessee and did not allow the netting of the interest. This action of the AO was confirmed by the learned CIT(A). 14. We have considered the facts of the case. The learned Authorised Representative had strongly argued that the income from interest is a business income since the fixed deposits were kept as a margin money to avail on overdra....
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....en followed by the Kerala High Court in the case of CIT vs. Vaikundam Rubber Co. Ltd. (2002) 173 CTR (Ker) 397 : (2002) 253 ITR 417 (Ker) where interest paid by the assessee was not an allowable deduction against the interest income under s. 57(iii) of the Act. Therefore, following the decision of the apex Court in the case of CIT vs. Dr. V.P. Gopinathan, the interest paid by the assessee is not an allowable deduction from the interest earned by the assessee. The immediate source of income of interest is from fixed deposits with bank and not from export business and therefore, income from interest amounting to Rs. 4,38,342 cannot be said to be income from export business and also as discussed above, a deduction of Rs. 13,16,634 for interest paid cannot be allowed as a deduction from the gross interest receipts. Therefore, the AO has rightly allowed Rs. 13,16,634 as deduction under s. 37(1) and s. 36(1)(iii) of the Act and has rightly taxed Rs. 4,38,342 as income from other sources. 17. Also, to support the abovesaid view and in the facts of the following cases, the income was held not to form part of profits derived from the export: (1) Nanji Topanbhai & Co. vs. Asst. CIT (19....
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.... (2003) 183 CTR (Ker) 176 : (2003) 263 ITR 10 (Ker), SLP dismissed by the Supreme Court: (2004) 265 ITR (St) 38 (SC) [Interest on fixed deposits as the same was income from other sources]". 18. The deduction in respect of profits retained for export business is provided under s. 80HHC(1) which reads as under: "80HHC(1): Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise." 19. By reading the said s. 80HHC(1), it is clear that s. 80HHC(1) overrides all other provisions contained in s. 80HHC. Therefore, for claiming deduction under s. 80HHC(1), there should be profits derived by the assessee from the exports of such business. There should be a direct nexus between the profits, on the one hand and the export activity, on the other hand as held in the case of CIT vs. K.K. Doshi & Co. (2000) 163 C....
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....ourt rejected the submission of the appellant by relying upon the decision of this Court in Cambay Electric Supply Industrial Co. Ltd. vs. CIT (1978) 1978 CTR (SC) 50 : (1978) 113 ITR 84 (SC), where this Court had clearly stated that the expression 'derived from' had a narrower connotation than the expression 'attributable to': 'In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as for instance in s. 80J. In our view, since the expression of wider import, namely, 'attributable to', has been used, the legislature intended to cover receipts form sources other than the actual conduct of the business of generation and distribution of electricity.' The word 'derived' has been construed as far back in 1948 by the Privy Council in CIT vs. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC) when it said: 'The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But, the enquiry should stop as soon as the effective source is discovered. In the genea....
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....vides for method of computation of deduction for the purpose of sub-s. (1) of s. 80HHC. As Explanation (baa) speaks of reduction of certain sums etc., provisio to s. 80HHC(3) speaks of inclusion of certain sums referred to in cls. (iiia), (iiib) and (iiic) of s. 28 and does not speak of inclusion of interest income. Sec. 80HHC(3) reads as under: (3) For the purposes of sub-s. (1)- (a) Where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee; (b) Where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export; (c) Where the export out of India is of goods or merchandise manufactured or processed by the assessee and of trading goods, the profits derived from such export shall,- (i) in respect of the goods or merchandise manufactur....
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....to the provisions of law and facts on the record and hence the appellant be held entitled to the deduction on the entire amount including Rs. 2,76,10,955 (correct being Rs. 2,01.20,132 ) and deduction be allowed in full." 24. The brief facts of the case are that the assessee claimed a deduction of Rs. 73,35,845. The AO allowed the deduction as per computation of income at pp. 24 and 25 of his order as under: Income from business as shown by assessee in return of income Rs. 3,13,66,380 Less: Interest taxed under the head "Income from other sources" (para-3) Rs. 4,38,342 --------....
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.... India are distinguishable and are on different facts of the case. In the case of Cambay Electric Supply Industrial Co. Ltd., the profit is arising due to actual conduct of business. Whereas in the case of Sterling Foods, the facts were different and there was a sale of import entitlement which was not includible in the income for computing the special deduction. In the present case, the issue is not the sale of the import entitlements in the open market. The assessee being a 100 per cent exporter is covered by the advanced licensing which is also a case of duty drawback under the quantity base duty exemption entitlement wherein the assessee exporter was bound to consume the imported duty-free raw material for its own captive consumption and such a license was not at all transferable which is clearly mentioned on the license itself. Therefore, the present case stands at the same footing as in duty drawback the amount is refunded whereas in the present case, there is a direct reduction of the cost. The AO admitted at various places that the amount of the duty difference in the shape of availability of the duty-free raw material, was a part of direct cost. The assessee reduced the sa....
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....s palpable that the deduction is to be allowed on profits and gains derived from "any business of" an industrial undertaking. It shows that the admissibility is with reference to profits and gains derived form any business of an industrial undertaking. Thus, it becomes vivid that if the condition of industrial undertaking is satisfied, then the assessee becomes entitled to deduction in respect of profits of any business of such industrial undertaking. Any business may be that of manufacturing or processing or otherwise. More or less the same phraseology continues under s. 80-IA and under s. 80-IB in this year also. At this juncture, it is pertinent to note that the legislature has set the scope of deduction under s. 80-IA by using the appropriate phraseology when seen in contrast with that used in s. 80-IA. Whereas the latter provision grants deduction in respect of 'profits and gains derived from an industrial undertaking', the former provides for deduction on 'profits and gains derived from any business of an industrial undertaking'. As long as the income keeps on emanating from 'any business' of an industrial undertaking, it would remain to qualify for deduction under this secti....
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.... case also, the benefit of the duty difference was a part of the business of the eligible undertaking directly and hence qualifies for deduction. Further, the amount of such a benefit has been treated to be assessable as a business profit under s. 28(iiid) therefore, the legislative intent is also very clear to treat such benefit to be a businessman (sic). The case relied upon is Asstt. CIT vs. Pratibha Syntax Ltd. (1999) 63 TTJ (Ahd) 409 : (1999) 106 Taxman 32 (Mag)(Ahd). In the past, the Revenue did not give a different treatment on these issues. No such disallowance/reduction in the claimed deduction was made. In asst. yr. 2004-05, the submissions of the assessee were accepted. Thereafter also the claim made has been accepted. Also, in the case of sister-concern, namely, M/s Emkay Export, the issue stands decided in favour of the assessee. This is evident from the assessment/appellate order. Alternatively without prejudice to above submission and case law, still if there are certain decisions against, the issue involved is clearly debatable and it is settled that view favourable to the assessee has to be adopted as held in the case of CIT vs. Vegetable Products Ltd. (1973) CTR (....
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....se are that the assessee had first claimed the deduction under s. 80HHC at Rs. 2,50,74,703 @ 80 per cent and also separately made a claim of deduction under s. 80-IB @ 25 per cent of the eligible profits at Rs. 78,35,845 totalling to Rs. 3,29,10,548. However, the same was restricted to the gross total income of Rs. 3,13,66,380 in view of the restriction put by the s. 80A(4). The AO however, first allowed the deduction under s. 80-IB and thereafter reduced the deduction under s. 80HHC by Rs. 32,12,780 from the eligible export profits of business of Rs. 4,04,52,078. The action of the AO was confirmed by the learned CIT(A). 32. The learned Authorised Representative (sic) of the assessee being entitled to deduction under s. 80HHC and also having been a new industrial undertaking was also entitled to deduction under s. 80-IB @ 25 per cent, hence made a separate claim under both the provisions. Accordingly, claim made by the assessee under s. 80HHC was of Rs. 2,50,74,703. The AO while computing the deduction under s. 80HHC however, reduced the amount of deduction under s. 80-IB of Rs. 32,12,780 (as computed by the AO and separately challenged by the assessee) out of the income from bu....
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....y the assessee @ 80 per cent under s. 80HHC and @ 25 per cent under s. 80-IB, in any case did not exceed the gross total income. Hence, both the provisions operate differently and the deduction under one section need not be curtailed because of the other. yet assuming so, it is submitted that the very underlying object and intention of the legislature, which is manifestly clear from the notes on clauses of Budget 1988-89, reproduced in verbatim by the learned CIT(A) at pp. 18-19 is that in certain cases, the assessee claimed the deduction more than 100 per cent under different provisions and therefore, with a view to provide suitable statutory safeguard and to prevent such taxpayer from taking undue advantage of the existing provision. Hence, the said amendment was brought on statute book. Applying the rule of liberal interpretation of an incentive provision, and intention of the legislature as above and keeping the admitted fact in mind that in the present case the assessee did not claim more than 100 per cent, hence the deduction as claimed has to be allowed in full without any artificial reduction as done by the AO. A bare reading of s. 80-IA(9) also clearly supports the views. ....