TaxTMI 
TaxTMI 
1999 (2) TMI 673
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....eri For the Respondent : D.J. Tralshawala ORDER Per Pradeep Parikh, A.M. - The assessee is in appeal before us against the order of the ld. CIT(A) dated 28-9-1997 for assessment year 1994-95. There are two main grounds in the appeal, one relating to deduction under section 80HHC of the Income-tax Act, 1961 (`the Act') and second, relating to deduction under section 80-I of the Act. Four main issues are involved in the ground relating to section 80HHC which are as follows : (a)Whether premium received by the assessee on sale/surrender of import licences is to be included in the total turnover or not. (b)Whether the profits of the business have to be reduced by 90% of gross labour charges or by 90% of net labour charges received by the assessee. (c)Whether the profits of business have to be reduced by 90% of gross interest received by the assessee or by 90% of the net interest received by the assessee. (d)Whether the profits of the business have to be increased by 90% of the net premium received from the Government of India. 2. The assessee firm is engaged in the business of importing of rough diamonds, processing them and exporting of cut and polished dia....
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....nd hence could not form part of "total turnover". Reference was then made to section 28. Referring to clause (iiia) of section 28, it was submitted that since the assessee had sold the licences held by it, it was a profit under section 28 and it was also to be excluded from the "total turnover" as provided in clause (ba) of the Explanation. Since the licences were not sold in the open market, but were surrendered to the Government, it was also submitted that if the transaction is not considered to be a sale of licence, then by virtue of surrendering them to the Government, the premium received as a result thereof should be treated as cash assistance as mentioned in clause (iiib) of section 28. Thus, in nut shell, the contention of the ld. counsel was that the total premium received by the assessee on sale/surrender of import licences fell either under clause (iiia) or clause (iiib) or under both, of section 28. This being the case, it was contended that as per clause (ba) of the Explanation the sum of Rs. 51,93,829 cannot be treated as turnover. So far as this aspect is concerned, the ld. D.R. relied on the order of the Assessing Officer. 4. We have given our due consideration t....
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....In the instant case, assessee was granted such licences under the Imports (Control) Order, 1955 on exports effected by it. Thus assessee earned this incentive on fulfilling its export obligation. The licences could have enabled the assessee to import rough diamonds at a lower cost. However, with the introduction of full convertibility of the rupee, exporters who had completed their exports but had not completed their imports stood to lose if goods were to be imported under the licences they held. Hence, in order to adequately compensate the exporters, Ministry of Commerce, Government of India announced a scheme vide its Circular No. 1/2/REP/74-EPC (pt) dated 5-5-93, whereby the Government was to pay cash amount equivalent to 8% of their unutilised import licences. The sum of Rs. 15,47,005 represents this 8% of unutilised import licence. 6. Earlier, we have already mentioned that grant of import licence to an exporter by a governmental authority under the import-export policy of the Government is an incentive earned by the exporter. This incentive could not be put to intended use profitably on account of change in governmental policy itself and hence government offered cash equiv....
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....acquired from any other person), and clauses (iiib) and ( iiic) of section 28, the same proportion as export turnover bears to the total turnover of the business. 9. From the above discussion it is clear that after determining export profit on trading, what has to be added is the profit on sale of licence. When profit of an independent item is added to already determined profits of business, logically, the question of including sale proceeds of a licence does not arise. Both the profits are determined independently, hence the sale proceeds of the two items need not be and should not be mixed. The accounting logic is specifically approved by the Legislature by providing in clause (ba) of the Explanation to section 80HHC reproduced earlier. Thus, the amount of Rs. 36,46,824 shall not form part of total turnover. Accordingly, the first issue is decided in favour of the assessee, that is, the amount of Rs. 51,93,829 (Rs. 15,47,005 + Rs. 36,46,824) shall not form part of the total turnover. 10. Since issue (d ) mentioned in para 1 is closely related to the issue determined above, we take up the said issue before taking up issues at (b) and (c) mentioned in first para above. The AO....
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....ssee. It doesn't matter that the same were surrendered to the Government and Government itself paid cash. The fact remains that these are not incentives earned by the assessee and hence cannot claim deduction on the same. If assessee's plea to include 90% of such premium in export profit is accepted, at times it may lead to disastrous situation. A non-exporter may acquire licence in the open market and on earning profit thereon, may claim deduction under section 80HHC. The argument of the assessee that it is not a trader in licence is also not helpful to it. To a regular trader in licence, of course, the deduction cannot be allowed. At the same time, in case of a regular exporter also no distinction can be made for the reason that it is not an incentive in his case also. Thus, we hold that export profit derived as per clause (a) of sub-section (3) shall be increased by 90% of Rs. 15,47,005 only and not by 90% of Rs. 21,34,030. This finishes us with issues(a) and (d) mentioned in first para of this order. 12. Now we take up the remaining issues connected with the deduction under section 80HHC. They are, whether, profits of the business have to be reduced by 90% of gross l....
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....s of the business" has been given in clause (baa) of the Explanation to section 80HHC. We reproduce the said clause below for immediate reference : "(baa) `profits of the business' means the profits of the business as computed under the head `Profits and gains of business or profession' as reduced by- (1)ninety per cent of any sum referred to in clauses (iiia), (iiib ) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2)the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India." From the above it is clear that profit of the business first has to be computed under the head "Profits and gains of business or profession". Having done so, the profit so determined has to be reduced by the sums specified in sub-clauses (1) and (2) above. It is obvious that when profit is determined under the head "Profits and gains of business or profession", what are included in it are the net receipts of the various components that go to make the profit under that head. The object of reducing the profits by the ....
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....y. 15. We now come to the last issue in connection with the deduction under section 80HHC. Here also, as in the case of labour charges, in its original profit & loss account assessee had shown a net debit of Rs. 34,24,095 as interest paid to the bank. No credit on account of interest was reflected in the profit & loss account. However, at the insistence of the AO, assessee furnished a detailed profit & loss account in which bank interest debited amounted to Rs. 36,21,595 (Rs. 36,89,553 - 67,958) and bank interest credited amounted to Rs. 1,97,500. This, that is Rs. 36,21,595 - Rs. 1,97,500 gives a net amount of Rs. 34,24,095 which was shown as net debit in the profit & loss account. AO, applying the same logic as in the case of labour charges, reduced the profits of business by 90% of Rs. 1,97,500. The submissions of the ld. counsel and the ld. D.R. are the same as they were in respect of labour charges above. In para 12 above we have already observed that credits and debits of the same nature should be netted out against each other in order to avoid any distortion in the profits. The same analogy will apply in case of interest also. It cannot be denied that despite earning inte....
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....with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction." Further, referring to the decision of the Supreme Court in the case of Chalapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 , their Lordships observed as follows : "In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income." 18. Understanding the above two decisions, in our opinion it follows that whereas a revenue receipt cannot be adjusted against capital expenditure, a capital receipt can be so adjusted. On the same analogy, in our view, while computing profits of business for the purposes of section 80HHC, r....
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.... no part of Rs. 36,46,824 shall go to increase the profits of business (para 11). 20. The last ground relates to the denial of deduction of Rs. 84,428 under section 80-I of the Act. AO relied on the decision of the Bombay High Court in the case of CIT v. London Star Diamond Co. (I) Ltd. [1995] 213 ITR 517/ 79 Taxman 276. He was of the view that assessee was engaged merely in the activity of processing diamonds and not in any manufacturing activity and hence deduction under section 80-I could not be allowed. CIT(A) upheld the disallowance. 21. We have given our due consideration to the rival contentions. The issue, in our opinion, is almost settled by the Bombay High Court in the cases of London Star Diamond Co. (I) Ltd. (supra) and CIT v. Sterling Foods (Goa) [1995] 213 ITR 851/ 79 Taxman 381 . In the case of Sterling Foods (Goa) (supra) the Bombay High Court was seized with the issue as to whether processing of prawns amounts of manufacture or not. The High Court held that before processing the product was prawns and after processing also it has remained prawns. Hence, no new product has come into existence on account of processing. In the case of London Star Diamond Co. (I)....