TaxTMI 
TaxTMI 
2000 (6) TMI 117
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....ume 1 running into 100 pages including inter alia, earlier orders of the Tribunal for assessment years 1992-93 and 1993-94. Written submissions have been filed by the learned counsel placed in the paper book pages 1 to 17. Volume II of the paper book running into 166 pages contains particulars of Advance Import Licences utilised by the assessee-company for the import of Polyester Yarn as well as Dyes and Chemicals. Written submission made by the learned representatives before us have been duly considered and oral arguments made during the course of hearing held from time to time have also been considered by us. 3. The main issues arising before us relate to the accounting of export benefits as well as computation of deduction under section 80HHC. 4. First, we take up the assessee's ITA No. 463/Ahd/2001 Ground Nos. 1 to 4, challenging the addition of Rs.6,22,41,119 on account of notional debit of customs duty on the imported goods read as under:- (1) On the facts and circumstances of the appellant's case, the learned Assessing Officer and the Commissioner (Appeals) has grossly erred: - in not accepting the method of realizing and accounting the export incentives as up....
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....Schedule to the Customs Tariff Act, 1975 (51 of 1975); and (ii) the whole of the addition all duty leviable under section 3 of the said Customs Tariff Act where specifically claimed by the importer, subject to the following conditions, namely: (1) That the importer has been issued a Pass Book by the designated authority under paragraph 54 of the Export and Import Policy (hereinafter referred to as said Pass Book.) (2) The importer has been permitted credit entries of the amounts equal to basic/customs duties on the inputs used in the products exported by the importer as verified by an Assistant Commissioner of Customs: 6. Thus, under the Exim Policy 1992 to 1997, the assessee was entitled to import specified raw material without payment of customs duty on the basis of exports. The salient features of the DEEC Scheme are as below: (1) The object of the Scheme is to neutralise the incidence of customs duty on import contents of an export product. This neutralisation has to be provided by way of grant of duty credit against the export of a product. Under the Scheme, an exporter is eligible to claim duty credit as specified percentage of the FOB value of the exports m....
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....bsp; (3-4) ------------------------------------------------------------------------- 1 2 3 4 5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 7.1 In the aforesaid pass book, the credit entries represent recognition of incentive on exports and debit entries represent realisation of the same in the form of payment of customs duty of imports. According to the assessee, the DEEC book represents current account with respect to customs duty maintained by the Government of In....
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.... in various assessment years are reflected as under: ----------------------------------------------------------------------- POLYESTER FILAMENT YARN ----------------------------------------------------------------------- Assessment year Dyed Printed Sarees exported Cr. Cr. Dr. ----------------------------------------------------------------------- 1992-93 26.54 616.82 590.28 1993-94 &....
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.... it would be seen that for assessment year 1996-97 a sum of Rs.700.25 crores has been credited to the P&L Account and included under the head "other income" as per page 74 of assessee's paper book Volume I. At page 80 of the paper book, Schedule M details various items of income aggregated under the head "other income" which includes an amount of Rs.7,00,24,935 on account of duty benefit against export. The assessee-company has accounted for the duty benefit on the basis of customs duty rates as per the entries made in the DEEC Book as under: ----------------------------------------------------------------------- A. On import of Dyes Rs. 5,93,30,763 B. On import of Yarn Rs. 1,06,94,172 &nb....
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.... Rs. Rs. Receivable - Yarn - Dr 54,46,163 Entitlement Receivable - Dyes - Dr 23,37,653 To Duty Benefit Cr 77,83,816 ----------------------------------------------------------------------- (Being the entries passed, for accrual of Benefits as per mercantile system of accounting i.e. Exports made during the year but imports could not be made. Amount of benefit receivable on pending imports entitlement and realisable during coming year) It will be seen from the above th....
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.... V to the printed balance sheet indicating notes on accounts placed at page 84 of the assessee's paper book. Volume I which indicates that the company follows mercantile system of accounting and recognise income and expenditure on accrual basis. The revenue/income and cost/expenditure are accounted for on accrual basis. The liability on account of customs duty on imported materials in transit or in bonded warehouses is accounted for only in the year in which the goods are cleared from the Customs. All inventories other than finished products are valued at cost and finished products are valued at market price. Further export benefits/incentives are accounted for on accrual basis. Accordingly the estimated import duty benefit against exports effected during the year are accounted as incentives accruing by way of duty free imports of raw materials yet to be made against the exports. 11. The Assessing Officer while making the impugned assessment for assessment year 1996-97, in he backdrop of the aforesaid facts and features of the case, proceeded to disallow the amount of Rs.6,22,41,119 on account of utilisation of duty benefit debited to the Purchase Account. According to the Asses....
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....as income whereas a corresponding debit entry of customs duty made to the Purchase Account, duly supported by the customs duty liability as quantified and recorded in the DEEC pass book, has been disallowed. The learned counsel further submitted that the Income-tax authorities have not correctly appreciated the method of accounting the export benefits adopted by the assessee and made the impugned addition in violation of the accepted principles of accounting as well as the provisions of the statutory law. The learned counsel assiduously took us through the Duty Exemption Scheme and urged that the customs duty liability debited to the Purchase Account is the actual liability debited to the books as per the quantification and determination made by the Custom Authorities by making entries in the Bill of Entry and DEEC book. The liability has been satisfied through the utilisation of credit entry of exports incentives in the DEEC pass book so once the Revenue has accepted the customs duty benefit credited to the P&L Account as tangible and taxable income of the assessee, it does not stand to reason that the customs duty liability relatable to imports made by the assessee during the yea....
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.... obligation as specified under the Scheme. According to the learned DR since the assessee is entitled to exemption from customs duty on the imports, there is no occasion for claiming any expenditure as accrued business liability under section 37(1). Shri Dave heavily relied on the decision of the Gujarat High Court in the case of Shree Digvijay Cement Co. Ltd. in support of his contention that since the liability in question is a contingent liability, deduction has been rightly denied by the Revenue authorities. With regard to the credit on account of export duty benefit of Rs.7,00,24,935 included in the income and brought to tax by the Revenue authorities, the learned CIT argued that the point in issue is the admissibility of deduction of a fictional liability debited to the Purchase Account by the assessee and therefore the credit entry of Rs.7,00,24,935 is not the subject-matter of any discussion or debate and such a credit entry would not by itself support the assessee's case for deduction of fictional and contingent liability of Rs.6,22,41,119. The learned DR further argued that even if the customs duty liability debited to the Purchase Account is to be treated as accrued liab....
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....le transaction unconnected with the system and method of accounting of the assessee or in other words, the debit entry of Rs.6,22,41,119 is an integral part of accounting treatment of export incentives adopted by the assessee in the books of account? (2) Whether the method of accounting followed by the assessee is in consonance with accepted principles of accounting as enshrined in the accounting standards formulated by the Institute of Chartered Accountants of India? (3) Whether the debit entry of Rs.6,22,41,119 is hit by the mischief of section 43B. We have referred hereinbefore to the entries with regard to the customs duty benefit under the DEEC Scheme recorded in the books of account by the assessee whereby the entitlement of customs duty benefit accruing to the assessee as a result of exports of synthetic fabrics made during the year has been credited to the P&L Account amounting to Rs.7,00,24,935 under the head "Duty Benefit against exports". This amount has been credited on the basis of duty benefit quantified and determined as per the DEEC Book and credited as payable to the assessee. Further when the imports of yarn, dyes and chemicals are made, the customs duty ....
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....5 have accepted the method of accounting as correct. Once the method of accounting followed by the assessee has been accepted as correct, we feel that there is absolutely no justification for the Assessing Officer to disallow the deduction of Rs.6,22,41,119. In the instant case the method of accounting of the export benefits adopted by the assessee appears to be in conformity with the accounting standards formulated by the Institute of Chartered Accountants of India which is a body of professional experts in the field of accountancy. The Institute has issued accounting standards and made it mandatory for the members of the Institute to comply with the standards while conducting audit work. Such accounting standards have been formulated in conformity with the laws, customs, usages and business environment of the country. The Hon'ble Supreme Court has endorsed and approved the authoritative nature of the accounting standards formulated by the Institute. Reference in this connection may be made to the decisions of the Supreme Court in the cases reported in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 and Tuticorin Alkali Chemicals & Fertilizers Ltd.'s. For our present purpose the ....
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....arned DR responded to the query by observing that the focus of the entire controversy is the fictional and contingent debit to the Purchase Account and not the other unrelated issue like valuation of closing stock or inclusion of a similar credit entry on account of customs duty benefit. We are not persuaded to accept the contention of the learned DR since in our opinion the entire question of deduction of Rs.6,22,41,119 hinges on the system of accounting of the export benefits adopted by the assessee. Since the system of accounting is in our opinion in conformity with the accepted principles of commercial accounting as well as the provisions of law, we are not inclined to sustain the disallowance of Rs.6,22,41,119. The recent decision of the Gujarat High Court in Kaira Distt. Co-op. Milk Producers' Union Ltd.'s case quoted by the learned counsel renders direct support to the view taken by us. The facts in the case before the Hon'ble Gujarat High Court are as under:- "The assessee was a Co-operative Society engaged in the business of marketing milk and milk products. The assessee received raw material and spares through the Government from the UNICEF free of cost. As against the....
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....urpose of the provision would be violative of the accepted rules of interpretation. Admittedly the non obstante clause with which the section begins restricts the meaning of the word "payment" in supersession of the definition as contained under section 43(2). However, it would be unreasonable to contend that the word "actual payment" as used in section 43B envisages physical tender of cash as the only mode of payment. It is a cardinal rule of interpretation of statute that while interpreting a provision, textual as well as contextual perspective both should be given equal primacy and attempt should be made to synchronise textual meaning with the object and purpose of the statute. The learned DR has cited the decision of the Apex Court in the case of Shree Sajjan Mills Ltd. support of his plea for adopting literal meaning of "actual payment". However, their Lordships in the said decision while endorsing the strict interpretation of the statutes have held that the principle of strict interpretation does not exclude reasonable construction to give effect to the purpose or intention of any particular provision as apparent from the Act. In our opinion the assessee has made the payment ....
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....ble inasmuch as the liability of customs duty on account of import of raw material is an ascertained and crystallised liability which has been discharged by the assessee by way of adjustment against the customs duty benefit under the Duty Exemption Scheme. Therefore the decision does not help the Revenue. 21. The other decisions cited by the learned DR particularly on the question of accrued liability as well as applicability of provisions of section 43B have also been gone through by us and we find that they are entirely distinguishable and render no assistance to the department's case. 22. Ground Nos. (1) to (4) are allowed. 23. Ground No. (5) is against the sustaining of addition of Rs.2,40,000 incurred for raising share capital. The learned counsel submitted that the expenditure in question is admittedly of capital nature and is not allowable. However, it is urged that the assessee has not debited the amount in the P&L Account and therefore no disallowance should be made. We hold accordingly. The matter is restored back to the file of the Assessing Officer which the direction that in the case amount has been claimed by way of deduction, the disallowance would be mainta....
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....e Bank Ltd. AIR 1959 SC 713. (4) When there is a loss from the export business, the proviso to section 80HHC(3) should not be applied and the assessee should not be allowed deduction under section 80HHC in view of the decision of ITAT Madras Bench in the Krislar-Diesel Engines (P.) Ltd. v. Asstt. CIT [2000] 74 ITD 414. 28.1 These grounds concerned with the computation of deduction 801 HHC in the assessmemt year 1996-97 under appeal. The relevant facts having a bearing on the computation of deduction under section 80HHC may be briefly indicated. The assessee claimed deduction under section 80HHC amounting to Rs.7,16,03,516. The computation of deduction as claimed by the assessee has been reproduced by the Assessing Officer in para 6 of the assessment order as under:- --------------------------------------------------------------------------- STATEMENT-C --------------------------------------------------------------------------- Profit of the Business: &nb....
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....bsp; 3,258,446 2,932,602 ------------- -------------- 104,492,260 104,492,260 -58,315,994 --------------------------------------------------------------------------- &nbs....
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....------ 405339178 = 71603516 Total Deduction under section 80HHC (A+B) = 71603516 --------------------------------------------------------------------------- 28.2 The Assessing Officer has, however, allowed the deduction as per page 17 of the assessment order amounting to Rs.7,24,48,103. While making the assessment and allowing the aforesaid amount of deduction, the Assessing Officer observed that in case the assessee succeeds before the Appellate Authorities in the matter of allowing deduction of Rs.6,22,41,119 debited to the Purchase Account as above, in that case the assessee....
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....benefit credited to the P&L Account is covered under section 28(iiib). In fact, the Assessing Officer in the assessment order for the assessment year 1996-97 under appeal while computing the deduction under section 80HHC, himself has proceeded on the basis that the duty benefit credited to the P&L Account is profits under section 28(iiib). Without entering into any further discussion on the matter we feel that the export benefit of Rs.7,00,24,935 is covered under section 28(iiib) of the Act. 30. Shri Dave, the learned CIT-DR took us through the computation of deduction under section 80HHC as made by the assessee in the return and strongly urged that since the profit of business as per Explanation (baa) is a negative figure, the assessee has incurred loss in the export business and no deduction under section 80HHC is allowable to the assessee. Regarding the proviso appended to sub-section (3) of section 80HHC, Shri Dave argued that the function of the proviso is to carve out an exception to the main provision. He further added that the proviso cannot be construed as enlarging the scope of an enactment and therefore the proviso to section 80HHC(3) would be operative only if the as....
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.... the issue. The learned counsel further placed reliance on the following decisions of various Benches of the Tribunal: (1) A.M. Moosa v. Asstt. CIT [1996] 54 TTJ (Coch.) 193 (2) Avon Cycles Ltd. v. Asstt. CIT [1997] 59 TTJ (Chd.) 75 (3) Alpine Solvex Ltd. v. Dy. CIT [IT Appeal Nos. 510 and 1026 Indore of 1997] (4) Hindustan Fashions Ltd. v. Asstt. CIT [1998] 61 TTJ (Ahd.) 734 31.2 The learned counsel vehemently argued that in view of the aforesaid decisions of various Benches of the Tribunal including as many as three decisions of Ahmedabad Bench of the Tribunal, the entire issue stands covered and needs to be decided in favour of the assessee. The learned counsel submitted that while computing deduction under section 80HHC, the first component which is a negative figure should be ignored and the profit as worked out under the proviso should be adopted for the purpose of deduction under section 80HHC, as held by the various Benches of the Tribunal as above. 32. We have carefully considered the rival submissions and gone through the various decisions cited by the learned representatives before us. Since the entire issue of deduction involved in the Cross Objection ....
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.... with the proviso appended thereto consistently speak of profits. The word "Profit" is understood and known in the common parlance as well as in the commercial world as excess of incoming over outgoing. The computation section 80HHC(3)(a) provides for computation of profits derived from exports comprised in two components, say, (A) and (B). The profit component (A) is to be further increased by profit component (B) to arrive at the profits derived from exports for purpose of section 80HHC(1). It is to be noted that the section envisages both the profit components as positive figures and there is no occasion for any adjustment if the figure as worked out under Explanation (baa) is a negative figure. What section 80HHC(3) provides for is not the algebraic sum of the two profit components, one computed under the main section i.e. clause (a) and the other computed under the proviso to the section. Had the Legislature used the word "income", the word may have negative connotation also in the light of the inclusive definition of income u/s 2(24) of the Act. 35. The fact that the word "profit" is intended by the Legislature to have positive connotation, as commonly understood in the co....
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....is left after reduction. Thus the phraseology used by the Legislature while enacting section 80HHC(3) clearly indicates that the figure arrived at as per Explanation (baa) would be a positive figure (which includes a NIL figure also) provided the assessee has positive income under the business head. 38. It is interesting to note that the computation provision i.e. section 80HHC(3) has been so designed and conceived by the Legislature that an assessee engaged in export business as well as deriving income from domestic business would not be deprived of the benefit of the incentive provisions in the eventuality of loss incurred in the domestic business. Clause (a) applies to an assessee manufacturer who is exporting his goods as well as selling them in the domestic market. Under the main clause i.e. clause (a) of section 80HHC(3) the first profit component is to be calculated by excluding 90% of the export incentive in the same proportion as export turnover bears to the total turnover. Proviso stipulates that the aforesaid amount which is virtually deducted while calculating the first profit component is added back by virtue of the proviso. The method of computation thus laid down ....
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.... drafting the proviso cannot be ignored merely on the basis of certain rules of interpretation regarding normal function of proviso. Any such approach, which is suggested by the learned DR before us, would be contrary to the express provisions of section 80HHC(3) and would be impermissible in law. We are therefore inclined to reject the contention of the learned CIT-DR that if the profit component "A" is worked out at a negative figure, proviso becomes a mere surplusage. 41. The learned Sr. DR has vehemently urged that since "profits of the business" as computed under Explanation (baa) is a negative figure, the assessee has incurred loss in export business. In our opinion this contention is contrary to the facts and law and can not be accepted. As we have already pointed out that the profits derived from exports for the purpose of section 80HHC(1) are to be arrived at by the first profit component as computed under the main provision which is further increased by the second profit component as worked under the proviso thereto. The first profit component worked out under the main provision does not represent profits or loss of the export business. The figure of profits from expor....