TaxTMI 
TaxTMI 
1985 (9) TMI 103
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....broad. The export turnover is substantial and in the account year under appeal the cif value of the goods exported is shown at about Rs. 1.40 crores. (b) Under the rules and schemes of different Government departments in force an exporter of goods is entitled to claim certain financial benefits. The three main benefits are (i) drawback, (ii) cash assistance, and (iii) replenishment licences. Brief notes regarding each of these schemes are as under : (i) Drawback The IAC has written a short note on this point in para 13 of the assessment order. For the sake of convenience the same is repeated below: 'All goods imported into India attract a levy of customs duty by virtue of the provisions of section 12 of the Customs Act, 1962 (Act 52 of 1962). Such duty is levied at the rates specified in the Indian Tariff Act, 1934 or any other law for the time being in force. Normally the import levy is intended to be attracted only by the goods that are imported for being used or consumed in India. Similarly, a large number of goods manufactured within India attract an internal levy in the form of Central excise duty under the Central Excises and Salt Act, 1944 (Act 1 of 1944) and the Central....
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....porter gets entitled to as a result of the exports carried out by him. (c) The manner in which the total financial effect of each export transaction ought to be recorded in the account books or more particularly the manner in which the financial effect of the right to claim export benefits, which is embedded in each export transaction, ought to be recorded when recording the export turnover of the trade---is the main subject matter of the dispute. The assessee follows the mercantile method of accounting for recording the sale proceeds. The purchasers account is debited and the sales account is credited with the invoice price of the goods as soon as the goods are despatched. The export benefits as at (b)(i) and (ii), however, are taken credit for in the accounts only as and when actually received. For the replenishment licences no entry is passed when the export sale is completed or even when the licences are received. The financial effect of the advantage of receiving the replenishment licence automatically gets reflected in the accounts when the assessee imports goods free of duty because then the debit to trading account is that such loss and the profit reflected is that much mo....
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....ner (Appeals) approached the issues involved on the following lines as mentioned in para IV of his order: (a) Now the question to be answered as at para II(a) is whether the IAC is right in his view that the method of accounting followed by the assessee does not reflect the true profits of the business. That, however, raises the question, what then is the correct meaning of 'true profits' as understood under the Income-tax Act, 1961 ('the Act') as different from the profits revealed by the method of accounting followed ? (b) it must be noted that the IAC does not say that the accounts are not correct and complete. In that case he would have had recourse to section 145(2) of the Act but that is not the case. The view taken is that the accounts are correct and complete but the method followed does not reflect the true profits. (c) This means that the IAC has his own concept about what according to law ought to appear as 'true profits' on these facts and he rejects the method of accounting because he finds that the method does not reflect the figure which is his concept of 'true profits'. (d) What exactly is the concept of 'true profits' as understood by the IAC in this regard has....
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....benefits, vide para IX. The stand of the assessee was that duty drawback and cash assistance formed independent and separate sources of income as different from the export business. This plea was rejected by him relying upon Seth Shiv Prasad v. CIT [1972] 84 ITR 15 (All.). 6. The next question considered in parax is when does the 'income' which is embedded in these revenue receipts accrue to the assessee. After considering various authorities and for the reasons recorded in paras XII, XIII and XIV, following the decision of the Gujarat High Court in Ahmedabad Mfg. & Calico Printing Co. Ltd. v. CIT [1982] 137 ITR 616, he came to the conclusion that the IAC erred in bringing to tax in this accounting year itself, the estimated amount of the future advantage represented by the duty exemption attached to replenishment licences issued in respect of the export sales of this year. 7. He further went on thus. As regards the drawback duty and cash assistance, the question is the same. The benefits for which the debt becomes due by the Government is created in favour of the assessee only when the Government department sanctioned the drawback or the cash assistance. For this, he drew suppor....
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....sion was factually wrong because the right to claim drawback of duty is statutory one. He then referred to Central Excise Rules, 1971, consequent to statutory enactment and then submitted that at least drawback accrued to the assessee, the moment export was made. The decision of the Tribunal in the case of Hindustan Fashions (P.) Ltd. was distinguishable on account of the fact that the claim was dependent upon the sanction of cotton mills federation which is not the case here. He then placed reliance on rule 3 of the Central Excise Rules and made detailed submissions as follows: 1. The income of the assessee is to be computed under the head 'Profits and gains of business or profession' (section 28 of the Act). There is no dispute between the parties on this point. The assessee is carrying on the business of sale and purchase of cloth as well as manufacturing of fabrics and sarees. Sales are made in the home market as well as in the foreign market. 2. The income referred to in section 28 is to be computed in accordance with the provisions contained in sections 30 to 43A of the Act. 3. Profits and gains of business carried on by the assessee-company during the previous year should....
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....able to the exporter by way of drawback. Customs and Central Excise Duties Drawback Rules, 1971 are framed under section 75 of the Customs Act read with section 7 of the Central Excises and Salt Act, 1944. Rules 3, 4, 6 and 11 of the above Rules show that as soon as the goods are exported, the exporter is entitled to the drawback. Cash assistance: (b) (Para 13, page 27, of the Commissioner's order in paper book) The object of the same is to pay cash assistance and freight subsidy across the counter soon after each shipment, and optional system of fortnightly payment has also been provided. This scheme also shows that on exports made, the assessee is entitled to cash compensatory benefit. Import entitlement: (c) (Paper book, page 6) The replenishment entitlements are determined on the basis of fob value of goods sold by export. Book on Import Policy Chapter XVIII deals with the manner of providing import replenishment of the materials required in the manufacture of products exported. The case law shows that cash assistance and customs drawback have direct nexus with the export of goods and is so connected with export of goods. In support of above, reliance was placed on Ahmed....
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....tem in the sense that incentive benefits were shown on receipt basis, since the assessment year 1974-75, (b) book results shown in the aforesaid manner were accepted after scrutiny till the assessment year 1978-79, (c) provisions of section 145(2) are not applied, and (d) that the replenishment licences were not transferred by the assessee to anyone and no licence was used for import of capital goods. According to him, the material aspects required to be considered were whether income accrued or arose during the previous year and whether it is in the consequence with the system of accounting regularly followed by the assessee. This again shall have to be based after keeping in mind mechanism of various facts of claim pertaining to drawback and cash assistance. With regard to the replenishment licences, it was stated that value or benefit, if any, could be obtained by the assessee, only in future and that too only if raw material was imported not otherwise. Therefore, the revenue was seeking to tax national gains which is not permitted. Bringing to our notice, endorsements on various licences under which the goods were imported, it was stated that at various occasions the assessee c....
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.... claim is allowed only on lower weight and, therefore, there is invariably difference between the amount for which the application is made and amount sanctioned for refund. Only after adjudication of the claim of the assessee, order for refund is passed. Bringing to our notice one instance, where application was delayed by three months by the Textile Committee for issuing the final inspection report, the application was treated as time barred. On appeal, the Appellate Controller also rejected the claim as time barred. This was the unique case where the assessee suffered even because of the lapse on the part of the Government officials. Vide press cutting dated 18-4-1982, it was sought to be argued that withdrawal of duty concession was an instance of unilateral action by the Government without prior notice to the trade. Again, as per the public notice dated 15-3-1982 no drawback was disbursed for the past six months because the claimants were required to bring the evidence to prove that proper Central excise duty had been paid without protest by the manufacturers and this was an impossible task for the claimants. A notice dated 8-4-1981 appearing at page 234 was pressed into servic....
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....ur Mills (P.) Ltd. [1964] 53 ITR 134 (SC), Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473 (Bom.), Ahmedabad Mfg. & Calico Printing Co. Ltd.'s case and CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC). 13. In reply the standing counsel for the revenue stated that withdrawal of any incentive would only be prospective as per principles of promissory estoppel. On a query from the Bench regarding limitation factor of the time, regarding claim for refund, etc. it was stated that the same could be considered appropriately in future by way of deduction as business loss. The decision of the Gujarat High Court in the case of CIT v. Godhra Electricity Co. Ltd. [1983] 140 ITR 657 was pressed into service to support that the claim of the assessee was backed by law and not backed by contract. In directors' report, there was a binding statement as clarified to the shareholders and this supported the revenue's stand regarding real income theory. 14. We will take first the aspect of integrated or composite business receipts. Reference is required to be made to clause (iv) of section 28. The said clause was inserted by the Finance Act, 1964 with effect from 1-4-1964. It reads as under: ....
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....nsideration extraneous to sale contracts. That is why usually rebates/discounts, etc. (not as per terms of contract but as per practice) are shown by the traders only on receipt basis. 16. The theory of integrated business receipts cannot find place in science of recording transactions known as accountancy though it forms part of vital cord of business economics. For it will be impossible to forecast and envisage and also evaluate incidental gains of export sales because at a relevant time it will not even be known by the traders what benefits in totality would accrue and materialise, not to talk of evaluation in money terms, e.g., amount of reduction in tax incidence on account of lower rate of tax such as found in section 80HHC of the Act with amendments from time to time. There may even be similar incentives offered by the Government of the country of the importer because of preferential or favourable treatment in respect of Indian goods. Who is going to enumerate such benefits from export transactions so as to determine and include the value together with the export business receipts ? The income sought must be capable of being processed as was held in B.M. Kamdar, In re [1946....
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....term ; but, when used adjectively, it may have a restricted area of reference : as, the field of accountancy, a school of accountancy, a journal of accountancy ; but the profession of accounting, an accounting system, a course in accounting, an accounting supervisor." Again the same book gives meaning of 'Accounting system' as follows: "Accounting system: The principles, methods and procedures relating to the incurrence classification, recording and reporting of the transactions of an organization. 2. Hence the process of operating, testing and accumulating, under such a system, in accordance with controlling internal administration policies, and with any regulatory requirements of higher authority. 3. The books, records, vouchers, files and related supporting data resulting from the application of the accounting process ; accounting records." 20.2 In the above context, proviso to section 145(1) gives power to the ITO to determine the income in his own way provided he gives a finding that the 'method' employed is such that the income cannot property be deduced. This would require him to evaluate and appraise the trading results reflected depending upon 'method of accounting'.....
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....f this, an instance is also cited where because of delay on the part of officials in the office of the Textile Commissioner, the refund claim got time barred and even on appeal, it was decided as such. With these facts, we are unable to appreciate the support drawn by the revenue (probably referring the case of Motilal Padmpat Sugar Mills Co. Ltd. v. State of Uttar Pradesh [1979] 118 ITR 326 (SC) regarding promissory estoppel coming into operation. We may clarify that this principle is made fluid by subsequent decision of the Supreme Court in Jit Ram Shiv Kumar V. State of Haryana AIR 1980 SC 1285. It is accepted fact that various notifications so as to give effect to decisions and changes therein are issued from time to time, based on policy decisions on account of various factors like amount of subsidies to be disbursed, changes in fiscal policies, foreign exchange reserve, export trade of India, vis-a-vis imports, etc. These decisions are taken by those concerned with policy regarding imports and exports trade. Even if it is accepted for the sake of argument that the assessee is entitled to refunds no sooner the export sales are effected, the same is required to be valued after ....