2007 (8) TMI 493 - AT - Income Tax

Summary

Issues Involved:
1. Inclusion of the cost of rough and rejected diamonds in the total turnover for computing allowable deduction u/s 80HHC.

Summary:

Issue 1: Inclusion of the cost of rough and rejected diamonds in the total turnover for computing allowable deduction u/s 80HHC

The appeal filed by the department challenges the order of the CIT(A) which directed the Assessing Officer not to include the cost of rough and rejected diamonds amounting to Rs. 12,23,32,074 in the total turnover for the purpose of working out allowable deduction u/s 80HHC.

At the assessment stage, the assessee claimed that it was engaged in importing rough diamonds, cutting and polishing them, and then exporting the cut and polished diamonds. During the processing, some diamonds were found unsuitable and were sold as rough and rejected diamonds. The assessee sought to exclude these from the "total turnover" and the cost of materials for computing the deduction u/s 80HHC. The Assessing Officer rejected this claim.

On appeal, the CIT(A) decided in favor of the assessee, stating that since the rough and rejected diamonds had not undergone the processes contemplated in clauses (d) and (e) of Schedule 12, they were minerals and ores as envisaged u/s 80HHC(2)(b). Therefore, the accounting treatment by the assessee was correct, and the Assessing Officer was directed not to include the cost of rough and rejected diamonds in the total turnover.

The Departmental Representative supported the Assessing Officer's order, arguing that the export proceeds of rough and rejected diamonds were in the nature of turnover and should be included in the "total turnover" as defined in section 80HHC.

The Authorized Representative for the assessee supported the CIT(A)'s order, citing a Tribunal decision in Sheetal Mfg. Co. v. ITO, which held that the export proceeds of rough and rejected diamonds should be excluded from the "total turnover" to maintain parity between the numerator and denominator.

The Tribunal noted that section 80HHC is intended to provide incentives for exports by granting deductions to the extent of profits derived from the export of eligible goods or merchandise. The formula in sub-section (3) and various definitions in section 80HHC restrict the availability of deduction only to the extent of profits derived from the business of export. The Tribunal held that the term "total turnover" includes all forms of sales, including the sale of rough and rejected diamonds.

The Tribunal concluded that the export sales of rough and rejected diamonds made by the assessee constitute "total turnover" in the formula under section 80HHC(3). The export proceeds of rough and rejected diamonds cannot be excluded from the purchase price of rough diamonds imported by the assessee.

In view of the foregoing, the Tribunal reversed the order of the CIT(A) and restored that of the Assessing Officer, holding that "total turnover" for the purpose of sub-section (3) of section 80HHC shall include the export of rough and rejected diamonds made by the assessee. The appeal filed by the Department was allowed.