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TMI Blog2007 (6) TMI 242X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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 22.00% 3,13,43,379 ------------------------------------------------------------- The AO observed that in its production records, the receipt of raw material i.e. copper, PVC compound and G I Wire is shown in we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsumption 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 norms. The AO relied upon the production of same type, in the sister-concern M/s. Emkay Exports, and accordingly pointed out certain deficiencies in the consumption to production. The AO relied upon the decision of Hon'ble Calcutta Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso 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 had challenged the rejection of books of account by the AO and argued that the assessee is a 100 per cent exporter and has been maintaining complete books of account and the other subsidiary records in a comprehensive manner. Complete quantitative reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 defects in the books of account and the subsidiary records maintained by the assessee which were all produced before the AO and the AO vide para 1 at p. 1 of his order has admitted the same. The AO cannot allege that books of account are incomplete since s. 44AA r/w r. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 fresh orders, which were obtained during the year and were executed also during the same very year. The assessee accordingly filed a further detailed comparative chart showing reduced sale price as compared to the preceding year. Also, a detailed submission was made to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 the assessee at 20.74 per cent though enhanced by the AO to 30 per cent but the learned CIT(A) deleted the addition accepting the same plea. There apart, it is also submitted that duty difference does not always result into a loss but it has also resulted into a profit in the pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 overdraft facility from the bank and such overdraft facility was utilized directly in the export business which would not have been possible had the assessee not placed the FDRs as a margin money and therefore, such interest should be treated as a part and parcel of business income. The learned Aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 (1999) 157 CTR (Ker) 225 : (2000) 243 ITR 192 (Ker) [Interest from the fixed deposits with the bank] (2) CIT vs. Samir Diamonds Exports Ltd. (2000) 163 CTR (Bom) 484 : (2000) 245 ITR 548 (Bom) [Interest on refunds and loans, as the same were assessable under the head 'Income from other sources'] (3) CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CTR (Bom) 472 : (2000) 245 ITR 849 (Bom). In this respect we also take the support of decision of Hon'ble apex Court in the case of Pandian Chemicals Ltd. vs. CIT (2003) 183 CTR (SC) 99 : (2003) 262 ITR 278 (SC) relevant pp. 279 to 281 (of 262 ITR) where the Hon'ble apex Court has held as under: "The assessment year in question is 198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, 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 genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition.' This definition was approved and reiterated in 1955 by a Constitution Bench of this Court in the decision of Mrs. Bacha F. Guz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes 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 manufactured or processed by the assessee, be the amount which bears to the adjusted profits of the business in the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and (ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 --------------- Rs. 3,09,28,038 Add: on account of trading addition as discussed (para 2.4) Rs. 95,34,040 --------------- Income from business and profession Rs. 4,04,62,078 Deduction under s. 80-IB Computation of profit derived from industrial undertaking Income from business and profession Rs. 4,04,62,078 Less: Import entitlement accrued [para-5(H)] Rs. 2,76,10,995 Rs. 1,28,51,123 --------------- --------------- Deduction available under s. 80-IB @ 25% of Rs. 1,28,51,123 = Rs. 32,12,780 25. The learned CIT(A) confirmed the action of the AO. 26. We have considered the facts of the case. The learned Authorised Representative, Sh. Mahendra Gargieya, advocate, argued that the AO has wrongly mentioned the import entitlement whereas the same is the value of duty difference and the AO reduced the value of duty difference alleging that the same was not derived from industrial undertaking and accordingly restricted the deduction @ 25 per cent on Rs. 1,28,51,123 as mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltantly. The increase/reduction in the gross profit is directly related with the increase/decrease in the direct cost i.e. consumption cost in this case. Thus, it is not the case where this entitlement was sold in the open market and something was earned thereon. In such case, the profit does not arise because of the entitlement under a Government Scheme, but the source of the gross profit (and resultantly the eligible net profits) is the reduced cost of material and hence the very eligible undertaking only. A direct decision on this issue is CIT vs. India Gelatine & Chemicals Ltd. (2005) 194 CTR (Guj) 492 : (2005) 275 ITR 284 (Guj) wherein decision of Cambay Electric & Sterling Food has been distinguished. The headnotes in the case of CIT vs. India Gelatine & Chemicals Ltd. are reproduced as under: "(ii) That duty drawback is specifically to reduce the cost of manufacturing the goods. The very scheme of duty drawback is framed and embodied in the statutory provisions in order to relieve the goods to be exported of the burden of customs duties and excise duties. As customs duties and excise duties are admittedly an integral part of the cost of production any receipts by way of rei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecisions do not apply in this case. The reliance on decision in CIT vs. Ritesh Industries (2004) 192 CTR (Del) 81 : (2005) 274 ITR 324 (Del) by the Revenue is misplaced as that decision was in the context of s. 80-I which does not use the word business and therefore, the Hon'ble Court held that duty drawback was not profits derived from industrial undertaking, eligible for deduction. The immediate and proximate source should be the eligible undertaking and not the business of the eligible undertaking. The entire concentration of the Court was on the profits derived from the industrial undertaking. Moreover, in that case the assessee was to take back the amount of duty, whereas in the present case, the cost of purchases was directly reduced because of the benefit. The above distinction has been noted in ITO vs. Five Star Rugs vide para 5, with reference to Ritesh Industries. Similarly, Sterling Foods Ltd., is also fully distinguishable. Thus, that case was totally distinguishable and not applicable in the present case. The AO himself treated and assessed such a receipt to be a business income under the head Business and Profession for the purpose of s. 80HHC, Expln. (baa) and theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Hon'ble Gujarat High Court in the case of India Gelatine & Chemicals Ltd. Therefore, the duty difference is a part of the business of the eligible undertaking directly and qualifies for the deduction as mentioned hereinbefore. Therefore, the AO is directed to accept the treatment given by the assessee who has reduced the duty difference from the purchases and the same is directed to be treated as direct cost and allow the deduction under s. 80-IB as claimed by the assessee. The AO has rightly treated the FDRs' interest as income from other sources in view of our decision in this appeal in ground Nos. 2.1 and 2.2 hereinbefore. Thus, ground No. 3 of the assessee is partly allowed. 30. In ground No. 4, the assessee has prayed as under: "Rs. 25,70,224 The learned CIT(A) further erred in law as well as on the facts of the case in confirming the reduction of the deduction claimed under s. 80HHC, by the amount of deduction under s. 80-IB of Rs. 32,12,780 and thus thereby reducing the deduction under s. 80HHC @ 80 per cent by Rs. 25,70,224. The authorities below seriously erred in not computing the two deductions claimed by the assessee under ss. 80HHC and 80-IB, separately and ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed. The AO has lost the sight of important provisions contained in s. 80AB of the Act which has an overriding effect on all other provisions contained in Chapter VI-A under the heading "Deductions in respect of certain incomes". Sec. 80AB provides the overall manner of computing and allowing deductions in the entire chapter. It provides that by computing the deduction under a particular provision, amount of income to be considered, shall be only that income which is before making any further deduction under Chapter VI-A which is derived/received by the assessee and included in the gross total income (GTI). Hence, for the purposes of computing a deduction under s. 80HHC, the amount derived/received by the assessee from exports and included in the GTI (before making any deduction under Chapter VI-A) shall alone be the deemed amount of eligible income for this purpose. Thus, in other words, the deduction allowable under s. 80HHC cannot be reduced by the amount of any deduction under s. 80-IA/s. 80-IB. The decision in case of IPCA Laboratory Ltd. vs. Dy. CIT (2004) 187 CTR (SC) 513 : (2004) 266 ITR 521 (SC) supports the contention that s. 80AB is having an overriding effect over a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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