TMI Blog2006 (1) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... judicating upon other issues arising in connection with the basis adopted by the Assessing Officer while denying the claim of deduction under section 80HHC. 3. The learned CIT(A) erred in rejecting the claim for exclusion from total income of Rs. 4,73,02,238 being the amount of interest erroneously credited by the appellant under mistaken view of entitlement on the outstanding export proceeds due from Freeway Suppliers Ltd. 4. The learned CIT(A) erred in rejecting the claim for exclusion from total income of Rs. 88,33,956 being the amount of gain arising out of foreign exchange fluctuation credited by the appellant on the outstanding export proceeds due from Freeway Suppliers Ltd. 5. The learned CIT(A) erred in confirming the interest levied under sections 234A, 234B and 234C." 2. The facts of the case are that the assessee is an exporter engaged in the business of manufacturing of cement based exterior paints and also in exporting goods after purchasing them from Singapore. During the year under consideration, the assessee sold goods worth Rs. 56.86 crores. One Dubai party to whom exports were made became debtor to the assessee for a sum of US$ 2,90,02,561. During the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Indian border as no custom duty was paid and thereafter goods were dispatched to M/s. Freeway Suppliers, Dubai." 5. The Assessing Officer has dealt with the issue in paras 9 to 15 of his order as under : "9. Unrealised Exports: During the year the assessee has only realized an amount of US $8,69,959 of the earlier relevant assessment year and not pertaining to this year and the balance amount of US $2,81,32,602 remains unrealized. The assessee has not received the amounts till date ( i.e. date of passing the assessment order). The assessee claims to have filed a case in the High Court of Justice, Commercial Court, London against Freeway Suppliers Limited, London. The extension which the assessee got from various dealer is as under : S. No. Name of the Bank Amount Extension 1. State Bank of Hyderabad, C-15, Mittal Tower, Nariman Point, Mumbai US$ 4,51,000 Expired Long Back 2. Abu Dhabi Commercial Bank, 751, Veer Nariman Road, Mumbai US $1,28,96,100 25-3-2004 3. Allahabad Bank, Industrial Finance Branch, Mumbai-20. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erritorial Waters... Etc. Act, the territorial water is considered as a territory of Union of India i.e. Central Government. We purchased the materials through parties by endorsement as per para 6.4C of Exchange Control Manual. The goods were lying at the Customs Bonded Warehouse, from where it has been re-exported to M/s. Freeway Suppliers Limited. (2) It has been held in Chhaganlal Sevchand v. CIT 62 ITR 33 (Bom.) the transfer of documents can be effected by mere delivery without any endorsement on it. (3) Even a bank endorsement is also legal endorsement (Bills of Landing in International Law and practice by Dr. Justuce T. Kochu Thommen, Page 29). There can be a sale by endorsement on the delivery order ( Kollasree v. State 13 STC 522 (SC). (4) Thus it can be seen that the transfer of the GR from with endorsement in favour of buyer are amount to the sale of goods and the assign of the property in goods from the seller to the buyer ( Milkhiram v. State of Bombay [1963] 14 STC 18 (Bom.). (5) In the Income-tax Act, 1961 has given the following negative definition of "export out of India" at Explanation ( aa ) below to section 8HHC(4B), it states : ( aa ) "e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly considered the facts of the case. As per the arguments of the learned AR of the appellant, no profits have been earned by the appellant as a result of the said export of goods to M/s. Freeway Supplies Ltd., London. On the contrary, the appellant has allegedly not be able to realize the sale proceeds of the exports itself, let alone, earning and bringing into India any income in convertible foreign exchange. Deduction under section 80HHC of Income-tax Act, 1961 is to be allowed only in respect of the profits earned in respect of export profits where sale proceeds of the exported goods or merchandise are brought into India in convertible foreign exchange within a period of six months from the end of relevant previous year or within such extended time as the competent authority may allow in this behalf. In the case of the appellant, such sale proceeds have not been received by the Company even till the date of passing of this appellate order. In view of these written submissions and oral arguments of the learned AR of the appellant, there is no case for the appellant to claim any deduction under section 80HHC of the Income-tax Act, 1961 as no profits have been earned by the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 80HHC. The assessee received any convertible foreign exchange during the year would arise for considering subsequently. 10. We have considered the rival submissions and material on record. The undisputed facts are that goods imported from Singapore were kept in bonded warehouse and sold out of India to Dubai. The question is whether it is an "export out of India". There are two legal aspects in this. One is that it should be a transaction by way of sale or otherwise in a shop/emporium/an establishment situated in India and other is customs clearance as defined in the Customs Act. The definition given in Explanation ( aa ) is rather negative. If transactions do not satisfy the conditions then, it shall not be regarded as export out of India. Conversely, for an export out of India, it is necessary to have custom clearance at any custom station. The custom station is defined in section 2( 13 ) of Custom Act. It means any custom port or custom airport or land custom station. Sections 57 and 69 of Custom Act reads as under : "57. Appointing of public warehouses . At any warehousing station the Assistant Collector of Customs may appoint public warehouses wherein dutiable goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uphold the claim of the assessee that it is entitled for deduction under section 80HHC. This ground of the assessee is rejected. 12. Before parting away with this issue, we may like to observe that the Assessing Officer would be free to examine and assessee would be at liberty to adduce evidence about the nature of transaction, which has given rise to these debts. In the present appeals, we have noted that the assessee was not able to produce any evidence as to whether any LC was obtained for the alleged export. No evidence as to the import of the material for keeping in the warehouse and their removal from the warehouse after alleged customs clearance was produced. There was no evidence as to whether any export duty was paid when goods were taken out from the warehouse. The transaction apparently does not appear to be convincing but these issues were examined by the Assessing Officer or by the CIT(A). We have gone on the presumption that certain goods were imported, kept in bonded warehouse and then exported to Dubai party. There was no evidence as to whether it had actually happened. Therefore, we make clear that at the time of when question of allowing debt not recoverable f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant has treated M/s. Freeway Suppliers Ltd., London as its debtor in its books of account and the audited Balance Sheet filed along with the return of income. Under these circumstances, the appellant cannot claim any trading loss as no such loss has been debited to the profit and loss account. Moreover, trading loss cannot be put at par with a bad debt. The appellant had supplied goods to M/s. Freeway Suppliers Ltd. in the past also and received payments even in the previous year relevant to the assessment year under appeal, in respect of the goods supplied to this party in the past. Trading loss may occur due to unforeseen reasons in the process of carrying on the trading activity such as fire, flood, war or sinking of ships carrying the goods but it cannot be considered to have taken place where the debtors are not recovered. If the appellant is not able to recover anything from its debtor, the proper course of action is to claim a deduction on account of bad debt after satisfying the conditions prescribed in section 36(2) of the Income-tax Act, 1961. I do not agree with the learned AR of the appellant that a deduction on account of trading loss can be made at the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not written off the same in the books of account in the assessment year in question, the same cannot be called even a bad debt. The learned DR submitted that assessee has artificially created distinction between financial debt and trading debt, though no such distinction existed in the statute. The learned DR relied on the decision of Hon ble Supreme Court in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546 for the proposition that literal meaning of the words of the statute should be given. 16. We have considered the rival submissions and the material on record. We have also given our sincere consideration to the decisions cited by the parties. The assessee has claimed the amount not recoverable from Dubai party as a trading loss on the ground that loss has occurred during the course of business. No doubt, a trading loss has a wider connotation than a bad debt. A bad debt is also trading loss but all trading loss need not necessarily be a bad debt. There can be a debt which may not fall within the purview of section 36(1)( vii ) read with section 36(2) and would be eligible for deduction in the computation of net profit chargeable to tax. For example, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umal v. CIT - 15 ITR 155, the question involved was whether loss due to accidental fire of a part of stock-in-trade of the assessee, who is a dealer in grain, jute, groceries and cloth, is allowable as business loss under section 10 of Income-tax Act, 1922. Hon ble Patna High Court referred to the views of House of Lords in Green v. Glikstern Sons Ltd. , wherein the loss of stock-in-trade in fire and non-recovery of money from insurance on a part of such loss was considered equivalent to non-recovery from a customer to whom timber was sold. Since the provisions of section 37(1)( vii ) read with section 36(2) are new insertion in Income-tax Act, 1961, there were no equivalent provisions in section 10(2) of Income-tax Act, 1922. Originally, it was introduced by amendment Act, 1939 as clause ( xi ). It could not be said that equivalent provision for bad debts were available before House of Lords in the case of Green v. Glikstern Sons Ltd. ( supra ). After having specific provisions in 1922 Act and then in 1961 Act, section 36(1)( vii ) read with section 36(2), the observations of House of Lords in Green v. Glikstern Sons Ltd. ( supra ) are no longer relevant. The d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also satisfied the condition under section 36(1)( vii ) read with section 36(2) can be allowed either way but not in a case where conditions laid down under section 36(1)( vii ) read with section 36(2) are not satisfied. 18. Another proposition of the learned counsel for assessee is that, it is not essential to write off trading loss. Since, we have already held above that amount irrecoverable is debt and can be allowed as a bad debt not as a trading loss, the question of writing off such trading loss in the books of account for its allowability is no longer relevant. 19. The last proposition raised by the learned counsel for assessee is that as the income would accrue even though not credited in the books of account, the loss would also accrue even though not debited in the books of account. There is no dispute with this proposition. This would be applicable if amount not recovered during the year is treated as trading loss. We have already held that it is only a debt, which is yet to be written off in the books. In view of this, we reject the contention of the assessee and confirm the order of the CIT(A) on this ground. Deduction under section 80HHC on interest of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be reduced from total income. The assessee s submissions are considered as under : The company has filed its return of income on the scheduled time and the time for filing revised return has also lapsed. The assessee has claimed that it was an erroneous belief, if that would have been the case, the same would not have been either approved by auditors/or Directors of the Company. The assessee has filed its claim and has formed part of its accounts, now as the deduction under section 80HHC is not being allowed and as the assessee has not realised its export proceeds, just to reduce its liability the company wants to withdraw its income. The assessee has an option to write off in the coming year if the same is not realised and these are not fictitious but are arrived methodically on outstanding, so the claim of the assessee regarding withdrawal is non- bona fide and out of the time and with the intention to reduce tax liability. Further, the Company has booked Rs. 88,33,956 as an exchange gain during the year. By applying the principles of real income, the notional income, i.e., estimated profits on foreign exchange transactions which was represented by book entries is not li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding amount from M/s. Freeway Suppliers Ltd. Moreover, the appellant did not file any revised return within the time permissible under section 139(5) of the I.T. Act, 1961. Under these circumstances, I do not find anything wrong in the action of the Assessing Officer to turn down the appellant s request for reducing its returned income by an amount of Rs. 4,73,02,238 on account of accrued interest and Rs. 88,33,956 on account of exchange fluctuation gain. This ground of appeal is, therefore, dismissed." 23. Before us, the learned AR submitted that no enforceable right has accrued to the assessee for charging interest under the head "Other sources". He relied on the decision of Hon ble Allahabad High Court in National Handloom Development Corpn. Ltd. v. Dy. CIT [2004] 266 ITR 647 and also of the Hon ble Delhi High Court in the case of CIT v. Modi Rubber Ltd. [1998] 230 ITR 817 . 24. On the other hand, the learned DR relied on the orders of authorities below. 25. We are of the view that authorities below have not been able to show that there existed an agreement between the assessee and Dubai party that on its failure to make the payment of sale proceeds, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on the real income theory. He submitted as under: "1. Whether any commercial profit or real profit has arisen/accrued on account of the export of goods by the appellant a. Badridas Daga v. CIT ( 34 ITR 10 )(SC) (refer to pages 142 to 153 of PB) While section 10(1) of the Indian Income-tax Act, 1922, imposes a charge on the profits or gains of a business, it does not provide how these profits are to be computed. Section 10(2) enumerates various items which are admissible as deductions but they are not exhaustive of all allowances which could be made in ascertaining the profits of a business taxable under section 10(1). Profits and gains which are liable to be taxed under section 10(1) are what are understood to be such under ordinary commercial principles. When a claim is made for a deduction for which there is no specific provision under section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. The loss for which a deduction is claimed must be one that springs directly from the carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applied. e. In Usher s Wiltshire Brewery Ltd. v. Bruce Lord Parker observed that: where a deduction is proper and necessary to be made in order to ascertain the balance of profits and gains, it ought to be allowed provided there is no prohibition against such an allowance. " [Emphasis supplied] 28. Against this, the learned DR submitted that sale proceeds recoverable is a trading item. Any gain on account of foreign exchange fluctuation will also be trading receipt. Therefore, it would be taxable. He relied on CIT v. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. [1999] 237 ITR 253 (Bom.) and CIT v. V.S. Dempo Co. (P.) Ltd. [1994] 206 ITR 291 (Bom.) for the proposition that extra amount payable due devaluation of rupee is allowable as business loss. Then similarly extra amount received/receivable on account of foreign exchange fluctuation should be taxed as revenue receipt. 29. We have heard the rival submissions and considered the material on record. The undisputed facts are that the assessee has credited its accounts by foreign exchange fluctuation. The question is whether it is a real income and is liable to tax or not. During the end of the accounting y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent foreign currencies, the assessee estimated the profits recoverable on these outstanding contracts on the basis of the rates of exchange as at the end of the accounting period in respect of the two assessment years 1972-73 and 1973-74. The assessee contended that the estimated profits were not assessable in its hands. The Income-tax Officer rejected this contention and the Tribunal also held that the estimated profits were assessable. On a reference : Held that the amounts in question were only estimated anticipated income arrived at on the basis of the rates of exchange which prevailed, presumably on the last day of accounting year, without an actual settlement of the forward contracts in foreign currencies having been brought about and, in that sense, the amounts in question represented merely notional profits and could not be subjected to tax." 30. However, in the present case in hand, the assessee is not dealing in forward transaction in foreign exchange and there is no question of any settlement of any contract. The sale of goods to Dubai Party is complete. What is due to the assessee is an ascertained sum being the sale proceeds of goods, whose final value in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mercantile system and it had been consistently claiming the losses suffered by it on account of fluctuation in foreign currency rates only on accrual basis. In fact, in the assessment years 1982-83 to 1986-87 the claim of the assessee was allowed by the Assessing Officer. Up to the assessment year 1981-82 the loss was claimed in the year in which the loans or part thereof were repaid. Thus, the assessee had changed its method of accounting from the assessment year 1982-83 but the bona fides of the change were not doubted or disputed by the Department. Further, the assessee had been consistent and definite in making entries in its account books in respect of the losses suffered on account of fluctuation in foreign currency rates. By adopting the same accounting principles that were adopted in the year under consideration, the assessee had shown a gain of Rs. 293.37 crores during the assessment year 1997-98 because the Indian rupee appreciated as compared to foreign currency. The assessee offered this amount for taxation and the Department also had taxed the same. The Department could not be permitted to deny the claim in one year and in another year when there was a profit, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the increased gain arising due to fluctuation. If the exchange in liability due to fluctuation is only capital account then such increased liability cannot affect the profit loss account. But where change in liability is on revenue account, then it will certainly affect the Profit and Loss Account. In the present case, it is not disputed that change is in revenue account. But according to learned counsel for assessee, it is not real income hence should not be taxed. We are unable to agree. Specific provision is made in the statute in section 36(1)( vii ) read with section 36(2). Where debt become bad, it can be written off and is allowable against profit of the business in the year when it is written off. A debt, which has not become bad cannot be set off against profit of the business on the ground that it is not real income ignoring the specific provision made in the statute in this regard. If trade debts not considered recoverable and allowed to be set off on the ground that they do not represent real income then the provisions of section 36(1)( vii ) read with section 36(2) will become redundant so far as allowability of bad debts are concerned. The theory of real income is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r s remuneration Rs. 4,40,520 8. Deferred revenue exp. Written off Rs. 1,00,04,972 Total Rs. 18,15,18,323 36. The Assessing Officer further noted that total turnover of the business is Rs. 1,52,89,50,156, whereas value of export trade is Rs. 56,86,75,431. Thus, the export turnover is only 37.2 per cent of total turnover. Accordingly, he allocated indirect cost of Rs. 6,75,62,016 being 37.2 per cent of total turnover and worked out allowable deduction as under : Export turnover of trading goods Rs. 56,86,75,431 Less : ( i )direct cost Rs. 44,04,44,628 ( ii )indirect cost Rs. 20,34,829 ( iii )not considered Rs. 6,75,62,016 by the assessee Rs. 51,00,41,473 allowable deduction Rs. 5,86,33,958 claimed by the assessee Rs. 12,61,95,974 37. When asked to explain, the assessee explained to the Assessing Officer that no indirect cost has been incurred for export; entire indirect expenses pertained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost should not be taken into consideration for the purpose of proportionate allocation. 40. Regarding the action of Assessing Officer in not distributing indirect expenses on the basis of period for which export was made, we are of the view that such action is against the principles of natural justice. If the assessee had made export for seven months, then indirect expenses of entire year cannot be allocated to export trade. Therefore, allocation of indirect expenses to export trade should be restricted to the period for which export was made. In case, there was only temporary lull in the export trade and assessee has again started export activities after a gap of few months, then there is no need to restrict such allocation period-wise. In other words, temporary lull in export activities would not result in savings in indirect expenses relating to export trade. 41. Another issue, which requires to be considered is whether deduction under section 80HHC has to be restricted on the basis of foreign exchange brought into India, we are of the view that the Assessing Officer and hence CIT(A) are justified in restricting the claim of deduction under section 80HHC on the basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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