TMI Blog2014 (1) TMI 645X X X X Extracts X X X X X X X X Extracts X X X X ..... PB cannot apportioned on treated on profit derived by the undertaking from export out of India - The exemption provisions in 10BA have to be liberally interpreted unless the credit of DEPB and DDB is expressly taken away Decided in favour of assessee. Netting of interest and the method of computation u/s 80HHC of the Act Held that:- Following Tata Sponge Iron Limited Vs. C.I.T [2007 (4) TMI 211 - ORISSA High Court] - In the case of exporters the interest paid by the assessee is liable to be reduced from interest received by it while calculating deduction u/s 80HHC(1) r.w. Explanation [baa] - Decided in favour of assessee. Brokerage on Export-Shipping-Freight Held that:- This is not income but it is paid as part of shipping freight by the assessee, it has to be obviously, set off against such payment so as to arrive at the export profit eligible for deduction u/s 10BA of the Act Decided in favour of assessee. Disallowance out of the telephone, travelling and coun. Expenses and depreciation on cars Held that:- Both the A.O. and the ld. CIT(A) have made adhoc disallowances It would be justified if the disallowance is further reduced to 1/10th of the total claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before us will give a bird s eye view of the issues raised therein. The chart is being extracted below :- Asst. Year ITA No. Issues involved 2003-04 (Assessee) 40/07 80HHC DEPB Netting of Interest Exp Disl low ed 2004-05 (Department) 596/07 10BA/DEPB/DDB Trading Addition 2004-05 (Assessee) 628/07 Netting of interest Expenses Disallowed Brokerage on Shipping Freight 2005-06 (Department) 597/07 10BA/DEPB/DDB Trading Addition 2005-06 (Assessee) 629/07 629/07 Netting of interest Expenses Disallowed Brokerage on Shipping Freight 2007-08 (Assessee) 232/10 10BA/DEPB/DDB Brokerage on Shipping Freight 2008-09 (Assessee) 309/11 10BA/DEPB/DDB Brokerage on Shipping Freight 3. It is evinced from the above chart that the issues relating to (i) deduction u/s 10BA/DEPB/DDB; (ii) netting of interest; (iii) brokerage on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest netting. The case of the assessee is that the brokerage received on export shipping freight is nothing but a part of export profit. In respect of the interestincome , it is pleaded that the interest paid is more than the interest received and, therefore, the interest received cannot be treated as income other than the export-profit. It is pleaded that interest receipts, under identical circumstances, have been allowed by the revenue in assessee s own case. Apart from this, the ld. A.R. has sought support from the decision of Hon'ble Orissa High Court in the case of Tata Sponge Iron Ltd. 292 ITR 175 [Orissa] inter-alia. Against the relief allowed qua DDB/DEPB, the case of the revenue, as put forth by the ld. CIT(A), is that these receipts being not a part of export profit, are not eligible for deduction u/s 10BA of the Act. He has further cited the facts, law and relevant precedents in support of A.O s findings. In respect of this very issue we have recently taken a view while deciding the case of M/s Suraj Exports India Vs. ITO in ITA No. 336/Jodhpur/2011 for A.Y. 2008-09 decided on 31.01.2013. The following paragraphs of the above orders are being extracted for ready re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king. The relevant part of section 28 reads as under: 28. The following income shall be chargeable to Income-tax under the head "profits and gains of business or profession". (iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971; (iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992); (iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992); In the light of above discussion, we find that the assessee is entitled to deduction u/s 10BA on DEPB as in accordance with section 28 of the Act these are business income." 10. This decision has been approved by Hon'ble Bombay High Court and the decision is reported in 66 DTR 85 (Bombay) I.T.A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the undertaking and not from any other business carried on by the assessee. So, by this amendment only the profits of the business of the undertaking only is to be considered for working out the profits and gains as are derived by an undertaking from export out of India of eligible articles or things. The profits and the gains of the business of the undertaking is to be worked out as per the provisions of section 28(i). This does not include the profits of items does not include the profits of items under s.s. (iiia), (iiib), (iiic), (iiid) and (iiie) etc. Duty Draw Back and any profit on transfer of DEPB. Section 28 itself makes it abundantly clear that the profit on account of Duty Draw Back or on transfer of DEPB will not form part of profit and gains of the business or profession which was carried on by the assessee as discussed above. The plain reading of Section 10BA which deals with export of certain articles or things will make it clear that such profits as are derived from the export out of India shall be allowed from the total income of the assessee. Sub Section (1) of Section 10BA is subject to the provisions of S.Ss. 2, 3, 5, 6 and 7 but s.s. 4 lays down a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest income qua 80HHC benefit. But the issue now before us is regarding netting of interest. After treading through the facts and the above noted decisions, we have found that this issue of netting of interest stands covered by the decisions of the Tribunal, Hon'ble Orissa High Court and of the Hon'ble Delhi High Court as has been discussed above. Therefore, we have to decide this issue in favour of the assessee. The interest income [interest receipts] has to be netted against the interest paid. This decision will also apply to other A.Ys. C. Brokerage on Export-Shipping-Freight Now coming to the issue of shipping brokerage, it is found that this receipt being part of shipping freight paid by the assessee. According to the ld. A.R. this amount has to be set off against such payment so as to arrive at the export profit eligible for deduction u/s 10BA. The case of the revenue is that the brokerage income is not related with the export profit, therefore, it has to be excluded for computation of deduction either u/s 80HHC or u/s 10BA. After hearing both the sides, we are unable to understand the factual matrix of this issue. On what account the brokerage income has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntives on the purchases of raw materials/packing material which subsequent to purchases were used in export turnover, should have been set off against the total cost of purchases. Further, on account of transfer of DEPB there was no profit during the year under appeal and as such, the same ought not have even been considered to be hit by the alleged amended provision allegedly amended u/s 28 r.w.s 80HHC. 7. The first ground in this appeal is general in nature and does not need specific adjudication. 8. Ground No. 2 pertains to disallowance of expenses. The A.O. has disallowed 1/5th of the expenses claimed in the account of telephone, travelling and depreciation on cars, etc. 9. After hearing both the sides and clearly understanding the issue we are of the considered opinion that both the A.O. and the ld. CIT(A) have made adhoc disallowances. Therefore, we feel that he ends of justice shall meet if the disallowance is further reduced to 1/10th of the total claim. Accordingly, Ground No. 2 of this appeal is partly allowed. 10. Ground No. 3(a) pertains to the formula provided in section 80HHC(3)(b) regarding method of computation of direct and indirect cost. This issue stands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Merchandise to which section 80 HHC applies computed under sub section (3) of section 80 HHC(i) N.A 15) Export turnover, deduction in respect of which will be claimed by a supporting manufacturer in accordance with section 80 HHC (l) NIL 16) Profit from the export turnover Mentioned in ite 15, above calculated in accordance with provision to sub section (l) of section 80 HHC. N.A 17) Deduction under section SO HHC to which the assessee is entitled (ite 14-16) 18) Remarks if any:- RS. 3,27,86,633/- i) The assessee carries on business of handicraft items, of various designs, specifications, sizes; shapes and dimensions, it is not practically possible for the assessee to Maintain separate records showing the goods purchased and exported or goods Modified/altered /Manufactured and exported during the year, in the absence of the above bifurcations the export sales can not be bifurcated into that of traded goods and of Manufactured goods.l, therefore, assumed for the purpose of calculation of claims u/s 80 HHC that the entire export sales is of traded goods and accordingly the calculations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 52,360.55 29. Repair Maintenance of Machineries and Equipments. 8,50,718.62 30. P.P. Expenses 7,10,467.00 31. Fees Subscription 83,270.00 32. Building Repai rings 1,17,164.64 33. Sratuity Expenses 1,10,727.50 34. interest C Net J 87,38,744.30 46,58,49,788.57 16,47,01,400.00 Less closing stocks 30,11,48,388.57 Proportionately relating to exports 37,67,99,180 X 30,11,48,388 = 30,06,58,371 37,74,13,292 v) The above claim is subject to realization of following amount within the time allowed or extended by the competent authorities, outstanding as on 30-09-20O3:- S. No. Bill No. Entry Date Name of Party Account 1. 7170 11.7.2002 GUNTILISBERGAN, HOLLANT 1,22,723.69 2. 7714 31.3.2003 GUNTILISBERGAN, HOLLANT 15,44,320.00 3. 7475 09.1.2003 LOTHAR HEUBEL, GERMANY 1,24,712.00 4. 7507 09.1.2003 LOTHAR HEUBEL, GERMANY 3,48, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived in India in convertible foreign exchange as per section 80HHC. He accordingly reduced the deduction claimed u/s. 80HHC. The Id. CIT (A) sustained the decision reached by the Assessing Officer on the reasons mentioned in the assessment order. 5. Admittedly, the assessee is engaged in the business of manufacturing and export of handicraft goods besides carrying local trading thereof. During the year under consideration, the Assessing Officer is stated to have deviated from the consistent method of calculating profits derived from the export for the purpose of deduction u/s. 80HHC and ignored the provisions contained u/s. 80HHC(3). We, therefore, set aside the order to what effect and direct the Assessing Officer to recalculate the export profit by apportioning the total business profits on the basis of export turnover to total turnover and allow deduction accordingly. "Needless to add. the effective opportunity of being heard shall be allowed to the assessee before taking a decision in the remand proceedings. 6. The Assessing Officer also is found to have admitted that earning of interest by the assessee for Rs.6,46,137/- is business income of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in law as well as on facts in making/sustaining the addition of Rs. 5 lacs representing the alleged disallowances out of the expenses of profit and loss account which is illegal and bad in law. ITA Nos. 596/JU/2007 is the appeal of the assessee in which following grounds have been raised: (1) Deleting the trading addition of Rs. 10,00,000/- made by the A.O. on account of low gross profit rate by invoking provision of section 145 of the Act. (2) Directing to allow deduction u/s 10BA on account of DEPB and DDB receipts ignoring the fact that DEPB DDB are incentives given by Indian Government in Indian currency and are not part of export business profit from eligible articles or things. 19. After hearing both the sides, we are convinced that Ground No. (1) of assessee s appeal is likely to be allowed for and on account of the reasons given in para 4 of this very order. Accordingly, we allow this ground of appeal as we have discussed and decided the issue of shipping brokerages and netting of interest in the favour of the assessee. The facts of this year are exactly identical. Hence Ground No. (1) is allowed. 20. The facts regarding Ground No. (2) relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a fact that the A.O. has not pin-pointed any defect much less any material defect in the books of account. The slight fall in the gross profit rate is due to huge increase in the turnover of this year. Moreover, the slight fall in the gross profit rate is not even material. Still further, it is trite that only on account of difference in gross profit rate alone books of account cannot be rejected and no addition can be made u/s 145(3) of the Act. To crown all other reasons, no adhoc and lump-sum addition can be made even once the provisions of section 145(3) are invoked. Accordingly, we approve the action of the ld. CIT(A) who has not confirmed this adhoc addition and has deleted the same. As a result, after confirming the impugned deletion, we dismiss Ground No. (1) of this appeal. As a result this appeal of the revenue stands dismissed. 26. In the result, the appeal of the assessee in ITA No. 628/JU/2007 [A.Y. 2004-05 is partly allowed and the appeal of the revenue in ITA No. 596/JU/2007 [[A.Y. 2004-05] is dismissed. 27. ITA No. 629/JU/2007 and ITA No. 597/JU/2007 for A.Y. 2005-06 have been filed against the order of the ld. CIT(A) dated 29.5.2007. 28. The assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of deduction u/s 10BA in respect of DEPB/DDB receipts, dismiss Ground No. (2) as well. 32. ITA No. 232/JU/2010 A.Y. 2007-08 This appeal is directed against the order of the ld. CIT(A) dated 15.2.2010. In this appeal, the following grounds have been raised: 1. That the authorities below have erred in law as well as on facts in treating the receipt of DDB/DEPB at Rs. 62,32,918/- as the income not forming part of export profit of the undertaking eligible for deduction/exemption u/s 10BA. 2. That the authorities below have erred in law as well as on facts in not allowing/sustaining the disallowance the claim of alleged brokerage on shipping freight of Rs. 2,55,147/- for the purpose of computing the export profit eligible for deduction u/s 10BA. This being resulted in less computation of eligible export profit and thereby the less claim allowed as deduction u/s 10BA is highly unjustified. 33. As is evidenced from the above grounds, these stand covered in the favour of the assessee by our former observations. Accordingly, we allow both the grounds by holding that DDB/DEPB receipts and brokerage are to be considered for the purposes of computing the export p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ground in favour of the assessee in all these appeals. 42. In some of the appeals, the assessee has also raised a legal issue challenging reopening u/s 147 r.w.s 148 of the Act. But these legal grounds were not pressed by the ld. A.R. at the time of hearing. Therefore, these legal grounds taken in the appeals stand dismissed as not pressed. The assessee has raised this legal grounds in ITA Nos. 361, 362 393/JU/2012 Therefore, these appeals are partly allowed. 43. To sum up, all the appeals are decided as below: M/s. Suncity Art Exporters, Jodhpur Vs. ACIT A.Y. Result ITA No. 40/Jodh/2007 2003-04 Partly Allowed ITA No. 628/Jodh/2007 2004-05 Partly Allowed ITA No. 629/Jodh/2007 2005-06 Partly Allowed ITA No. 232/Jodh/2010 2007-08 Allowed ITA No. 309/Jodh/2011 2008-09 Allowed ITO Vs. M/s. Suncity Art Exporters, Jodhpur ITO Vs. M/s. Suncity Art Exporters, Jodhpur A.Y. Result ITA No. 596/Jodh/2007 2004-05 Dismissed ITA No. 597/Jodh/2007 2005-06 Dismissed M/s. Maharani Art Emporium Vs Dy. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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