TMI Blog2008 (6) TMI 587X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and reportedly found no discrepancy or inconsistency in the business transaction of the assessee. Finding no merit in the ground in appeal for both the years, the same stands rejected. For parity of reasons and as the facts and law are same in all other appeals on the ground of Revenue in those appeals also stands rejected. Deduction u/s. 10BA - CIT(A) directed the AO to allow deduction u/s. 10BA on account of DEPB and DDB receipts ignoring the fact that DEPB and DDB are not derived from export of eligible articles or things - HELD THAT:- In the assessee's case before us the AO has accepted the fact that exemption provisions contained u/s. 10BA of the Act are applicable to the assessee. The same were, therefore, to be interpreted liberally for granting deduction in terms of sub-s. (4) unless the amount of profit arising from credit of DEPB and DDB was taken away expressly - The judgment rendered by apex Court in CIT v. Lakshmi Machine Works [ 2007 (4) TMI 202 - SUPREME COURT] is a judgment that relates to deduction u/s. 80HHC in relation to total turnover as to whether excise duty, sales-tax, commissions, interest, rent, etc. partake the character of turnover. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ITA Nos. 607/Jd/2007 and 608/Jd/2007 as a lead case which is an appeal by the Revenue against the separate orders dt. 28th May, 2007 of learned CIT(A), Jodhpur. On the consent of the parties this request was allowed. Grounds in appeal in ITA Nos. 607/Jd/2007 and 608/Jd/2007 : On the facts and in the circumstances of the case the learned CIT(A) -I, Jodhpur has erred in : 1. Deleting the trading addition made by the AO on account of low GP rate by invoking provision of s. 145 of IT Act. 2. Directing to allow deduction under s. 10BA on account of DEPB and DDB receipts ignoring the fact that DEPB and DDB are not part of export business profit from eligible articles or things. 2. The first common ground relates to deletion of the trading addition of ₹ 5,00,000 and ₹ 3,00,000 made by the AO in asst. yrs. 2004-05 and 2005- 06 respectively, on account of low GP rate by invoking s. 145 of IT Act. 3. Briefly the facts are that the AO rejected the books of account by invoking action under s. 145 of the Act for the reason that there was fall in GP rate and the assessee did not maintain stock records. The AO considering the facts and past history made ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ₹ 3,00.000 in asst. yr. 2005-06, and the same was rightly deleted by the learned CIT(A) for both the years. It was further contended that : (i) The AO had observed that assessee was maintaining regular books of account and the same were supported by purchase vouchers, sale bills and supporting vouchers, and in the records so maintained no defect or discrepancy had been found by the AO. The rejection of books, therefore, was without any valid basis. It is contended that before rejection of books of account there should be material defects or irregularities in the accounts. Simply on the ground that GP was low cannot be a sole basis for rejection of books of account, as GP may vary from year to year on various counts. The learned CIT(A) also considered various judicial judgments in this regard. (ii) The learned CIT(A) has also considered the decision of Hon'ble Tribunal in case of Ganesh Foundry v. ITO (2000) 67 TTJ (Jd) 434 that absence of stock register or fall in GP cannot be basis for rejection of accounts. The learned CIT(A) also considered the decision of Uttam Chuna Pathar Udyog v. ITO (1997) 59 TTJ (Jp) 763 : 20 Tax World 422 (Jp), that few defects would n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ix) The comparable case relied upon by the learned AO was also not justified. Firstly no such facts were stated to the assessee nor any opportunity was given to him. The other comparative case is of a very old and existing handicraft dealer having large volume of business. Further even in the said case ad hoc addition on account of trading account was made, which also stood deleted. (x) The assessee has also relied upon the decision in the case of Hotel Hilltone (P.) Ltd. v. Asstt. CIT (2005) 97 TTJ (Jd) 969. in which it has been held that it would not be justified to make any addition in the declared trading results without pointing out specific mistakes and discrepancies. The assessee had relied upon various other decisions in this regard in the written submissions. It is also submitted that trading addition so made will be more of academic nature, as this would increase trading profits and shall increase the deduction allowable under s. 10BA, resulting into no fruitful exercise. Therefore, the deletion of the trading addition by the learned CIT(A) was perfectly justified. 7. Having heard the parties with reference to material on record, we find no reason or basis to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also on the judgment, by Hon'ble Rajasthan High Court in the case of CIT v. Sharda Gum Chemicals (2007) 209 CTR (Raj) 143 : (2007) 288 ITR 116 (Raj) . He submitted that the decision of Rajasthan High Court in the aforesaid case relates to asst. yr. 1989-90 and the High Court has clearly given finding that amendment of excluding the income falling within the cls. (iiia), (iiib) and (iiic ) of s. 28 from computation of profits of business or profession for purposes of computing deduction under s. 80HHC was applicable retrospectively w.e.f. 1st April, 1989. He submitted that both these appeals before Tribunal are for asst. yrs. 2004-05 and 2005-06 as s. 10BA was inserted w.e.f. 1st April, 2004. (ii) The learned Departmental Representative referred to the provisions of ss. 10BA, 80HH, 80HHC including Expln. (baa) thereof, for purposes of comparing the language of the aforesaid provisions. He contended that for eligibility of deduction under S. 10BA, the profits of the business should be derived by an undertaking from the export out of India of eligible articles or things to be manufactured or produced without use of imported raw material and the eligible articles or thin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cals IAd. v. CIT (2003) 183 CTR (SC) 99 : (2003) 262 ITR 278 (SC) ; (m) CIT v. Shri Ram Honda Power Equip (2007) 207 CTR (Del) 689 : (2007) 289 ITR 475 (Del) ; (n) CIT v. Malwa Cotton Spinning Mills Ltd. (2008) 166 Taxman 457 (P H) ; (o) Kashmir Arts v. CIT (2007) 213 CTR (Del) 421 : (2008) 166 Taxman 237 (Del) ; (p) CIT v. Jyoti Apparels (2007) 209 CTR (Del) 288 : (2008) 166 Taxman 343 (Del) ; (q) CIT v. Rajesh Rakheja (2008) 166 Taxman 50 (Del) ; (r) Rani Paliwal v. CIT (2003) 185 CTR (P H) 333 : (2004) 268 ITR 220 (P H) ; (s) CIT v. T.C. Usha (2004) 187 CTR (Ker) 661 : (2003) 264 ITR 368 (Ker) ; (t) CIT v. Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596 : (2000) 245 ITR 769 (Bom) : (u) CIT v. Lakshmi Machine Works (2007) 210 CTR (SC) 1 : (2007) 290 ITR 667 (SC) . (v) ( a) In his arguments, he, however, highlighted only some of the aforesaid judgments. It was pointed out by him that the Hon'ble Supreme Court in the case of CIT v. K. Ravindranathan Nair (supra) has held that incentives and interest income etc. are independent income which have no element of export turnover and had to be reduced from gross total inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Arnit Kothari, the learned Authorised Representative strongly supported the order of the learned CIT(A) . He also filed written submissions and made oral arguments during the course of hearing. (i) The learned counsel submitted that the learned CIT(A) had rightly held that the claim of DEPB and DDB received by the assessee was also eligible for deduction under s. 10BA of the IT Act. The learned CIT(A) has rightly relied upon various decisions including the decision of Hon'ble Rajasthan High Court in the case of CIT v. Sharda Gum Chemicals (supra), and also the decision in the case of Gujarat High Court in the case of CIT v. India Gelatine Chemicals Ltd. (supra) to support his conclusion. The assessee submits that the DEPB and DDB are inextricably linked to the export business of the assessee, and therefore, have to be regarded as part of profits from export business only, and therefore the learned CIT(A) had rightly allowed the deduction under s. 10BA in respect of such amounts received by the assessee. (ii) The main object of DEPB/DDB is to neutralize the incidence of input cost of raw material and other manufacturing costs. It is basically part and parcel of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Nabhi's book on Duty Drawback 2005-06 at pp. 1 and 2 as under ; The provisions for relief of duties paid on various inputs used in the manufacture of products for exports, where the inputs are imported, Were provided under the Sea Customs Act, 1878 [under s. 43B (ibid) ] and these have continued with certain modifications in the Sea Customs Act, 1962 which replaced the Sea Customs Act. Sec. 75 of the Customs Act, 1962 gives the legal sanction for granting such relief and it is referred to as 'drawback'. As per s. 75(1) of Customs Act, drawback shall be allowed by the Central Government in respect of such goods and in accordance with and subject to the provisions of rules made and notified under s. 75(2) of the said Act. It is essentially used in the context of s. 75 ibid (and even universally) to mean grant of relief/refund of duties suffered on imported inputs used in the manufacture of a product of its export.... The existing scheme of drawback is governed by the provisions of s. 75 of the Customs Act, 1962 read with the Customs and central excise duties Drawback Rules, 1995 framed under s. 75(2) of the Customs Act and s. 37 of the Central Excise Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the total manufacturing expenses. The said amounts of DEPB and DDB have been separately disclosed in the P L a/c with a view to make a true and full disclosure of the relevant facts to the concerned outside world. It is therefore, evident that amount of DEPB and DDB are parts of profits of the export business carried on by the assessee and the same has rightly been considered as eligible for grant of deduction under s. 10BA. (iv) The learned counsel further submitted that the eligibility for grant of deduction under s. 10BA to the assessee has been accepted by the AO himself, who has accepted the claim for grant of deduction under s. 10BA on the entire income except on the amount of DEPB and DDB. The fulfilment of all the conditions prescribed in s. 10BA has thus been accepted by the AO and there is no valid reason for denying grant of such deduction on the amount of DEPB and DDB. The learned C1T(A) has given elaborate reasons for granting deduction under s. 10BA on the amount of DEPB and DDB. (v) The learned counsel further submitted that the provision of s. 10BA(1) provides the grant of deduction in respect of profit and gain derived by an undertaking from the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80HHC(3) . It was held that 90 per cent of the processing charges will have to be excluded under cl. (baa) of Explanation to s. 80HHC like items of independent income such as rent, commission, brokerage etc. Likewise, various other judgments relating to interpretation of cl. (baa) of the Explanation to s. 80HHC were heavily relied upon by the learned Departmental Representative. Clause (baa) to s. 80HHC inter alia provides that profits of the business for the purposes of s. 80HHC, means the profits of the business as computed under the head Profits and gains of business or profession as reduced by- (1) 90 per cent of any sum referred to in cls. (iiia), (iiib), (iiic), (iiid) and (iiie) of s. 28 or any receipts by way of brokerage, commission, interest, rent, charges or any other receipts of a similar nature included in such profits and, (2) . (vii) The judgment of Hon'ble Supreme Court in the case of K. Rauindranathan Nair (supra) and other judgments relating to interpretation of cl. (baa) of Explanation to s. 80HHC are clearly distinguishable. (viii) The learned Departmental Representative has also tired to distinguish various decisions relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 are admittedly an integral part of the cost of production, any receipts by way of reimbursement of such duties are inextricably linked with the cost of production which has to be reflected in the P L a/c of the assessee. Therefore, duty drawback was derived from the industrial undertaking and eligible for deduction under s. 80J of the Act.... Having heard learned counsel for the parties, we are of the view that the question under consideration is an interesting one. While the Duty Drawback Scheme may certainly be a part of the Larger Fiscal Scheme of exports assistance and export incentives formulated by the Government for the development of foreign markets for Indian products and commodities, the Duty Drawback Scheme which is embodied in the relevant provisions of the Customs Act and Excise Act stands on a different footing from the other cash incentives under the executive instructions. Sec. 75(1) of the Customs Act, 1962 contains the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in order to relieve the goods to be exported of the burden of customs duties and excise duties, as indicated above. The object of the duty drawback is to reimburse customs duties and excise duties paid by the assessee. As customs duties and excise duties are admittedly an integral part of the cost of production any receipts by way of reimbursement of such duties are inextricably linked with the cost of production which has to be reflected in the P L a/c of the assessee and, therefore, the Revenue's argument cannot be accepted. Since the above distinction between general incentives like cash assistance and imported entitlements on the one hand and the specific incentives like duty drawback was not brought to the notice of the Madras High Court and, therefore, was not considered while deciding CIT v. Jameel Leathers Uppers (2000) 246 ITR 97 (Mad) or CIT v. Viswanathan Co. (2003) 181 CTR (Mad) 335 : (2003) 261 ITR 737 (Mad), we would like to record our respectful disagreement with the view taken therein the duty drawback is not derived from the industrial undertaking. In view of the above discussion, we are of the view that while cash compensatory support (cash assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's total income from 'profits and gains of business' under Part D of Chapter IV in the asst. yr. 1989-90. The legislature in its wisdom has thought it fit to extend benefit of deduction firstly by including such profit in the income as mentioned in cls. (iiia), (iiib) and (iiic) of s. 28 with retrospective effect and later on by directly allocating 90 per cent of such profit to the allowable deduction. Consequently, the CIT(A) was right in allowing the appeal of the assessee by directing inclusion of income falling under cl. (iiia), (iiib) or (iiic) of s. 28 in computing profits and gains of business carried on by the assessee. (c) Asstt. CIT v. Vipin Sardana (2005) 148 Taxman 41 (Del) (Mag) Following the decision of the Tribunal in the case of Asstt. CIT v. Anand International (decided on 13th May, 2005) wherein it was held that the deduction under s. 80-IB was allowable on duty drawback as it had a direct link with the business activity of industrial undertaking, the CIT(A) was justified in allowing the assessee's claim. (d) P .G Enterprises (P.) Ltd. v. Dy. CIT (2005) 93 TTJ (Del) 788, at. p. 790 Conclusion : 90 per cent of DE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nexus between the activity of an industrial undertaking and the profits and gains. The sources of the duty drawback is the business of the industrial undertaking which is to manufacture and export goods out of raw material that is imported and on which customs duty is paid. The entitlement for duty drawback arises from s. 75(1) of Customs Act, 1962, read with the relevant notification issued by the Central Government in that regard. An assessee would be entitled to special deduction under s. 80-IB in respect of customs duty drawback. (xi) The learned counsel further submitted that a recent judgment of Hon'ble Supreme Court in the case of B. Desraj v. CIT (2008) 7 DTR (SC) 54, dt. 1st May, 2008 conclusively and clinchingly supports and views taken by the learned CIT(A) . A copy of the said judgment was also furnished. It was held by the Hon'ble apex Court as under in this case : Held : At the relevant time an issue arose as to whether cash assistance though includible in business profits under s. 28(iiib) would or would not constitute eligible income for the purposes of deduction under s. 80HHC. Since there was some doubt, CBDT had issued a circular. By the circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Laboratories Ltd. v. Dy. CIT (2008) 116 TTJ (Mumbai) 131 : BCAJ of March, 2008 on p. 635-Held that, assessee, a trader exporter, was entitled to grant of deduction under s. 80HHC on the amount of profit on sale of DEPB. This judgment is based on various other decisions referred to in the said order. (b) ITO v. Paramount Industrial Corpn. (2007) 109 TTJ (Chd) 295-Held - Income earned on account of duty drawback is income derived from industrial undertaking eligible for deduction under s. 80-IB. (c) And L. Shah v. Asstt. CIT (2005) 95 TTJ (Mumbai) 216 at p. 218- Conclusion-Receipts in the nature of duty drawback, insurance, recover of export freight, etc. have direct nexus with the industrial undertaking, hence eligible for deduction under s. 80-I. (xiv) The assessee further submits that the provisions of s. 28(iiid) inserted with retrospective effect w.e.f. 1st April, 1998 provide that any profit on transfer of the DEPB under the export and import policy formulated and announced under s. 5 of the Foreign Trade (Development and Regulation) Act, 1992, shall be treated as business income. (xv) The amendment classifies the exporters into two categories. One ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the Revenue in their appeals are devoid of any merit. 12. We have heard the parties, with reference to material on record, written submission and precedents cited at Bar. The assessee is a manufacturer and exporter of handicraft items and derives income from the export of goods so manufactured, besides that it has also received incentives from the Government such as credit of DEPB and DDB. The AO found that the assessee is eligible for exemption under s. 10BA in respect of export of eligible articles or things as specified under that section and allowed deduction thereon under s. 10BA(1) of the Act but refused to consider the amount of DEPB and DDB as part of the profits of the business of the undertaking on the premise that the same are not derived from the business of undertaking from the export out of India of eligible articles or things. The assessee, however, claimed that all such profits will partake character of profit of business of undertaking and deduction on the amount of such incentives has to be allowed to it. It, therefore becomes imperative to analyse the applicability of the relevant provisions of s. 10BA of the Act which runs with the title Special pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y means the RBI or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. (4) For the purposes of sub-s. (1), the profits derived from export out of India of the eligible articles or things shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things bears to the total turnover of the business carried on by the undertaking. (5) The deduction under sub-s. (1) shall not be admissible, unless the assessee furnishes in the prescribed form along with the return of income, the report of an accountant, as defined in the Explanation below sub-s. (2) of s. 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. (6) Notwithstanding anything contained in any other provision of this Act, where a deduction is allowed under this section in computing the total income of the assessee, no deduction shall be allowed under any other section in respect of its export profits. (7) The provisions of sub-s. (8) and sub-s. (10) of s. 80-IA shall, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-s. (4) to be the amount which bears to the profits of the business of the undertaking in the proportion of export turnover of such eligible articles or things to the total turnover of the business. From the language of sub-s. (1) of s. 10BA it is evident that the deduction to be granted is subjected to the provisions of this section as the section starts with the words subject to the provisions of this section . Thus by the use of expression 'subject to' in sub-s. (1) of s. 10BA, it is clear that the provision contained under sub-s. (4) shall override the provisions of sub-s. (1) of s. 10BA of the Act. If the legislature had by mandate prescribed as to what shall be the amount of profit derived from export out of India of the eligible articles or things for the purpose of sub-s. (1) of s. 10BA of the Act then there remains little scope for the assessing authority to enter into that arena and interpret the expression derived used in sub-s. (1) differently than to what it has been subjected to. Once the assessing authority has found the assessee eligible for deduction under s. 10BA(1) of the Act, then the only scope available to the assessing authority was to find o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits used is in plural and word of is to be read in conjunction with the word that follows it. The word of is preceded by profits and followed by business . The legislation in its wisdom did not use the expression profit in singular but used it as profits in plural. There can thus be profits not only by exporting the eligible articles or things but also can be those which are related to export of such articles or things, which in the present cases in appeal are DEPB and DDB determined with relation to export sales effected by these assessees. A useful reference on interpretation may be had from the judgment rendered by apex Court in the case of Kerala State Cooperative Marketing Federation Ltd. v. CIT [1998] 147 CTR (SC) 29 : [1998] 231 ITR 814 (SC) . 16. Learned counsel for the assessee, during the course of hearing has also drawn our attention to a recent judgment rendered by apex Court in the case of B. Desraj v. CIT (2008) 7 DTR (SC) 54 : (2008) 301 ITR 439 (SC) wherein income received by way of export incentives namely cash compensatory support and DDB were found to have been included as part of the business profits derived from export of goods or merchandise out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit of DEPB/DDB and resultant profit therefrom, have to be taken as profit of the business of the undertaking of the assessee, when there is no other business of such undertaking. 19. Through various judgments cited at Bar by learned Departmental Representative it was sought to be pleaded that numerator and denominator are required to have the common element, i.e., it is the sale proceeds and as such it was contended that the incentives such as DEPB and DDB cannot be part of total turnover. We do agree with the proposition laid down as such, and when s. 28 itself treats the profits of DEPB or DDB as profits and gains of the business, the same will not enter into the total turnover or export turnover by any direct or indirect method of accounting or otherwise and will not be treated as part of the turnover. 20. The learned Departmental Representative placed strong reliance on the judgment rendered by apex Court in the case of CIT v. Sterling Foods (supra) which was a judgment with respect to deduction under s. 80HH of the Act and the issue related to the sale of import entitlements. As per s. 80HH of the Act the deduction allowable was only on the profits and gains derived fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that although the exemption provisions are to be construed strictly as regards the applicability thereof to the case of the assessee once it is found that the same is applicable, the same are required to be interpreted liberally . Reference to Tata Iron Steel Co. Ltd. v. State of Jharkhand (2005) 4 RC 641, Government of India v. India Tobacco Association (2005) 5 RC 379 and CCE v. Hira Cement (2006) 6 RC 219 was made. 23.2 In the assessee's case before us the AC) has accepted the fact that exemption provisions contained under s. 10BA of the Act are applicable to the assessee. The same were, therefore, to be interpreted liberally for granting deduction in terms of sub-s. (4) unless the amount of profit arising from credit of DEPB and DDB was taken away expressly. Learned Departmental Representative appearing on behalf of Revenue did not point out any such provision under s. 10BA of the Act which could permit the Revenue to take away the amount of profit of DEPB/DDB from the profits of business of the undertaking. He however, did make a reference to cl. (i) of s. 28 to say that profits and gains of the business are distinct from profits on DDB in cl. (iiic) and profits on D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h incentives as income from other sources. Special Bench of the Tribunal has entertained the view on similar dispute that export incentives are to be taken as capital receipt. In order to put an end to this controversy, cls. (iiia), (iiib) and (iiic) were inserted below s. 28 so as to say that they are profits and gains of business of the assessee. The object of the amendment has been clarified in the Circular No. 572, dt. 3rd Aug., 1990. Now the export incentives are taken as business profits and to this extent there is no dispute. Due to legislative edict these receipts are to be treated as part of the profits of the business irrespective of the fact that these are incentives bestowed on an exporter from the scheme of the Government. It thus follows that whatever be real character or source of the receipt, it essentially partakes the character of profits of the business of the undertaking. Agreeing with the learned Departmental Representative we find that the jurisdictional High Court did not hold that the export incentives are derived from the business of the undertaking. It merely held the position that these incentives are part of profits of the business for the purpose of s. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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