TMI Blog1999 (2) TMI 673X X X X Extracts X X X X X X X X Extracts X X X X ..... tyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin-top:0in; mso-para-margin-right:0in; mso-para-margin-bottom:10.0pt; mso-para-margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; mso-bidi-font-size:10.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"Times New Roman"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;} <![endif]--> M.A. Bakshi, Judicial Member And Pradeep Parikh, Accountant Member For the Appellant : B.V. Jhaveri For the Respondent : D.J. Tralshawala ORDER Per Pradeep Parikh, A.M. - The assessee is in appeal before us against the order of the ld. CIT(A) dated 28-9-1997 for assessment year 1994-95. There are two main grounds in the appeal, one relating to deduction under section 80HHC of the Income-tax Act, 1961 (`the Act') and second, relating to deduction under section 80-I of the Act. Four main issues are involved in the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947). 3. In this connection it was stated by the ld. counsel that assessee had received certain licences from the Joint Chief Controller of Imports against its own exports. These licences were surrendered to the Government of India, for which it received a premium of ₹ 15,47,005. Besides this the assessee also had purchased import licences in respect of rough diamonds from the open market at a cost of ₹ 30,59,799. These licences were also surrendered to the Government for premium of ₹ 36,46,824. Referring to clause (ba) of the Explanation to section 80HHC, the ld. counsel submitted that these were incentives referred to in clauses (iiia), (iiib) and (iiic ) of section 28 and hence could not form part of total turnover . Reference was then made to section 28. Referring to clause (iiia) of section 28, it was submitted that since the assessee had sold the licences held by it, it was a profit under section 28 and it was also to be excluded from the total turnover as provided in clause (ba) of the Explanation. Since the licences were not sold in the open market, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For our purposes, we shall divide the premium amount (Rs. 51,93,829) into two parts, viz; ( a) premium received on own licences (Rs. 15,47,005) and premium received on licences purchased in the open market (Rs. 36,46,824) and deal with them separately. First we take up the issue pertaining to premium received on own licences. 5. Admittedly, clauses ( iiia) to (iiic) of section 28 pertain to various incentives as exporter is entitled to on effecting exports. Grant of an import licences is one such incentive which enables the exporter to import raw material. This is a facility which enables the assessee not only to obtain the raw material of the required quality if the same is not available in the local market, but it also facilitates to procure raw materials at a cost lower than that obtaining in the local market. In the instant case, assessee was granted such licences under the Imports (Control) Order, 1955 on exports effected by it. Thus assessee earned this incentive on fulfilling its export obligation. The licences could have enabled the assessee to import rough diamonds at a lower cost. However, with the introduction of full convertibility of the rupee, exporters who ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a processor, in order to determine export profits, under clause (a) of sub-section (3) of section 80HHC, one is required to determine profits of business. Profits of business, as per clause (baa) of the Explanation to section 80HHC means profits of business determined under the head Profits and gains of business or profession , as reduced by, inter alia, ninety per cent of the sums referred to in clauses (iiia), (iiib) and (iiic ) of section 28. Clause (iiia) of section 28 refers to profits on sale of a licence granted under the Import (Control) Order. Thus what has to be reduced while determining profits of business is profit on sale of licence. Again, under proviso to section 80HHC(3), profits of business are to be increased by the amount which bears to 90% of the sums referred to in clause (iiia) (except profits on sale of a licence acquired from any other person), and clauses (iiib) and ( iiic) of section 28, the same proportion as export turnover bears to the total turnover of the business. 9. From the above discussion it is clear that after determining export profit on trading, what has to be added is the profit on sale of licence. When profit of an independent item i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business as per clause (baa). Therefore, having determined profits derived from export as per clause (a) of sub-section (3), said profits have to be increased by 90% of the export incentives on prora basis. However, there is only one exception. Profits on sale of a licence acquired from any other person cannot go to augment the export profit. In the instant case, assessee got a premium of ₹ 36,46,824 on licences acquired from other persons at a cost of ₹ 30,59,799. The intention of the Legislature is to grant deduction to the exporter on incentive earned by it. Earlier, in case of premium of ₹ 15,47,005 we have held that these were licences earned by the assessee on its export performance. The same is not true so far as licences acquired from open market are concerned. The acquisition of these licences have no connection whatsoever with the export performance of the assessee. It doesn't matter that the same were surrendered to the Government and Government itself paid cash. The fact remains that these are not incentives earned by the assessee and hence cannot claim deduction on the same. If assessee's plea to include 90% of such premium in export profit is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit side. AO was of the view that as per clause (baa), it were receipts which were included in such profits which were to be reduced and not the net receipts. Accordingly, he reduced the profits of the business by 90% of ₹ 23,31,585 thereby ignoring the expenditure of like amount incurred by the assessee. CIT(A) upheld the action of the AO without any application of mind. The contention of the ld. counsel is that clause (baa) envisages net receipts and not gross receipts and further, he has relied on the decision of the Mumbai Bench of the Tribunal in the case of Kantilal Chhotalal [IT Appeal No. 2045 (Mum.) of 1996, dated 30-4-98]. The ld. D.R. has relied on the orders of the lower authorities. 13. We have given our due consideration to the issue before us. Earlier we have noted that under clause (a) of sub-section (3) export profit has to be carved out from profits of the business. The meaning of profits of the business has been given in clause (baa) of the Explanation to section 80HHC. We reproduce the said clause below for immediate reference : (baa) `profits of the business' means the profits of the business as computed under the head `Profits and gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.5 - Situation II : (Net labour charges considered) : Profits of business 13.0 Less : 90% of 3 (15 - 12) 2.7 10.3 From the above illustration it is evident that though there is profit on export trade and though there is net profit in the business, assessee will be denied deduction under section 80HHC in view of negative figure obtained in Situation I. Negative figure is obtained because something more is sought to be deducted than the actual net profit of the business. This is fallacious, it gives a distorted picture and it runs counter to the intended objective of section 80HHC. 14. In the instant case, the fact regarding payment of labour charges is not disputed. The fact that assessee was reimbursed the same is also not disputed. The amount of labour charges paid and received ₹ 23,31,585 is also not dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtantly, an income which had no characteristic of a capital receipt would have escaped the tax net. Therefore, the Supreme Court did not allow a revenue receipt to be adjusted against capital expenditure. 17. In another case, i.e ., in CIT v. Bokaro Steel Ltd. [1999] 102 Taxman 94 (SC), at the relevant time, the assessee was in the process of constructing its factory and installation of plant. During this period assessee had given some of its capital assets to the contractors for use and had charged the contractors for the same. It had also given interest bearing advances to the contractors so that the contractors did not have to raise funds from out-side agencies. The Tribunal and the High Court held that all these amounts received by the assessee had gone to reduce the cost of construction. These were in the nature of capital receipts which could be set off against capital expenditure incurred by the assessee during the relevant assessment years. The Supreme Court, distinguishing its decision in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra ) affirmed the view taken by the High Court by observing as follows : However, while interest earned by investi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hence the adjustment. Since expenditure on interest is higher than the interest income, no interest income augmented the profits of the business which needed to be reduced as envisaged by clause (baa). This very principle has been followed by us while dealing with the issue relating to labour charges in earlier paras and also in respect of interest income. 19. Finally, with regard to the deduction under section 80HHC, we summarise our conclusions as follows : (a)The amount of ₹ 51,93,829 - (Rs. 15,47,005 + 36,46,824) being premium on sale/surrender of import licences shall not form part of the total turnover (para 9). (b)The profits of the business have to be reduced by 90% of net labour charges. In the instant case, since the income from labour charges is nil, no reduction will take place (para 14). (c)The profits of the business have to be reduced by 90% of the net interest received by the assessee. In the instant case, since there is no surplus in the interest account, no reduction will take place (paras 15 to 18). (d)Under cl. (baa) of the Explanation to section 80HHC the profits of business shall be reduced by 90% of net premium of ₹ 21,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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