TMI Blog2004 (7) TMI 275X X X X Extracts X X X X X X X X Extracts X X X X ..... at Rs. 56,701 in respect of interest receipts of Rs. 5,57,113 and Misc. receipts of Rs. 9,904 totalling Rs. 5,67,017. The Assessing Officer held that the assessee being 100% trading goods exporter is to be granted deduction on profit derived from export computed under section 80HHC(3)(b). According to him the definition of the profits of the business as per Explanation (baa) below sub-section (4B) of section 80HHC wherein 10 per cent are to be excluded which are meant for expenses is not relevant for 100 per cent trading exporter. He also observed that the assessee has not actually incurred any such expenditure and the rebate of 10 per cent of income as claim of expenses resulted in minus figure at indirect expenses. The Assessing Officer therefore rejected the claim of the assessee of Rs. 6,26,674 as expenditure towards benefit of licences. For the same reasoning the Assessing Officer rejected the claim of the assessee in respect of expenses relatable to interest receipts and misc. receipts also. The relevant observations on the issue are contained in paragraphs 4.4 to 4.6 of his order and they read as under: "4.4 While the assessee has furnished the audit report in Form No. 10C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,26,674 which the assessee claimed as expenditure against benefits on licences is not allowable as per IT Act. Further, this expenditure has nowhere been incurred by the assessee. On being asked to explain the assessee admitted that there is no such expenditure incurred. This is just an imaginary expenditure and the claim of the assessee is not tenable Therefore, Rs. 6,26,674 claimed as expenditure against benefits on licences are disallowed and indirect costs attributable to the exports have been worked accordingly, as per Annexure-1 of the order." 3. He further noticed that the interest income of Rs. 5,57,113 was net income. The gross income was Rs. 7,27,915 and interest expenditure of Rs. 1,70,802 was deducted by debiting to interest receipts. He found that only Rs. 49,827 was relating to earning of interest income and the balance was to be debited against earning of profit from export business. His observations on this issue are as under: "On going through the particulars Furnished by the assessee and in depth study of various depositors' accounts, it is found that the funds of Rs. 51,78,511 fall under the category (ii) as stated above, and the remaining funds fall under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of Rs. 1,20,975 is to be included in the indirect costs attributable to the export of the assessee and thereafter the profits derived from the business are to be computed accordingly. This computation has been done in the Annexure-1 to this order. Therefore, Rs. 1,20,975 is automatically added to the total income of the assessee in Annexure-1." 4. He accordingly computed the deduction to be allowed under section 80HHC at Rs. 58,03,683 as against assessee's claim of Rs. 65,51,332 in the return of income. 5. Before the CIT(A), the assessee objected to the lower deduction allowed by Assessing Officer. After considering the submissions and arguments of the learned counsel and also extracting relevant provisions of the IT Act as well as circular No. 621 dated 19-12-1991, the CIT(A) held that 10 per cent of the amounts being Rs. 6,26,674 towards benefit of licences and Rs. 56,701 towards interest and misc. receipts should be considered as ad hoc expenses and consequently the assessee will be entitled to 100 per cent deduction on profit on trading exports as increased by these amounts of expense of 10% relatable to import licence benefit, interest income and misc. receipts. In oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not find any reason why the 10 per cent should not be treated as expenses in case of 100 per cent trading exports also otherwise it would be unjustified for the person having business making 100 per cent trading export. It has also been held by courts that if main provision or section i.e., sub-section (1) herein allows deduction then the computation section i.e., sub-section (3) cannot take way the right or deduction available under the main section 80HHC also incorporate the words profit derived from such exports like the sub-section (1) of section 80HHC. In view of the circular and position of law I hold that 10 per cent being Rs. 6,26,674 towards benefit of licences and sum of Rs. 56,701 towards interest and misc. receipts should be considered as ad hoc expenses and consequently the appellant will be entitled to 100 per cent deduction on profit on trading exports and the case of interest and misc. receipts after reducing the expenses of 10 per cent i.e., Rs. 56,701 from the total sum of such receipt of Rs. 5,67,015, the balance only would be taxable under the provisions of section 80HHC of the IT Act." 6. As regards the interest income he observed in para 3(b) as under: "3( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods." '(3) For the purposes of sub-section (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, the same proportion as the adjusted export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1962 (52 of 1962); (b) "export turnover" means the sale proceeds [received in, or brought into India] by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962), (ba) "total turnover" shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962): Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression "total turnover" shall have effect as if it also excluded any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28: (baa) "profits of the business" means the profits of the business as computed under the head "profits and gains of business or profession" as reduced by - (1) ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business computed under the head "profits and gains of business or profession" as reduced by (i) ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (ii) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India. This is the Explanation on which assessee rests his case and got accepted by the CIT(A). The reference and reliance on this Explanation (baa) in our opinion is misplaced in this case and is not relevant and is also besides the issue. This Explanation only defines what is the "profit of the business" and what is to be excluded therefrom in view of the specific provisions contained in clause (b) of sub-section (3) of section 80HHC referred to above, defining the 'profit derived from export' itself specifically to mean export turnover in respect of such goods as reduced by the direct costs and indirect costs attributable to such export and that is what is required by section 80HHC(1) of the Act for computing and allowing deduction there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Mahalaxmi Calchem (P.) Ltd. [ITA No. 2120/Ahd./1999 dated 18-8-2003] the Tribunal held that reduction of 90% of interest income as required under the Explanation (baa) to section 80HHC of the Act can only be of net interest income and not of the gross interest income. 15. A very heavy reliance is placed by the assessee on the Special Bench decision of the Tribunal in the case of Surendra Engg. Corpn. v. Asstt. CIT [2003] 78 TTJ (Mum.) 347. In this case the Tribunal held as under:- "Held, in the case of an exporter of trading goods the export profits shall be the export turnover in respect of such trading goods as reduced by (1) the direct costs, and (2) the indirect costs. Both these costs should however, be 'attributable to such export', which means the export of trading goods. By using these words in clause (b) of sub-section (3) and thereby introducing a condition that both the direct and the indirect costs must be attributable to the export of trading goods, the legislation has manifested an intention that any costs which are attributable to receipts other than the export turnover of trading goods must be left out of reckoning at the threshold itself. This condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt deduction from such incomes to account for these expenses. Accordingly, clause (baa) of the Explanation excluded 90 per cent of such receipts from the profits of the business, because these receipts had nothing to do with the exports. It did not exclude the entire receipts. Similarly, when it came to the proviso to sub-section (3), by which the deduction for export profits was to be increased by the export incentives, the legislature restricted the increase to 90 per cent of the export incentives. Here, the entire 90 per cent of the export incentives was not given as additional deduction but the same was restricted to the proportion which the export turnover bears to the total turnover of the business. By restricting the additional deduction under the proviso to 90 per cent of the export incentives, the legislature impliedly recognized that 10 per cent of the export incentives would have been incurred by the assessee as expenses to earn the same. It is pertinent to note that both in Explanation (baa) and in the proviso to sub-section (3), the export incentives of a particular type have been specifically mentioned. All these provisions strengthen the view that the legislature its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37-9/Mum./2000, Raj Impex (ITA No. 951/Mum./2001) and Gemini International (ITA No. 1995/Mum./1999) overruled." 16. On the basis of aforesaid decision the assessee submits that the amount arrived at by 10 per cent of receipts is a notional figure and an assumption is to be made to the effect that the Parliament considers that 10 per cent of the receipts unconnected with the export activity would have been incurred by the assessee as expenditure to earn the same. In our opinion there is a fallacy in assessee's claim inasmuch as it wants to attribute the expenditure of Rs. 6,83,358 to earning of import entitlement and interest, which expenditure it has not incurred at all. The assessee had incurred only Rs. 1,16,224 as the expenditure as is evident from the P L Account of the assessee which is reproduced hereunder: -------------------------------------------------------------------------------------- Previous Particulars Current Previous Particulars Current year Rs. year Rs. year Rs. year Rs. -------------------------------------------------------------------------------------- 3,070,069 To Purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure cannot be attributed to earning import benefits or interest and other income and thereby increase the export profit by such minus figure. 18. Section 80HHC(3)(b) which is applied in this case and which provides for as to how the profit derived is to be computed. It provides for a specific method for arriving at the profit derived from export. As per this provision the export profit is the amount which is arrived at by reducing direct and indirect costs from the export turnover of the assessee. When the total expenditure after direct costs is Rs. 1,16,324, how can a higher amount thereof be attributed to the earning of other income resulting in a negative figure of expenditure for earning export profit. Even if one assumes that the entire expenditure incurred by the assessee as indirect costs is relatable to earning the other income it can at best be a NIL expenditure to be reduced for working out the export profit and certainly not a minus figure arrived at by notional figure of 10% of the other income. 19. The Tribunal in Surendra Engg. Corpn's case has taken the aid of Memorandum explaining the introduction of Explanation (baa) providing for computing "Profits fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) below section 80HHC(3) in so far as income from interest and misc. income, other than export benefits mentioned in sections 28(iiia), 28(iiib) and 28(iiic) is concerned. The assessee's claim for reduction of further 10% expenses relatable to this other income is not warranted and therefore the CIT(A)'s order in this regard is reversed for this reason as well. 22. The decision of the Special Bench of the Tribunal is to be therefore limited to the expenditure relating to export benefit under sections 28(iiia), 28(iiib) and 28(iiic) of the Act. It has to be taken as laying down a proposition for allowing upper limit of indirect expenses at 10%. An exercise is to be made first to find out as to how much is or could be the expenditure relating to export benefits by some accountancy principle. That in our opinion could be a proportionate basis allocating the expenditure on the basis of total receipts to export turnover on one hand and the benefits under section 28(iiia), 28(iiib) and 28(iiic) and other receipts on the other. The amount so arrived at and as relating to export benefits can be reduced from the total indirect expenditure. This is of course a passive and a negative method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rived at by excluding from the total indirect expenditure incurred by the assessee, a part of the expenditure attributable to the earning of import entitlement, interest and misc. income. 26. In terms of Explanation (e) to section 80HHC(3) the amount of indirect expenditure has to be arrived at by allocating total indirect expenditure based on export turnover and total turnover. Because the term "total turnover" does not include export benefits under sections 28(iiia), 28(iiib) and 28(iiic), no expenditure in that case would be allocable to such benefits by the said formula. If on the other hand, the ratio of the Special Bench decision is adopted, it works to be a minus figure and no expenses could be allocated to export activities. That also would be absurd and unwarranted to say that no expenditure at all was incurred by the assessee for earning export profit or in connection with the export activity. On the facts and in the circumstances of the case, we are of the opinion that the fair and reasonable view would be to allocate the indirect expenditure on proportionate basis viz., export sales on one hand to arrive at the export profit, import entitlement, interest and misc. inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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