M/s. Kumbhat Exports, JODHPUR V. DCIT, JODHPUR

ITA 393/JODH/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1575 (ITAT-JODHPUR)
• Duration Of Justice: 1 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 10-01-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 14-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUBHASH CHANDRA
• Assessee Lawyers: R R SI NGHVI
• Keywords: Gross profit estimation; Business income; Depreciation
• Section: 80HHC; 147; 145; 148; 28; 10

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JODHPUR BENCH, JODHPUR BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AN D SHRI N.K.SAINI, ACCOUNTANT MEMBER ITA NO. 40/JODH/2007 ASSESSMENT YEAR: 2003-04 ITA NO. 628/JODH/2007 ASSESSMENT YEAR : 2004-05 ITA NO. 629/JODH/2007 ASSESSMENT YEAR : 2005-06 ITA NO. 232/JODH/2010 ASSESSMENT YEAR 2007-08 ITA NO. 309/JODH/2011 ASSESSMENT YEAR 2008-09 M/S. SUNCITY ART EXPORTERS VS ACIT, CIRCLE-3 JODHPUR. JODHPUR PAN NO. AACFS 5664 P ITA NO. 596/JODH/2007 ASSESSMENT YEAR 2004-05 & ITA NO. 597/JODH/2007 ASSESSMENT YEAR 2005-06 ITO, WARD-1(1), VS M/S. SUNCITY ART EXPORTERS, JODHPUR. JODHPUR. PAN NO. AACFS 5664 P (APPELLANT) (RESPONDENT) 2 DATE OF HEARING : 10.01.2013 DATE OF PRONOUNCEMENT : 21.02.2013 ITA NO. 310/JODH/2011 ASSESSMENT YEAR 2008-09 M/S. MAHARANI ART EMPORIUM VS DY. CIT, CIRCLE-2, JODHPUR. JODHPUR. PAN NO. AABFM 8936 G ITA NO. 361/JODH/2012 ASSESSMENT YEAR 2004-05 ITA NO. 362/JODH/2012 ASSESSMENT YEAR 2005-06 ITA NO. 393/JODH/2011 ASSESSMENT YEAR 2006-07 ITA NO. 24/JODH/2011 ASSESSMENT YEAR 2007-08 ITA NO. 25/JODH/2011 ASSESSMENT YEAR 2008-09 M/S. KUMBHAT EXPORTS VS DY. CIT, CIRCLE-1, JODHPUR. JODHPUR. PAN NO. AAEFK 1440 N (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.R. SINGHVI DEPARTMENT BY : SHRI SUBHASH CHANDRA, CIT DR 3 DATE OF HEARING : 10.1.2013 DATE OF PRONOUNCEMENT : 21.2.2013 ORDER PER BENCH : THIS IS A BUNCH OF THIRTEEN APPEALS RELATING TO DIFFERENT ASSESSEES PERTAINING TO A.YS. 2003-04, 2 004- 05, 2005-06, 2006-07, 2007-08 AND 2008-09. FOR A.YS 2004-05 AND 2005-06 THERE ARE CROSS APPEALS. ALL T HESE APPEALS WERE HEARD TOGETHER, SO, IT WOULD NOT ONLY BE CONVENIENT BUT ALSO BE CONGRUENT TO DECIDE THEM BY A COMMON ORDER. 2. IN THE CASES OF M/S SUNCITY ART EXPORTERS, THERE ARE TOTAL SEVEN APPEALS FIVE APPEALS ARE BY THE ASSES SEE AND TWO APPEALS BY THE REVENUE. THE FOLLOWING CHART , FILED BEFORE US WILL GIVE A BIRDS EYE VIEW OF THE ISSUES RAISED THEREIN. THE CHART IS BEING EXTRACTED BELOW :- 4 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 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 ISSU ES RELATING TO (I) DEDUCTION U/S 10BA/DEPB/DDB; (II) N ETTING OF INTEREST; (III) BROKERAGE ON SHIPPING FREIGHT AN D TRADING ADDITION ARE COMMON IN MOST OF THE APPEALS AND DECI SION TAKEN OF ANY ISSUE, ON PRINCIPLE, IN ANY OF THE APP EALS WOULD APPLY MUTATIS MUTANDIS TO OTHER APPEALS. 5 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AS PUT FORTH BY THEIR RESPECTIVE AUTHORIZED REPRESENTATIVES. WE HAV E ALSO GONE THROUGH THE RECORDS OF THE CASES AS WELL AS WR ITTEN SUBMISSIONS FILED BY THEM. FOR THE SAKE OF CONVENIE NCE, WE WOULD NARRATE THE FACTS OBTAINING IN THE CROSS A PPEALS IN ITA NO. 596 & 628/JU/2007. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE-FIRM DERIVES INCOME FROM MANUFACTURING MAINLY OF WOODEN HANDICRAFT ARTICLE S. THE ASSESSEE HAS BEEN TREATED AS ELIGIBLE FOR THE DEDUC TION U/S 80HHC OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED T O AS 'THE ACT', FOR SHORT] FOR ITS EXPORT PROFIT. THE ASSESSEE CAL CULATES ITS PROFIT FROM EXPORT BUSINESS PERTAINING TO THE HANDICRAFTS ON THE BASIS OF DIRECT AND INDIRECT COST/EXPENSES, ETC. IN TERMS OF THE PROVISIONS OF SECTION 80HHC. THE INCOME FROM OTHER SOURCES AR E SEPARATELY CALCULATED AS PER THE ACT. AS WE HAVE CARVED OUT D IFFERENT COMMON ISSUES WHICH WILL BE REPEATED IN OTHER APPEA LS, WE WOULD LIKE TO DISCUSS AND DECIDE THEM UNDER DIFFERENT HEA DINGS. A. DEDUCTION U/S 10BA ITSELF AND WITH REFERENCE TO DEPB, DDB ETC. THE ASSESSEE HAS CLAIMED DEDUCTION U/S 10BA IN RESP ECT OF SUCH PROFITS AND GAINS AS ARE DERIVED FROM THE EXPORT OU T OF INDIA ARE ELIGIBLE ARTICLES FROM ITS TOTAL INCOME 6 THE ASSESSEE HAS ALSO RECEIVED DUTY DRAWBACK, BROKE RAGE, RENT, DEPB CLAIMED, INTEREST, AS INCOME OF THE YEAR. THE A.O. HAS ALLOWED THIS CLAIM OF THE ASSESSEE BY HOLDING THAT IT IS ELIGIBLE FOR DEDUCTION U/S 10BA. BUT HE HAS NOT ALLOWED SOME OF THE INCOME FROM THE PROFIT ELIGIBLE FOR DEDUCTION U/S 10BA ON THE PREMISE THAT THESE ARE NOT THE PART OF THE EXPORT PROFIT. THESE INCOMES ARE AS UNDER: (I) DUTY DRAWBACK [DDB] (II) DEPB RECEIPTS (III) BROKERAGE ON EXPORT SHIPPING FREIGHT (IV) INTEREST NETTING [INTEREST RECEIVED VIS-A-VIS INTEREST PAID APART FROM THE ABOVE, TWO MORE ADDITIONS ONE TRAD ING AND TWO ON ACCOUNT OF DISALLOWANCE OF EXPENSES UNDER THE HE AD PROFIT AND LOSS ACCOUNT HAVE BEEN MADE. THE LD. CIT(A) HAS AL LOWED THE INCOME IN RESPECT OF DDB AND DEPB U/S 10BA OF THE A CT. HE HAS ALSO DELETED THE TRADING ADDITION. BUT HE HAS NOT ALLOWED THE CLAIM IN RESPECT OF BROKERAGE AND INTEREST NETTING. THE CASE OF THE ASSESSEE IS THAT THE BROKERAGE RECEIVED ON EXPORT S HIPPING FREIGHT IS NOTHING BUT A PART OF EXPORT PROFIT. IN RESPECT OF THE INTEREST- INCOME, IT IS PLEADED THAT THE INTEREST PAID IS MO RE THAN THE INTEREST RECEIVED AND, THEREFORE, THE INTEREST REC EIVED CANNOT BE 7 TREATED AS INCOME OTHER THAN THE EXPORT-PROFIT. IT IS PLEADED THAT INTEREST RECEIPTS, UNDER IDENTICAL CIRCUMSTANCES, H AVE BEEN ALLOWED BY THE REVENUE IN ASSESSEES OWN CASE. APA RT 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/DEP B, THE CASE OF THE REVENUE, AS PUT FORTH BY THE LD. CIT(A), IS THA T 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, L AW AND RELEVANT PRECEDENTS IN SUPPORT OF A.OS FINDINGS. IN RESPEC T 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 PARAGR APHS OF THE ABOVE ORDERS ARE BEING EXTRACTED FOR READY REFERENC E, TO DECIDE THIS ISSUE, AS UNDER: 8. WE HAVE COGITATED RIVAL ARGUMENTS VIS-A-VIS EVI DENCE ON RECORD. WE HAVE EXAMINED THE DECISIONS ON WHICH PARTIES HAVE PLACED THEIR RESPECTIVE RELIANCE. WE HAVE FOUND THAT THE RATIO OF THE DECISION OF HON 'BLE APEX COURT RENDERED IN THE CASE OF LIBERTY INDIA VS. CIT REPORTED 225 C TR 233 (HON'BLE SUPREME COURT) IS NOT APPLICABLE TO THE FACTS OF THIS CASE. THE SECTION UNDER INTERPRETATION BEFORE HON'BLE SUMMIT COURT WAS 801 A. IN SEC 80IA, NO FORMULA FOR COMPUTATION OF PROFITS DERIVED BY THE UNDERTAKING IS LAID DOWN, WHEREAS IN SECTION 10BA AND SECTION 80HHC FORMULA IS PRESCRIBED FOR THE PURPOSE. THEREFORE, ; IN OUR CONSIDERED OPINION, SECTION 10BA AND 80HHC A RE MORE NEARER TO EACH OTHER, AND WHATEVER INTERPRETATION O F 'DERIVED FROM' IS GIVEN IN ANY DECISION IN WHICH SECTION 80HHC IS INVOLVED, WO ULD ALSO MUTATIS-MUTANDIS TO THE INTERPRETATION OF SECTION 10BA. THE HON'BLE APE X COURT IN THE CASES OF TOPMAN EXPORTS VS. CIT REPORTED IN 67 DTR 185 (S.C .) AND ACG ASSOCIATED 8 CAPSULES PVT. LTD. VS. CIT REPORTED IN 67 DTR 205 H AS RECENTLY HELD THAT DEPB IS CHARGEABLE AS INCOME AND CL. (IIIB) OF SECTION 28 I N THE YEAR IN WHICH THE ASSESSEE APPLIES FOR DEPB CREDIT AGAINST THE EXPORTS WHEREAS THE PROFIT ON TRANSFER OF DEPB BY THE ASSESSEE IS CHARGEABLE AS INCOME UNDER CL. (III D) OF SECTION 28 IN HIS HANDS IN THE YEAR IN WHICH HE MAKES THE TRANSFER. THE MUMBAI BENCH OF HON'BLE INCOME TAX APPELLATE TRIBUNAL IN THE CASE ARTS AND CRAFTS EXPORTS VS INCOME-TAX OFFICER REPORTED IN 66 DTR 69 (MUMBAI), AFTER CONSIDERING T HE DECISION OF LIBERTY INDIA (SUPRA) HAS TAKEN A CLEAR CUT DECISION IN FAVOUR OF THE ASSESSEE. THE HELD PORTION OF THE MUMBAI BENCH IS AS UNDER: 'PARA-11.14-AS REGARDS DEDUCTION U/S 10 BA IN RESPE CT OF DEPB, WE FIND THAT SUB-SECTION (4) OF SECTION 1OB A DEFINES PROFITS DERIVED FROM ELIGIBLE ARTICLES. SECTION 28 (IIIC), (IIID) AND (IIIE) PROV IDES THAT THESE INCOME ARE PROFITS AND GAINS OF BUSINESS. THE SAID SUB-SECTION (4) OF SECTION 1OB A IS REPRODUCED BELOW: FOR THE PURPOSES OF SUB-SECTION (1), THE PROFITS DE RIVED FROM EXPORT OUT OF INDIA OF THE ELIGIBLE ARTICLES OR THINGS SHALL BE T HE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, THE SAME PROPOR TION AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THINGS BEARS TO THE TOT AL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. THE RELEVANT PART OF SECTION 28 READS AS UNDER: 28. THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INC OME-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 CENTRA L EXCISE DUTIES DRAWBACK RULES, 1971; (IIID) ANY PROFIT ON THE TRANSFER OF THE DUTY ENTIT LEMENT PASS BOOK SCHEME, BEING THE DUTY REMISSION SCHEME UNDER THE EXPORT AN D 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 AN D IMPORT POLICY FORMULATED 9 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 SE CTION 28 OF THE ACT THESE ARE BUSINESS INCOME.' 10. THIS DECISION HAS BEEN APPROVED BY HON'BLE BOMB AY HIGH COURT AND THE DECISION IS REPORTED IN 66 DTR 85 (BOMBAY) I.T.A.T. INDORE SPEC IAL BENCH IN THE CASE OF M/S. MARAL OVERSEAS LIMITED VS ACIT REPORTED IN 136 ITD 177 HA S HELD THIS ISSUE IN FAVOUR OF THE ASSESSEE. SIMILARLY, THE AHMEDABAD BENCH IN THE CAS E OF KADEN EXPORTS (SUPRA), HAS TAKEN A SIMILAR VIEW OF THE MATTER. THE HELD PORTION OF BOT H THESE DECISIONS HAVE BEEN EXTRACTED IN THE EARLIER PORTION OF THIS ORDER. THE WRITTEN S UBMISSION OF ID. CIT (DR), HAVE BEEN CAREFULLY CONSIDERED. ALL THE RELEVANT DECISIONS AN D THE LINE OF ARGUMENTS TAKEN BY HIM, HAVE BEEN CONSIDERED AND DECIDED IN THE CASES REFER RED TO AS ABOVE. THEREFORE, WE DON'T FIND ANY MERIT WORTH DISSUADING BY US, FROM THE CON SIDERED AND SETTLED VIEW TAKEN BY THE HON'BLE APEX COURT AND VARIOUS HIGH COURTS AND THE TRIBUNAL. ALL THE ARGUMENTS RAISED BY LD. CIT(DR) STAND EXPLAINED IN OUR ABOVE FINDING. 11. WE HAVE NOTICED THAT SECTION 10BA(4) TAKES ITS SHAPE AND FORM FROM ERSTWHILE SECTION 10B(4) WHICH WAS AMENDED VID E THE FINANCE ACT, 2001 W.E.F. 01.04.2001. PRIOR TO 01.04.2001, THIS S ECTION 10B(4) READ AS UNDER :- 10B(4) FOR THE PURPOSE OF S.S. (1), PROFITS DER IVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS, THE SAME PROP ORTION AS THE EXPORT TURNOVER OF THE BUSINESS CARRIED ON BY THE ASSESSEE . CLARIFICATIONS ON NOTES OF CLAUSES OF THE FINANCE ACT, 2001 CLARIFIES THE PURPOSE OF THIS AMENDMENT THAT UNDER THE EXISTING PROVISION CONTAI NED IN S.S. (4), THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS O R COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFIT OF TH E BUSINESS, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUC H ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF TH E BUSINESS CARRIED ON BY THE ASSESSEE. SUB CLAUSE (B) SEEKS TO CLARIFY TH AT SUCH PROPORTIONS 10 SHALL BE CALCULATED WITH REFERENCE TO THE PROFITS A ND GAINS OF THE BUSINESS OF THE UNDERTAKING AND NOT FROM ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE. THUS PRIOR TO AMENDMENT THE PROFITS DERIV ED FROM EXPORT OF ARTICLES WAS MEANT THE AMOUNT WHICH BORE TO THE PRO FITS OF THE BUSINESS, THE SAME PROPORTION AS EXPORT TURNOVER IN RESPECT O F SUCH ARTICLES BEAR TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE ASSESSEE, WHEREAS, AFTER THE AMENDMENT, THE PROFITS DERIVED FROM EXPOR T OF ARTICLES OR THING MEANS THE AMOUNT WHICH BEARS TO THE PROFITS AND GAI NS OF THE BUSINESS OF THE UNDERTAKING AND NOT FROM ANY OTHER BUSINESS CAR RIED ON BY THE ASSESSEE. SO, BY THIS AMENDMENT ONLY THE PROFITS OF THE BUSINESS OF THE UNDERTAKING ONLY IS TO BE CONSIDERED FOR WORKING OU T THE PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM EXPORT OUT OF INDIA OF ELIGIBLE ARTICLES OR THINGS. THE PROFITS AND THE GA INS OF THE BUSINESS OF THE UNDERTAKING IS TO BE WORKED OUT AS PER THE PROV ISIONS OF SECTION 28(I). THIS DOES NOT INCLUDE THE PROFITS OF ITEMS D OES 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. SECTI ON 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 G AINS OF THE BUSINESS OR PROFESSION WHICH WAS CARRIED ON BY THE ASSESSEE AS DISCUSSED ABOVE. THE PLAIN READING OF SECTION 10BA WHICH DEALS WITH EXPO RT 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 SUBJEC T TO THE PROVISIONS OF S.SS. 2, 3, 5, 6 AND 7 BUT S.S. 4 LAYS DOWN A METHO D OF COMPUTATION FOR THE PURPOSE OF SUB SECTION (1). LIKEWISE, THE SALE PROCEEDS OF DEPB CANNOT BE CONSIDERED AS PART OF TURNOVER AS IT IS N OT THE SALE PROCEEDS OF THE ARTICLES OR THINGS MANUFACTURED AND SOLD BY THE ASSESSEE, THEN THE PROFITS FROM SALE OF DEPB CANNOT APPORTIONED ON TRE ATED 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. 11 12. ACCORDINGLY, WE ARE LEFT WITH NO OPTION BUT TO DECIDE THE IMPUGNED COMMON ISSUE, IN FAVOUR OF THE APPELLANT/ASSESSEE. AS A RESULT, WE HOLD THAT THE MANUFACTURING ACTIVITIES OF THE ASSESSEE ARE ELIGIB LE FOR DEDUCTION PROVIDED U/S 10BA OF THE ACT. THEREFORE, BY RESPECTFULLY, FOLLOWING THE ABOVE FIN DING, WE DECIDE THE ISSUE OF ALLOWABILITY OF DDB/DEPB RECEIPTS AGAI NST EXPORT PROFIT U/S 10BA OF THE ACT; IN FAVOUR OF THE ASSESS EE AND CONFIRM THE FINDING OF LD. CIT(A). THIS FINDING WILL APPLY TO OTHER APPEALS IN A SIMILAR MANNER. RESPECTFULLY FOLLOWING THE ABOVE ORDER, WE ALLOW THIS CLAIM U/S 10BA OF THE ACT. B. NETTING OF INTEREST AND THE METHOD OF COMPUTATIO N U/S 80HHC OF THE ACT. THIS ISSUE AS PER THE LD. A.R. SHRI R.R. SINGHVI ST ANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL RENDERED IN THE CASE OF ASSESSEES SISTER CONCERN, NAMELY, MAHARANI ART EMPORIUM IN ITA NO.39/JODHPUR/2007 FOR A.Y. 2003-04 DATED 18 .12.2009. IT HAS BEEN HELD THAT IN THE CASE OF EXPORTERS THE INT EREST PAID BY THE ASSESSEE IS LIABLE TO BE REDUCED FROM INTEREST RECEIVED BY IT WHILE CALCULATING DEDUCTION U/S 80HHC(1) R.W. EXPLA NATION [BAA]. SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE ORISSA H IGH COURT IN THE CASE OF TATA SPONGE IRON LIMITED VS. C.I.T [2007] 2 92 ITR PAGE 175 12 [ORISSA]. THE HON'BLE DELHI HIGH COURT IN THE CASE S OF CIT VS. SHRI RAM HONDA POWER EQUIPMENT [2007] 158 TAXMAN 474 [DE L] AND CIT VS. ANAND KUMAR [2007] 164 TAXMAN 330 [DEL] HAS TAK EN SIMILAR VIEW. ON THE OTHER HAND, AS PER THE LD. D.R., THIS VERY BENCH HAS TAKEN A CONTRARY VIEW IN ASSESSEES OWN CASE FOR A. Y. 1997-98 IN ITA NO. 550/JU/2000 DATED 20.5.2005 WHEREIN IT HAS BEEN HELD THAT THE INTEREST INCOME DOES NOT QUALIFY FOR DEDUC TION U/S 80HHC OF THE ACT. AFTER CONSIDERING THE RIVAL SUBMISSIONS , WE HAVE FOUND THAT THE ISSUE IN ORDER DATED 20.5.2005 OF THE TRIB UNAL [SUPRA] WAS IN RESPECT OF INTEREST INCOME QUA 80HHC BENEFIT. B UT THE ISSUE NOW BEFORE US IS REGARDING NETTING OF INTEREST. AF TER TREADING THROUGH THE FACTS AND THE ABOVE NOTED DECISIONS, WE HAVE FOUND THAT THIS ISSUE OF NETTING OF INTEREST STANDS COVER ED BY THE DECISIONS OF THE TRIBUNAL, HON'BLE ORISSA HIGH COUR T AND OF THE HON'BLE DELHI HIGH COURT AS HAS BEEN DISCUSSED ABOV E. THEREFORE, WE HAVE TO DECIDE THIS ISSUE IN FAVOUR OF THE ASSES SEE. THE INTEREST INCOME [INTEREST RECEIPTS] HAS TO BE NETTE D AGAINST THE INTEREST PAID. THIS DECISION WILL ALSO APPLY TO OT HER A.YS. C. BROKERAGE ON EXPORT-SHIPPING-FREIGHT NOW COMING TO THE ISSUE OF SHIPPING BROKERAGE, IT I S FOUND THAT THIS RECEIPT BEING PART OF SHIPPING FREIGHT PAID BY THE ASSESSEE. 13 ACCORDING TO THE LD. A.R. THIS AMOUNT HAS TO BE SET OFF AGAINST SUCH PAYMENT SO AS TO ARRIVE AT THE EXPORT PROFIT ELIGIB LE FOR DEDUCTION U/S 10BA. THE CASE OF THE REVENUE IS THAT THE BROK ERAGE INCOME IS NOT RELATED WITH THE EXPORT PROFIT, THEREFORE, IT H AS 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 BROKERAG E INCOME HAS BEEN EARNED IS NOT CLEARLY BROUGHT OUT ON RECORD. I N CASE THIS INCOME IS FOUND TO BE NOT RELATED WITH THE EXPORT I NCOME HOW IT CAN BE CONSIDERED U/S 80HHC. THEREFORE, WE CANNOT ALLOW THIS ISSUE IN FAVOUR OF THE ASSESSEE. IN CASE THIS IS NO T INCOME BUT IT IS PAID AS PART OF SHIPPING FREIGHT BY THE ASSESSEE, I T HAS TO BE OBVIOUSLY, SET OFF AGAINST SUCH PAYMENT SO AS TO AR RIVE AT THE EXPORT PROFIT ELIGIBLE FOR DEDUCTION U/S 10BA OF TH E ACT. WE HAVE MENTIONED ALL THE THREE SITUATIONS AS ABOVE. BUT A T THE END, WE HAVE FOUND THAT THIS IS A PART OF SHIPPING FREIGHT PAYMENT, SO THIS PAYMENT HAS TO BE SET OFF AGAINST SUCH PAYMENTS. I N THAT EVENTUALITY, IT WOULD BE A FACTOR ENABLING FOR ARRI VING AT EXPORT PROFIT ELIGIBLE FOR DEDUCTION U/S 10BA. TO THAT EX TENT WE ALLOW THIS CLAIM OF THE ASSESSEE. THE CONNECTED ISSUE RA ISED BY THE REVENUE HAS TO FAIL. 14 5. NOW WE WILL DEAL WITH INDIVIDUAL APPEALS IN THE CASE OF SUNCITY ART EXPORTERS. ITA NO. 40/JU/2007 FOR A.Y. 2003-04 6. THIS APPEAL OF THE ASSESSEE FOR A.Y. 2003-04 IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 6.11.2006 . FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL: 1) THAT THE AUTHORITIES BELOW HAVE ERRED IN LAW AS WELL AS ON FACTS IN NOT APPRECIATING THE FACTS PRO PERLY. 2) THAT THE AUTHORITIES BELOW HAVE ERRED IN LAW AS WELL AS ON FACTS IN NOT APPRECIATING THE FACTS AND IN PROCEDURE IN MAKING AN ADDITION OF RS. 11,82,281/- REPRESENTING THE 1/5 TH DISALLOWANCE OUT OF THE TELEPHONE, TRAVELLING AND COUN. EXPENSES AND DEPRECIATION ON C ARS AND HAVE ALSO ERRED IN DEVIATING FROM THE CONSISTEN T AND LEGAL METHOD OF CALCULATION OF DEDUCTION U/S 80HHC. 3) THAT THE AUTHORITIES BELOW HAVE ERRED IN REDUCIN G THE CLAIM OF DEDUCTION U/S 80HHC FROM RS. 3,27,86,6 63/- TO RS. 3,19,95,720/- BY: 15 A) NOT FOLLOWING THE METHOD OF DIRECT AND INDIRECT COST FORMULA PRESCRIBED IN SEC. 80HHC93)(B) OF THE ACT. B) DEVIATING THE CONSISTENT METHOD AND INTEREST RECEIPTS OF RS. 1,45,313/- CONSIDERED SEPARATELY WITHOUT TAKING INTO ACCOUNT THE INTEREST PAID AT RS . 88,84,957/-. C) COMPUTING THE DEDUCTION WITHOUT TAKING INTO ACCOUNT 90% OF THE CLAIM OF DEPB IN WORKING OUT THE EXPORT PROFIT ELIGIBLE FOR DEDUCTION U/S 80HHC. 4. THAT THE AUTHORITIES BELOW HAVE ERRED IN LAW AS WELL AS ON FACTS IN TREATING THE CLAIM OF DDB & DEP B AS INCOME FROM OTHER SOURCES WHEREAS SUCH CLAIMS BEING INCENTIVES ON THE PURCHASES OF RAW MATERIALS/PACKIN G MATERIAL WHICH SUBSEQUENT TO PURCHASES WERE USED IN EXPORT TURNOVER, SHOULD HAVE BEEN SET OFF AGAINST T HE TOTAL COST OF PURCHASES. FURTHER, ON ACCOUNT OF TR ANSFER OF DEPB THERE WAS NO PROFIT DURING THE YEAR UNDER A PPEAL AND AS SUCH, THE SAME OUGHT NOT HAVE EVEN BEEN CONSIDERED TO BE HIT BY THE ALLEGED AMENDED PROVISI ON ALLEGEDLY AMENDED U/S 28 R.W.S 80HHC. 16 7. THE FIRST GROUND IN THIS APPEAL IS GENERAL IN NA TURE AND DOES NOT NEED SPECIFIC ADJUDICATION. 8. GROUND NO. 2 PERTAINS TO DISALLOWANCE OF EXPENS ES. THE A.O. HAS DISALLOWED 1/5 TH OF THE EXPENSES CLAIMED IN THE ACCOUNT OF TELEPHONE, TRAVELLING AND DEPRECIATION ON CARS, ETC . 9. AFTER HEARING BOTH THE SIDES AND CLEARLY UNDERST ANDING THE ISSUE WE ARE OF THE CONSIDERED OPINION THAT BOTH TH E A.O. AND THE LD. CIT(A) HAVE MADE ADHOC DISALLOWANCES. THEREFOR E, WE FEEL THAT HE ENDS OF JUSTICE SHALL MEET IF THE DISALLOWA NCE IS FURTHER REDUCED TO 1/10 TH OF THE TOTAL CLAIM. ACCORDINGLY, GROUND NO. 2 OF THIS APPEAL IS PARTLY ALLOWED. 10. GROUND NO. 3(A) PERTAINS TO THE FORMULA PROVIDE D IN SECTION 80HHC(3)(B) REGARDING METHOD OF COMPUTATION OF DIRE CT AND INDIRECT COST. THIS ISSUE STANDS COVERED BY THE DE CISION OF THE JODHPUR BENCH OF THE TRIBUNAL IN THE CASE OF MAHARA NI ART EMPORIUM IN ITA NO. 39/JU/2007 ORDER DATED 15.12.20 09. THE COPY OF FORM NO. 10CCAC DATED 27.10.2003 AS AVAILAB LE AT PAGES 11 TO 14 OF THE ASSESSEES PAPER BOOK IS AS UNDER: 17 1. I HAVE EXAMINED THE ACCOUNTS AND RECORDS OF M/S SUNCITY ART EXPORTS, 5, UNSAID BHAWAN PALACE ROAD, JODHPUR [P.A .NO. AACFS 6554P] RELATING TO THE BUSINESS OF EXPORT OUT OF IN DIA, OF THE GOODS AND MERCHANDISE , CARRIED ON BY THE ASSESSEE DURING THE YEAR ENDED ON 31ST MARCH,2003. 2.(A) I CERTIFY THAT THE DEDUCTION TO BE CLAIMED BY THE ASSESSEE UNDER SUB-SECTION (OF SECTION 80 HHC OF THE INCOME TAX ACT,1961 IN RESPECT OF THE ASSESSMENT YEAR 2003-2004 IS RS.3,27 ,86,633/- WHICH HAS BEEN DETERMINED ON THE BASIS OF THE SALE PROCEE DS RECEIVED / RECEIVABLE BY THE ASSESSEE IN CONVERTIBLE FOREIGN E XCHANGE. THE SAID AMOUNT HAS BEEN WORKED OUT ON THE BASIS OF THE DETAILS IN ANNEXURE (A) TO THIS FORM. (B) NOT APPLICABLE 3. I, THEREFORE, CERTIFY THAT THE TOTAL DEDUCTION T O BE CLAIMED BY THE ASSESSEE UNDER SECTION 80 HHC IN RESPECT OF THE ASSESSMENT YEAR 2003-2004 IS RS. 3,27,86,633/- PLACE : JODHPUR [SD/-] DATE : 27.10.2003 VINOD CHANDRA MATHUR, C.A, M. NO. 71590 ANNEXURE (A) DETAILS RELATING TO THE CLAIMED BY THE EXPORTER FOR DEDUCTION UNDER SECTION 80 HHC OF THE LNCOME TAX ACT, 1961 FOR ASSE SSMENT YEAR 2003-2004 1) NAE OF THE ASSESSEE 2) ASSESSMENT YEAR 3) TOTAL TURNOVER OF BUSINESS 4) TOTAL EXPORT TURNOVER 5) TOTAL PROFITS OF BUSNINESS 6) EXPORT TURNOVER IN RESPECT OF TRADING GOODS 7) DIRECT COST OF TRADING GOODS EXPORTED 8) INDIRECT COST ATTRIBUTABLE TO TRADING GOODS EXPORTED 9) TOTAL (7+8) 10) PROFIT FROM EXPORT OF TRADING GOODS (6-9)+EXPORT INCENTIVES, RESTRICTED TO 50T 11) ADJUSTED TOTAL TURNOVER(3-6) 12) ADJUSTED PROFITS OF THE BUSINESS(4-&) 13) ADJUSTED PROFITS OF THE BUSINESS(5~LO) 14) PROFIT DERVIED BY THE ASSESSEE FRO* EXPORT OF GOODS OR MERCHANDISE TO WHICH SECTION 80 HHC APPLIES COMPUTED UNDER SUB SECTION (3) OF SECTION 80 HHC(I) 15) EXPORT TURNOVER, DEDUCTION IN RESPECT OF WHICH WILL BE CLAIMED BY A SUPPORTING MANUFACTURER IN ACCORDANCE WITH SECTION 80 HHC (L) 16) PROFIT FROM THE EXPORT TURNOVER MENTIONED IN ITE 15, ABOVE CALCULATED IN ACCORDANCE WITH PROVISION TO SUB SECTION (L) OF SECTION 80 HHC. 17) DEDUCTION UNDER SECTION SO HHC TO WHICH THE ASSESSEE IS ENTITLED (ITE 14-16) 18) REMARKS IF ANY:- I) THE ASSESSEE CARRIES ON BUSINESS OF HANDICRAFT ITEM S, OF VARIOUS DESIGNS, SPECIFICATIONS, SIZES; SHAPES AND DIMENSIONS, IT IS NOT PRACTICALLY POSSIBLE FOR THE ASSESSEE TO MAINTAIN SEPARATE RECORDS SHOWING T HE GOODS PURCHASED AND EXPORTED OR GOODS MODIFIED/ALTERED /MANUFACTURED AN D 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 MANUFAC TURED 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 HAVE BEEN MADE. M/S SUNCITY ART EXPORTERS 2003- 2004 RS. 37,74,13,292/- RS. 37,67,99,180/- N.A RS.37,67,99,180/- RS.1,50,85,956./- RS-30,06,58,371/-RS- 31,57,44,327/- RS. 3,27,86,633/- N.A N.A N.A N.A. NIL N.A RS. 3,27,86,633/- 19 ANNEXURE A SUNCITY ART EXPORTERS FOR YEAR ENDED 3 1 ST MARCH 2003 (II) THE PROFIT DERIVED BY THE ASSESSEE RELATING TO EXPORT TO WHICH SECTION 80HHC APPLIES AS REFERRED TO IN COLUMN 14 A BOVE HAS BEEN CALCULATED AS UNDER; EXPORT [DIRECT EXPENSES PROPORTION -] [90% OF EXP ORT TURNOVER] TURNOVER [RELATING TO + INDIRECT + [EXPORT X ---- EXPORT TURNOVER EXPENSS ] [INCENTIVES TOTAL TURNOVE R] 376799180 [15085956 + 300658371] + 90% 5028643 X 376799180 377413292 = 61054853 + 4518414 = 655733267 = RESTRICTED TO 50% RS. 32786633 (III) DIRECT COST OF EXPORTS [DIRECTLY RELATED TO E XPORTS ONLY] RS. 1. CLEARING & FORWARDING EXPENSES 15085 956.63 15085956.63 (IV) INDIRECT COST/EXPENSES 1. OPENING STOCK 10,71,51,000.00 2. PURCHASES 22,48,94,539.15 3. JOB WORK EXPENSES 4,74,95,672.18 4. WAGES 49,22,816.21 5. CONS UNABLE STORES 2,22,80,971.60 6. PACKING EXPENSES 1,13,96,194.11 7. INWARD EXPENSES 1,10,32,370.00 8. DEPRECIATION 87,82,314.00 9. SALARIES 7,25,305.60 10. PRINTING & STATIONARY 6,22,438.93 11. POSTAGE & TELEGRAM 2,19,388.25 20 12. ADVERTISEMENT 34,610.00 13. BANK COMMISSION & CHARGE 9,20,234 14. INSURANCE EXPENSES 7,16,819.00 15. TELEPHONE EXPENSES 10,65,166.61 16. RENT RATES AND TAXES 7,16,702.00 17. TRAVELLING EXPENSES 3,34,874.70 18. LEGAL I PROFESSIONAL FEES 99,488.00 19. GENERAL EXPENSES 2,32,736,30 20. STAFF WELFARE 8,20,812.47 21. CONVEYANCE & VEHICLES EXPENSES 27,03,954.55 22. AUDIT FEES 15,OOO.OO 23. ELECTRICITY EXPENSES 65,74,316.85 24. SALES PROMOTION EXPENSES 96,855.44 25. MACHINERY HIRE CHARGES 3,00,OOO.OO 26. WATER EXPENSES 2,03,596.00 27. BONUS EXPENSES 8,28,160.00 ANNEXURE (A) SUNCITY ART EXPORTER FOR YEAR ENDED 3T ST MARCH' 2003. 28. E.S.I. EXPENSES 52,360.55 29. REPAIR & MAINTENANCE OF MACHINERIES 8,50,718.62 AND EQUIPMENTS. 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 21 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 FOL LOWING AMOUNT WITHIN THE TIME ALLOWED OR EXTENDED BY THE COMPETENT AUTHORITIES, OUTSTANDING AS ON 30-09-20O3:- S. BILL ENTRY NAME OF PARTY ACCOUNT NO. NO. DATE 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, 48,393.00 5. 7512 21.1.2003 THE INDIA SHOP IMPRESS LTD UK 3,60,775.00 6. 7730 31.3.2003 WORLD EXPRESSION USA 7, 05,393.00 11. THE ABOVE COMPUTATION IS CORRECT AS PER THE DEC ISION OF MAHARANI ART EMPORIUM [SUPRA] WHEREIN IT HAS BEEN HELD AS UN DER: 2. THE ISSUE IN NEXT GROUND IS THAT THE ASSESSEE C LAIMED DEDUCTION U/S. 80HHC A RS. 1,12,03,109/-. THE ID. ASSESSING A UTHORITY GATHERED FROM THE DETAILS FILED BY THE ASSESSEE THAT THE INT EREST RECEIVED BY THE ASSESSEE HAS BEEN ADJUSTED AGAINST INTEREST PAID AN D THE BALANCE INTEREST PAYABLE HAS BEEN DEBITED IN PROFIT & LOSS ACCOUNT. THE ASSESSEE HAS 22 RECEIVED INTEREST OF RS.6,46,137/- FROM FDRS AND VA RIOUS OTHER PARTIES AND THE SAME IS NETTED FROM THE TOTAL INTEREST OF RS. 1 3,59,062/- PAID TO SISTER CONCERN AND OTHER PARTIES. THUS, THE ASSESSEE HAS S HOWN NET INTEREST PAID TO THE TUNE OF RS.7,12,925/-. ON BEING ASKED WHY THE INTEREST RECEIVED SHOULD NOT BE REDUCED FROM THE BUSINESS PROFIT SHO WN FOR THE PURPOSE OF CALCULATING CORRECT DEDUCTION ALLOWABLE U/S. 80HHC, THE ASSESSEE SUBMITTED THAT THIS INTEREST WAS EARNED ON SURPLUS FUNDS AND THE INVESTMENT WAS COMPENSATED BY RAISING SOME LOANS ET C. IT WAS FURTHER REPLIED THAT THE MAJOR BORROWED FUNDS HAVE BEEN LES S THAN THE INVESTMENT IN STOCK OF GOODS OTHER THAN HANDICRAFTS , THEREFORE, THE ENTIRE ACCOUNT OF INTEREST RECEIVED AND PAID HAS BEEN MAIN TAINED SEPARATELY. ENTIRE POSITIVE AND NEGATIVE INCOMES OF OTHER THAN BUSINESS HAS BEEN SEPARATELY ACCOUNTED FOR AND ONLY THE RESULTANT FIG URES HAVE BEEN CONSIDERED IN THE FINAL ACCOUNTS. SINCE THE NET RES ULT IS A NEGATIVE INCOME DEBITED TO P&L ACCOUNT WHICH MAINLY RELATES TO THE EXPENSES ON INTEREST FOR THE BUSINESS OF GOODS OTHER THAN HANDICRAFTS, THE I D. ASSESSING AUTHORITY THOUGH ACCEPTED THE CONTENTION OF ASSESSEE THAT THE INTEREST RECEIPT IS BUSINESS INCOME, BUT HOLDING THAT THE INTEREST INCO ME AND INCOME FROM OTHER THAN EXPORT IS NOT ELIGIBLE FOR DEDUCTION U/S . 80HHC OF THE ACT. THE ASSESSING OFFICER RELIED UPON THE DECISION OF MADRA S HIGH COURT RENDERED IN THE CASE OF K.S. SUBBIAH PILLAI (INDIA) PVT. LTD. VS. CIT (2004) 134 TAXMAN 735 (MAD.) AND CIT VS. NIZZAR AHMED & CO . (2003) 133 TAXMAN 322 (MAD.). THUS, THE TOTAL SUM OF RS. 13,51 ,829/- CREDITED IN PROFIT AND LOSS ACCOUNT WAS HELD TO HAVE NOT RELATED TO EX PORT BUSINESS HAVING BEEN NOT RECEIVED IN INDIA IN CONVERTIBLE FOREIGN E XCHANGE AS PER SECTION 80HHC. HE ACCORDINGLY REDUCED THE DEDUCTION CLAIMED U/S. 80HHC. THE ID. CIT (A) SUSTAINED THE DECISION REACHED BY THE A SSESSING OFFICER ON THE REASONS MENTIONED IN THE ASSESSMENT ORDER. 23 5. ADMITTEDLY, THE ASSESSEE IS ENGAGED IN THE BUSIN ESS OF MANUFACTURING AND EXPORT OF HANDICRAFT GOODS BESIDES CARRYING LOC AL TRADING THEREOF. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER IS STATED TO HAVE DEVIATED FROM THE CONSISTENT METHOD OF CALCULA TING PROFITS DERIVED FROM THE EXPORT FOR THE PURPOSE OF DEDUCTION U/S. 8 0HHC AND IGNORED THE PROVISIONS CONTAINED U/S. 80HHC(3). WE, THEREFORE, SET ASIDE THE ORDER TO WHAT EFFECT AND DIRECT THE ASSESSING OFFICER TO REC ALCULATE THE EXPORT PROFIT BY APPORTIONING THE TOTAL BUSINESS PR OFITS ON THE BASIS OF EXPORT TURNOVER TO TOTAL TURNOVER AND ALLOW DEDUCTI ON ACCORDINGLY. 'NEEDLESS TO ADD. THE EFFECTIVE OPPORTUNITY OF BEIN G HEARD SHALL BE ALLOWED TO THE ASSESSEE BEFORE TAKING A DECISION IN THE REM AND PROCEEDINGS. 6. THE ASSESSING OFFICER ALSO IS FOUND TO HAVE ADM ITTED THAT EARNING OF INTEREST BY THE ASSESSEE FOR RS.6,46,137/- IS BUSIN ESS INCOME OF THE ASSESSEE. HE, HOWEVER, DID NOT ASSIGN ANY REASON AS TO WHY DEDUCTION THEREON U/S. 80HHC OF THE ACT CANNOT BE ALLOWED TO THE ASSESSEE. HAVING REGARD TO THE JUDGMENT RENDERED BY ORISSA HIGH COUR T IN THE CASE OF TATA SPONGE IRON LTD. VS. CIT (2007) 292 1TR 175 (ORISSA ) AS RELIED UPON BY THE ID. COUNSEL FOR THE ASSESSEE THROUGH WRITTEN SUBMIS SIONS, THE INTEREST EARNED AND INTEREST PAID SHALL PARTAKE THE SAME CHARACTER AND SET OFF OF INTEREST RECEIVED SHALL BE ALLOWED AGAINST THE INTEREST PAID . THE ASSESSING OFFICER IS DIRECTED TO RE-WORK THE DEDUCTION ACCORDINGLY. THEREFORE, WE ALLOW GROUND NO. 3(A) FOR STATISTICAL PURPOSES IN FAVOUR OF THE ASSESSEE IN THE CASE OF M/S MAHARANI ART EMP ORIUM [SUPRA]. 24 12. THE NEXT GROUND NO. 3(B) IS REGARDING NETTING O F INTEREST. WITH THE REASONING GIVEN IN POINT (A) ABOVE OF THIS ORDE R, WE ALLOW THIS GROUND IN FAVOUR OF THE ASSESSEE. 13. GROUND NO. 3(C) AND GROUND NO. 4 IS REGARDING C ONSIDERATION OF DEPB IN RESPECT OF SECTION 80HHC CALCULATIONS. THI S ISSUE NOW STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE HON'BLE APEX COURT RENDERED IN THE CASE OF TOPMAN EXPORTS VS. CI T REPORTED IN 342 ITR 49 [SC] WHEREIN IT HAS BEEN HELD THAT : THE ENTIRE AMOUNT RECEIVED ON SALE OF DEPB ENTITLEMENT IS NOT PROFIT CHARGEABLE U/S 28(IIID) O F THE ACT BUT HE FACE VALUE OF DEPB HAS TO BE DEDUCTED FROM THE SALE PROCEEDS. ACCORDINGLY, WE ALLOW GROUND NO. 3(C) AND GROUND NO . 4 IN FAVOUR OF THE ASSESSEE. 14. IN THE RESULT THE APPEAL IS PARTLY ALLOWED. 15. THERE IS NO CROSS APPEAL AS INFORMED BY BOTH TH E PARTIES FOR A.Y. 2003-04. 16. ITA NOS. 628/JU/2007 AND ITA NO. 596/JU/2007 FO R A.Y. 2004-05 17. THESE ARE CROSS APPEALS FILED AGAINST THE ORDER OF THE LD. CIT(A) DATED 29.5.2007. 25 18. ITA NOS. 628/JU/2007 IS THE APPEAL OF THE ASSES SEE IN WHICH FOLLOWING GROUNDS HAVE BEEN RAISED: 1) THAT THE AUTHORITIES BELOW HAVE ERRED IN LAW AS WE LL AS ON FACTS IN NOT ALLOWING/SUSTAINING THE DISALLOW ANCE THE CLAIM OF ALLEGED BROKERAGE ON SHIPPING FREIGHT OF R S. 4,23,028/- AND INTEREST RECEIPTS OF RS. 24,22,643/- WITHOUT DEDUCTING PAYMENT THEREOF AT RS. 66,85,573/- FOR TH E PURPOSE OF COMPUTING THE EXPORT PROFIT ELIGIBLE FOR DEDUCTION U/S 10BA. THIS BEING RESULTED IN LESS COMPUTATION OF ELIGIBLE EXPORT PROFIT AND THEREBY T HE LESS CLAIM ALLOWED AS DEDUCTION U/S 10BA IS HIGHLY UNJUS TIFIED. 2) THAT THE AUTHORITIES BELOW HAVE ERRED IN LAW AS WELL AS ON FACTS IN MAKING/SUSTAINING THE ADDITION OF RS . 5 LACS REPRESENTING THE ALLEGED DISALLOWANCES OUT OF THE E XPENSES 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. 26 (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 ASSESSEES APPEAL IS LIKELY TO BE ALLOWE D FOR AND ON ACCOUNT OF THE REASONS GIVEN IN PARA 4 OF THIS VERY ORDER. ACCORDINGLY, WE ALLOW THIS GROUND OF APPEAL AS WE H AVE DISCUSSED AND DECIDED THE ISSUE OF SHIPPING BROKERAGES AND NE TTING 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 TO SUSTAINED ADDITION OF RS. 5 LAKHS ARE THAT THE ASSESSEE HAS D EBITED THE FOLLOWING EXPENSES IN THE PROFIT AND LOSS ACCOUNT: (I) TRAVELLING EXPENSES RS. 44,714/- (II) TELEPHONE EXPENSES RS. 10,40,697/- (III) STAFF WELFARE EXPENSES RS. 7,28,904/- 27 (IV) CONVEYANCE AND VEH. EXPENSES RS. 31,35,036/- (V) DEPRECIATION ON MOTOR CARS RS. 23,56,768/- (VI) GENERAL EXPENSES RS. 3,21,659/- TOTAL RS. 76,27,778/- THE ASSESSEE-FIRM CONSISTS OF TWO PARTNERS. AS PER THE A.O., PERSONAL USER OF TELEPHONE AND CARS BY PARTNERS AND MEMBERS OF THEIR FAMILIES CANNOT BE RULED OUT. THE OTHER EXPE NSES WERE ALSO NOT FOUND PROPERLY MAINTAINED. THEREFORE, THE A.O. HAS DISALLOWED A LUMP-SUM OF RS. 5 LAKHS BY TREATING TH EM TOWARDS NON-BUSINESS PURPOSES. THE LD. CIT(A) HAS ALSO CON FIRMED THIS ADDITION. 21. AFTER CONSIDERING THE ENTIRE FACTS OF THIS ISSU E, WE ARE OF THE OPINION THAT THE ENDS OF JUSTICE WOULD MEET IF THE EXPENSES ARE FURTHER REDUCED TO RS. 3 LAKHS. ACCORDINGLY, W E PARTLY ALLOW THIS GROUND. 22. AS A RESULT THIS APPEAL IN ITA NO. 628/JU/2007 IS PARTLY ALLOWED. 28 23. IN REVENUES APPEAL [ITA NO. 596/JU/2007 [A.Y. 2004-05], THE SECOND GROUND STANDS COVERED BY OUR DECISION TA KEN IN THE EARLIER PART OF THIS ORDER. THEREFORE, WE CANNOT A LLOW GROUND NO. (2) OF REVENUES APPEAL. WE HAVE TAKEN A VIEW THAT DEDUCTION U/S 10BA QUA DEPB/DDB RECEIPTS IS ALLOWAB LE. ACCORDINGLY, WE DISMISS GROUND NO. (2) OF THE REVEN UES APPEAL. 24. THE FACTS OF GROUND NO. (1) WHICH RELATES TO TR ADING ADDITION OF RS. 10 LAKHS MADE BY THE A.O. ON ACCOUN T OF LOW GROSS PROFIT RATE BY INVOKING PROVISIONS OF SECTION 145(3 ) OF THE ACT ARE THAT DURING THE A.Y. 2004-05, THE ASSESSEE HAS DECL ARED A GROSS PROFIT RATE OF 29.64% ON A TURNOVER OF RS. 41.90 CR ORES AS AGAINST GROSS PROFIT RATE OF 29.92% ON A TURNOVER OF RS. 37 .74 CRORES SHOWN IN THE IMMEDIATELY PRECEDING YEAR I.E. 2003-0 4. THE ASSESSEE DID NOT MAINTAIN STOCK REGISTER. THEREFOR E, ON ACCOUNT OF SLIGHT FALL IN THE GROSS PROFIT RATE AND FOR NON -MAINTENANCE OF THE SALE REGISTER, THE A.O. HAS INVOKED SECTION 145 (3) AND HAS MADE A TRADING ADDITION OF RS. 10 LAKHS. THE LD. C IT(A) HAS DELETED THIS ADDITION BY HOLDING THAT THERE IS NO V ALID REASON EVEN FOR REJECTING THE BOOKS OF ACCOUNT. 29 25. AFTER HEARING BOTH THE SIDES, WE HAVE FOUND IT FOR A FACT THAT THE A.O. HAS NOT PIN-POINTED ANY DEFECT MUCH L ESS ANY MATERIAL DEFECT IN THE BOOKS OF ACCOUNT. THE SLIGH T FALL IN THE GROSS PROFIT RATE IS DUE TO HUGE INCREASE IN THE TU RNOVER OF THIS YEAR. MOREOVER, THE SLIGHT FALL IN THE GROSS PROFI T RATE IS NOT EVEN MATERIAL. STILL FURTHER, IT IS TRITE THAT ONLY ON A CCOUNT OF DIFFERENCE IN GROSS PROFIT RATE ALONE BOOKS OF ACCO UNT 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 ADDI TION 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 S AME. AS A RESULT, AFTER CONFIRMING THE IMPUGNED DELETION, WE DISMISS GROUND NO. (1) OF THIS APPEAL. AS A RESULT THIS AP PEAL OF THE REVENUE STANDS DISMISSED. 26. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN IT A 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. 30 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 L D. CIT(A) DATED 29.5.2007. 28. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL FOR A.Y. 2005-06: 1) THAT THE AUTHORITIES BELOW HAVE ERRED IN LAW AS WE LL AS ON FACTS IN NOT ALLOWING/SUSTAINING THE DISALLOW ANCE THE CLAIM OF ALLEGED BROKERAGE ON SHIPPING FREIGHT OF R S. 1,45,88,769/- AND INTEREST RECEIPTS OF RS. 3,10,635 /- WITHOUT DEDUCTING PAYMENT THEREOF AT RS. 61,14,989/ - 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 T HE LESS CLAIM ALLOWED AS DEDUCTION U/S 10BA IS HIGHLY UNJUS TIFIED. 2) THAT THE AUTHORITIES BELOW HAVE ERRED IN LAW AS WELL AS ON FACTS IN MAKING/SUSTAINING THE ADDITION OF RS . 5 LACS REPRESENTING THE ALLEGED DISALLOWANCES OUT OF THE E XPENSES OF PROFIT AND LOSS ACCOUNT WHICH IS ILLEGAL AND BAD IN LAW. 29. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS I N ITS APPEAL FOR A.Y. 2005-06: 31 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A), JODHPUR HAS ERRED IN: (1) DELETING THE TRADING ADDITION OF RS. 15,00,000/- 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. 30. AFTER HEARING BOTH THE SIDES WE HAVE FOUND THAT THE FACTS OF GROUND NOS. 1 AND 2 OF REVENUES APPEAL AN D GROUND NOS. (1) AND (2) OF ASSESSEES APPEAL ARE, MUTATIS MUTANDIS SIMILAR AND IDENTICAL AS WERE IN A .Y. 2004-05. THEREFORE, WITH THE SAME REASONING WHICH WE HAVE GIVEN IN A.Y. 2004-05 [AS ABOVE], WE HAVE TO A LLOW GROUND NO (1) OF ASSESSEES APPEAL AND PARTLY ALLOW GROUND NO (2) BY RESTRICTING THE ADHOC DISALLOWANCE OF RS. 5 LAKHS OUT OF EXPENSES DEBITED IN THE PROFIT A ND LOSS ACCOUNT TO RS. 3 LAKHS. 32 31. SIMILARLY, WE DISMISS GROUND NOS. 1 AND 2 OF REVENUES APPEAL. THE TRADING ADDITION IS LUMP-SUM AND ADHOC ON ACCOUNT OF SIMILAR REASONS AS GIVEN IN A.Y . 2004-05. THEREFORE, WITH THE HELP OF THE REASONS G IVEN TO CONFIRM THE IMPUGNED DELETION IN A.Y. 2004-05, T HAT THERE IS SLIGHT FALL IN THE GROSS PROFIT RATE AND I NCREASE IN THE TURNOVER AND NO DEFECT HAS BEEN POINTED OUT IN THE BOOKS, WE DISMISS GROUND NO. (1) AND BY FOLLOWI NG OUR VIEW TAKEN IN RESPECT OF ALLOWANCE OF DEDUCTION U/S 10BA IN RESPECT OF DEPB/DDB RECEIPTS, DISMISS GROUN D 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 FOLLOW ING 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. 33 2. THAT THE AUTHORITIES BELOW HAVE ERRED IN LAW AS WELL AS ON FACTS IN NOT ALLOWING/SUSTAINING THE DISALLOW ANCE THE CLAIM OF ALLEGED BROKERAGE ON SHIPPING FREIGHT OF R S. 2,55,147/- FOR THE PURPOSE OF COMPUTING THE EXPORT PROFIT ELIGIBLE FOR DEDUCTION U/S 10BA. THIS BEING RESULT ED IN LESS COMPUTATION OF ELIGIBLE EXPORT PROFIT AND THEREBY T HE LESS CLAIM ALLOWED AS DEDUCTION U/S 10BA IS HIGHLY UNJUS TIFIED. 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 PROFIT ELIGIBLE FOR DEDUCTION U/S 10BA. 34. ITA NO. 309/JU/2011 A.Y. 2008-09 THIS APPEAL IS DIRECTED AGAINST THE ORDER OF THE LD . CIT(A) DATED 7.6.2010. IN THIS APPEAL, THE FOLLOWI NG GROUNDS HAVE BEEN RAISED: 1. THAT THE AUTHORITIES BELOW HAVE ERRED IN LAW AS WELL AS ON FACTS IN TREATING THE RECEIPT OF 34 DDB/DEPB AT RS. 53,83,649/- 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 DISALLOW ANCE THE CLAIM OF ALLEGED BROKERAGE ON SHIPPING FREIGHT OF R S. 1,35,684/FOR THE PURPOSE OF COMPUTING THE EXPORT PR OFIT ELIGIBLE FOR DEDUCTION U/S 10BA. THIS BEING RESULT ED IN LESS COMPUTATION OF ELIGIBLE EXPORT PROFIT AND THEREBY T HE LESS CLAIM ALLOWED AS DEDUCTION U/S 10BA IS HIGHLY UNJUS TIFIED. 35. AS IS EVIDENT, BOTH THE ABOVE GROUNDS ARE TO BE ALLOWED IN THE FAVOUR OF THE ASSESSEE IN VIEW OF OU R AFORESAID DISCUSSION. THEREFORE, WE ALLOW BOTH THE SE GROUNDS AND CONSEQUENTLY ALLOW THE APPEAL OF THE ASSESSEE. 36. AS A RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO. 309/JU/2011 A.Y. 2008-09 STANDS ALLOWED. 35 37. ITA NO. 310/JU/2011 A.Y. 2008-09 M/S MAHARANI ARTS EMPORIUM THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 7.6.2011. 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. 2504579/- AS THE INCOME NOT FORMING PART OF EXPORT PROFIT OF THE UNDERTAKING ELIGIBLE FOR DEDUCTION/EXEMPTION U/S 10BA. 38. THE ABOVE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE, AS THE FACTS IN THIS ASSESSEES CASE AND IN ITS SISTER CONCERN SUNCITY ART EMPORIUMS CASE ARE EXAC TLY IDENTICAL. 39. AS A RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO. 310/JU/2011 FOR A.Y. 2008-09 IS ALLOWED. 40. ITA NOS. 361, 362 & 393/JU/2012 AND 24 & 25/JU/2011 ARE ALL APPEALS OF THE ASSESSEE, NAMELY M/S 36 KUMBHAT EXPORTS. THESE APPEALS PERTAIN TO A.YS. 2 004- 05, 2005-06, 2006-07, 2007-08 AND 2008-09 RESPECTIV ELY. IN ALL THESE APPEALS, THE MAIN ISSUE ON MERITS IS R EGARDS ELIGIBILITY OF DDB/DEPB RECEIPTS FOR EXEMPTION U/S 10BA OF THE ACT. 41. SINCE WE HAVE ALREADY TAKEN A VIEW IN FAVOUR OF ALLOWABILITY WHILE DECIDING THE CASES IN SUNCITY EX PORTS [SUPRA], WE HAVE TO ALLOW THIS COMMON GROUND IN FAV OUR OF THE ASSESSEE IN ALL THESE APPEALS. 42. IN SOME OF THE APPEALS, THE ASSESSEE HAS ALSO R AISED A LEGAL ISSUE CHALLENGING REOPENING U/S 147 R.W.S 1 48 OF THE ACT. BUT THESE LEGAL GROUNDS WERE NOT PRESSED BY THE LD. A.R. AT THE TIME OF HEARING. THEREFORE, TH ESE LEGAL GROUNDS TAKEN IN THE APPEALS STAND DISMISSED AS NOT PRESSED. THE ASSESSEE HAS RAISED THIS LEGAL GR OUNDS IN ITA NOS. 361, 362 & 393/JU/2012 THEREFORE, THESE APPEALS ARE PARTLY ALLOWED. 37 43. TO SUM UP, ALL THE APPEALS ARE DECIDED AS BELO W: 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 A.Y . RESULT ITA NO. 596/JODH/2007 2004-05 DISMISSED ITA NO. 597/JODH/2007 2005-06 DISMISSED 38 M/S. MAHARANI ART EMPORIUM VS DY. CIT A.Y . RESULT ITA NO. 310/JODH/2011 2008-09 ALLOWED M/S. KUMBHAT EXPORTS, JODHPUR VS. DY. CIT A.Y . RESULT ITA NO. 361/JODH/2012 2004-05 PARTLY ALLOWED ITA NO. 362/JODH/2012 2005-06 PARTLY ALLOWED ITA NO. 393/JODH/2011 2006-07 PARTLY ALLOWED ITA NO. 24/JODH/2011 2007-08 ALLOWED ITA NO. 25/JODH/2011 2008-09 ALLOWED ORDER PRONOUNCED IN THE COURT ON 21 ST FEBRUARY, 2013. SD/- SD/- (N.K.SAINI) [HARI OM MARATH A] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 21 ST FEBRUARY, 2013 VL/- 39 COPY TO: THE APPELLANT THE RESPONDENT THE CIT BY ORDER THE CIT(A) THE DR ASSISTANT REGISTRAR ITAT, JODHPUR