THE DCIT CIR 18(1), MUMBAI V. M/S. S.K. INTERNATIONAL (EXPORT) CO., MUMBAI

ITA 7258/MUM/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1151 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: J
• Next Hearing Date: 07-06-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 05-12-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: L K AGRAWAL
• Assessee Lawyers: JITENDRA SINGH
• Keywords: Business income; Set aside
• Section: 80HHC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J BEFORE SHRI N.V. VASUDEVAN (JM) & SHRI B. RAMAKOTAI AH (AM) I.T.A.NO. 7258/MUM/07 (ASSESSMENT YEAR : 2004-05) DCIT CIRCLE 18(1) 1 ST FLOOR, PIRAMAL CHAMBERS LALBAUG, MUMBAI-400 012. VS. M/S. S.K. INTERNATIONAL (EXPORT) CO. A-2, UNIT NO. 79 SHAH & NAHAR INDUSTRIAL ESTATE S.J. ROAD MUMBAI-400 020. APPELLANT RESPONDENT PAN/GIR NO. : AAAFS5529G ASSESSEE BY : SHRI K. GOPAL & SHRI JITENDRA SINGH DEPARTMENT BY : SHRI L.K. AGRAWAL ORDER PER N.V. VASUDEVAN, JM :- THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 18.9.2007 OF LEARNED CIT(A)-XVIII, MUMBAI RELATING TO A.Y. 2004-05. 2. GROUND NO. 1 (I) & (II) READS AS FOLLOWS :- 1(I) THE ORDER OF LEARNED CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. (II) LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSIN G OFFICER TO TREAT THE FRIGHT CHARGE OF RS. 68,29,533/- AS BUSIN ESS INCOME FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 80HHC WITHOUT APPRECIATING THE FACT THAT THE RECEIP T OF FREIGHT CHARGES CANNOT BE TREATED AS DERIVED FROM T HE EXPORT BUSINESS. 3. THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN TH E BUSINESS OF 100% EXPORT OF READYMADE GARMENTS. AS PER THE PROVI SIONS OF SECTION 80HHC, THE ASSESSEE IS REQUIRED TO SHOW ITS EXPORT TURNOVER AT FREE ON BOARD (FOB) VALUE BASIS ONLY. FRIEGHT AND INSURANCE CHARGES RECOVERED FROM THE CUSTOMERS CANNOT BE PART OF EXPORT TURNOVE R. THE ASSESSEE INCURS FREIGHT AND INSURANCE CHARGES AT THE TIME OF EXPORT FOR AND ON M/S. S.K. INTERNATIONAL (EXPORT) CO. 2 BEHALF OF ITS CUSTOMER AND THEREAFTER SUCH COSTS AR E REIMBURSED BY THE CUSTOMERS. ANY REIMBURSEMENT OF ACTUAL EXPENSES IN CURRED IN RESPECT OF FREIGHT AND INSURANCE CHARGES RECOVERED FROM CUSTOM ERS ARE SHOWN IN THE EXPORT SALES INVOICES. THE FREIGHT AND INSURA NCE CHARGES RECOVERED FROM THE CUSTOMERS ARE SHOWN BY THE ASSESSEE AS OTH ER INCOME IN THE PROFIT AND LOSS ACCOUNT. THE CUSTOMER PAYS VALUE OF GOODS (ON FOB BASIS) PLUS COST OF FRIGHT AND INSURANCE SHOWN IN THE EXPO RT SALES INVOICE. THE TOTAL VALUE OF EXPORT SALES WORKS WAS RS. 9,54,43,5 78/- (FOB VALUE OF RS. 8,86,07,662/-) FRIGHT AND INSURANCE RS. 68,35,916/- ). THE ASSESSEE HAD SHOWN FRIGHT AND INSURANCE CHARES OF RS. 68,35,916/ - RECOVERED FROM CUSTOMERS UNDER THE HEAD OTHER INCOME SINCE THE EXP ORT TURNOVER AS PER THE PROVISIONS OF SECTION 80HHC OF THE I.T. ACT 196 1 WAS REQUIRED TO BE SHOWN ONLY AT FOB VALUE. THE FIRM HAD ALSO PAID FRI GHT AND INSURANCE CHARGES OF RS. 68,17,600/- TO VARIOUS SHIPPING LINE RS AND OTHER FREIGHT FORWARDERS. THE SAME ARE DEBITED TO THE PROFIT AND LOSS ACCOUNT. ACCORDING TO THE ASSESSEE THE FRIGHT AND INSURANCE CHARGES RECOVERED FROM CUSTOMERS HAD DIRECT NEXUS WITH EXPORT ACTIVIT IES AND THEREFORE HAD TO BE CONSIDERED AS PART OF BUSINESS INCOME OF THE ASSESSEE. IN THE ALTERNATIVE, THE ASSESSEE PLEADED THAT IF THE RECEI PT IS NOT CONSIDERED AS BUSINESS INCOME EVEN THEN THE ENTIRE GROSS RECEIPT CANNOT BE CONSIDERED FOR EXCLUSION FROM BUSINESS INCOME BUT ONLY THE NET RECEIPT, I.E., FREIGHT AND INSURANCE RECEIVED FROM THE CUSTOMER WHICH THE ASSESSEE HAS SHOWN IN THE CREDIT SIDE OF THE PROFIT AND LOSS ACC OUNT MINUS FREIGHT AND INSURANCE PAID BY THE ASSESSEE ON BEHALF OF THE CUS TOMER WHICH IS DEBITED TO THE PROFIT AND LOSS ACCOUNT HAS TO BE RE DUCED FROM THE PROFIT. IN THIS REGARD THE ASSESSEE RELIED ON CERTAIN JUDIC IAL PRONOUNCEMENTS: A) DDIT VS. DIAMOND CREEK, 82 ITD 291 (MUM) B) KHIMIJEE HANSRAJ VS. DCIT, 69 ITO 332 (CAL) C) ACIT VS. SHARDA GUM & CHEMICALS INDUSTRIAL AREA, 76 ITD 282 (JOD) D) R. PRAKASH VS. ACIT, 75 TTJ 546 (COCH) E) HONDA SIEL POWER PRODUCTS LTD. VS. DCIT, 77 ITD 123 (DEL) F) PINK STAR, 72 ITD 137 (BOM) M/S. S.K. INTERNATIONAL (EXPORT) CO. 3 4. THE ASSESSING OFFICER WHILE COMPUTING THE PROFIT S OF THE BUSINESS FOR THE PURPOSE OF ALLOWING DEDUCTION U/S. 80HHC OF THE ACT EXCLUDED THE AFORESAID RECEIPTS FROM THE PROFITS OF THE BUSI NESS. ACCORDING TO THE ASSESSING OFFICER, THE AFORESAID FREIGHT CHARGES RE CEIVED DID NOT HAVE ANY DIRECT NEXUS WITH THE ASSESSEES EXPORT BUSINESS. T HE ASSESSING OFFICER IN THIS REGARD RELIED ON THE DECISION OF HON'BLE BO MBAY HIGH COURT IN THE CASE OF M/S. RAVI RATNA EXPORT PVT. LTD., 246 ITR 4 43(BOM). 5. ON APPEAL BY THE ASSESSEE, LEARNED CIT(A) HELD A S FOLLOWS :- I HAVE CAREFULLY CONSIDERED THE ISSUE INVOLVED IN THIS POINT AND AGREE WITH PROPOSITION OF LEARNED AR THAT THE RECEI PT UNDER THE HEAD FREIGHT CHARGES DIRECTLY RELATED TO THE EXPORT ACTIVITY OF THE APPELLANT. IN FACT, THE EXPORT CANNOT BE IMAGINED W ITHOUT THE INVOLVEMENT OF THIS ACTIVITY. MOREOVER, THE APPELLA NT HAS ALSO INCURRED EXPENDITURE AGAINST THIS RECEIPT IN THE SH APE OF PAYMENTS TO VARIOUS TRANSPORTERS/COURIER SERVICES. THE AMOUN T HAS BEEN RECEIVED IN FOREIGN CURRENCY AND TAKES THE SHAPE OF RECEIPT UNDER THE HEAD SALES. IT IS A DIRECT RESULT OF EXPORT OF GOODS. IN VIEW OF THESE FACTS, I HOLD THAT THE ASSESSING OFFICER HAS ERRED IN EXCLUDING THIS AMOUNT FROM THE COMPUTATION OF DEDUC TION U/S. 80HHC. THIS GROUND OF APPEAL IS THEREFORE ALLOWED. 6. AGGRIEVED BY THE ORDER OF LEARNED CIT(A), THE RE VENUE HAS RAISED AFORESAID GROUNDS OF APPEAL BEFORE THE TRIBUNAL. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LEARNED D.R. RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN IT A NO.200 OF 2009 CIT VS. M/S.ASIAN STAR CO. LTD. JUDGEMENT DATED 19- 3-2010, WHEREIN IT WAS HELD THAT NETTING OF INCOME FROM EXPENDITURE IS NOT ALLOWED. IT WAS SUBMITTED BY HIM THAT THE FREIGHT AND INSURANCE CHA RGES RECEIVED BY THE ASSESSEE CANNOT BE SET OFF AGAINST THE FREIGHT AND INSURANCE CHARGES THE ASSESSEE PAID IN CONNECTION WITH EXPORT. FURTHER R ELIANCE WAS ALSO PLACED ON THE DECISION OF THE HONBLE BOMBAY HIGH C OURT IN ITA NO.2186 OF 2009 IN CIT VS. M/S.DRESSER RAND INDIA PVT.LTD. JUDGMENT DATED 8-4- 2010 WHEREIN IT WAS HELD THAT RECEIPTS WITH NO NEXUS TO EXPORTS HAVE TO BE EXCLUDED FOR S. 80HHC DEDUCTION. WE ARE OF THE VIE W THAT IN THE LIGHT OF THE ABOVE DECISIONS, THE INSURANCE AND FREIGHT CHARGES M/S. S.K. INTERNATIONAL (EXPORT) CO. 4 HAVE TO BE EXCLUDED FROM BUSINESS INCOME. THE ALTERNATIVE ARGUMENT OF THE ASSESSEE THAT THE CORRESPONDING DEBIT OF THESE CHARGES IN THE PROFIT AND LOSS ACCOUNT SHOULD ALSO BE IGNO RED WHILE COMPUTING PROFITS OF BUSINESS DESERVES EXAMINATION. AS CON TENDED BY THE LEARNED COUNSEL FOR THE ASSESSEE THE CORRESPON DING DEBIT OF THESE EXPENSES IN THE PROFIT AND LOSS ACCOUNT HAS TO BE REMOVED OTHERWISE THE TRUE PROFITS OF THE BUSINESS WILL NOT BE REFLEC TED. IN OTHER WORDS THE EXPENDITURE ON ACCOUNT OF FREIGHT AND IN SURANCE CHARGES PAID BY THE ASSESSEE WAS IN FACT NOT PAID BY TH E ASSESSEE AND THEREFORE THE SAME WILL NOT GO TO REDUCE HIS BUSINESS PROFITS AND THEREFORE TO THAT EXTENT THE PROFITS OF BUSINESS WILL B E SHOWN LESS. THE FREIGHT AND INSURANCE CHARGES DEBITED IN THE PR OFIT AND LOSS ACCOUNT CANNOT BE SAID TO BE WHOLLY AND EXCLUSIVELY INCURRED BY THE ASSESSEE FOR THE PURPOSE OF BUSINESS OF THE ASSE SSEE AND CANNOT BE ALLOWED AS A DEDUCTION. THE LEARNED DR HOWEVER SUBMITTED THAT THE ASSESSING OFFICER HAS TO EXAMINE EACH OF THE RECEIPTS OF FREIGHT AND INSURANCE FROM ITS CUSTOMERS BY THE ASSESSEE WHICH IN ALL WAS RS.68,35,916/-. HE HAS ALSO TO EXAMINE THE PAY MENT OF FREIGHT AND INSURANCE CHARGES BY THE ASSESSEE TO VARIOUS SHIPPI NG LINERS AND FREIGHT FORWARDERS OF RS. 68,17,600/-. IF HE FINDS THAT TH E RECEIPTS IN THE FORM OF FREIGHT AND INSURANCE CHARGES ARE PAID OVER AS FREI GHT AND INSURANCE CHARGES ONLY THEN THE DEBIT IN THE PROFIT AND LOSS ACCOUNT SHOULD BE DISREGARDED IN ARRIVING AT THE PROFITS OF BUSINESS. IN THIS REGARD IT WAS SUBMITTED BY HIM THAT THE FREIGHT AND INSURANCE CHA RGES DEBITED IN THE PROFIT AND LOSS ACCOUNT COULD BE IN RELATION TO SOM E OTHER TRANSACTIONS AND NOT RELATED TO THE TRANSACTIONS IN RESPECT OF W HICH FREIGHT AND INSURANCE CHARGES WERE COLLECTED BY THE ASSESSEE FR OM ITS CUSTOMERS AND SHOWN IN THE CREDIT SIDE OF THE PROFIT AND LOSS ACC OUNT. WE AGREE WITH THE SUBMISSIONS OF LEARNED DR. EVEN LEARNED COUNSEL FOR THE ASSESSEE DID NOT HAVE ANY OBJECTION FOR SUCH EXAMINATION BY THE ASSESSING OFFICER. WE THEREFORE SET ASIDE THE ORDER OF LEARNED CIT(A) ON THIS ISSUE AND M/S. S.K. INTERNATIONAL (EXPORT) CO. 5 REMAND THE SAME TO THE ASSESSING OFFICER FOR FRESH CONSIDERATION IN THE LIGHT OF THE OBSERVATIONS MADE ABOVE. THE ASSESSEE WILL SHOW AS TO HOW FREIGHT AND INSURANCE CHARGES SHOWN IN THE CREDIT S IDE OF THE PROFIT AND LOSS ACCOUNT AND FREIGHT AND INSURANCE CHARGES SHOW N IN THE DEBIT SIDE OF THE PROFIT AND LOSS ACCOUNT HAVE A DIRECT NEXUS. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT IN SOME CASES FREIGHT AND INSURANCE CHARGES ACCOUNTED FOR IN A PREVIOUS YEAR MIGHT BE A CTUALLY BE PAID IN A SUBSEQUENT PREVIOUS YEAR AND IN SUCH EVENT THE ASSE SSEE SHOULD BE GIVEN BENEFIT OF FRIGHT AND INSURANCE CHARGES ACTUA LLY DEBITED TO THE PROFIT AND LOSS ACCOUNT. WE AGREE WITH THIS SUBMISSION OF LEARNED COUNSEL FOR THE ASSESSEE ALSO. THE ASSESSING OFFICER WILL EXAMI NE THE ISSUE IN THE LIGHT OF THE OBSERVATIONS SET OUT ABOVE. 8. GROUND NO. 1(III)(&(IV) READ AS FOLLOWS :- (III) THE LEARNED CIT(A) ERRED IN DIRECTING THE ASS ESSING OFFICER TO CONSIDER THE SERVICE CHARGES RECEIVED AT RS. 1,1 7,533/- AS BUSINESS INCOME FOR THE PURPOSE OF COMPUTING DED UCTION U/S. 80HHC WITHOUT APPRECIATING THE FACT THAT THE F ORMULA LAID DOWN IN SECTION 80HHC IN RESPECT OF DETERMININ G BUSINESS PROFIT DOES NOT INCLUDE SERVICE CHARGES AN D THE SAME HAS NO DIRECTED NEXUS WITH THE SALE PROCEEDS F ROM THE EXPORT ACTIVITIES. (IV) LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSIN G OFFICER TO TREAT THE DISCOUNT RECEIVED OF RS. 1,38,389/- BY TH E ASSESSEE AS ELIGIBLE FOR DEDUCTION U/S. 80HHC WITHO UT APPRECIATING THE FACT THE RECEIPT OF DISCOUNT DO NO T HAVE ANY NEXUS WITH THE SALE PROCEEDS FROM THE EXPORT ACTIVI TIES. 9. ON THIS ASPECT, WE FIND THAT THE NATURE OF SERVI CE CHARGES RECEIVED BY THE ASSESSEE HAS NOT BEEN EXAMINED BY THE ASSESS ING OFFICER. SIMILARLY, NATURE OF DISCOUNT RECEIVED BY THE ASSES SEE HAS ALSO NOT BEEN EXAMINED BY THE ASSESSING OFFICER. 10. BEFORE LEARNED CIT(A), ASSESSEE HAS ARGUED THAT SERVICES CHARGES HAVE BEEN RECEIVED FROM FOREIGN CUSTOMERS AGAINST S AMPLING WORK. SIMILARLY, DISCOUNT HAS BEEN RECEIVED FROM CREDITOR S. THE ASSESSEE SUBMITTED THAT BOTH THE RECEIPTS ARE PART OF RECEIP TS RELATED TO EXPORT M/S. S.K. INTERNATIONAL (EXPORT) CO. 6 BUSINESS. THE LEARNED CIT(A) ACCEPTED THE PLEA OF THE ASSESSEE AND ALLOWED THE CLAIM OF THE ASSESSEE. 11. BEFORE US, THE LEARNED DR HAS PLACED RELIANCE O N THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. AS IAN STAR CO. LTD.(SUPRA) AND CIT VS. M/S. DRESSER RAND INDIA P. LTD. (SUPRA) WHEREIN HON'BLE BOMBAY HIGH COURT HAS HELD THAT RECEIPTS CO NSTITUTING INDEPENDENT INCOME HAVING NO NEXUS TO THE EXPORTS H AVE TO BE REDUCED FROM THE BUSINESS PROFIT UNDER CLAUSE (BAA) SO AS T O AVOID DISTORTION IN THE COMPUTATION OF EXPORT PROFITS. WE ARE OF THE VI EW THAT THE NATURE OF THE RECEIPT REQUIRES EXAMINATION BY THE ASSESSING O FFICER IN THE LIGHT OF THE LAW LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE DECISIONS REFERRED TO ABOVE AND THEREFORE THE ISSUE IS REMAND ED TO THE ASSESSING OFFICER TO EXAMINE THE NATURE OF RECEIPTS AND TO VE RIFY THE SAME AS TO HOW THEY HAVE NEXUS WITH EXPORTS. IN CASE THEY ARE FOU ND NOT TO HAVE ANY NEXUS WITH THE EXPORTS, THEN ONLY 90% OF THESE RECE IPTS HAVE TO BE EXCLUDED FROM THE PROFITS OF BUSINESS UNDER EXPLN.( BAA) TO SEC.80HHC AND NOT THE ENTIRE RECEIPTS. 12. IN THE RESULT, APPEAL OF THE REVENUE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 9 TH DAY OF JULY2010. SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER SD/- (N.V. VASUDEVAN) JUDICIAL MEMBER DATED : 9 TH JULY, 2010 COPY TO : 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT(A)-CONCERNED. 4. THE CIT, CONCERNED. 5. THE DR CONCERNED, MUMBAI 6. GUARD FILE BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI PS