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2008 (9) TMI 621 - AT - Income TaxLoss on account of irrecoverability of advances - ascertaining the advances paid for acquiring capital assets - CIT(A) held that, these are advances in the nature of business and revenue expenses - allowed the appeal of the assessee - ld DR submitted that such expenses are of capital nature and therefore, if the advances relatable to capital expenditure are written off, then such loss is a capital loss and is not allowable. HELD THAT - The Hon ble Privy Council in the case of CIT v. Motiram Nandram 1939 (11) TMI 13 - PRIVY COUNCIL had an occasion to consider as to whether the loss of advances is a trading loss or capital loss. In that case, the assessee advanced money on interest for securing organizing agency of oil company. The Hon ble Privy Council observed that the purpose of giving deposit was to secure an enduring benefit of a capital nature. The loss of the deposit was therefore is a loss of capital and could not be deducted from the profits of the business made by the assessee for the purpose of income-tax. Therefore, it is clear that an advance, which has been given for acquiring a capital assets or for securing an enduring benefit cannot be considered as a trading loss to be allowable when such advance becomes irrecoverable. Hence, we uphold the finding of the AO that in case advance has been given for acquiring a capital asset, then it will not be allowable as a trading loss. Free trade zone - total turnover - Expenditure incurred in foreign currency - CIT(A) has erred in working out export turnover by reducing 50 per cent of communication charges and entire expenditure under technical service charges - HELD THAT - In the case of the assessee, there are no domestic sales and all the sales are related to exports. Hence, as per the Circular issued by the Board, the assessee is entitled to deduction of entire profit. This is possible when the total turnover is considered on the same lines as export turnover, meaning thereby, the total turnover should be sum of export turnover and domestic turnover. The Board Circular No. 717, explains the scope and effect of the newly inserted section 10A(2)(ia) by the Finance Act, 1995. This section was introduced so that industrial undertakings who exported 75 per cent of their production were made eligible for deduction u/s 10A. It made clear that the units which export less than 75 per cent of the turnover can avail themselves of the normal 100 per cent deduction u/s 80HHC to the extent of the export profits. This makes it clear that the words total turnover should be understood in the same sense as the definition given in section 80HHC. For calculating as to whether export is less than 75 per cent or more, one cannot use the different yardstick for the total turnover for the purpose of sections 10A and 80HHC. Hence, to say that the definition of total turnover as contained in section 80HHC cannot be imported is not acceptable in view of the Circular of the Board. An item, which is not included in the export turnover has to be excluded from the total turnover. The ld CIT(A) has given the finding based on the literal interpretation of the words total turnover . The Hon ble Apex Court in the case of Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME COURT has already held that meaning of the words total turnover as mentioned in other enactments cannot be imported in view of the objective for which the section has been enacted to allow deduction in respect of profits from export. It is a well-settled Rule of construction that where the plain literal interpretation of its statutory provision provides a manifestly absurd and unjust result, which could never have been intended by the Legislature, the Court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction Luke v. IRC 1963 (2) TMI 46 - HOUSE OF LORDS . Following this Rule of interpretation and considering the discussion, we hold that whatever is not included in the export turnover cannot be included in the total turnover as total turnover is the sum of export turnover plus domestic turnover. Since the issue before us stands covered by the decision of the Tribunal in the case of other assessee s, therefore, respectfully following that we hold that whatever is not included in export turnover is not to be included in the total turnover. Before parting we would like to mention that judicial discipline requires that quality of wisdom should yield to the hierarchy of system. The ld CIT(A) is bound to follow the decision of the jurisdictional Tribunal as held by the MP High Court in the case of Agrawal Warehousing Leasing Ltd. v. CIT 2002 (7) TMI 86 - MADHYA PRADESH HIGH COURT . Telecommunication charges - HELD THAT - It is provided that expenses relating to delivery is to be excluded from export turnover. Since no special details were provided, AO was justified in estimating at 50 per cent of the total expenses relating to telecommunication charges as expenses for delivery of goods or services. The AO was also justified in excluding the expenses relating to technical services as per the facts on record as such expenses were incurred in foreign exchange. However, these issues become academic in view of the fact that in the case of the assessee, total turnover is the same as export turnover as there is no domestic turnover. In the result, the appeal filed by the revenue for the AY 2000-01 is allowed for statistical purpose while the appeal filed by the assessee for the AY 2004-05 is partly allowed.
Issues Involved:
1. Allowability of advances written off as capital or revenue expenditure. 2. Computation of export turnover and total turnover under section 10A of the Income-tax Act for the assessment year 2004-05. Detailed Analysis: 1. Allowability of Advances Written Off as Capital or Revenue Expenditure: The revenue appealed against the CIT(A)'s decision allowing advances written off, which were considered capital in nature, amounting to Rs. 25.74 lakhs. The Assessing Officer (AO) had initially allowed Rs. 21,06,726 as revenue expenditure but disallowed Rs. 25,74,009 as capital expenditure. The assessee argued that all advances were towards revenue expenditure and relied on past ITAT decisions and the Bombay High Court's ruling in I.B.M. World Trade Corpn. v. CIT [1990] 186 ITR 412. The CIT(A) allowed the appeal, treating the advances as revenue expenses. The Tribunal noted that the AO had not provided detailed reasons for treating certain advances as capital expenditures and remitted the issue back to the AO for a detailed examination. The Tribunal upheld that advances for acquiring capital assets are not allowable as trading losses, referencing CIT v. Motiram Nandram [1940] 8 ITR 132 and CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649. 2. Computation of Export Turnover and Total Turnover Under Section 10A: The assessee's appeal concerned the calculation of export turnover by reducing 50% of communication charges and entire technical service charges. The AO had excluded these expenses from the export turnover but not from the total turnover, leading to a reduced deduction under section 10A. The CIT(A) upheld the AO's decision, stating that the definition of total turnover in section 10A does not necessarily align with sections 80HHE or 80HHC. The Tribunal, however, disagreed, referencing the Supreme Court's decision in CIT v. Lakshmi Machine Works [2007] 290 ITR 667, which held that items excluded from export turnover should also be excluded from total turnover to maintain consistency. The Tribunal cited multiple cases, including Tata Elxsi Ltd. v. Asstt. CIT [2008] 155 TTJ 423, supporting the principle that total turnover should be computed in a manner consistent with export turnover. The Tribunal directed the AO to exclude the expenses from both export and total turnover, effectively allowing the assessee's appeal. Conclusion: - The appeal by the revenue for the assessment year 2000-01 was allowed for statistical purposes, requiring further examination by the AO. - The appeal by the assessee for the assessment year 2004-05 was partly allowed, with the Tribunal directing the AO to exclude the disputed expenses from both export and total turnover, ensuring the correct computation of the deduction under section 10A.
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