2014 (1) TMI 645 - AT - Income Tax

Deduction u/s 10BA with reference to DEPB DDB etc. Held that - Following M/s. Maral Overseas Limited Vs ACIT 2012 (4) TMI 345 - ITAT INDORE - As per the amended section 10B(4) - Only the profits of the business of the undertaking only is to be considered for working out the profits and gains as are derived by an undertaking from export out of India of eligible articles or things - The profits and the gains of the business of the undertaking is to be worked out as per the provisions of section 28(i) - This does not include the profits of items under sub-sections (iiia) (iiib) (iiic) (iiid) and (iiie) etc. Duty Draw Back and any profit on transfer of DEPB. The plain reading of Section 10BA which deals with export 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 - The sale proceeds of DEPB cannot be considered as part of turnover as it is not the sale proceeds of the articles or things manufactured and sold by the assessee then the profits from sale of DEPB cannot apportioned on treated 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 Decided in favour of assessee. Netting of interest and the method of computation u/s 80HHC of the Act Held that - Following Tata Sponge Iron Limited Vs. C.I.T 2007 (4) TMI 211 - ORISSA High Court - In the case of exporters the interest paid by the assessee is liable to be reduced from interest received by it while calculating deduction u/s 80HHC(1) r.w. Explanation baa - Decided in favour of assessee. Brokerage on Export-Shipping-Freight Held that - This is not income but it is paid as part of shipping freight by the assessee it has to be obviously set off against such payment so as to arrive at the export profit eligible for deduction u/s 10BA of the Act Decided in favour of assessee. Disallowance out of the telephone travelling and coun. Expenses and depreciation on cars Held that - Both the A.O. and the ld. CIT(A) have made adhoc disallowances It would be justified if the disallowance is further reduced to 1/10th of the total claim Partly allowed in favour of assessee. Deduction u/s 80HHC Method of computation - Held that - Entire positive and negative incomes of other than business has been separately accounted for and only the resultant figures have been considered in the final accounts - The net result 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 Id. Assessing authority though accepted the contention of assessee that the interest receipt is business income but holding that the interest income and income from other than export is not eligible for deduction u/s 80HHC of the Act - The Assessing Officer have deviated from the consistent method of calculating profits derived from the export for the purpose of deduction u/s. 80HHC and ignored the provisions contained u/s. 80HHC(3) The issue was set aside with a direction to the Assessing Officer to recalculate the export profit by apportioning the total business profits on the basis of export turnover to total turnover and allow deduction accordingly. Addition on account of low G.P. rate Held that - The A.O. has not pin-pointed any defect much less any material defect in the books of account - The slight fall in the gross profit rate was due to huge increase in the turnover of this year - The slight fall in the gross profit rate was not even material - Only on account of difference in gross profit rate alone books of account cannot be rejected and no addition can be made u/s 145(3) of the Act Decided against Revenue.

Summary

Issues Involved:
1. Deduction under Section 10BA/DEPB/DDB
2. Netting of Interest
3. Brokerage on Shipping Freight
4. Trading Addition
5. Disallowance of Expenses

Detailed Analysis:

A. Deduction under Section 10BA/DEPB/DDB:
The primary issue was whether the receipts from Duty Drawback (DDB), DEPB, and brokerage on export shipping freight qualify for deduction under Section 10BA. The tribunal noted that the Assessing Officer (A.O.) had allowed the deduction under Section 10BA but excluded certain incomes like DDB, DEPB, and brokerage, arguing they were not part of export profit. The CIT(A) allowed the DDB and DEPB receipts but denied the brokerage and interest netting. The tribunal, referencing previous decisions, concluded that DDB and DEPB receipts are part of business income and eligible for deduction under Section 10BA. The tribunal also noted that brokerage on export shipping freight should be considered part of export profit if it is directly related to export activities.

B. Netting of Interest:
The assessee argued that interest paid should be deducted from interest received when calculating export profit under Section 80HHC. The tribunal agreed, citing previous decisions that support netting of interest for exporters. The tribunal directed that interest income should be netted against interest paid, thereby allowing the assessee's claim.

C. Brokerage on Shipping Freight:
The tribunal examined whether brokerage on shipping freight should be included in the export profit. The tribunal found that if brokerage is part of the shipping freight paid by the assessee, it should be set off against such payments to arrive at the export profit eligible for deduction under Section 10BA. The tribunal allowed this claim for the assessee.

D. Trading Addition:
The tribunal addressed the issue of trading addition due to low gross profit rates and non-maintenance of stock registers. The A.O. had made an adhoc trading addition, which the CIT(A) deleted. The tribunal upheld the CIT(A)'s decision, noting that slight variations in gross profit rates and increased turnover do not justify rejecting the books of account or making adhoc additions without pinpointing specific defects.

E. Disallowance of Expenses:
The tribunal addressed disallowances made by the A.O. on expenses like telephone, traveling, and car depreciation. The tribunal found the disallowances to be adhoc and reduced them from 1/5th to 1/10th of the total claim, thereby partly allowing the assessee's appeal.

Individual Appeals:
- ITA No. 40/JU/2007 for A.Y. 2003-04: Partly allowed, reducing adhoc disallowance of expenses.
- ITA Nos. 628/JU/2007 and ITA No. 596/JU/2007 for A.Y. 2004-05: Assessee's appeal partly allowed; Revenue's appeal dismissed.
- ITA No. 629/JU/2007 and ITA No. 597/JU/2007 for A.Y. 2005-06: Assessee's appeal partly allowed; Revenue's appeal dismissed.
- ITA No. 232/JU/2010 for A.Y. 2007-08: Allowed.
- ITA No. 309/JU/2011 for A.Y. 2008-09: Allowed.
- ITA No. 310/JU/2011 for A.Y. 2008-09 (M/s Maharani Arts Emporium): Allowed.
- ITA Nos. 361, 362 & 393/JU/2012 and 24 & 25/JU/2011 (M/s Kumbhat Exports): Partly allowed for some years, allowed for others.

Summary:
The tribunal's decision clarified that DDB and DEPB receipts are eligible for deduction under Section 10BA, interest should be netted for Section 80HHC calculations, and brokerage on shipping freight can be included in export profit if directly related. Adhoc trading additions and disallowances of expenses were largely reduced or dismissed, favoring the assessees.