1985 (9) TMI 103 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition of Rs. 54,80,149 by the Commissioner (Appeals).
2. Direction to allow weighted deduction under section 35B of the Income-tax Act, 1961, for expenses of Rs. 12,773 and Rs. 59,745.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 54,80,149:

The appellant company, engaged in the manufacture and sale of fabrics, especially sarees, follows a mercantile method of accounting for sales proceeds but records export benefits (drawback, cash assistance, and replenishment licences) on a receipt basis. The IAC argued that the export benefits should be included in the income as soon as the export sales are recorded to reflect the true profits. The IAC recast the trading account to include these benefits, resulting in an addition of Rs. 54,80,149 as concealed income.

The Commissioner (Appeals) disagreed with the IAC's approach, stating that the method of accounting followed by the assessee does reflect true profits over the years. He noted that the IAC did not claim the accounts were incorrect or incomplete but only that the method did not reflect true profits. The Commissioner (Appeals) concluded that export benefits are revenue receipts of the export business but do not constitute part of the export sale proceeds. They arise from government rules and schemes, not from the sale itself.

Regarding the nature and timing of the receipts, the Commissioner (Appeals) held that duty drawback and cash assistance accrue only when sanctioned by the government, not at the time of export sales. This view was supported by various case laws, including the decision of the Gujarat High Court in Ahmedabad Mfg. & Calico Printing Co. Ltd. v. CIT. The Commissioner (Appeals) also upheld the assessee's practice of recording export benefits on a cash basis, as it was consistent with sections 4, 5, and 145 of the Act.

The Tribunal agreed with the Commissioner (Appeals), emphasizing that export incentives should be recorded on a receipt basis and that the assessee's method of accounting was proper. The Tribunal noted that the ITO has the discretion to determine the income if the method of accounting does not correctly reflect the same, but in this case, the assessee's hybrid system was appropriate. The Tribunal upheld the Commissioner (Appeals)'s order, rejecting the revenue's appeal.

2. Weighted Deduction under Section 35B:

The second issue involved the allowance of weighted deduction under section 35B for expenses of Rs. 12,773 and Rs. 59,745. The Commissioner (Appeals) allowed the claim, and the Tribunal found no reason to interfere with this decision. The Tribunal upheld the Commissioner (Appeals)'s order, dismissing the revenue's appeal on this ground as well.

Conclusion:

The Tribunal dismissed the appeal, upholding the Commissioner (Appeals)'s order on both grounds. The method of accounting followed by the assessee was deemed appropriate, and the weighted deduction under section 35B was correctly allowed.