2007 (7) TMI 330 - AT - Income Tax

Summary

Issues Involved:
1. Exclusion of a sum from the export turnover for the purpose of computing admissible deduction under section 80HHC.
2. Exclusion of an amount from the export turnover for not being received within six months from the end of the previous year.
3. Increasing the direct cost of the export by not allowing the deduction at 10% of the export incentives.
4. Disallowance of the sum being the quota premium paid to sister concerns.
5. Deleting the disallowance of interest on account of interest-free advances given to the sister concern.

Issue-wise Detailed Analysis:

1. Exclusion of a Sum from the Export Turnover (Ground No. 1):
The assessee contested the exclusion of Rs. 10,20,31,150 from the export turnover for computing deduction under section 80HHC. The assessee argued that the exports were made through sister concerns due to exhausted export quotas. The sister concerns acted as agents, and the export proceeds were transferred to the assessee. However, the Assessing Officer and CIT(A) rejected this plea, stating that the sister concerns had their own quota rights and made exports in their own right. The Tribunal upheld this view, emphasizing that the sister concerns were not agents of the assessee and the export proceeds were not received by the assessee in convertible foreign exchange, as required by section 80HHC.

2. Exclusion of Amount for Not Being Received Within Six Months (Ground No. 8):
The assessee's export proceeds of Rs. 3,46,37,449 were excluded from the export turnover as they were not received within six months from the end of the previous year, and no extension was granted by the Reserve Bank of India. The Tribunal upheld the CIT(A)'s decision, noting that mere application for extension was insufficient without actual approval. The reliance on the Uttam Corporation case was found misplaced as it did not establish a precedent for including delayed export proceeds without RBI approval.

3. Direct Cost of Export and Deduction of Export Incentives (Ground No. 9):
Both parties agreed that the issue of increasing the direct cost of export by not allowing the deduction at 10% of the export incentives should be revisited. The Tribunal directed the Assessing Officer to re-examine the matter in light of the decisions in Surendra Engg. Corporation and Rang International, providing a reasonable opportunity of hearing to the assessee.

4. Disallowance of Quota Premium Paid to Sister Concerns (Ground No. 10):
The assessee paid Rs. 8,86,281 as quota premium to sister concerns, which was disallowed by the Assessing Officer citing violation of the Garment Export Entitlement Policy. The CIT(A) directed verification of whether the deduction was claimed by the assessee. The Tribunal upheld this direction, emphasizing that if the expenditure was for acquiring non-transferable quota rights, it would be hit by the Explanation to section 37(1) and thus not allowable.

5. Deleting Disallowance of Interest on Interest-Free Advances (Department's Grounds):
The Department contested the deletion of disallowance of interest on interest-free advances to sister concerns. The CIT(A) had directed verification of whether the assessee had sufficient interest-free funds. The Tribunal found the CIT(A)'s directions contradictory and remanded the issue for fresh consideration in light of the Supreme Court decision in S.A. Builders Ltd., which requires examining whether the advances were for business purposes and commercially expedient.

Conclusion:
The Tribunal partly allowed the assessee's appeal and treated the Department's appeal as allowed for statistical purposes. The key findings were that the sister concerns were not agents of the assessee, the export proceeds were not received in convertible foreign exchange by the assessee, and the disallowance of interest-free advances needed further examination.