1990 (12) TMI 147 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of cash assistance received by the assessee.
2. Deductibility of cash assistance paid to manufacturers.
3. Applicability of public policy to the transfer of export incentives.
4. Treatment of duty drawback and export incentives as income.

Issue-wise Detailed Analysis:

1. Taxability of Cash Assistance Received by the Assessee:
The assessee received cash assistance of Rs. 38,23,642 during the assessment year 1981-82, out of which Rs. 30,83,920 was paid to various manufacturers. The balance amount of Rs. 7,39,722 was declared as the assessee's income. The Income-tax Officer (ITO) initially disallowed the amount of Rs. 30,83,920, considering it as the assessee's income. The CIT(Appeals) directed the ITO to verify if the transfer of cash assistance was permissible under public policy and the relevant import-export regulations. Upon further appeal, it was held that the cash assistance received by the assessee was taxable as a trading receipt, supported by the retrospective amendment of section 2(24)(vb) and section 28(iiib) with effect from 1-4-1967 by the Finance Act, 1990. The cross-objection by the assessee challenging the taxability of Rs. 7,39,723 was dismissed.

2. Deductibility of Cash Assistance Paid to Manufacturers:
The ITO disallowed the deduction of Rs. 30,83,920 paid to manufacturers, citing lack of business expediency under section 37(1) and public policy concerns. The CIT(Appeals) noted that the ITO did not fully verify the facts as directed by the IAC and instructed the ITO to re-examine the matter. On further appeal, it was determined that the agreements between the assessee and manufacturers included provisions for the transfer of export entitlements, including cash assistance, to the manufacturers. The Tribunal concluded that the transfer of cash incentives was in conformity with public policy and the relevant import-export regulations, thus allowing the deduction of Rs. 30,83,920.

3. Applicability of Public Policy to the Transfer of Export Incentives:
The ITO argued that sharing export incentives with non-exporters was against public policy and could not be allowed as a deduction. However, the CIT(Appeals) and the Tribunal found that the agreements between the assessee and manufacturers were in line with the import-export policy, specifically para 165, which allowed third-party claims on export entitlements with proper disclaimers. The Tribunal confirmed that the transfer of export incentives was not against public policy, supported by clarifications from the Engineering Export Promotion Council and the Federation of Indian Export Organisations.

4. Treatment of Duty Drawback and Export Incentives as Income:
The ITO included the entire amount of duty drawback and export incentives as the assessee's income, while the assessee argued that a significant portion was passed on to manufacturers. The CIT(Appeals) held that the duty drawback and export incentives were transferable and excluded the amounts passed on to manufacturers from the assessee's income. The Tribunal upheld this view, stating that the agreements created a charge by which the income from cash incentives was diverted at the source to the manufacturers. The Tribunal also referenced the CBDT Circular No. 466, which supported the treatment of such transfers as allowable business expenditure under section 37(1).

Conclusion:
The appeal by the department and the cross-objection by the assessee were both dismissed. The Tribunal affirmed that the cash assistance and duty drawbacks were transferable and their transfer did not violate public policy. The amounts transferred to manufacturers were excluded from the assessee's income, and the remaining cash assistance was taxable as a trading receipt.