2008 (7) TMI 455 - AT - Income Tax

Claim for deduction under ss. 80HHC and 80-IB - business profits derived by the assessee - Deduction u/s 80-IB - Duty drawback/DEPB - Disallowance of various expenses on ad hoc basis. Claim for deduction under ss. 80HHC and 80-IB - business profits derived by the assessee - manufacturer and exporter of aluminum art wares, brass art wares, EPNS wares and other Indian handicrafts - AO for the purpose of computing deduction u/s. 80HHC reduced the amount of deductions u/s. 80-IB and on the balance he allowed deduction u/s. 80HHC of the Act - CIT(A) upheld the stand taken by the AO - HELD THAT - From the language of s. 80-IA(9) it is clear that deduction to the extent of profits and gains allowed u/s. 80-IA shall not be allowed under any other provisions of Chapter VI-A under the heading C.-Deductions in respect of certain incomes . Sec. 80HHC falls under the heading C.-Deductions in respect of certain incomes of Chapter VI-A. Therefore, where an assessee is entitled to both the deductions under, ss. 80HHC and 80-IA, deduction u/s. 80HHC will be available on profits derived from export business after reducing the amount of deduction allowed u/s. 80-IA of the Act - Since provisions of s. 80-IA(9) are applicable to s. 80-IB by virtue of provisions of s. 80-IB(13), the amount of deduction allowable under s. 80-IB will be reduced from profits derived from export business for the purpose of deduction under s. 80HHC. However, there was difference of opinion amongst various Benches of this Tribunal. The controversy amongst the various Benches of the Tribunal has been set at rest by the decision of Tribunal, Chennai Special Bench in the case of Asstt. CIT vs. Rogini Garments 2007 (4) TMI 122 - ITAT, CHENNAI wherein it has been held that relief u/s. 80-IA should be deducted from profits and gains of assessee's business before computing relief under s. 80HHC of the Act. In the case of CIT vs. Rochi Ram Sons 2004 (7) TMI 75 - RAJASTHAN HIGH COURT , the issue related to deduction under ss. 80-IA and 80HHC, but since the assessment year involved was 1995-96 and the amendment in s. 80-IA was made w.e.f. 1st April, 1999 by the Finance Act, 1998, inserting sub-s. (9A), Court decided the matter on merits by holding that deduction under ss. 80-IA and 80HHC will be allowable on gross total income and not on the balance amount after any deduction made under any section. Contention of the ld AR of the assessee is that Hon'ble Madras High Court in the case of SCM Creations 2008 (3) TMI 223 - MADRAS HIGH COURT , one of the interveners in Rogini Garments has allowed the appeal in its favour. Therefore, the assessee's case is covered by the decision in the case of SCM Creations which is only decision of any High Court available on the issue. It is a settled law that a law declared by the Supreme Court/High Court has a binding effect as is contemplated by Art. 141. According to the well-settled theory of precedents, every decision contains three basic postulates-(i) finding of material facts, direct and inferential. An inferential finding of fact is the inference which the Judge draws from the direct or perceptible facts; (ii) statements of the principles of law applicable to the legal problems disclosed by the facts; and (iii) judgment based on combined effect of the above. A deliberate judicial decision arrived at after hearing an argument as a question which arises in the case or is put in issue may constitute a precedent, no matter for what reason, and the precedent by long recognition may mature into rule of stare decisis. It is the rule deducible from the application of law to the facts and circumstances of the case which constitutes ratio decidendi. Hon'ble Supreme Court in Union of India vs. Raghubir Singh (Decd by Liquidetor) 1989 (5) TMI 54 - SUPREME COURT has held that the doctrine of binding precedent has the merit of promoting a certainty and consistency in judicial decisions, and enables an organic development of law, besides providing assurance to the individual as to the consequences of transactions forming part of his daily affairs. And therefore, the need for a clear and consistent enunciation of legal principles in the decision of a Court . In State of Punjab vs. Surinder Kumar 1991 (12) TMI 57 - SUPREME COURT , held that a decision is available as a precedent only if it decides a question of law. From the decision of Hon'ble Madras High Court 2008 (3) TMI 223 - MADRAS HIGH COURT , the counsel appearing for SCM Creations did not refer to the provisions of s. 80-IA(9A) before the Hon'ble Madras High Court and hence their Lordships have no occasion to examine the provisions of s. 80-IA(9A) inserted by the Finance Act, 1998 w.e.f. 1st April, 1999. At the same time we cannot overlook the insertion of sub-s. (9A) of s. 80-IA for the purpose of computation u/s. 80HHC. Tribunal in the case of Rogini Garments had examined the provisions of s. 80-IA(9A) and has held that the relief allowed u/s. 80-IA should be deducted from profits and gains of assessee's business before computing relief u/s. 80HHC of the Act. The decision of the Tribunal is binding on us. Respectfully following the same, it is held that the deduction claimed and allowed u/. 80-IB(13) will be reduced from eligible profits of business for computation of deduction u/s. 80HHC of the Act. Deduction u/s 80-IB - Duty drawback/DEPB - HELD THAT - AO has not allowed deduction under s. 80-IB of the Act in respect of duty drawback and DEPB on the ground that these were not derived from industrial activities of the assessee. Secs. 80-IA and 80-IB were substituted for s. 80-IA by the Finance Act, 1999 w.e.f. 1st April, 2000. The present s. 80-IA was substituted by the Finance Act, 2001 w.e.f. 1st April, 2002. On comparison of phraseology used in s. 80-IA as stood prior to the amendment by the Finance Act, 1999 and s. 80-IB, we find that the words used convey the same meaning that any profits and gains derived from any business of undertaking will be eligible for deduction. These words are common in both the sections. Therefore, for eligibility of deduction under these sections, the profits and gains derived by the undertaking should have the nexus with the business activities of the industrial undertaking. In other words, the profits and gains on which deduction u/s. 80-IB of the Act will be available should be from the business of industrial undertaking referred to in sub-ss. (3) to (11A) of the Act. As long as the income is derived from business of the undertaking, the assessee will be eligible for deduction u/s. 80-IB of the Act. Respectfully following the Supreme Court decision in CIT vs. Sterling Foods 1999 (4) TMI 1 - SUPREME COURT and Cambay Electric Supply Industrial Co. Ltd. vs. CIT 1978 (4) TMI 1 - SUPREME COURT and CIT vs. Eltek SGS (P) Ltd 2008 (2) TMI 17 - DELHI HIGH COURT . It is held that the assessee will be entitled for deduction u/s. 80-IB of the Act in respect of duty drawback and DEPB received by it as the same has direct nexus with the business of industrial undertaking. Disallowance of various expenses on ad hoc basis - AO disallowed 10 per cent that the expenditure of personal nature could not be ruled out while on foreign tour - CIT(A) upheld the stand taken by the AO - HELD THAT - The issue is squarely covered by the decision of Tribunal in the case of Mahendra Oil Cake Industries (P) Ltd. vs. Asstt. CIT 1996 (3) TMI 148 - ITAT AHMEDABAD-A wherein it was held that there was no justification in making the ad hoc disallowance to the extent of 1/4th of the total foreign tour expenditure without pointing out any specific item or instance of personal expenses. Respectfully following the precedent, the addition confirmed by the learned CIT(A) is deleted. The AO is directed to allow the relief to the assessee. In the result, the appeal filed by the assessee is partly allowed.

Summary

Issues Involved:
1. Deduction under Section 80HHC of the IT Act by reducing the amount of deduction allowed under Section 80-IB.
2. Deduction under Section 80-IB in respect of duty drawback/DEPB.
3. Disallowance of various expenses on an ad hoc basis.

Issue-wise Detailed Analysis:

1. Deduction under Section 80HHC by reducing the amount of deduction allowed under Section 80-IB:

The first issue pertains to whether the deduction under Section 80HHC should be computed after reducing the amount of deduction allowed under Section 80-IB. The assessee, a manufacturer and exporter, claimed deductions under both sections. The AO, referring to Sections 80-IB(13), 80-IA(9), and 80HHC(4B), held that once a deduction is allowed under Section 80-IB, it should be reduced from the profits for computing deduction under Section 80HHC. The CIT(A) upheld this view.

The assessee's representative cited the Hon'ble Madras High Court's decision in SCM Creations vs. Asstt. CIT, which ruled against the Revenue. However, the Departmental Representative argued that Section 80-IA(9) explicitly prevents double deductions on the same income under different provisions. The Tribunal noted that Section 80-IA(9) mandates that profits allowed as a deduction under Section 80-IA should not be allowed under any other provisions of Chapter VI-A, which includes Section 80HHC.

The Tribunal, referencing the Special Bench decision in Asstt. CIT vs. Rogini Garments, concluded that the relief under Section 80-IA should be deducted from the profits before computing the deduction under Section 80HHC. The Tribunal also noted that the Madras High Court in SCM Creations did not consider Section 80-IA(9A), which was inserted by the Finance Act, 1998, effective from April 1, 1999. Therefore, the Tribunal held that the deduction claimed and allowed under Section 80-IB should be reduced from the eligible profits for computing the deduction under Section 80HHC.

2. Deduction under Section 80-IB in respect of duty drawback/DEPB:

The second issue concerns whether duty drawback and DEPB are eligible for deduction under Section 80-IB. The AO excluded these amounts from the deduction, which the CIT(A) upheld, citing a lack of direct nexus between these receipts and the industrial undertaking's business.

The assessee's representative argued that duty drawback and DEPB are derived from the business of the industrial undertaking, citing the Delhi High Court's decision in CIT vs. Eltek SGS (P) Ltd., which held that duty drawback is a profit derived from the business of the industrial undertaking. The Tribunal, referencing the Delhi High Court's decision, concluded that duty drawback and DEPB receipts have a direct nexus with the business of the industrial undertaking and are therefore eligible for deduction under Section 80-IB.

The Tribunal also cited its previous decisions in Bharat Rasayan Ltd. vs. Asstt. CIT and Anil Kumar Rastogi vs. Asstt. CIT, which supported the view that duty drawback and DEPB receipts are eligible for deduction under Section 80-IB. Consequently, the Tribunal held that the assessee is entitled to the deduction under Section 80-IB for duty drawback and DEPB receipts.

3. Disallowance of various expenses on an ad hoc basis:

The final issue involves the disallowance of various expenses on an ad hoc basis, particularly foreign tour expenses. The AO disallowed 10% of the foreign tour expenses, suspecting personal expenditure, which the CIT(A) upheld.

The assessee's representative argued that the disallowance was made without pointing out any specific personal expenses and was therefore based on conjecture. The Tribunal agreed, noting that the AO had not provided evidence of personal expenses. Citing the Tribunal's decision in Mahendra Oil Cake Industries (P) Ltd. vs. Asstt. CIT, which held that ad hoc disallowances without specific evidence are unjustified, the Tribunal deleted the disallowance and directed the AO to allow the relief.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the reduction of the deduction under Section 80-IB from the profits for computing the deduction under Section 80HHC. It allowed the deduction under Section 80-IB for duty drawback and DEPB receipts and deleted the ad hoc disallowance of foreign tour expenses.