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TMI Blog1993 (7) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... mainly of commission income from such consultations. In view of the prescription of uniform accounting year for all companies by the Income-tax Act, the previous year relevant to the assessment year under appeal, was for twenty-one months. During the previous year relevant to the assessment year under appeal, in addition to its usual consultation activities, it exported fashion garments and sports goods of an invoice value of Rs. 46,86,435. The assessee claimed deduction under section 80HHC of Rs. 18,93,970. 3. The Assessing Officer (hereinafter referred to as AO), had noted that, the cost of goods sold was Rs. 43,18,942 and the gross profit on sale of goods was just Rs. 3,69,003. The AO also had noted that, the claim of deduction was based on the report of the auditor. The AO had observed that, the assessee had stated that, the total turnover at Rs. 143,43,602. including commission income of Rs. 91,08,191. The AO had noted that the assessee due to incapacity to execute all the export orders received by it, passed the same to other exporters, for which it was paid commission at the rate of 10 per cent of the export value, in India and in Indian rupees. The AO while computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase in the amount of deduction from Rs. 2,92,170. 6. The learned counsel of the assessee. Shri Ganesan submitted that, the CIT (A) was wrong in excluding the commission income from the concept of turnover of the business. He contended that, for the business the term ' turnover ' is not merely a total of sales of goods, but, is the total figure of credits to the profit and loss account. He pleaded that, section 80HHC of the Act, refers to the export of goods and merchandise in sub-section (1), and the quantum of deduction is to be determined concerning sub-clauses (a) and (b) of sub-section (3) of that section. He pointed out that, sub-clause (a), refers to an assessee, who has exclusive export business activity, i.e., no other activity and, therefore, this sub-clause has no applicability to the assessee, because in addition to the export activity, the assessee has earned income from commission in India and hence would fall within the ambit of sub-clause (b). He submitted that according to sub-clause (b), the assessee, if it has profit derived from exports, as well as from its domestic business, then, total of the profit from exports and others, would need to be apportioned in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, assessee could not have claimed any deduction at all. But, she submitted that since the AO, had allowed deduction on some basis, she has no alternative, but to plead for limitting the deduction to that extent only. She referred to the decision of the Tribunal in Impulse India (P.) Ltd. v. ITO [1992] 40 ITD 36 (Delhi), for the proposition that, commission could not be treated as turnover. She also referred to the decision of the Tribunal in V.D. Swami Co. Ltd. v. Dy. CIT [1993] 44 ITD 91 (Mad.), for the proposition that, the intention of section 80HHC being to identify the export profits, and commission earned in India, could not be considered for working out the export profits or for working out the eligible deduction. 8. We have very carefully considered the rival submissions and have perused all the circulars, issued as clarifications, relating to section 80HHC of the Act and to the materials that have been placed on our record, to which there had been no objection from the department that, they are not so placed before the authorities below. Because, the issue revolves around the interpretation of the provisions of section 80HHC of the Income-tax Act. we shall reproduce t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) minerals and ores. (3) For the purposes of sub-section (1), profits derived from the export of goods or merchandise out ofIndiashall be,---- (a) in a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profits of the business as computed under the head ' Profits and gains of business or profession '; (b) In a case where the business carried on by the assessee does not consist exclusively of the export out of India of such goods or merchandise to which this section applies, the amount which bears to the profits oft he business (as computed under the head Profits and gains of business or profession) the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. (4) The deduction under sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifuing that the deduction has been correectly claimed on the basis of the amount of export turnover. (4A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of computation of the deduction permissible under this section and had submitted that, the amount of profit derived from the export business, had to be computed by taking into account, the entire profit from all of its business, and that, the circular does not make any distinction about the profit from trade of goods or from commission. He had submitted that, sub-clause (b). has been explained in the said circular to include situations, where the business comprises of exports and other domestic business. He had pleaded that, the said circular that grants benefits to the assessee, is of a binding nature on the department. 10. The circular as referred to above, the relevant paragraphs, are reproduced below, for the sake of convenience : 3. Several doubts have been expressed about how the deduction under section 80HHC is to be allowed. Representations received by the Board show that there is lack of uniformity amongst authorities in respect of allowing the aforesaid deduction. 4. Sub-section (3) of section 80HHC statutorily fixes the quantum of deduction on the basis of proportion of the profits of business under the head " Profits and gains from business or profession " irresp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, the entire profit under the head " Profits and gains of business or profession " (which will include the three export incentives) will be deductible under section 80HHC. However, to arrive at the amount deductible under section 80HHC in the case of an assessee doing export business as well as some other domestic business. the fraction of " export turnover " to " total turnover ", will be applied to his profits computed under the head " Profits and gains of business or profession " (which again will include the three export incentives). The operation of section 80HHC read with section 28, as amended by the Finance Act, 1990, can be illustrated by way of the following examples : (Figures in lakhs rupees) ----------------------------------------------------------------------------------- Code I Code II Code III Code IV Exclusively - 2/3 1/2 1/3 export export export export business 1/3 1/2 2/3 domestic domestic domestic sale sale sale ----------------------------------------------------------------------------------- (i) Turnover : (a) FOB exports 100 100 100 100 (b) Domestic sale -- 50 100 200 -------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the business carried on by the assessee does not consist exclusively of the export out ofIndiaof such goods or merchandise to which this section applies. The word ' exclusive ' is stated to mean, debarring from participation, of the nature of monopoly, sole, select (Chamber's Twentieth Century Dictionary, 1972 Edition, page 456). If we have to strictly interpret the sub-section (3) of section 80HHC, then the first category should cover only those cases, where, the assessee is carrying on exclusive export trade and no other activity inIndia. The second category should cover only those cases, where the assessee is selling goods or merchandise in India and export them, more specifically, the trade of identical goods or merchandise in India, as the ones that are exported by him, because otherwise the apportionment of profit between export and local sale is impossible. To put it in other words, if the assessee is in exclusive trade or goods or merchandise, then, he would get the benefit of deduction under this section. To be eligible for deduction in the second category, the assessee, should be in the business of trade of goods or merchandise inIndiaand for exports. In cases, where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant to the section, the total value of which would be considered for the ' total turnover '. In our view, the purpose of introducing the concept of total turnover by the Legislature is based on the vision of the situation of an assessee, dealing in identical goods or merchandise, both for exports as well as domestic sale, and thus making it difficult for an assessee to identify the element of profit between exports and domestic trade, to which the section is directed. Therefore, with a view to avoid litigation on the question of reasonability of export profits, while allowing the deduction under this section, a formula was devised of relating the export profits as a proportion of export turnover to the total turnover. The second category, in our view, would come into play only when, there are export of goods or merchandise along with trade of goods or merchandise, more specifically of identical goods or merchandise and not to a situation where, the export is of goods or merchandise, but the local activity of business is non-trade. The strict interpretation of the section would mean that, (a) the deduction is allowable to an assessee, who is carrying on one and the only activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus the figure of turnover of brass wares is to be made part of the total turnover, and the entire profit would include profit from sale of brass wares too. If the apportionment of profit to export of leather garments is to be made with reference to export turnover of leather garments and the total turnover of leather garments plus the brass wares, it could very well be imagined that, the result would be based on wrong comparison. This kind of comparison, would in effect give raise to wrong results, because the rate of profit from leather garments and brass wares can never be the same, except in cases of sheer coincidence, which in our view, could happen in fiction. In the event of the rate of profit from brass wares is lower than from leather garments, it would result in reduced relief under this section and if the rate of profit from brass wares is greater than from leather garments, it might result in allowing of relief under this section at a figure larger than the profit from the exports, i.e., some part of the domestic profit might get allowed as a deduction in the guise of export profits, which is not the intention of the Legislature. This could be examined with an example ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which would give a profit figure of Rs. 22.50 lakhs, which is more than the profit of Rs. 20 lakhs, as shown above. By this formula, the assessee, if allowed a deduction of Rs. 22.50 lakhs, then it would mean that, deduction to the extent of Rs. 2.5 lakhs, had been allowed from out of domestic profit, which deduction is adverse to the intention of the section. In our view, therefore, the intention of the Legislature for the second category, is concerning the sale of goods or merchandise and that too only of those goods or merchandise, which are exported and sold in India and every other kind of business, is excluded from the purview of the second category. As had been observed earlier, in all other situations, the section would be unworkable and any or every action that makes the implementation of the statute, has to be necessarily discarded. This strict interpretation, would result in non-allowing of relief to those assessees, who export goods or merchandise and have some income from commission inIndia, as is the present case before us. The assessee, on the strict interpretation of the section, would not be treated as to fall in the first category, because, he is not in exclusive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instant case, the assessee-company, has export sales of Rs. 46.87,945 and other incomes arising from its domestic activities, such as commission, consultancy, interest, lease-rentals. The cost of goods exported are of a value of Rs. 43,18,942, which has yielded a gross profit of Rs. 3,69,003. The CIT(A), had considered the net profit to the total credits to the profits loss account for the year ended on 30-6-1987, which was 46 per cent and applied the same ratio to the total profits shown in the profit loss account for the year ended on 31-3-1989 and on this basis, he had concluded that, the profits from the export business were to the tune of Rs. 17,66,859. Carrying the above suggestion further, by apportioning the expenses relatable to the export business, the absorption of expenses for export, would be to the extent of 46 per cent of Rs. 42,87,508, which would be Rs. 19,72,254. This would mean that, the assessee in its export business had suffered loss of Rs. 16,03,251 (Rs. 19,72,254 less gross profit of Rs. 3,69,003). Since, evidently, every trade would have some expenses on sales administration and the like, and on the basis of the above comparative proportion of expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing deduction of the profits from the domestic business, which goes quite adverse to the intention of the section.If for the sake of argument, the figure of commission and other incomes are to be taken to represent turnover, then the total turnover figure would be Rs. 143.44 lakhs and the profit of Rs. 59.66 lakhs would need to be apportioned in the ratio of export turnover of Rs. 46.86 lakhs to the total turnover of Rs. 143.44 lakhs, to get at the rate of profit from exports, that would be 32.67 per cent. By this proposition, the export profit would be 32.67 per cent of the total profit of Rs. 59.66 lakhs, i.e., Rs. 19.49 lakhs. It can very well be appreciated that, the proposition as advanced by the assessee, is totally fallacious, because when the gross profit from the sale of goods or merchandise is Rs. 3.69 lakhs, the net profit could never be greater than the figure of gross profit. The circular as issued by CBDT, which has been reproduced earlier, refers to the term " total turnover " as total of " export sale " and " domestic sale ". In para 9 of the above circular, it has been clearly stated that, in case of exclusive export of goods or merchandise, ' export turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pite the fact, such deduction or relief as allowed by AO, is quite contrary to the provisions of the Act. Though, we would very much like to delete the deduction as allowed by AO, but in view of the constraints or fetters placed on us by the provisions of the Act, we are compelled to sustain the deduction to that extent. We accordingly grant this issue in favour of the revenue and against the assessee. 13. The appellant company has challenged the disallowance of Rs. 30,634 out of bonus, by applying the provisions of section 43B of the Act, for the sole reason that, the proof of payment was not placed before AO. In our view, since the amount represents bonus of the employees, though the assessee should have filed the proof of payment as made along with the return of income, it could have been considered and therefore, we remand this issue to the AO, to verify whether the payment had been made before the due date for filing the return and if it is so made, then allow deduction. 14.The assessee is aggrieved by the disallowance out of foreign travelling expenses to the tune of Rs. 6,16,351, on the reasoning that, the visits were to the countries other than Russia, to which country ..... X X X X Extracts X X X X X X X X Extracts X X X X
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