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TMI Blog2008 (6) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... letion of the trading addition of Rs. 5,00,000 and Rs. 3,00,000 made by the AO in asst. yrs. 2004-05 and 2005- 06 respectively, on account of low GP rate by invoking s. 145 of IT Act. 3. Briefly the facts are that the AO rejected the books of account by invoking action under s. 145 of the Act for the reason that there was fall in GP rate and the assessee did not maintain stock records. The AO considering the facts and past history made ad hoc trading addition of Rs. 5 lacs in asst. yr. 2004-05 and Rs. 3 lacs in asst. yr. 2005-06. 4. The learned CIT(A) set aside the action and deleted ad hoc addition as no material was placed on record by the AO to show that there are material defects, omissions or any unauthorised trading activity carried by the assessee. He also found that the AO has failed to find any fault or incorrectness in the explanation tendered by assessee for decline in GP rate. He further observed that the appellant dealt in manufacturing of innumerable items of wooden handicrafts which are distinct and separate in all respects and it is practically not possible to maintain day-to-day production record, i.e., stock register in respect of each and every item manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us judicial judgments in this regard. (ii) The learned CIT(A) has also considered the decision of Hon'ble Tribunal in case of Ganesh Foundry v. ITO [2000] 67 TTJ (Jd) 434 that absence of stock register or fall in GP cannot be basis for rejection of accounts. The learned CIT(A) also considered the decision of Uttam Chuna Pathar Udyog v. ITO [1997] 59 TTJ (Jp) 763 : 20 Tax World 422 (Jp), that few defects would not render accounts liable for rejection and normally the profits be deduced from the regular accounts of the assessee. (iii) That there is peculiar fact in the case of the manufacturers of handicraft items. The assessee is manufacturing large number of items, and there is large variety of products and it is not practically possible to maintain quantitative details in respect to consumption of raw material and finished goods. (iv) The assessee is a manufacturer and exporter of handicraft items, and there is mainly export of such goods so manufactured. The raw material is mainly wood which is purchased in cubic feet or square feet. The finished goods are manufactured in numbers and that too of large variety, different sizes and combination. The various products are of dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that trading addition so made will be more of academic nature, as this would increase trading profits and shall increase the deduction allowable under s. 10BA, resulting into no fruitful exercise. Therefore, the deletion of the trading addition by the learned CIT(A) was perfectly justified. 7. Having heard the parties with reference to material on record, we find no reason or basis to interfere with the decision taken by learned CIT(A) more particularly when learned Departmental Representative has placed reliance on the order of the AO without pointing out any error in well reasoned decision reached by him. The learned CIT(A) has considered the nature of business activity, market conditions, quality of raw material used, and the fact that the AO laid no material on record to suggest that there has been any suppression of income nor that the assessee carried any activity outside the books. We also find from the remand report given by the assessing authority in appeal before learned GIT(A) that he had deputed the Ward Inspector to verify the records of the assessee and reportedly found no discrepancy or inconsistency in the business transaction of the assessee. Finding n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of ss. 10BA, 80HH, 80HHC including Expln. (baa) thereof, for purposes of comparing the language of the aforesaid provisions. He contended that for eligibility of deduction under S. 10BA, the profits of the business should be derived by an undertaking from the export out of India of eligible articles or things to be manufactured or produced without use of imported raw material and the eligible articles or things should be handmade which are, of artistic value of wood that has to be its main raw material. (iii) He further submitted that DEPB is an incentive granted to the exporters in the shape of import entitlement. It is freely transferable to other importers. The assessees have earned income by sale of this import entitlement and there is no direct nexus between the sale consideration so received from sale of DEPB with the export of eligible articles or things. The sale consideration of DEPB is received in Indian currency and there is no cost incurred to earn the credit of DEPB. It is totally different from "duty drawback" because DDB is an incentive to the exporter in the form of refund of customs duty on imported raw materials. In the case of respondent, it has already been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted only some of the aforesaid judgments. It was pointed out by him that the Hon'ble Supreme Court in the case of CIT v. K. Ravindranathan Nair has held that incentives and interest income etc. are independent income which have no element of export turnover and had to be reduced from gross total income to arrive at business profits. He also placed reliance on judgment of Hon'ble Supreme Court in the case of P.R. Prabhakar v. CIT in which it was held that, the assessee was entitled to deduction under s. 80HHC in respect of commission and brokerage income because of the express provision in statute. It was also held that the amendment made in the s. 80HHC by the Finance (No. 2) Act, 1991 was prospective and was effective from 1st April, 1992. Likewise, the learned CIT-Departmental Representative placed reliance on various judgments relating to interpretation of s. 80HHC. In most of those cases 90 per cent of the income/receipts by way of interest, brokerage, commission, job charges etc., were excluded from the business in terms of Expln. (baa) to s. 80HHC(3). Some of the cases dealt with the question as to whether interest income is assessable as income from other sources or they are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction under s. 10BA in respect of such amounts received by the assessee. (ii) The main object of DEPB/DDB is to neutralize the incidence of input cost of raw material and other manufacturing costs. It is basically part and parcel of trading and manufacturing activity. In fact, DEPB/DDB can be considered as part of trading activity of exports only, reducing the cost of raw material and production expenses. It is in the nature of a rebate or remission on the purchase price of raw material and cost of manufacturing expenses and production. The handicraft industry has to survive in global competition and has to compete with dealers and manufacturers of various other countries. The DEPB and DDB have been granted to such exporters to reduce the cost of their production/manufacturing, so that their handicraft articles can be exported in the global market at competitive rates. The contention of the learned Departmental Representative that no imported raw material can be used for manufacture of handicraft articles by the assessee, instead of supporting the contention of the learned Departmental Representative, supports the view taken by the learned CIT(A) because the prohibition of use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned by the provisions of s. 75 of the Customs Act, 1962 read with the Customs and central excise duties Drawback Rules, 1995 framed under s. 75(2) of the Customs Act and s. 37 of the Central Excise Act, 1944. Under this scheme, drawback is allowed not only of the duties incurred on the direct inputs or raw materials and components utilized in the manufacture of export goods, but also of the earlier inputs that go into the manufacture of the said raw materials and components. Drawback also takes into consideration the wastages involved in the manufacture and the duty incidences on the packing materials used in the export of goods. Drawback rates are fixed on the basis of either the average of duty incidences on the materials or of actual duties paid by manufactures. These rates are announced either for a class of goods commonly known as all industry rates, or for manufacture of specific goods by a particular manufacturer termed as 'Brand' rates......" "Under the Duty Drawback Scheme, the relief is given for the burden of duty incidence of customs and central excise on basic inputs like raw material, components, intermediates and packing materials used at various stages of product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd DDB. (v) The learned counsel further submitted that the provision of s. 10BA(1) provides the grant of deduction in respect of profit and gain derived by an undertaking from the export out of India of eligible articles or things. Sub-s. (4) of s. 10BA further provides that for the purposes of sub-s. (1), the profits derived from export out of India of the eligible articles or things shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things bears to the total turnover of the business carried on by the undertaking. Thus proportionate amount of the "profits of the business of the undertaking" in the ratio of export turnover to the total turnover is the amount of deduction allowable under s. 10BA. The distinction between the words "profits derived from the industrial undertaking" or "profit derived from export" used in other provisions are clearly different and distinct than the words "profits of the business of the undertaking" used in s. 10BA. The meaning and scope of "profits of the business of the undertaking" used ins. 10BA(4) determines the quantum of deduction allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0HHC are clearly distinguishable. (viii) The learned Departmental Representative has also tired to distinguish various decisions relied upon by the learned CIT(A) by placing reliance on the provisions of s. 80HHC r/w cl. (baa) to Explanation thereof, inter alia providing for exclusion of 90 per cent of the sums referred in s. 28(iiia), (iiib), (iiic), (iiid), (iiie) and other receipts. Such argument advanced by the learned Departmental Representative instead of supporting the Revenue's contention, support the assessee's claim for grant of deduction under s. 10BA. There is no provision similar to Expln. (baa) of s. 80HHC(4A) in the relevant provisions of s. 10BA. The absence of similar provision in s. 10BA like cl. (baa) of (Explanation to section) 80HHC (Revenue authorities), further supports the grant of deduction under s. 10BA on the amount of DEPB and DDB, which are specifically regarded as part of "profits of business" under s. 28(iiie) and (iiid) etc. (ix) In relation to the reliance placed by learned Departmental Representative on the judgment in the case of CIT v. Sterling Foods and various other judgments which are also based on the aforesaid judgment in the case of Ste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es under the executive instructions. Sec. 75(1) of the Customs Act, 1962 contains the following scheme of duty drawback : '75. Drawback on imported materials used in the manufacture of goods which are exported (1) Whether it appears to the Central Government that in respect of goods of any class or description manufactured in India being goods which have been entered for export and in respect of which an order permitting the clearance and loading thereof for exportation has been made under s. 51 by the proper officer, a drawback should be allowed of duties of customs chargeable under this Act on any imported material of a class or description used in the manufacture of such goods, the Central Government may, by notification in the Official Gazette, directed that drawback shall be allowed in respect of such goods in accordance with the subject to the rules made under sub-s. (2)." "Similar provisions are there in s. 36 of the Central Excise Act, 1944. The object of the Duty Drawback Scheme is to reimburse exports for tariffs paid on the imported raw materials and intermediates and central excise duties paid on domestically produced inputs which enter into export production. Custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view that while cash compensatory support (cash assistance) received by the assessee would not constitute income 'derived from' an industrial undertaking and, therefore, the same is eligible for relief under s. 80J of the IT Act, 1961 in the case of duty drawback, the same is 'derived from' the industrial undertaking and, therefore, eligible for relief under s. 80J of the IT Act." (b) CIT v. Sharda Gum Chemicals "Because of such retrospective insertion of cl. (iiia), (iiib) or (iiic) in s. 28, these provisions must be deemed always to be existing and in force with effect from the date the same were inserted. Since all the three provisions were inserted with effect from the year prior to 1st April, 1989, they must be deemed to be part of IT Act as on 1st April, 1989, and governing assessment of income from these sources as income from 'profit and gains of business' of the assessee. This effect of retrospectively operative legislative Act hardly needs any elaboration. In this connection, it will be pertinent to notice that s. 28 states in no uncertain terms that profits and gains of business or profession which was carried on by the assessee at any time during the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the profits of business as computed under the head 'Profits and gains of business or profession' for the purpose of computing profits of business under cl. (baa) of the Explanation to s. 80HHC." (e) Mrs. Saroj Dassani v. Asstt. CIT [2006] 99 TTJ (Del) 345. at. p. 346 "Conclusion : Assessee exporter is entitled to deduction under s. 80HHC in respect of DEPB and DFRC receipts; Departmental authorities having brought the DEPB and DFRC receipts to tax under s. 28(iv) and not under cls. (iiia) to (iiic) of s. 28, 90 per cent of these receipts cannot be excluded from the profits of the business." (f) Padhrod v. ITO [2007] 39-E BCAJ 30 (October, 2007). "Re. Duty drawback: Relying on the decision of the Mumbai Tribunal in the case of Suditi Industries Ltd., where it was held that export incentives were part of profits and gains of business of industrial undertaking in view of the provisions of s. 28(iiia), (iiib) and (iiic) of the Act, the Tribunal held that duty drawback was income derived from the industrial undertaking and eligible for deduction under s. 80-IB of the Act" (g) Irfan Sheriff v. Asstt. CIT [2006] 7 SOT 57 (Bang) (h) Journal of BCAJ of June, 2006 at p. 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits of the business for computing the deduction under s. 80HHC. With the issuance of this circular the point is no more res integra. The formula indicated in s. 80HHC(3) itself shows that business profits include export incentives. This formula is also indicated in the circular referred to above issued by CBDT. It indicates that the Parliament as well as CBDT have taken into account the insertion of cl. (iiib) in s. 28 by the Finance Act, 1990. Further, it is also relevant to note that by the same Finance Act cl. (iiib) was inserted into s. 28 and changes were also made in s. 80HHC(3). Therefore, s. 80HHC as it stood at the relevant time was required to be read with s. 28(iiib) because both the sections have been amended by the same Finance Act of 1990. In the circumstances, the words 'business profits' in the above formula under s. 80HHC(3) would include cash compensatory allowance and duty drawback and accordingly the AO is directed to work out deduction in accordance with the law as it stood during the relevant asst. yr. 1991-92." The assessee's contention is that the DDB/DEPB received would therefore be part of business profits, and in view of the above decisions of H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation to profit on sale of DEPB in case of large exporters. Without prejudice to the above, it is respectfully submitted that the sale proceeds of DEPB licences are now treated as business income by virtue of amendment of s. 28. The amendment of s. 80HHC only denies grant of deduction in respect of "any profit" on sale of DEPB. In case, where assessees do not derive any profit on DEPB the sale proceeds of DEPB licences will have to be regarded as part of business income derived from exports and will be eligible for grant of deduction under s. 80HHC." (xvi) The assessee lastly submits that it is well-settled principle that when the provisions of law are enacted to provide certain deductions and exemptions to the assessees and to encourage certain trade or industry or for achieving any national objective, such as earning of foreign exchange and promotion of exports as in this case, the language of the statute should be interpreted liberally. This view is supported by the following cases : (a) Bajaj Tempo Ltd. v. CIT [1992] 104 CTR (SC) 116 : [1992] 196 ITR 188 (SC); (b) CIT v. Strawboard Manufacturing Co. Ltd. [1989] 77 CTR (SC) 75 : [1989] 177 ITR 431 (SC); (c) Uddeereswara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of such profits and gains as are derived by an undertaking from the export out of India of eligible articles or things, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, deduction under s. 10A or s. 10B has been claimed, the undertaking shall not be entitled to the deduction under this section : Provided further that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years. (2) This section applies to any undertaking which fulfils the following conditions, namely : (a) it manufactures or produces the eligible articles or things without the use of imported raw materials; (b) it is not formed by the splitting up, or the reconstruction, of a business already in existence : Provided that the condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of such undertaking as is referred to in s. 33B, in the circumstances and within the period specified in that sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing treated by the RBI as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1992 (42 of 1999), and any rules made thereunder or any other corresponding law for the time being in force; (b) 'eligible articles or things' means all handmade articles or things, which are of artistic value and which require the use of wood as the main raw material; (c) 'export turnover' means the consideration in respect of export by the undertaking of eligible articles or things received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-s. (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India; (d) 'export out of India' shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance of any customs station as defined in the Customs Act, 1962 (52 of 1962)." 13. As pointed out earlier, the AO has found the assessee eligible for the exemption under s. 10BA of the Act and merely disputed the quantum of deduction in that respect, it therefore, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he mandate of this section it is evident that the business of the undertaking needs only to be manufacture or production of eligible articles or things without the use of imported raw materials. If the business is that as specified in cl. (a) of sub-s. (2) of s. 10BA of the Act then further requirement amongst others is also that 90 per cent or more of its sales should be by way of export of eligible articles or things. This means in the event the undertaking undertakes to sell more than 10 per cent of its eligible articles or things in a way other than making exports then it has to lose the benefit of deduction bestowed under s. 10BA of the Act. Put differently, from the scheme of the Act as contained under s. 10BA of the Act, the undertaking in order to make it eligible for deduction under s. 10BA of the Act, has to confine itself to the manufacture or production of eligible articles and export thereof at least to the extent of 90 per cent out of India. The moment either of these two conditions is not satisfied, the deduction of profit under s. 10BA(1) shall not be granted. Essentially, therefore, the business of the undertaking was to be of eligible articles or things only as sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came to be considered by the apex Court in the aforesaid judgment. 17. The language of s. 80HHC of the Act in sub-s. (1) for allowing deduction in asst. yr. 1991-92 was with respect to the profits derived by the assessee from export of goods or merchandise and for the purpose of this sub-s. (1), profits derived from the export of goods or merchandise outside India were to be in a proportionate manner as prescribed under sub-s. (3) thereof by using the expression "shall" as has also been used similarly in sub-s. (4) of s. 10BA of the Act for the purpose of deduction under sub-s. (1) of s. 10BA of the Act. If the CBDT itself has considered that the incentives such as DDB and cash compensatory support are profits of the business as early as in the year 1990, there remains no scope or room for the assessing authorities to deviate from such accepted position where language of statute in s. 10BA of the Act to that extent is similar. Undoubtedly the Board circulars were binding on the assessing authority and this proposition is very well-settled by now. Reference to this can be made to the apex Court judgment rendered in the case of CCE v. Dhiren Chemical Industries [2002] 172 CTR (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT was also a case where deduction under s. 80HH was being claimed on the amount of interest on deposits made with Electricity Board. The deduction under that section is allowable only on the amount of profits and gains derived from the industrial undertaking. Sub-s. (1) of s. 10BA lays only the eligibility criteria but the quantum of deduction is not related only to the profits and gains of business of the undertaking but the computation is prescribed under sub-s. (4) with reference to formula prescribed under that sub-section which subject the actual amount of deduction to be given by sub-s. (1) of that section, as also distinguished in the earlier judgment relied on behalf of Revenue. 22. The judgment rendered by apex Court in CIT v. Lakshmi Machine Works is a judgment that relates to deduction under s. 80HHC in relation to total turnover as to whether excise duty, sales-tax, commissions, interest, rent, etc. partake the character of turnover. In the present case in appeal before us, the amount of profit of DEPB/DDB has specifically been included as profits and gains of business and as already found the amount thereof will not enter in the turnover of the business of the und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of India [2006] 202 CTR (SC) 464 : [2006] 2 JT 369 (SC). 24. In the case of CIT v. Ravindranathan Nair, referred by learned Departmental Representative, the issue decided is that the amount of processing charges, which are part of gross total income form an independent income and have to be included in the total turnover in the formula for arriving at the business profits in terms of cl. (baa) of the Explanation to s. 80HHC(3) of the Act. However, a similar provision as contained under cl. (baa) is absent under the provisions of s. 10BA of the Act but by interpretation of sub-s. (4) and by mandatory inclusion thereof under s. 28 the amount of profits of DDB and DEPB are found to have formed part of profits and gains of business of the assessee's undertaking. 25. We also agree with the distinction drawn by the assessee's counsel in respect of various other judgments of the High Court relied by learned Departmental Representative through written submission as well as orally in his arguments before us as are found reproduced in above paras and therefore do not consider it necessary to distinguish here again. 26. The learned CIT(A) is also found to have placed strong reliance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court has held that the DDB is reimbursement of duty paid and therefore is inescapably linked with the business of undertaking and as such entitled to deduction. Learned Departmental Representative had pointed out that the respondent assessee in these appeals before us cannot use imported raw material and as such question of payment of import duty in his case does not arise and also likewise, the items dealt by him are being made of wood and even all raw materials being wood, no excise duty is payable for which there can be no reimbursement. As such it will not be the case of reimbursement as well. Even though there may be some force in the argument advanced by learned Departmental Representative yet the same cannot be taken to be the conclusive inasmuch as the stipulation is with respect to the use of imported raw materials but when the assessee exports its goods, it has to use a sizable quantity of packing material in which involvement of content of import duty has not been denied by either of the parties. This may be one reason that the assessee has been bestowed with such incentives. We, however, do not consider it necessary to delve deep into the scheme to find out really a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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