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TMI Blog2006 (1) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... b)Not adjudicating upon other issues arising in connection with the basis adopted by the Assessing Officer while denying the claim of deduction under section 80HHC. 3. The learned CIT(A) erred in rejecting the claim for exclusion from total income of Rs. 4,73,02,238 being the amount of interest erroneously credited by the appellant under mistaken view of entitlement on the outstanding export proceeds due from Freeway Suppliers Ltd. 4. The learned CIT(A) erred in rejecting the claim for exclusion from total income of Rs. 88,33,956 being the amount of gain arising out of foreign exchange fluctuation credited by the appellant on the outstanding export proceeds due from Freeway Suppliers Ltd. 5. The learned CIT(A) erred in confirming the interest levied under sections 234A, 234B and 234C." 2. The facts of the case are that the assessee is an exporter engaged in the business of manufacturing of cement based exterior paints and also in exporting goods after purchasing them from Singapore. During the year under consideration, the assessee sold goods worth Rs. 56.86 crores. One Dubai party to whom exports were made became debtor to the assessee for a sum of US$ 2,90,02,561. During the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue in paras 9 to 15 of his order as under :-- "9. Unrealised Exports: During the year the assessee has only realized an amount of US $8,69,959 of the earlier relevant assessment year and not pertaining to this year and the balance amount of US $2,81,32,602 remains unrealized. The assessee has not received the amounts till date (i.e. date of passing the assessment order). The assessee claims to have filed a case in the High Court of Justice, Commercial Court, London against Freeway Suppliers Limited, London. The extension which the assessee got from various dealer is as under : S. No. Name of the Bank Amount Extension 1. State Bank of Hyderabad, C-15, Mittal Tower, Nariman Point, Mumbai US$ 4,51,000 Expired Long Back 2. Abu Dhabi Commercial Bank, 751, Veer Nariman Road, Mumbai US $1,28,96,100 25-3-2004 3. Allahabad Bank, Industrial Finance Branch, Mumbai-20. Total US$1,40,58,434 (including earlier years) US$2,82,06,034 Expired Long Back 10. From the above, it can be seen that the assessee-company does not have extension for the money realization and although RBI has granted powers to authorized dealer to grant extension, the above banks have practic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited. (2) It has been held in Chhaganlal Sevchand v. CIT 62 ITR 33 (Bom.) the transfer of documents can be effected by mere delivery without any endorsement on it. (3) Even a bank endorsement is also legal endorsement (Bills of Landing in International Law and practice by Dr. Justuce T. Kochu Thommen, Page 29). There can be a sale by endorsement on the delivery order (Kollasree v. State 13 STC 522 (SC). (4) Thus it can be seen that the transfer of the GR from with endorsement in favour of buyer are amount to the sale of goods and the assign of the property in goods from the seller to the buyer (Milkhiram v. State of Bombay [1963] 14 STC 18 (Bom.). (5) In the Income-tax Act, 1961 has given the following negative definition of "export out of India" at Explanation (aa ) below to section 8HHC(4B), it states : (aa) "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 at any customs station as denied in the Customs Act, 1962 (52 of 1962). Further the section 2(b) of the Customs Act, 1962 defines "Customs Stations" means. . . , customs airport or ... we have giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in convertible foreign exchange. Deduction under section 80HHC of Income-tax Act, 1961 is to be allowed only in respect of the profits earned in respect of export profits where sale proceeds of the exported goods or merchandise are brought into India in convertible foreign exchange within a period of six months from the end of relevant previous year or within such extended time as the competent authority may allow in this behalf. In the case of the appellant, such sale proceeds have not been received by the Company even till the date of passing of this appellate order. In view of these written submissions and oral arguments of the learned AR of the appellant, there is no case for the appellant to claim any deduction under section 80HHC of the Income-tax Act, 1961 as no profits have been earned by the appellant from its export activity and no sale proceeds of the exported goods have been brought into India in any form. Hence, I uphold the action of the Assessing Officer in denying the deduction under section 80 HHC to the appellant." 7. The main thrust of the CIT(A) is that the assessee has not been able to realize the sale proceeds in convertible foreign exchange even after the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ects in this. One is that it should be a transaction by way of sale or otherwise in a shop/emporium/an establishment situated in India and other is customs clearance as defined in the Customs Act. The definition given in Explanation (aa) is rather negative. If transactions do not satisfy the conditions then, it shall not be regarded as export out of India. Conversely, for an export out of India, it is necessary to have custom clearance at any custom station. The custom station is defined in section 2(13) of Custom Act. It means any custom port or custom airport or land custom station. Sections 57 and 69 of Custom Act reads as under :-- "57. Appointing of public warehouses.--At any warehousing station the Assistant Collector of Customs may appoint public warehouses wherein dutiable goods may be deposited without payment of duty. 69. Clearance of warehoused goods for exportation.--(1) Any warehoused goods may be exported to a place outside India without payment of import duty if-- (a )a shipping bill or a bill of export has been presented in respect of such goods in the prescribed form; (b)the export duty, penalties, rent, interest and other charges payable in respect of such goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not able to produce any evidence as to whether any LC was obtained for the alleged export. No evidence as to the import of the material for keeping in the warehouse and their removal from the warehouse after alleged customs clearance was produced. There was no evidence as to whether any export duty was paid when goods were taken out from the warehouse. The transaction apparently does not appear to be convincing but these issues were examined by the Assessing Officer or by the CIT(A). We have gone on the presumption that certain goods were imported, kept in bonded warehouse and then exported to Dubai party. There was no evidence as to whether it had actually happened. Therefore, we make clear that at the time of when question of allowing debt not recoverable from Dubai party is examined, the two parties will be at liberty to adduce evidence for deciding that issue de novo. Trading loss 13. The assessee has claimed the non-recovery of export sale proceeds as trading loss. The fact on record is that the assessee has not been able to realize any convertible foreign exchange out of sale proceeds. The assessee treated M/s. Freeway Suppliers as its debtor in its books of account. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he past also and received payments even in the previous year relevant to the assessment year under appeal, in respect of the goods supplied to this party in the past. Trading loss may occur due to unforeseen reasons in the process of carrying on the trading activity such as fire, flood, war or sinking of ships carrying the goods but it cannot be considered to have taken place where the debtors are not recovered. If the appellant is not able to recover anything from its debtor, the proper course of action is to claim a deduction on account of bad debt after satisfying the conditions prescribed in section 36(2) of the Income-tax Act, 1961. I do not agree with the learned AR of the appellant that a deduction on account of trading loss can be made at the appellate stage without first debiting the profit & loss account and claiming such a deduction in the return of income or during the assessment proceedings. 2.6 In view of these facts, the Assessing Officer's action of disallowing the appellant's claim for deduction under section 80HHC is upheld and the appellant's alternate claim for allowing the deduction on account of trading loss is dismissed. In the result, this ground of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the words of the statute should be given. 16. We have considered the rival submissions and the material on record. We have also given our sincere consideration to the decisions cited by the parties. The assessee has claimed the amount not recoverable from Dubai party as a trading loss on the ground that loss has occurred during the course of business. No doubt, a trading loss has a wider connotation than a bad debt. A bad debt is also trading loss but all trading loss need not necessarily be a bad debt. There can be a debt which may not fall within the purview of section 36(1)(vii) read with section 36(2) and would be eligible for deduction in the computation of net profit chargeable to tax. For example, a loss pertaining to stock-in-trade, money advanced in the course of business of financing, or money lending, but irrecoverable, would constitute a trading loss. Loss of stock-in-trade either under storage or during transit after purchase or prior to sale would normally be covered as trading loss. But where goods are sold, the title of the goods is passed on to the purchaser under Sale of Goods Act and the purchaser become the owner of the goods, then what the purchaser is require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overy from a customer to whom timber was sold. Since the provisions of section 37(1)(vii) read with section 36(2) are new insertion in Income-tax Act, 1961, there were no equivalent provisions in section 10(2) of Income-tax Act, 1922. Originally, it was introduced by amendment Act, 1939 as clause (xi). It could not be said that equivalent provision for bad debts were available before House of Lords in the case of Green v. Glikstern & Sons Ltd. (supra). After having specific provisions in 1922 Act and then in 1961 Act, section 36(1)(vii) read with section 36(2), the observations of House of Lords in Green v. Glikstern & Sons Ltd. (supra) are no longer relevant. The decision of Hon'ble Patna High Court in Motamal Jethumal case are, therefore, not applicable to the facts of the present case. (16.2) The decision in Pohoomal Bros.' case - 34 ITR 69 is also not applicable for the similar reasons. There was a destruction of stock-in-trade due to enemy fire. It was treated as business loss. There is no dispute with this proposition but it is not a case where trading dues not recovered has been allowed as trading loss ignoring the provisions in the statute, with regard to bad and doubtful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... longer relevant. 19. The last proposition raised by the learned counsel for assessee is that as the income would accrue even though not credited in the books of account, the loss would also accrue even though not debited in the books of account. There is no dispute with this proposition. This would be applicable if amount not recovered during the year is treated as trading loss. We have already held that it is only a debt, which is yet to be written off in the books. In view of this, we reject the contention of the assessee and confirm the order of the CIT(A) on this ground. Deduction under section 80HHC on interest of Rs. 4,73,02,238 20. The next ground is that deduction under section 80HHC has not been allowed on interest amount of Rs. 4,73,02,238 credited by the assessee against M/s. Freeway Suppliers, Dubai on outstanding debt. The Assessing Officer disallowed the claim of deduction on the ground that it is not the profit derived from export of goods or merchandise. This income is on account of charge on debt and not on account of sale proceeds of goods. According to the Assessing Officer, the transaction in export comes to an end for the purposes of deduction under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educe its liability the company wants to withdraw its income. The assessee has an option to write off in the coming year if the same is not realised and these are not fictitious but are arrived methodically on outstanding, so the claim of the assessee regarding withdrawal is non-bona fide and out of the time and with the intention to reduce tax liability. Further, the Company has booked Rs. 88,33,956 as an exchange gain during the year. By applying the principles of real income, the notional income, i.e., estimated profits on foreign exchange transactions which was represented by book entries is not liable to tax as the same does not represent real/Commercial income (relying on Indian Overseas Bank v. CIT 250 ITR 146 (Mad.). The amount of Rs. 88,33,956 should not be liable for tax. The assessee's submissions are considered as under : The principle of accounting provides for the accounting of foreign exchange receivable/payable as on 31st March of the relevant year as per market value. The same has been recognized by the assessee accordingly but now as the export proceeds have not been received by the assessee and the same is treated as local turnover so the exchange gain is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for charging interest under the head "Other sources". He relied on the decision of Hon'ble Allahabad High Court in National Handloom Development Corpn. Ltd. v. Dy. CIT [2004] 266 ITR 647 and also of the Hon'ble Delhi High Court in the case of CIT v. Modi Rubber Ltd. [1998] 230 ITR 817 . 24. On the other hand, the learned DR relied on the orders of authorities below. 25. We are of the view that authorities below have not been able to show that there existed an agreement between the assessee and Dubai party that on its failure to make the payment of sale proceeds, the assessee would be entitled to charge interest. Therefore, unilateral action of the assessee in crediting interest against its dues from Dubai party would not entile the assessee to receive interest. In any case, we consider it proper that relevant agreement be examined by the Assessing Officer and if there is no provision for accrual of interest of delayed payment of sale proceeds, the same shall not be charged to tax. But where an agreement existed whereby the Dubai party would be liable to pay interest on delayed payment of sale proceeds, then, interest income would accrue to the assessee by operation of agreement. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits and gains which are liable to be taxed under section 10(1) are what are understood to be such under ordinary commercial principles. When a claim is made for a deduction for which there is no specific provision under section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. The loss for which a deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it, and not any loss sustained by the assessee even if it has some connection with his business. If that is established, then the deduction must be allowed, provided that there is no provision against it, express of implied, in the Act.' b. It is necessary to bear in mind that the thing to be taxed is the amount of profits or gains of the trade or business and that the word 'profit' should be understood in its natural and proper sense - in a sense which no commercial man would misunderstand: per Lord Chancellor Halsbury in Gresham Life Assurance Society v. Styles approved by the Privy Council in Pondicher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that extra amount payable due devaluation of rupee is allowable as business loss. Then similarly extra amount received/receivable on account of foreign exchange fluctuation should be taxed as revenue receipt. 29. We have heard the rival submissions and considered the material on record. The undisputed facts are that the assessee has credited its accounts by foreign exchange fluctuation. The question is whether it is a real income and is liable to tax or not. During the end of the accounting year, when the assessee credited this sum, the amount recoverable from Dubai party was not considered as a bad debt and was not written off. It was considered recoverable. Undisputedly, this debt is arising on account of trade. Therefore any addition or reduction in money receivable or payable on account of fluctuation would be on revenue account. The decision of Hon'ble Madras High Court in Indian Overseas Bank v. CIT [2001] 250 ITR 146 was based on their decision in Indian Overseas Bank v. CIT [1990] 183 ITR 200. In earlier decision in Indian Overseas Bank v. CIT [1990] 183 ITR 200 (Mad.), it was held that profit or loss in forward transactions in foreign exchange can only be ascertained a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n currencies having been brought about and, in that sense, the amounts in question represented merely notional profits and could not be subjected to tax." 30. However, in the present case in hand, the assessee is not dealing in forward transaction in foreign exchange and there is no question of any settlement of any contract. The sale of goods to Dubai Party is complete. What is due to the assessee is an ascertained sum being the sale proceeds of goods, whose final value in Indian rupees will depend upon the exchange rate at the end of the accounting period. 31. In ONGC Ltd. v. Dy. CIT [2002] 261 ITR (AT) 1 (Delhi) (SB), it was held that loss on account of foreign exchange fluctuation is allowable on a loan due to the assessee, if it is following mercantile system of accounting. Hon'ble ITAT observed as under :-- "The assessee, i.e., ONGC, which is a wholly owned Government of India Undertaking, established under the ONGC Act, 1959, for exploration, exploitation and extraction of mineral oils, had filed its return for the assessment year 1991-92 declaring a total income of Rs. 4,39,49,86,580 against which the Assessing Officer completed the assessment on a total income of Rs. 8, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dopting the same accounting principles that were adopted in the year under consideration, the assessee had shown a gain of Rs. 293.37 crores during the assessment year 1997-98 because the Indian rupee appreciated as compared to foreign currency. The assessee offered this amount for taxation and the Department also had taxed the same. The Department could not be permitted to deny the claim in one year and in another year when there was a profit, tax the same as the same was against the principles of natural justice and also against the principles of accounting. The Accounting Standard-11 (AS-11) on "accounting for the effects of changes in foreign exchange rates" issued by the Institute of Chartered Accountants of India, which came into the effect in respect of the accounting periods commencing on or after April 1, 1987, provides that if the result of conversion at the closing rate is a net loss, the long-term liabilities should be restated and loss should be charged in the profit and loss account. However, deferral of the liability over the remaining term of the liability is not permitted if such losses are likely to recur. Thus, the claim made by the assessee was according to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against profit of the business on the ground that it is not real income ignoring the specific provision made in the statute in this regard. If trade debts not considered recoverable and allowed to be set off on the ground that they do not represent real income then the provisions of section 36(1)(vii) read with section 36(2) will become redundant so far as allowability of bad debts are concerned. The theory of real income is applicable when there is no specific provision in the statute to deal with the issue. When the concept of real income comes directly in conflict with the provisions of the Act, then the provisions of Income-tax Act, 1961 will prevail. The arguments of the learned counsel for assessee that as when recoveries are made out of such 'unreal income', they will be offered for taxation, is of no consequence. Thus, increase in trading receipts on account of foreign exchange fluctuation is taxable as income. Where, it is finally not recoverable and written off, the provisions of section 36(1)(vii) read with section 36(2) are attracted. Thus, we do not find any fault in the order of authorities below in respect of this ground. Therefore, we reject this ground of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and generation of electricity. Further, export activities were carried out only for seven months. Therefore, if at all, indirect expenses are to be allocated, then proportionate expenses for seven months alone should be allocated to export trade. In addition, it was submitted that freight and handling charges of Rs. 7,27,11,139 pertained to local sales and purchase of goods only. The said cost is directly related to purchase and sale of goods cannot be allocated to export trade. The Assessing Officer rejected the claim on the ground that there is no specific provision in section 80HHC for restricting the indirect expenses only to the extent of period during which export activity was carried out in the relevant year. According to the Assessing Officer, the assessee would have incurred indict expenses even during the remaining months of previous year for obtaining export orders. The Assessing Officer also invoked the definition of indirect cost as provided in Explanation 'e' to section 80HHC(3). Thus, the Assessing Officer computed allowable deduction at Rs. 5,86,33,958 as referred above. Before the CIT(A) no submissions were made and accordingly, the CIT(A) confirmed the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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