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TMI Blog2008 (7) TMI 1065X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed. Calculation of deduction u/s 80HHC - excluding the receipts from DEPB - HELD THAT:- In the present case, the intent of the legislature is clear and we find no ambiguity with respect to the taxability of the profit on the transfer of DEPB and the authorities below need not call the aid of other rule of construction of statutes. If this is done, this will tantamount to straining the statute which is not permitted in view of the decisions of Hon'ble Supreme Court of India in the case of State of Punjab v. Jalandhar Vegetables [ 1965 (11) TMI 101 - SUPREME COURT] and Innamuri Gopalam v. State of AP[ 1963 (4) TMI 18 - SUPREME COURT] - Moreover, the revenue cannot adopt different ways of taxing one receipt, i.e., if the assessee utilizes the said entitlements for imports, no tax is levied on the part of profit which has resulted from the savings in the import duty whereas if it is not utilized and sold in the market, the same is taxed. Therefore, such cost cannot become the part of the profit. Essentially it has to be reduced from the sale consideration - DEPB entitlements are given to supplement the input cost of exports which is a fixed percentage of the export which d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .26 per cent and has ignored the past results declared by the assessee. Therefore, the order of the ld CIT (A) for sustaining the addition is reversed - Thus, ground for Rejection of books of account u/s 145(3) is dismissed and ground for confirming the trading addition of the assessee is allowed and solitary ground for reducing the GP rate of the revenue is dismissed. Rejection of books of account - trading addition - HELD THAT:- In the present case, We find the explanation of the assessee as convincing for fall in GP and therefore, no addition can be made even if the books of account are rejected in view of decision in the case of CIT v. Gotan Lime Khanjit Udyog (supra). Therefore, the order of the ld CIT (A) for sustaining the trading addition is reversed. Thus, ground No. 1 of. the assessee is dismissed and ground No. 2 of the assessee is allowed. Disallowance of a sum out of interest - loan is diverted by the assessee by way of investment and advancement of loans to various persons which are not connected with his business activities - HELD THAT:- The vital fact has been ignored by both the authorities below. The assessee is having the surplus capital and any investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank and during the year has incurred interest expenditure amounting to ₹ 30,02,765. The assessee has made the FDRs on which interest income of ₹ 2,39,976 has been earned. The net expenditure of ₹ 27,62,789 was claimed as interest expenditure i.e. the assessee has treated ₹ 2,39,276 as business income. The arguments of both the parties were taken on record. On identical issues, this Bench has been taking the consistent decisions where the income earned as interest on FDRs has to he treated as income from other sources and not income from business and the interest expenditure has been held to be allowable under Section 37(1)/36(1)(iii) of the Act. No netting in such cases can be done. Amongst other cases, the decision by this Bench has been taken in the case of Silver Mines v. Asstt. CIT, (ITA No. 102/Jp/1999, dated 10-3-2006). Following the same, we find no infirmity in the order of the learned Commissioner (Appeals) who has rightly confirmed the action of the assessing officer in treating the interest income as income from other sources and no netting has been allowed. Thus, ground No. 1 of the assessee is dismissed. Ground No. 2 : The learned Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, being the Duty Remission Scheme under the Export and Import Policy formulated and announced under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992). It may also be observed that Clauses (iiia) and (iiid) speak of profit and whereas Clauses (iiib) and (iiic) provide for gross receipts. DEPB entitlements are given to supplement the input cost of exports. One way could be to ascertain the entitlement based on actual cost of each exporter. However, instead of this cumbersome procedure, the Government has decided to allow DEPB on a fixed percentage of export. This percentage is decided on the basis of industry specific survey conducted by the Government. Therefore, this percentage differs for different products. It is this imputed or attributed cost which is to be set off against DEPB receipts in order to arrive at the sums defined under Section 28(iiid). The lower authorities seem to be under the impression that the whole proceeds of the transfer represent profits which ignores the principles of duty drawback scheme. This may be due to the fact that the cost element is not visible separately but is merged in the cost of purchase of the imported co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of imbibed cost is not foreign to Income Tax Act, 1961. Similar contention of cost being nil was raised by the revenue for bonus shares on the plea that nothing was paid for acquiring bonus shares. This issue travelled upto the Hon'ble Supreme Court of India in the case of CIT v. Dalmia Investment Co. Ltd. The Hon'ble. Supreme Court of India discussed the issue at great length and held that bonus shares cannot be said to be gift. Therefore, the Hon'ble Supreme Court of India held that the cost of bonus shares cannot be nil and has to be worked out by spreading the cost of original shares to the cost of all shares i.e. original plus bonus. This ratio of working out the imbibed cost squarely covers the controversy involved in the present case before the Hon'ble Bench. The revenue has not made out a case that DEPBs are gift. The learned Authorised Representative relied upon the decision of Tribunal Bench in the case of Dy. CIT v. Chandan Fashions (P) Ltd. (ITA No. 816/Jp/2007) reported at 29 Tax World 115 (Jp) where Tribunal has held that the profit on sale of DEPB shall be taxable. 11. The learned Authorised Representative further argued as under: (i) Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 80HHC. 12. The learned Authorised Representative prayed that in view of the above, the treatment given by the lower authorities may be held illegal. 13. The learned departmental Representative on the other hand relied upon the orders of the authorities below. 14. We have heard the rival contentions and perused the facts of the case. We are convinced with the arguments of learned Counsel for the assessee Shri Rajeev Sogani, chartered accountant that Section 28(iiia), 28(iiib), 28(iiic) and 28(iiid) specifically provides for chargeability of the income under the head Profit and gains of business or profession . Section 28(iiia) specifically provides for inclusion in the income the profit on sale of license Similarly, Section 28(iiid) provides for inclusion in the income, any profit on the transfer of the duty entitlement pass book scheme whereas in Section 28(iiib), cash assistance received or receivable and in Section 28(iiic) any duty of customs or excise repaid or repayable is included in the income. Therefore, the legislators were clear in their mind what is to be included in the Income. The words in the statute have to be read as they are written in the statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no such provision in the Act with regard to the DEPB. 18. The arguments of learned Authorised Representative with regard to the cost of DEPB entitlements are acceptable that the various Government, levies included in the inputs are the cost of DEPB although debited to cost of inputs. The cost is imbibed in the higher purchase price of input. DEPB entitlements are given to supplement the input cost of exports which is a fixed percentage of the export which differs from the different products. It is this imputed or attributed cost which is to be set off against DEPB receipts to arrive at the sums taxable under Section 28(iiid) of the Act. Therefore, in such circumstances and facts of the case, it is only the profit on the transfer of DEPB Scheme which has to be treated as income under Section 28(iiid) of the Act. On identical issue, the reliance has rightly been placed by the learned Authorised Representative on the following decisions: 1. Glenmark Laboratories Ltd. v. Dy. CIT (supra); 2. Dy. CIT v. Chandan Fashions (P) Ltd. (supra). In view of our findings and the cases relied upon, the assessing officer is directed to allow the claim of the assessee. The order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: The following concerns have shown the GP rate in assessment year 2003-04 as follows: S.N. Name of the assessee Turnover GP rate 1. Garment Craft India (P) Ltd. 2.33 crores 23.62% 2. Somani Fabric (P) Ltd. 3.56 crores 25.26% 3. M/s J.C. Fashions 7.02 crores 23.72% The assessee is showing less profits in comparison to above concerns which are also engaged in the export of similar items. Looking to the turnover, facts and circumstances of the case, GP rate of 24 per cent is applied in this case. Gross profits at this rate on a turnover of ₹ 14,76,94,680 come at ₹ 3,54.46,723. The assessee has disclosed GP of ₹ 3,06,50,329. Therefore, the difference of ₹ 47,96,394 is added to the income of the assessee. 23. The learned Commissioner (Appeals) observed that the cases relied upon by the assessing officer are not comparable as there is huge difference in the turnover. The book results of the assessee have been accepted by the assessing officer in the assessments under Section 143(3) for the assessment years 2001-02 and 2002-03. The learned Commissioner (Appeals) therefore, directed to apply a GP rate of 21.26 per cent by confirming the trading ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustaining the addition is reversed. Thus, ground No. 1 of the assessee is dismissed and ground No. 2 of the assessee is allowed and solitary ground of the revenue is dismissed. Ground No. 3 : The learned Commissioner (Appeals) has erred in upholding the action of the assessing officer in not considering the interest income of ₹ 2,85,272 for. the purpose of calculating the deduction under Section 80HHC. 25. The brief facts of the case are that the assessing officer excluded the interest on FDRs from business income for the purpose of calculation of deduction under Section 80HHC. The learned Commissioner (Appeals) confirmed the action of the assessing officer. 26. We have heard the rival contentions and perused the facts of the case. On identical issue, this Bench is taking consistent decisions as in the case of Silver Mines v. Asstt. CIT (ITA No. 102/Jp/1999, dated 10-3-2006) (supra) and in assessees own case for the assessment year 2002-03, supra, we find no infirmity in the order of the learned Commissioner (Appeals) who has rightly confirmed the action of the assessing officer. Thus ground No. 3 of the assessee dismissed. Ground No. 4 : The learned Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirming the rejection of books of account of the assessee. Ground No. 2 ; The learned Commissioner (Appeals) has erred in confirming the trading addition of ₹ 16,50,585.. 31. The brief facts of the case are that the assessee continues the same business as in the preceding year. The assessing officer has rejected the books of account by invoking the provisions of Section 145(3) of the Act since the assessee has not submitted any justification of the fates of work-in-progress. There was a fall in GP rate in the impugned year as compared to the preceding years. The explanation of the assessee with regard to the fall In GP rate was not accepted by the assessing officer and therefore, the assessing officer on the basis of the results declared by the assessee in the preceding years applied a GP rate of 20 per cent as against 18.93 per cent declared in the impugned year. The learned Commissioner (Appeals) confirmed the action of the assessing officer. 32. We have heard the rival contentions and perused the facts of the case. The assessee has not submitted the justification of work-in-progress and therefore, in such circumstances and facts of the case, the income declare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent of specified rate of export proceeds. The adjustment is done by book entries and an exporter has option to transfer its credit balance to any other party for some consideration. What the learned Authorised Representative of the assessee wants to say is that he had credit balance of ₹ 1,54,25,724 and sold these licenses for ₹ 1,40,56,320 and incurred losses. The contention is hypothetical and calculation is notional. In fact, there is no cost incurred by the assessee for entitlement of import of goods. This is an export incentive as per the. policy of the Government and entitlement is red (linked) with the export of goods. The cost of availing this entitlement is nil and therefore, whole amount received by the assessee is profit on sale of these licenses. The Parliament has used phrase profit on transfer of DEPB license because of the fact that the legislature has to enact a law with a vision and future possibilities. Although, there is no cost of availing this benefit right now, it may involve some cost in the future. As per above discussion, it is held that the assessee is not entitled for deduction under Section 80HHC on profit of ₹ 1,40,56,320 on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the interest-free advance is held to be out of interest-bearing funds and thus interest on interest-free loan is not deductible. In this respect, Hon'ble Allahabad High Court in the case of CIT v. H.R. Sugar Factory (P) Ltd. has held that if money has not been advanced to directors, it would have been available to the assessee for its business and to that extent it may not have been necessary to borrow funds from the bank and accordingly, Hon'ble High Court has held that in their opinion Income Tax Officer was right to disallow difference of interest claimed under Section 36 of Income Tax Act. Following the aforesaid judgments, in my considered view, the assessing officer was fully justified in working out such disallowance of interest claimed on account of diversion of borrowed funds for non-business purposes at ₹ 11,26,665 which is hereby confirmed by rejecting grounds of appeal No. 4. 37. The learned Counsel for the assessee, Mr. Rajeev Sogani, chartered accountant argued that learned Commissioner (Appeals) has erred in confirming the decision of assessing officer that the assessee has diverted the interest-bearing loans for making interest-free advances and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vances having closing balance amounting to ₹ 1,33,50,800 and investments of ₹ 83,82,000 (47,90,000 + 35,92,000) which are not for business purposes. Since various advances and investments mentioned by the assessing officer are less than the opening capital, therefore, had the investments been made by debiting the capital account, the same would not have appeared in the balance sheet. After withdrawing all non-business investments/advances, the capital of the proprietor remains at ₹ 6,07,57,735 (paper book 32). The above view point was duly explained to the assessing officer during the course of assessment proceedings. The observation of the assessing officer is factually incorrect as a detailed statement showing receipts of export proceeds and loans and advances given in the financial year 2003-04 was submitted to the assessing officer (paper book 3). The assessing officer has ignored the said statement. This statement established that liquid funds were available which could have been withdrawn by the proprietor but were given as loans or advances. According to the above statement, the assessee had sufficient liquid funds for investment or for advancing money. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility for payment of interest-free advance was there with the respondent assessee, had not utilized for the purpose of business. (3) CIT v. Britannia Industries Ltd. In this case, Hon'ble Court held that when the assessee had both borrowed funds as well as own funds there would be a presumption that the amount was made out of the Own funds of the assessee and not from the borrowed capital. The Hon'ble Court decided the case in favour of the assessee holding that there were sufficient funds and that the advances were made from the mixed account. (4) Jt. CIT v. I.T.C. Ltd. In this case, Hon'ble Special Bench held that when there are sufficient own funds, the interest-free loan given to sister concern will not lead to any disallowance of interest under Section 36(1)(iii). 38. The case law relied upon by the learned Commissioner (Appeals) have been distinguished by the learned Authorised Representative as under: (1) Indian Shaving Products Ltd. v. CIT The said company was not having its own sufficient funds even to run its business and was running in huge losses in these years, whereas the appellant had sufficient own capital and was earning huge profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firmed by the learned Commissioner (Appeals) is directed to be deleted. Thus, ground No. 4 of the assessee is allowed. Ground No. 5 : The learned Commissioner (Appeals) has erred in confirming the action of the assessing officer in treating the interest income amounting to ₹ 4,94,018 as income from other sources and excluding the same from computation of deduction under Section 80HHC. 40. The brief facts of the case are that the assessing officer excluded the interest on FDRs from business income for the purpose of calculation of deduction under Section 80HHC. The learned Commissioner(Appeals) confirmed the action of the assessing officer. 41. We have heard the rival contentions and perused the facts of the case. On identical issue, this Bench is taking consistent decisions as in the case of Silver Mines v. Asstt. CIT (ITA No. 102/JP/1999, dated 10-3-2006) (supra) and in assessees own case for the assessment year 2002-03, supra, we find no infirmity in the order of the learned Commissioner (Appeals) who has rightly confirmed the action of the assessing officer. Thus ground No. 5 of the assessee is dismissed. Ground No. 6 : The learned Commissioner (Appeals) has er ..... X X X X Extracts X X X X X X X X Extracts X X X X
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