9911796707
TMI Blog2000 (6) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... s; volume 1 running into 100 pages including inter alia, earlier orders of the Tribunal for assessment years 1992-93 and 1993-94. Written submissions have been filed by the learned counsel placed in the paper book pages 1 to 17. Volume II of the paper book running into 166 pages contains particulars of Advance Import Licences utilised by the assessee-company for the import of Polyester Yarn as well as Dyes and Chemicals. Written submission made by the learned representatives before us have been duly considered and oral arguments made during the course of hearing held from time to time have also been considered by us. 3. The main issues arising before us relate to the accounting of export benefits as well as computation of deduction under section 80HHC. 4. First, we take up the assessee's ITA No. 463/Ahd/2001 Ground Nos. 1 to 4, challenging the addition of Rs.6,22,41,119 on account of notional debit of customs duty on the imported goods read as under:- (1) On the facts and circumstances of the appellant's case, the learned Assessing Officer and the Commissioner (Appeals) has grossly erred: - in not accepting the method of realizing and accounting the export incentives as uph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Customs Tariff Act, 1975 (51 of 1975); and (ii) the whole of the addition all duty leviable under section 3 of the said Customs Tariff Act where specifically claimed by the importer, subject to the following conditions, namely: (1) That the importer has been issued a Pass Book by the designated authority under paragraph 54 of the Export and Import Policy (hereinafter referred to as said Pass Book.) (2) The importer has been permitted credit entries of the amounts equal to basic/customs duties on the inputs used in the products exported by the importer as verified by an Assistant Commissioner of Customs: 6. Thus, under the Exim Policy 1992 to 1997, the assessee was entitled to import specified raw material without payment of customs duty on the basis of exports. The salient features of the DEEC Scheme are as below: (1) The object of the Scheme is to neutralise the incidence of customs duty on import contents of an export product. This neutralisation has to be provided by way of grant of duty credit against the export of a product. Under the Scheme, an exporter is eligible to claim duty credit as specified percentage of the FOB value of the exports made in freely c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of customs duty benefit that has already accrued to him or that may accrue to him as and when he makes export pursuant to the export obligation undertaken by him. When the goods are imported, the following entry is passed in the books: Debit: Raw Material Purchase Account Credit: Customs Duty Payable Account 8.2 Since cross payment of duty payable on imports and duty benefit received on exports are to be settled by way of adjustment under the DEEC book maintained by the Government, the following entry is passed in the books: Debit: Customs Duty Payable Account Credit: Customs Duty Benefit Receivable Account 8.3 Thus, the method of accounting as followed by the assessee involves crediting Customs Duty Benefit Receivable Account in respect of the exports made and transferring this amount to the P&L Account. With regard to utilisation of the Duty Benefit while making imports without payment of customs duty, the Customs Duty Benefit actually utilised is debited to the Purchase Account. Since the Customs Duty Benefit to the extent of exports has been utilised by the assessee by way of adjustment against the Customs Duty on the import of goods, such benefit therefore, constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------------------------- (1) Purchase of Yarn - Dr 5,38,84,600 Purchase of Dyes - Dr 83,56,519 To Duty Benefit Cr 6,22,41,119 ----------------------------------------------------------------------- Thus as per DEEC Book pending import entitlement involve customs duty benefit available to the assessee as on 31-3-1996 is as under: ----------------------------------------------------------------------- (2) Entitlement Rs. Rs. Receivable - Yarn - Dr 54,46,163 Entitlement Receivable - Dyes - Dr 23,37,653 To Duty Benefit Cr 77,83,816 ----------------------------------------------------------------------- (Being the entries passed, for accrual of Benefits as per mercantile system of accounting i.e. Exports made during the year but imports could not be made. Amount of benefit receivable on pending imports entitlement and realisable during coming year) It will be seen from the above that the duty benefit account has been credited with the following amounts on the basis of the duty benefit available to the assessee as per DEEC book on the exports made during the year:- ----------------------------------------------------------------------- Rs. ---------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28(iiib) by the Tribunal in the earlier years, he would proceed on the basis that the amount of Rs.7,00,24,935 is covered under section 28(iiib). Even while computing the deduction under section 80HHC the Assessing, Officer proceeded on the basis that this amount of income falls under section 28(iiib). 12. The assessee carried the matter in appeal challenging the addition of Rs.6,22,41,119. The learned Commissioner (Appeals) vide the impugned order upheld the reasoning and conclusion of the Assessing Officer and held that the liability in question is a contingent liability and that the deduction in any case is hit by the provisions of section 43B. The learned Commissioner (Appeals) accordingly upheld the addition. 13. Aggrieved, the assessee is in appeal before us. Shri S.N. Soparkar, the learned counsel, assailing the impugned addition, strongly urged that the assessee-company is consistently following the mercantile system of accounting recognising the liability of accrued customs duty on the basis of quantum of duty assessed by the Customs authorities on the Bill of Entry and in the DEEC Book when the imports of raw material like yarn, dyes and chemicals are made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. In support of his contentions, the learned counsel placed reliance on the following decisions: (1) CIT v. Nainitcal Bank Ltd. [1966] 62 ITR 638 (SC) (2) J.B. Boda & Co. (P.) Ltd. v. CBDT [1997] 223 ITR 271 (SC) (3) CIT v. Kaira Distt. Co-op. Milk Producers' Union Ltd. [2001] 247 ITR 3142 (Guj.) (4) Asstt. CIT v. Shanti Dyeing & Finishing Works [2001] 114 Taxman 31 (Ahd. - Trib)(Mag.) Relying upon the Legal Thesaurus/ Dictionary (A Resource for the Writer and the Computer Researcher) by William P tatsky, the learned counsel argued that the payment includes discharge of a debt by way of adjustment or settlement. Physical handing over of money is not the only mode of actual payment as envisaged in the provisions of section 43B. The learned counsel argued that section 43B should be interpreted in consonance with the purpose and object of the Legislature in enacting the provision. 13.1 Concluding his arguments, the learned counsel strongly urged that the deduction of Rs.6,22,41,119 deserves to be allowed under section 37(1) and the payment is not hit by the mischief of section 43B. 14. Shri Girish Dave, the learned CIT-DR, on the other hand, referring to various clauses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the rule of literal interpretation would have to be adopted with a view to effectuate legislative intent as expressed in the unambiguous language of section 43B. The learned DR further relied upon the following decisions: (1) Girwar Lal Shri Chand v. CIT [1967] 63 ITR 248 (All.) (2) CIT v. E.L. Properties (P.) Ltd. [2001] 248 ITR 14 (Cal.) (3) CIT v. Gujarat Polycrete (P.) Ltd. [2001] 114 Taxman 58 (SC) (4) Eicher Motors Ltd. v. Dy. CIT [1999] 69 ITD 177 (Indore) (5) D.M. Wadhwana v. CIT [1966] 61 ITR 154 (Cal.) (6) CIT v. Chemical & Metallurgical Design Co. Ltd. [2001] 114 Taxman 463 (Delhi) (FB). (7) Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240 (Guj.) (8) Shri Sajjan Mills Ltd.'s case (9) ITO v. Abdul Razack [1990] 181 ITR 414 (AP) 15. We have given our thoughtful consideration to the facts and circumstances of the case as well as the rival submissions made by the learned representatives of both the sides before us. Various judicial pronouncements of the Hon'ble Supreme Court as well as High Courts cited at the Bar have also been carefully gone through by us, With a view to delineate the contours of the controversy arising before us we feel that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee and cannot be considered as an isolated and single transaction. It is manifestly ear that the debit to the Purchase Account is intimately and inextricably linked with the credit entry on account of export benefit credited to the duty benefit account and ultimately taken to the P&L Account. In this view of the matter our answer to the first question is that the question of allowability of deduction of Rs.6,22,41,119 is to be adjudicated on the basis of acceptability of the method of accounting followed by the assessee. We are not impressed by the arguments of the learned representative of the Revenue that the question of deduction of Rs.6,22,41,119 is not in any manner connected or linked with the credit entry of Rs.7,00,24,935 credited to the P&L Account on account of customs duty benefit on exports made by the assessee. In the facts of the present case the entire system of accounting the customs duty benefit as well as utilisation of the duty benefit for the purpose of making imports has to be considered in a composite manner as method of accounting of the assessee. 16. Now coming to question No. (2) we may point out at the outset that the system of accounting o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Duty Exemption Scheme the payment of customs duty is exempted, has to be viewed in the context of method of accounting followed by the assessee in conformity with the accepted principles under which customs duty benefit is credited on accrual and debited when the benefit is utilised for imports. Utilisation of customs duty benefit for exports of raw material by the assessee has to be booked by way of debit entry to the Purchase Account inasmuch as the duty benefit has already been credited to the P&L Account as income. The treatment accorded by the assessee in respect of the accounting for of export benefits is thus consistent and in accordance with the Accounting Standards. It is further to be noted that the debit on account of customs duty to the Purchase Account has been duly taken note of by the assessee while valuing the closing stock inventory in accordance with the Accounting Standard 2. In the circumstance we see no justification for the Assessing Officer to disallow the amount of Rs.6,22,41,119 on the specious ground that it represents contingent expenditure. We specifically put it across to the learned DR during the course of hearing whether an expenditure debited to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.7,00,24,935 which accrued to the assessee on account of exports made during the year. The assessee has in fact virtually a running account with the Customs Department involving accrual of customs duty benefit on exports receivable by the assessee and customs duty liability on imports of raw material payable by the assessee. The DEEC Book records the credit of export duty benefit available to the assessee and utilisation of the duty benefit by the assessee through instrumentality of imports of raw material. The entries in the books of account of the assessee essentially represent a mirror account-reflecting the account maintained by the Customs Department in the DEEC Book. Thus the statement of account involving adjustment of debit entry against the duty benefit receivable by the assessee would constitute, in the scheme of things, actual payment in terms of provisions of section 43B. "Actual payment" does not in any case involve physical tender of cash by the debtor. Any such interpretation would be unrealistic and contrary to the object and purpose of the Legislature in inserting the provisions of section 43B. Section 43B has been enacted into the Statute by the Legislature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 wherein it has been held that an assessee ought to get the advantage and suffer the disadvantage of the method of accounting employed by him. This decision in our opinion reinforces the conclusion arrived at by us above that the method of accounting regularly followed by the assessee, which is in accordance with well recognised principles of accounting, cannot be rejected. 18. Before parting with these grounds of appeal we may point out that a string of judicial authorities cited by the learned DR in support of Revenue's case have been carefully gone through by us and we find that these decisions are entirely distinguishable and do not support the case of the Revenue. 19. In Shri Digvijay Cement Co. Ltd.'s case (Guj.) relied upon by the learned DR, the liability debited in the books by the assessee-company was admittedly the contingent liability to the State Trading Corporation of India. The amount payable to the assessee by the CACO of sale was withheld for meeting the contingent liability to the STC of India. The decision therefore does not help the Revenue. 20. In Girwar Lal Shri Chand's case it was held by the Allah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition under section 43B, the assessee's contention should not be accepted that the customs duty is an allowable expenditure under section 37 of the IT Act. It is a notional entry and the same was not payable to the Customs Department as the same was exempt. Moreover, there is no enforceable liability for such expenditure, so it is not allowable under section 37 of the IT Act following the decision of Gujarat High Court in the case of Shri Digvijay Cement Co. Ltd. 27.1 This ground reiterates the case of the Department regarding deduction of Rs.6,22,41,119 debited to the Purchase Account under section 37 as well as 43B of the Act. We have already considered and disposed of this issue while deciding the assessee's appeal as above. This ground is therefore dismissed. 28. Ground Nos. (2), (3) and (4) read as under:- (2) If the addition under section 43B is deleted, deduction under section 80HHC should not be allowed for the notional credit entry and the assessee's working for 80HHC should not be accepted in view of the fact that the matter is sub judice before the Gujarat High Court in the assessee's own case for earlier years. (3) The proviso to section 80HHC(3) should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid amount of deduction, the Assessing Officer observed that in case the assessee succeeds before the Appellate Authorities in the matter of allowing deduction of Rs.6,22,41,119 debited to the Purchase Account as above, in that case the assessee would not be entitled to any deduction whatsoever under section 80HHC. The reasoning of the Assessing Officer is that the profits of the business computed by the assessee as per Explanation (baa) below section 80HHC(4B) is a negative figure and therefore the assessee has incurred loss in the export business and no deduction under section 80HHC would be allowable. 28.3 Since the learned CIT (A) upheld the action of the Assessing Officer in rejecting the claim of Rs.6,22,41,119, the issue regarding quantification of deduction under section 80HHC, as raised by the Assessing Officer above did not survive. 28.4 Now, since we have held above that the deduction of customs duty debited is allowable to the assessee, a whole controversy regarding the computation of deduction under section 80HHC, which is the subject matter of Cross-Objection by the Revenue is very much material and needs adjudication by us. Before we proceed further with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of the proviso is to carve out an exception to the main provision. He further added that the proviso cannot be construed as enlarging the scope of an enactment and therefore the proviso to section 80HHC(3) would be operative only if the assessee has profits from the export business. In support of his contention Shri Dave placed reliance on the following decisions:- (1) CIT v. Indo Mercantile Bank Ltd. [1959] 36 ITR 1 (SC) (2) CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC). 30.1 The learned DR also quoted from Principles of Statutory Interpretation by Justice G.P. Singh from pages 159 to 166 wherein the function of the proviso appended to a provision have been elaborated by the learned Author. The learned DR strongly urged that when there is a loss from the export business, proviso to section 80HHC should not be applied and the assessee should not be allowed deduction under section 80HHC. In support of his contentions, reliance has been placed on the following decisions: (1) CIT v. V.T. Joseph [1997] 225 ITR 731 (Ker.) (2) Krislar Diesel Engines (P.) Ltd.'s case (3) Themnis Agencies v. CIT 30 BCAJ Part 9 Dec. 1998 (4) IPCA Laboratories Ltd. v. Dy. CIT [2001] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal as above. 32. We have carefully considered the rival submissions and gone through the various decisions cited by the learned representatives before us. Since the entire issue of deduction involved in the Cross Objection rests on the interpretation of the provisions of section 80HHC, it will be useful to analyse the provisions contained in section 80HHC for computation of deduction. Section 80HHC(1), as it stands for the relevant period being assessment year 1996-97 envisages deduction of the profits derived by the assessee from the export of such goods or merchandise. Section 80HHC(3) provides for quantification of profits derived by the assessee from exports. This computation provision lays down three stages for computation of profits derived from exports: (1) In the first stage, "profits of the business" are to be computed as per Explanation (baa) appended below section 80HHC(4B) Profits and gains of business as computed under the head "business income" minus 90% of any sum under clauses (iiia), (iiib) and (iiic) of section 28 or any receipt by way of brokerage, commission, interest etc. (2) Calculate proportion of the aforesaid "profits of business" as export turnov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnotation also in the light of the inclusive definition of income u/s 2(24) of the Act. 35. The fact that the word "profit" is intended by the Legislature to have positive connotation, as commonly understood in the commercial world, is further manifested by the other computation provisions enacted in the IT Act, 1961 like section 67A which lays down the method of computing a member's share in income of association of persons or body of individuals. Clauses (a), (b) and (c) of sub-section (1) of section 67A are relevant in this connection. if the amount computed in clause (a) is a profit, then clause (b) would apply and the amount shall be added to interest, salary etc. to arrive at the member's share. If the amount computed in clause (a) is a loss, then clause (c) would apply and the loss amount shall be adjusted against the interest, salary etc. to arrive at the member's share. We may note here that a similar method of computation had been earlier laid down in section 67 for computing a partner's share in the income of a Firm (since omitted by the Finance Act, 1992 w.e.f. 1-4-1994). 36. The aforesaid provisions fully reinforce the view taken by us as above that first profit com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total turnover. Proviso stipulates that the aforesaid amount which is virtually deducted while calculating the first profit component is added back by virtue of the proviso. The method of computation thus laid down by the Legislature providing for deduction of the proportionate amount of export incentive in the first stage and adopting the same percentage in the second stage for arriving at the profits derived from exports, clearly indicates that the computation has been designedly made in such a way as to benefit the export manufacturer even if he is running into heavy loss in the domestic market. 39. Needless to say, section 80HHC is an incentive provision enacted by the Legislature with the objective of boosting foreign exchange earnings of the Government and such an incentive provision would obviously be interpreted in a liberal manner. In the instant case the, basic conditions as implicit in the incentive provision are fulfilled by the assessee before us inasmuch as goods manufactured have been exported and foreign exchange has been realised and since the composite picture of business including export business as well as domestic business, reflected in the books depicts a sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd profit component as worked under the proviso thereto. The first profit component worked out under the main provision does not represent profits or loss of the export business. The figure of profits from export business are to be arrived at on the basis of computation as laid down under section 80HHC(3). Merely because the figure worked out under Explanation (baa) is negative, would not lead to the conclusion that there is loss in the export business. Any such assumption would be contrary to the express provisions of section 80HHC(1). 42. The learned Sr. DR has also referred to the provisions of section 80AB in support of his contention that the assessee is not entitled to deduction under section 80HHC. We feel that the contention of the learned DR is not, based on the correct appreciation of section 80AB. Section 80AB read in the context of section 80HHC, lays down the restrictive condition that the deduction would be restricted to the "amount of income of that nature which is derived or received by the assessee and which is included in his gross total income". Now in the instant case the profits derived by the assessee from exports would qualify for deduction from gross total ..... X X X X Extracts X X X X X X X X Extracts X X X X
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