HERITAGE JEWELS JAILPUR vs. C I T JAIPUR

Judgment Per Hon’ble Jhaveri, J. 02/06/2017

“3. Disallowance

of claim

of Deduction u/s 80HHC of Rs.353,286/- The assessee has filed separate trading accounts in respect of local sales and export sales. Gross profit from trading account is Rs. 8,24,604/- on export sale of Rs. 29,88,282/- and gross profit from local sales is Rs.19,21,321/- on sale of Rs. 40,22,769/-. Total turnover comes to Rs.60,11,051/- (40,22,769+29,88,282). However

the assessee has filed one consolidated P&L A/c wherein total expenses of Rs. 18,00,111/- has been debited. Here it would not be out of context to mention that the assessee maintains only one set of books of accounts. In the computation, the assessee has computed income in a manner that is such, quantum of deduction u/s 80HHC of the Act would be calculated by the way of applying the following formulae:- 50% of (Export Turnover-Total Direct Cost.- Total Indirect Cost) + 90% of Export Incentive X Export Turnover Total Turnover In the case of the assessee, export turnover is Rs. 29,88,282/- and Direct cost of the trading goods is Rs.21,63,678/- As per clause(e) of the explanation to section 80HHC(3), indirect cost of trading goods shall be allocated in the ratio of the export turnover in respect of trading goods to the total turnover. In this case, total indirect cost that has been debited in the consolidated Profit & Loss A/C is Rs.18,00,111/-. Out of this, Rs.1,18,033/- under the head “export expenses” is fully attributable to the export sales. Therefore, the amount which is to (3 of 12) [ITA-5/2009] be allocated in the ratio of the export turnover in respect of trading goods to the total

turnover comes

to Rs.16,82,078/- (18,00,111-1,18,033).As per the provision of clause(e) of the explanation of section 80HHC(3), indirect cost attributable to the export sales is: = Rs.16,82,078/- X Export Turnover Total Turnover 16,82,078 X 19,88,282 60,11,051 = 8,36,214/-. This indirect cost of Rs.8,36,214/- is to be increased by Rs.1,18,033/- which is fully attributable to the export of trading goods. Therefore, total indirect cost comes to Rs.9,54,247/- (8,36,214+1,18,033) Therefore, quantum of deductions is calculated herein under:- = 50% of (Export Turnover-Total Direct Cost – Total Indirect Cost) + 90% of export incentive X Export Turnover Total Turnover. = 50% (29,88,282-21,63,678-9,54,247) + 0 (export incentive is Nil) = 50% X (-) 1,29,643/- = -64,821/- Therefore, it is evident that the assessee is not entitled to any deduction u/s section 80HHC since, it has not derived any profit from the export of trading goods. So, claim of deduction u/s80HHC to the extent of Rs.3,53,286/- is rejected. Penalty u/s 271(1)(c) is initiated for furnishing of inaccurate particulars of income.”

“4. For the purpose of claiming deduction u/s 80HHC(1) of the Act and in the present circumstances and facts of the case, the assessee is engaged in the export business as well as in the business of local sale of goods and therefore the profits derived from the export of goods merchandise out of India shall be worked out in accordance with provisions of section 80HHC(3)(b) of the Act. As per explanation (e) to section 80HHC(3), ‘indirect costs’ means costs not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover. Therefore we find no infirmity in the order of the authorities below who have rightly computed the deduction us/ 80HHC(1) as NIL. Alternatively, even if the books of account are separately maintained for export as well as the local sales, section 80HHC(3)(b) of the Act shall be applicable in view of decision of Hon’ble Kerala High Court in the u/s 80JHHC(1) of the Act as NIL and we find no infirmity in the order of ld. CIT(A). Thus ground no.1 and 2 of the assessee are (5 of 12) [ITA-5/2009] dismissed.”

“4. This question of law as to whether where the assessee has maintained the separate books of accounts in respect of domestic transaction as well as the export transaction the clubbing of income was permissible was considered by this Court in Commissioner of Income Tax v. Rathore Brothers

reported

in : [2002]254ITR656(Mad) . In that case, it was held that where the assessee has maintained separate accounts and it had maintained its trading receipts and profit and loss accounts separately for export sales and domestic sales and there was sufficient materials supported by all the necessary documents to show that the deduction claimed was entirely due to export, there was no warrant for disallowing any portion of the export earnings pro rata by invoking Clause (b) of Sub-section 3 of Section 80HHC of the Act. The purpose of the clause was to disallow a part of the allowances under the section only when the entire claim could not be regarded as being relatable to export. That decision has been followed subsequently, in Commissioner of Income Tax v. Suresh B. Mehta reported in : [2007]291ITR462(Mad) in a similar set of facts, where the assessee had maintained the separate accounts for domestic transaction as well as the export transaction. Having regard to the said fact, this Court has held that the assessee was maintaining separate accounts independent of his other business and that there was no intermingling of expenditure or interlacing of funds of any kind whatsoever the assessee was entitled to the relief. That decision was followed in another case in Commissioner of Income Tax v. Macmillam

(6 of 12) [ITA-5/2009] India Ltd. reported in 295 ITR 67, wherein also, the Court held as follows: Where the assessee had maintained separate accounts and maintained its trading receipts and profit and loss accounts separately for export sales and domestic sales and produced sufficient material in support of all the necessary documents to show that the deduction claimed was entirely due to export, there is no warrant for disallowing any portion of the export earnings pro rata by invoking Clause (b) of Sub-section (3) of Section 80HHC of the Income Tax Act, 1961, as the purpose of the clause is to disallow a part of the allowance under that section only when the entire deduction claimed could not be regarded as being relatable to exports.”

“2. Brothers [2002] 254 ITR 656, where the assessee had maintained separate accounts and maintained its trading receipts and profit and loss accounts separately for export sales and domestic sales and produced sufficient material for support of all the necessary documents to show that th deduction claimed was entirely due to export, it was held that there was no warrant for disallowing any portion of the export earning pro rata by invoking clause (b) of sub-section (3) of section 80HHC of the Income Tax Act, 1961, and the purpose of the clause was to disallow a part of the allowance under that section only when the entire deduction claimed could not be regarded as being relatable to exports.”

(7 of 12) [ITA-5/2009] “5. This court, in CIT v. Rathore Brothers [2002]254ITR656(Mad) , referred to supra, finding that the assessee therein had maintained separate accounts and it had maintained its trading receipts and profit and loss accounts separately for export sales and domestic sales and that there was sufficient material supported by all the necessary documents to show that the deduction claimed was entirely due to export, held that there was no warrant for disallowing any portion of the export earnings pro rata by invoking Clause (b) of Sub-section (3) of Section 80HHC of the Income Tax Act, 1961 and the purpose of the clause was to disallow a part of the allowance under that section only when the entire deduction claimed could not be regarded as being relatable to exports. In the instant case also, as could be seen from the order of the Commissioner as well as the Tribunal, the assessee was maintaining separate accounts independent of his other business and there is no intermingling of expenditure or interlacing of funds of any kind whatsoever. It could also be seen that the assessee had also complied with the legal requirements by filing Form No. 10CCA in support of his claim. In view of the above, we do not find any error or illegality in the order of the Tribunal. Accordingly, finding no question of law much less a substantial question of law that arises for consideration, the appeal stands dismissed.”

“14. It is thus clear that Explanation (e) which defines "indirect costs" has to be read in conjunction with sub-section (3)(c)(ii) of Section 80HHC, which provides that the profits shall be reduced by the "direct and indirect costs attributable to export of such trading goods." Since the word "attributable" has been used, it is clear that the indirect costs also must be attributable to the export of such goods; in other words, there must be some nexus that the "indirect costs" have to the export turnover of the assessee. Au contraire, if the term "indirect costs" is interpreted to also include such costs which are not attributable to the export of trading goods, then that would go against the language of the provision, as clarified by the Supreme Court. That being the position, in view of the declaration of the law in Hero Exports (supra), "indirect costs" computed must have some nexus (or in other words must be "attributable") to the export of trading goods. The decision of the ITAT on this question is therefore reversed.”

“24. In our opinion, where the legislature has used words in an Act which if generally construed, must lead to palpable injustice and consequences revolting to the mind of any reasonable man, the court will always endeavour to place on such words a reasonable limitation, on the ground that the legislature could not have intended such consequence to ensue, unless the express

(9 of 12) [ITA-5/2009] language in the Act or binding authority prevents such limitation being interpolated into the Act. In construing an Act, a construction ought not be put that would work injustice, or even hardship or inconvenience, unless it is clear that such was the intention of the legislature. It is also settled that where the language of the legislature admits of two constructions and if construction in one way would lead to obvious injustice, the courts act upon the view that such a result could not have been intended, unless the intention had been manifested in express words. Out of the two interpretations, that language of the statute should be preferred to that interpretation which would frustrate it. It is a cardinal rule governing the interpretation of the statutes that when the language of the legislature admits of two constructions, the court should not adopt the construction which would lead to an absurdity or obvious injustice. It is equally well settled that within two constructions that alternative is to be chosen which would be consistent with the smooth working of the system which the statute purported to be regulating and that alternative is to be rejected which will Page 4195 introduce uncertainty, friction or confusion with the working of the system. [See Collector of Customs v. Digvijaysinhji Spinning and Weaving Mills Ltd. and His Holiness Kesvananda Bharati v. State of Kerala ].

(10 of 12) [ITA-5/2009] which would lead to manifest absurdity or futility, palpable injustice, or absurd inconvenience or anomaly.... Further, in the case of State of Punjab v. Sat Ram Das , the Punjab High Court held that: To avoid absurdity or incongruity, grammatical and ordinary sense of the words can, in certain circumstances, be avoided.”

“3. We have heard the rival contentions and perused the facts of the case. The assessee has submitted separate trading account but a consolidated profit and loss account before the AO with regard to export as well as the local sales. The gross profit from trading on export sales is Rs.8,24,604/- on export turnover of Rs.29,88,282/- whereas on local sales it is Rs.19,21,321/- on local sales of Rs.40,22,769/-. The total turnover therefore declared was Rs.60,11,051/-. The assessee has filed one consolidated profit and loss account before the AO. The auditors have also audited the consolidated profit and loss account. Before the ld. CIT(A) the ld. AR argued that the assessee was maintaining separate books of account for export and local sales and the AO was not justified in allocating

the indirect

expenses proportionately. The ld. AR submitted a separate profit and loss account for the local sales and the export sales before the ld. CIT(A). On perusal of the said profit and loss account for the export sales, the assessee has shown only following four expenses:

(11 of 12) [ITA-5/2009] Rs.31,001/-

(12 of 12) [ITA-5/2009]