C I T JAIPUR vs. M/S BAID LEASING and FINANCE CO

1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR. (i) DB INCOME TAX APPEAL NO.242/2005 The Commissioner of Income Tax-I, Jaipur Versus M/s. Baid Leasing & Finance Co. Ltd. (ii) DB Cross Objection No.7/2006 In DB INCOME TAX APPEAL NO.242/2005 The Commissioner of Income Tax,-I, Jaipur Versus M/s. Baid Leasing & Finance Co. Ltd. DATE OF ORDER ::: 23.11.2016. HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE MAHENDRA MAHESHWARI Mr. Anuroop Singhi, for the appellant. Mr. Sanjay Jhanwar, for the respondent. 1. By way of this appeal, the appellant has challenged the judgment and order of the Income Tax Appellate Tribunal whereby the appeal of the assessee was partly allowed and cross-objection and appeal of the Department was dismissed confirming the order of the CIT (A) as well as AO. 2. The return declaring total income of Rs Nil was filed on 28-11-96. The same was processed u/s 143(1) (a) on 16.09.98. Thereafter notice u/s 148 was issued on 1-2- 2000. In response thereto the assessee vide his letter dated 21.02.2000 requested for considering the original return filed on 28.11.96 as return of income filed in response to

2 notice issued u/s 147/148. Notices u/s 143(2), 142(1) and questionnaire were issued from time to time. In compliance thereto Shri Naresh Sharma, C.A. and A/R appeared on behalf of the assessee. Filed return submissions and produced books of accounts. The books of accounts were test checked and the case was discussed with him. The assessee is engaged in the business of export of percious and semi precious stones and leasing and hire purchase of vehicle. During the year under consideration, the assessee has declared export turnover of Rs. 1,88,25,473/- and gross income from hire charges has been declared at Rs. 90,79,900/- and lease charges of Rs. 55,76,072/-. The company has also engaged in leasing and hire purchase financing of automobiles and vehicles. This is most important activity of the total business done by the company. The assessee was therefore, specifically asked vide questionnaire dated 05.02.2002 to furnish the details amongst others in respect of vehicles financed on hire purchase and on lease basis. The assessee has filed the details as per letter dated 11.02.2002 submitting that on hire purchase business, the company has not claimed any depreciation. But the company has claimed depreciation on all the leased assets as per the rates of depreciation. During the year under consideration depreciation of Rs. 1,13,109 was claimed on leased assets. The assessee was, therefore, again asked to file complete details of the lease transactions and as to how the depreciation was claimed on leased assets. The details

3 furnished reveal that these assets were purchased in the names of the vehicle owners and the assessee has simply financed them. The purchase bills issued by the seller of these vehicles are in the names of the assessee. The Assessee Company is not the real owner of these vehicles. All these vehicles are also registered by the Registering Authroity District Transport Officer under Motor Vehcile Act in the names of the Vehicle owners. The Purchase invoice/bills showed that the Assessee Company has simply financed them and its name is appearing only as financer. 3. This Court while admitting the appeals framed the following substantial questions of law: “i) Whether

the

facts

and circumstances of the case, the ITAT was right and justified in allowing the deduction of Rs.85,99,901/- u/s.80HHC and directed the Assessing Officer to obtain the audit report afresh in Form No.10CCAC, which is very much contrary to the provisions of section 80HHC (4) of the Act of 61? ii) Whether on, the facts and circumstances of the case, the ITAT was right and justified in allowing the deduction u/s 80HHC after excluding the expenses relating to 'Insurance & Registration Charges' and 'Depreciation on leased vehicle', from the indirect cost allocable to the export turnover, when the explanation (e) to Section 80HHC (3) specifically defines the indirect cost? iii) Whether

the

facts

and circumstances of the case, the find of the ITAT is perverse, contrary to the record and untenable in the eye of law?” 4. However, counsel for the respondent has relied upon decision of this Court in Income Tax Officer Vs. Novelty

4 Garments, (2002) 256 ITR 688, relevant para of which reads as under:- “3. Now the Board after recognising has clarified in its Circular, dt. 17th Jan., 2001 [published at (2001) 165 CTR (St) 9] that the submission of auditor's report in the old format of Form No.10CCAC is place of new format is a defect, which can be correct by filing the auditor's report in the revised format during the course of assessment proceedings. 4. the admitted fact is that the assessment has been completed in the case in hand on 26th March, 1998, and assessee had filed the auditor's report along with new format of Form No.10CCAC on 29th Aug., 1996, i.e., before completion of assessment order.” 5. The Tribunal for issue No.1 observed as under: “I have carefully considered rival submissions. It is admitted that the purchase of shares, purchase of transfer of stamps, insurance and registration expenses for purchase of vehicles are direct cost. However, it is not acceptable that rest of the administrative expenses, interest expenses, Misc. Expenses and depreciation can be taken within the direct cost. Considering the totality of facts and circumstances, it is clear that the appellant has not worked out the computation of deduction in accordance with the provisions of section 80HHC. If this calculation is made strictly in accordance with these provisions then the appellant is not entitled for deduction under this section for Rs.12,58,755/- only. The appellant had filed claim u/s 80HHC in form No.10CCAC alongwith original return of income in which claim of Rs.99,98,350.20/- has been made. A detailed working of this claim is given in Ann-A to this appellate order. During the course of appellate proceedings, the attention of the AR of the appellant was drawn to the fact that this working does not show any export turnover in respect of trading goods. In response to this querry, ld AR of the appellant filed another working for a claim of Rs.85,99,901/- for deduction u/s 80HCC alongwith a note as under: "In the original annexure-A, the nature of goods exported have mistakenly shows as those of "manufactured". In fact export represents "trading" only. This fact is evident from the details of our expenses, which do not contain any expenditure of the

5 nature of manufacturing or processing expenses. We have rectified this mistake in the enclosed Annexure- A". The fresh working filed by the apellant (Ann-B to this appellate order) for the claim of deduction u/s 80HHC at Rs.85,90,901/- is not supported by a report of an Accountant as defined in explanation below sub- section(2) of section 288 certifying that the deduction has been correctly claimed in accordance with the provisions of this section. Further-more, though in the annexed letter, it has been stated by the appellant that the whole of the export represents trading only and there was no manufacturing or processing activity but from the persual of record this assertion is found to be incorrect. From the shipping bill of the export, it is seen that the appellant has exported cut and polished stones only whereas the purchases show raw material and semi-finished goods as indicated below:- 1) Ledger a/c of Metro Gem Ltd Bangkok – 1.4.95 to 31.3.96 This account is credited by a sum of Rs.40,91,530/- on 5th June with the note "being raw-material purchased vide invoice No.1/95 for $1,28,400/- @ Rs.31.86/. Further the same account is further credited by a sum of Rsx.4,11,458/- on 21st December with the remark "being amount credited for rate difference in $/Rs and payments made to Metro Gems Co @ Rs.35.07/- instead of Rs. 31.86 on $ 1,28,400/-" . 2) M/s Overseas Emerald 1.5.95 to 31.3.96 The account of this company is credited by a sum of Rs.4,79,324/- on 23rd May as indigenous purchase with the ramark "being raw material purchase vide invoice No.64". Subsequently on 19th August the same amount is credited by Rs. 12,96,711/- by indigenous purchase. "being invoice No. 74 for purchase of raw material/semi finished goods". Again on 11th September this account is credited by a sum of Rs.5,34,112/- by indigenous purchase "being invoice No. 79 for purchase of raw-material/semi finished goods.” 6. With regard to issue No.2, the Tribunal held as under: “However, looking to the business of the appellant, hire charges and other receipts including dividend and other interest etc are taken as sales of the business then these receipts are to be taken into consideration in calculating total turnover of the business. The total turnover of the business will be Rs.4,06,67,858/- which includes export sales of Rs 1,88,25,433/-. Tfhe deduction u/s 80HHC will be required to be calculated in accordance with the provisions of this section. The appellant, in the revised working has calculated the deduction u/s 80HHC and the figures have been given in the form No. 10CCAC. Relevant figure is reproduced below as the business of the appellant is export in respect of trading goods only.

6 Total export turn over 1,88,25,473/- Total profit of the business 1,66,49,996/- Export turn over in respect of trading goods 1,88,25,473/- Direct cost of trading goods 92.49,218/- Indirect cost attributable to trading goods exported 9,76,354/- Total of direct cost and indirect cost 1,02,25,572/- Profit from export of trading goods 1,88,25,473/- 1,02,25,572/- 85,99,901/- The appellant has calculated the direct cost and indirect cost for the export attributable as under:- Direct cost:- 1. Cost of goods exported 90,05,456/- 2. Interest on export packing credit 1,47,208/- 3. Packing and forwarding expenses on the goods exported 15,636/- 4. Air freight 28,022/- 5. Insurance on exported goods 32,157/- 6. Bank charges (exclusively in r/o export a/c)20,739/- Total: 92,49,218/- Indirect cost: 1. Salaries (375824+36000) 4,11,824/- 2. Printing & stationary (119118+570) 1,19,686/- 3. Office expenses (11084+400) 11,484/- 4. Legal expenses (19930+20740) 40,670/- 5. Petrol expenses 28,106/- 6. Repair and maintenance 48,113/- 7. Electricity charges 42,036/- 8. Postage & telegraph 48,718/- 9. Auditor's fremuneration 25,000/- 10. Staff welfare expenses 22,397/- 11. Office rent 27,018/- 12. Telephone expenses (117804+650) 118454/- 13. News paper books & periodicals 8,914/- 14. Festival expenses 12,258/- 15. Membership fee(4000+2600) 6,600/- 16. Business promotion expenses 2,68,873/- 17. Depreciation(other than leased assests) 1,21,381/- 18. Misc. Expenses written off 3,21,836/- Total indirect cost 21,09,176/-Indirect cost attributable to exports: 9,76,354/- In calculating indirect cost in respect of trading goods, the appellant has not calculated the amount in terms of provisions of the Act. The indirect cost is defined in Explanation to sec.80HHC is "indirect cost means cost not being direct cost, allocated in the ratio of total turn over". In the P&L a/c the expenditure of the business is given as under:- Cost of goods sold (export) 90,05,456/- Cost of shares sold 42,16,951/- Administrative & other expenses 40,93.392/- Interest 25,51,122/-

7 Depreciation 38,29,105/- Misc. Expenses written off 3,21,836/- 2,40,17,862/- Depreciation in the above working has not been taken as per the provisions of the I.T.Act. If this is taken into consideration then the expenditure will be as under:- Total expenditure 2,40,17,862/- Less: Depreciation 38,29,105/- 2,01,88,757/- Add: depreciation 1,15,28,179/- 3,17,16,936/- The expenditure towards purchase which is direct expenditure, which is to be excluded to arrive at indirect cost. Therefore, indirect cost is to be worked out on the above figure of Rs.3,17,16,936 – (9005456+4216951) = 1,84,94,529/-. The export sales are Rs.1,88,25,473/- and other part of the turn over is Rs.4,06,67,858 – 1,88,25,473 = 2,18,42,385/-. Therefore, the indirect cost is to be computed as under:- Cost other than direct cost 1,84,94,529 x 1,88,25,473

4,06,67,858 = 85,61,262/- From the perusal of the above working, it is clear that the

direct

cost

and

indirect

cost

is Rs.4005456+8561262 = 1,75,66,718/-. Therefore, the profit from export of trading goods is Rs.1,88,25,473/- - 1,75,66,718 = Rs. 12,58,755/-. Therefore, the appellant can be entitled for deduction u/s 80HHC for Rs.12,58,755/- only.” 7. In view of the decision of this Court, the issue is required to be answered in favour of the assessee against the Department. 8. We are in complete agreement with the view taken by the Tribunal. The appeal is accordingly dismissed. The cross- objections thus become infructuous and are accordingly dismissed. A copy of this order be placed in the connected case. (MAHENDRA MAHESHWARI), J. (K.S. JHAVERI), J. /bm gandhi