ADVANCE ISPAT INDIA LTD. vs. COMMISSIONER OF INCOMET AX

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ITA - 940 / 2009HC Delhi29 September 20107 pages
For Petitioner: PRAKASH KUMAR
AI SummaryAllowed

What did the High Court hold?

The High Court held that the assessee was entitled to reduce indirect costs by 10% of export incentives and other income before attributing them to exports. The Tribunal's decision was set aside.

What were the facts?

The assessee, a 100% trader exporter, claimed deduction under Section 80HHC. The Assessing Officer reduced the claimed deduction by re-calculating indirect costs attributable to exports, which was upheld by the CIT(A) and Tribunal.

What were the issues?

Whether indirect costs attributable to other income should be reduced from total indirect expenses when calculating indirect costs attributable to exports for Section 80HHC deduction.

Which sections of the Income-tax Act were involved?

Section 80HHC

AI-generated summary — verify with the full judgment below

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IN THE HIGH COURT OF DELHI AT NEW DELHI

ITA No.940 of 2009

Decision Delivered On: SEPTEMBER 29, 2010.

Mr. C.S. Aggarwal, Sr. Advocate with Kumar,

Mr. Prakash

. . .Respondent

CORAM :-

HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MS. JUSTICE REVA KHETRAPAL

- Whether Reporters of Local newspapers may be allowed 1. to see the Judgment? - To be referred to the Reporter or not? 2. - Whether the Judgment should be reported in the Digest? 3.

A.K. SIKRI, J. (ORAL)

For orders, see ITA No. 937 of 2009. 1.

IUDGE

IUDGE

SEPTEMBER 29, 2010 pmc

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IN THE HIGH COURT OF DELHI AT NEW DELHI

ITA No.937 of 2009

with

ITA No.940 of 2009 and ITA No.973 of 2009

% <u>Decision Delivered On: SEPTEMBER 29, 2010.</u>

1) ITA No.937 of 2009

Mr. C.S. Aggarwal, Sr. Advocate with Mr. Prakash Kumar,

...Respondent

2) ITA No.940 of 2009

Mr. C.S. Aggarwal, Sr. Advocate

with Mr. Prakash Kumar,

. . . Respondent

3) ITA No.973 of 2009

Mr. C.S. Aggarwal, Sr. Advocate

with Mr. Prakash Kumar,

. . .Respondent

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CORAM :-

HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MS. JUSTICE REVA KHETRAPAL

- 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? - 2. To be referred to the Reporter or not? - 3. Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J. (ORAL)

- 1. Admit. - 2. The following substantial question of law arises for consideration:

"Whether on true and correct interpretation of the provisions contained in Section 80HHC (3)(b) of the Act read with Clause (e) to the Explanation, the Income Tax Appellate Tribunal was justified in law in not allowing reduction (of ₹1,35,422 and ₹1,16,897 being 10% of the export incentives and interest income respectively) being "indirect costs attributable to incomes other than exports" from the total indirect expenses debited in the profit and loss account for computing "indirect costs attributable to export" of trading goods by the assessee?"

- 3. With the consent of the learned counsel for the parties, we have taken up the matter for final arguments at this stage itself. - 4. The facts in brief may first be stated before taking note of the arguments advanced by the counsel for the parties. The appellant/assessee is a public limited company and enjoying the status of 100% trader exporter for last several years. It is, therefore, not in dispute that as being a trader and exporter, the appellant falls under Clause (b) of sub-section (3) of Section 80HHC of the Income Tax Act (hereinafter referred to as 'the Act') and is entitled to get the benefit of the said provision. For the Assessment Year 2001-02, it had filed its return declaring a total income of ₹25,36,270. In the return, the appellant also claimed deduction at ₹50,89,100 under Section 80HHC of the Act. It had

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mentioned that a total turnover for that year was ₹11,82,94,6 The appellant had also shown the direct cost in respect of such export turnover at ₹10,83,07,726. On that basis, deduction under Section 80HHC of the Act was claimed at ₹50,89,100.

5.

The Assessing Officer (AO), however, adopted the direct cost at ₹10,95,32,660 instead of ₹10,83,07,726 (in this respect, the Income Tax Appellate Tribunal (in short 'the Tribunal') has already provided necessary relief to the appellant by adopting the export turn over cost as declared by the assessee). That apart, the assessee had declared the indirect expenses in the Profit and Loss account in the sum of ₹38,65,447 and out of these indirect expenses attributable to exports for the purpose of Clause (b) of sub-section (3) of Section 80HHC of the Act were claimed to ₹36,05,649. The calculation given by the assessee is in the following manner:

"Selling & administrative | ₹30,15.769 expenses Interest & financial\nexpenses (after set off of\ninterest received on Bank FDRs ₹7,92,204 | ₹5,91,630 Depreciation | ₹2,58,048 Total indirect expenses as per Profit and Loss Account | ₹38,65,447 Less: Expenses attributable to other income @10% of such income Export Incentives (10% of ₹13,54,219) Dividend Income (10% of ₹74,790) Interest Income (10% of ₹11,68,973) | ₹1,35,422 ₹7,497 <u>₹1,16,897</u> ₹2,59,798 Indirect cost attributable to exports | ₹36,05,649"

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6.

The AO further was of the opinion that the indirect c attributable to the turnover would be higher at ₹45,99,046 which was calculated as under:

"Indirect cost as shown by the assessee | ₹38,65,447 Less: Expenses related to Dividend Income | ₹7479 Add: Interest on FDRs | ₹7,92,204 ₹46,50,172 Indirect tax attributable to export turnover | = <u>Indirect cost x Export Turnover</u> Total Turnover = <u>4650172 x 1170170059</u> 11,82,94,690 = ₹45,99,046"

- 7. By taking higher indirect cost attributable to the exports, income for the purpose of benefit under Section 80HHC stood reduced. Thus, the AO allowed deduction under Section 80HHC @ ₹32,72,749 as against the claim of ₹50,89,100 made by the assessee. He, thus, disallowed ₹18,16,351 out of the total claim of deduction under Section 80HHC of the Act of ₹50,89,100. - 8. Both CIT(A) as well as the Tribunal have upheld the aforesaid order of the AO. The entire case depends upon the interpretation, which is to be given to Section 80HHC (3)(b) read with Clause (e) to the Explanation below Section 80HHC (3)(b) of the Act so as to compute the deduction of the claim. These provisions are as under: - "Deduction in respect of profits retained for export business 80HHC - (3) For the purposes of sub-section (1),-- - (a) Where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of

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Ultimately, Clause (baa) to the Explanation is itself based on the assumption that 10% of the income would be an expense. We make it clear that we are not reading Explanation (baa) into Section 80HHC(3)(b). What we say is as a Guidance Value/Factor, 10% of the total. Other income of Rs. 1,60,000 would be fair estimate. This guidance value is not flowing from Clause (baa) but from the scheme of Section 80HHC read with the Memorandum to the Finance Act of 1991. Take a reverse case, if allocation of expenses is to be done on Actual Basis, it would not only be very difficult but in some cases actual apportionment may not be in the interest even of the Department.

- 15. In conclusion, we may state that under Section 80HHC(3)(b) one has to balance the "principle of attribution" with the concept of "allocation". The concept of allocation is meant to reduce the incentive. However, when "allocation" has to be balanced with the "principle of attribution", the object is to reduce the incentive and not to eliminate it." - 10. Furthermore, there is yet another aspect of the case, which needs to be highlighted. In the appellant's own case for the preceding assessment years, the Tribunal by a common order dated 21.07.2006 in ITA No.2378/Del/2002 for Assessment Year 1998-99 & ITA No.2284/Del/2002 for Assessment Year 1999-2000, has held that the appellant be allowed to reduce the indirect cost @ 10% of the amounts of export incentives and other income and only the balance amount be treated as "indirect costs attributable to export" of trading goods by the appellant. It was submitted by the learned counsel for the appellant that there was no change in the facts in this Assessment Year, which could not be controverted by the learned counsel for the Revenue.

11.

For all these reasons, we decide the question formulated above in favour of the assessee and against the Revenue. As a consequence, the order of the authorities below is set aside and this appeal is allowed. It is directed that the appellant/assessee

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shall be entitled to benefit of ₹50 lacs and not ₹30 lacs un Section 80HHC (3)(b) of the Act.

> A.K. SIKRI) JUDGE

(REVA KHETRAPAL) JUDGE

SEPTEMBER 29, 2010 pmc

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