S. MANSUHLAL & CO.,MUMBAI vs. DCIT 14(2), MUMBAI

The only grievance of the assessee relate to computation of deduction under Section 80HHC in respect of assessee being a trader exporter.

Rival contentions have been heard and record perused.

The facts in brief are that the assessee is engaged in the business of import and export of merchandise and thereby is an export trader. During the year under consideration, the assessee had exported 100% of its merchandise and claimed deduction under Section 80HHC of the Act and on sale of DEPB Free Replenishment Certificate (DFRC) and duty drawback. In the original 2 (A.Y.2001-2002) S.Mansukhlal & Co., vs. DCIT assessment, the AO denied the deduction under Section 80HHC on aforesaid income. The matter pertaining to assessee’s own case on the issue of eligibility of deduction under section 80HHC on DEPB/DFRC, a Special Bench was constituted (which decided matter in favour of assessee). On further appeal by Department to High Court, the order of Special Bench was reversed by High Court. Finally, the matter travelled upto Supreme Court and the Supreme Court in case of Topman Exports (342 ITR 49) alongwith the assessee’s case approving the Special Bench ruling and decided the issue in the assessee’s favour.

We have gone through the order of the Hon’ble Supreme Court and the relevant order of the High Court and the Special Bench. The main controversy before Special Bench / High Court / Supreme Court, was whether export incentive are eligible for deduction for 80 HHC and what is to be considered for pro rata reduction, is only “profit”(i.e., sale price less face value) of the scripts (i.e. export incentive) and / or whole of the export incentive. The Hon’ble Supreme Court while ruling in favour of the assessee in its order held that the face value of export incentive is cost recovered by the exporter would be eligible for deduction under section 80HHC of the Act. However, while giving effect to the Supreme Court decision (supra), Order giving effect order (OGE) was passed by the AO wherein the AO did not follow the guidelines laid down in Supreme Court’s decision. The said order was challenged by the assessee before the CIT(A) with respect to the working done by the AO. The CIT(A) dismissed the 3 ITA No. 248(Mum)2015 (A.Y.2001-2002) S.Mansukhlal & Co., vs. DCIT appeal filed by the assessee and upheld the working of the AO under wrong appreciation of facts and on the wrong assumption that in the present case assessee has claimed deduction under section 80HHC, on items of income, other than DEPB and DFRC, and such deductions cannot be allowed to the assessee. Against the above order of CIT(A), assessee is in further appeal before us.

We have considered rival contentions and the judicial pronouncements laid down by the Hon’ble Supreme Court wherein formula to work out deduction allowable to trader export has been given. In the instant case, the amount of deduction calculated under Section 80HHC by the AO amounts to Rs.1,36,97,383 as against correct amount of deduction of Rs.1,58,29,291/-. The working of the AO vis-a-vis of the correct working as per formula is as under:-

AO’s working Correct Working Particulars Amount Amount Total Exports (excluding 14,80,20,213 14,80,20,213 incentive) Less: 1) Cost of Goods sold 12,21,28,356 12,21,28,356 2) Direct Expenses 1,83,18,230 1,83,18,230 3) Indirect Expenses 58,68,288 58,68/288 Less: 10% of export (16,25,669) 42,42,619 (16,25,669) 42,42,619 incentive & income from other sources attributed to indirect expenses 4 (A.Y.2001-2002) S.Mansukhlal & Co., vs. DCIT Total cost 14,46,89,205 14,46,89,205 Profit from Export of 33,31,008 33,31,008 Trading of Goods Add: EFFC interest* 21,41,780 18,24,589 (incorrect figure) (correct figure) Add: Export incentives 1,22,57,936 1,40,36,265 (90% of face value of (correct figure (refer (incorrect Export incentives)** figure)(refer note 2) para 11) Add: Profit (90% of Sale - 5,94,752 value less face value of export incentive i.e. profit on sale of Export incentive) Less: 90% of the profit of (5,98,995) Rs.6,65,551/- on transfer of DEPB under clause (iiid) of the Act*** Total profit eligible for 1,71,12,729 1,97,86,614 80HHC Eligible deduction under 1,36,97,383 1,58,29,291*** section 80HHC – 80%

We found that AO has taken figure total of interest (which includes interest on EFFC account of Rs.18,24,589 and interest on other account as well). The Hon’ble ITAT in the first round of litigation has held that only interest on EFFC account is eligible for deduction under Section 80HHC of the Act (on the principle of netting off) (order for AY 2001-02 in dated 12th December 2007).

The precise observation of the tribunal in its order dated 19/09/2016 was as under:- 7. I have gone through the facts of the case and heard both the sides. I find from the facts of the case that the AO while giving effect to the decision of Hon’ble Supreme Court in the case of Topman Exports(Supra), he has not followed the 6 ITA No. 248(Mum)2015 (A.Y.2001-2002) S.Mansukhlal & Co., vs. DCIT directions. In this case I find from the facts of the case that there is loss on sale of export incentives as is clear from the comparative chart reproduced above. According to mu understanding of the decision of Hon’ble Supreme Court where there is a loss, and not profit, on sale of export incentive, there was no requirement of reducing any potion of such loss while computing deduction u/s 80HHC of the Act. Face value of export incentive will be added under first proviso to section 80HHC of the Act to the profit as face value of DEPB/DFRC would get covered under section 28(iiib) of the Act. Secondly, only Profit on sale of DEPB/DFRC would be covered under section 80HHC (3) of the Act and 90% of such profit would be 7 ITA No. 247/MUM/2015 (Assessment Year: 2003-04) eligible to be added to this profit as per third proviso to section 80HHC of the Act. The assessee has submitted a working claiming deduction at Rs. 21,53,625/- as against submitted before the lower authorities claiming at Rs.19,17,630/-. These figures need verification at the level of the AO. However, the claim of assessee is allowable, as the assessee has incurred a loss on sale of export incentive and hence no amount is to be excluded while calculating deduction in term of section 80HHC third proviso. Hence, I direct the Assessing Officer, as in the present case there is a loss, where there is a loss (and not profit) on sale of export incentives, no loss can be reduced while computing deduction under section 80HHC of the Act. I direct the Assessing Officer accordingly.

In view of the above discussion and respectfully following the order of the tribunal, we direct the AO to allow deduction of Rs.1,58,29,291 u/s. 80HHC as correctly worked out by us hereinabove.

In the result appeal of the assessee is allowed.