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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI MAHAVIR SINGH
This appeal by the assessee is arising out of the order of CIT (A)- 25, Mumbai in Appeal No.CIT(A)-25/ITA-331/DC14(2)13-14, dated 16/10/2014. Assessment was framed by ITO, Ward14(2), Mumbai under section 143(3) of the Income Tax Act, 1961 ( herein after ‘the Act’) for the assessment year 2003-04 vide his order dated 23/02/06.
The only issue in this appeal of the assessee is against the order of the CIT (A) confirming the action of the AO in short allowance of deduction under section 80HHC of the Act. For this assessee has raised the following Grounds No.2 & 3.
(Assessment Year: 2003-04) “2. Erred in determining the deduction allowable under Section 80HHC of the Act at Rs.12,36,692/- as against the deduction of Rs.19,17,629/- claimed by the Appellant; 3. erred in not reducing the cost value of DEPB licenses of Rs.75,05,816/- and also the cost value of DFRC licenses of Rs.26,66,913/- from the total cost of goods sold as per the decision of the Supreme Court in Appellant’s own case decided alongwith (2012) 342 ITR 49;”
Briefly stated, the facts are that assessee is engaged in only trading business of import and export. The assessee has exported 100% merchandise during the year under consideration. The assessee during the year under consideration claimed deduction under section 80HHC of the Act on sale of DEPB, duty free replenishment certificate and duty draw back. The main controversy was regarding eligibility of deduction under section 80HHC of the Act in regard to DEPB/DFRC and the controversy went before the Special Bench of this Tribunal in the case of Topman Exports vs. CIT, 124 ITD 1(SB)(Mum) and the same was reversed by Hon'ble Bombay High Court in ITA No. (L) 3019 of 2009, decided on 29.6.2010. Finally Hon'ble Supreme Court has reversed the Hon'ble Bombay High Court decision and affirmed the decision of the Special Bench of the Tribunal. The AO, while giving effect to the order of Hon'ble Supreme Court has computed the deduction under section 80HHC of the Act by taking the loss from export of trading goods and adjusting the same against proportionate incentive profits, i.e. profits on DEPB/DFRC. The assessee carried the matter before the CIT(A), who also confirmed the action of the AO, first on merit and also that rectification does not lie under section 154 of the Act because there is no mistake apparent from record, therefore, cannot be rectified as such. The CIT (A) also dismissed the appeal of the assessee. Aggrieved, now assessee is in second appeal before the Tribunal.
I have heard the rival contentions and gone through the facts and circumstances of the case. I have considered the issue and admittedly the assessee is a trader engaged in the business of import and export. During the year under consideration, assessee has exported 100% merchandise. Now coming to the computation part for claim of deduction, assessee has given his working in comparison to Assessing Officer’s working, which reads as under:-
AO's working Correct Working Particulars Amount Total Exports 15,55,86,514 15,55,86,514 (excluding incentive) Less: 1) Cost of Goods Sold 15,03,82,894 15,03,82,894 2)Direct expenses 98,19,450 98,19,450 3)Indirect Expenses 65,29,542 65,29,542 Less: 10% of export (13,61,876) 51,67,666 (15,45,262) 49,84,280 incentive & income 10% of realised [10% of face from other sources value of export value of export attributed to Indirect incentive] incentive] expenses Total cost 16,53,70,009 16,51,86,624 Profits from Export of (97,83,495) (96,00,110) Trading Goods Add. Export incentives 1,22,56,880 1,39,07,360 (90% of Export [90% of sale [90% of face incentives) value of export value of export incentive] incentive] 90% of profit on sale {Loss is reduced Nil since there is of export incentive by the AO under a loss the above working] Total profit eligible for 24,73,385 43,07,250 80HHC Eligible deduction 12,36,692 21,53,625 ** under section 80HHC- 50% ** In working submitted before AO/CIT(A) appellant had claimed deduction of Rs.19,17,630/-; However, the correct working as per Special Bench decision in case of Topman Exports 124 ITD 1(SB) Mumbai and Supreme Court decision (approving Special Bench in 342 ITR 49 (SC) read with provisions of 80HHC(3) will be Rs.21,53,625/-)”
(Assessment Year: 2003-04) 5. Ld. Representative for the assessee, Shri Rajan Vora argued that Hon'ble Supreme Court in the case of Topman Exports 342 ITR 49 (SC) has clearly held that the DEPB cash assistance receivable by a person against export under the scheme of Government of India and falls under clause (iiib) of section 28 of the Act and is chargeable to tax. He explained that as per clause (iiid) of section 28 of the Act any profit on transfer of DEPB is chargeable to tax under the head profits and gains of business or profession as an item separate from cash assistance under clause (iiib) of section 28 of the Act. Ld. Counsel narrated that Hon'ble Supreme Court has interpreted the word ‘profit’ which means the gross proceeds of the business transaction, less the cost of the transaction. According to him, since DEPB has direct nexus with the cost of imports and manufacturing an export product, any amount realized by the assessee over and above DEPB on its transfer would represents profit on the transfer of DEPB. He explained that while face value of the DEPB falls under clause (iiib) of section 28 of the Act, the difference between the sale value and face value of DEPB falls under the clause (iiid) of section 28 of the Act. He explained that the cost of acquiring DEPB is not nil because the person acquires it by paying custom duty on the import content of the export product and thus, the DEPB which accrues to a person against exports has always a cost inbuilt in it. For this, Ld. Counsel for the assessee explained that clause (iiia), (iiid) and (iiie) of section 28 of the Act refers to the amount of profit whereas clause (iiib) and (iiic) refers to the entire amount of cash assistance and duty draw back received. In view of clause (iiid) of section 28 of the Act, only profit amount is to be taken into consideration for the purpose of computing profit of the business as per Explanation (baa) to section (Assessment Year: 2003-04) 80HHC of the Act. He explained that only profit on transfer of DEPB is to be excluded for computing deduction under section 80HHC of the Act. He explained that since, there is no profit on sale of the DEPB licence in the present case, as per comparative computation given above; nothing has to be reduced from the profits and gains of business for the purpose of deduction under section 80HHC of the Act. For this, he drew our attention to section 80HHC (b) of the Act in respect of export of trading goods, which reads as under:-
“(b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;”
Then he drew our attention to second proviso and third proviso to section 80 HHC (3) of the Act, which reads as under:- “Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee : Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub- section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,”
Ld. Counsel stated that in the present case, there is actually loss on sale of export incentive and hence, nil income is to be taken while computing deduction under section 80HHC of the Act. He explained
(Assessment Year: 2003-04) that the face value of export incentive will be added under first proviso to section 80HHC (3) of the Act to the above profit because face value of DEPB/DFRC would get covered under section 28(iiib) of the Act. And only profit on sale of DEPB/DFRC would be covered under third proviso to section 80HHC(3) and 90% of such profit would be eligible to be added to above profit as per third proviso to section 80HHC of the Act subject to the condition mentioned in the section as the profit on sale of DEPB/DFRC would get covered under section 28 (iiid) of the Act and 90% of such profit would be eligible to be added to above profit as per the third proviso to section 80HHC subject to the condition mentioned in the section, as the profit on sale of DEPB/DFRC would get covered under section 28 (iiid) of the Act.
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 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 (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 the result, appeal of the assessee is allowed. Order pronounced in the open court on 19/09/2016.