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Income Tax Appellate Tribunal, BENCH “B”, MUMBAI
Before: SHRI B.R. BASKARAN & SHRI PAWAN SINGH
O R D E R PER PAWAN SINGH, JM: 1. These two cross appeal are arising out of the order of CIT(A)-26, Mumbai dated 07.12.2007 for AY 2002-03. is filed by Assessee and ITA No. 2094/M/2008 by Revenue. Both the appeals are arising from the same order, hence both the appeal were heard together and are being decided by common order.
In the assessee raised the following grounds of appeal:
Reopening of assessment Erred in upholding the re-opening of assessment u/s. 147; 2. Prior Period Expenditure Erred in confirming the disallowances of prior period expenses of Rs.61, 874/- (Rs.1,34,655/- less Rs. 72,781/-). Without prejudice to the above, erred in not directing the assessing officer to allow these expenditure to the year to which it pertains; 3. Disallowances U/s 14A136(1)(iii) Erred in confirming the disallowances u/s 14A/36(1)(iii) of Rs. 50,000 (adhoc amount) for Interest and Expenditure with respect to investment without appreciating the fact that the assessee has not incurred any expenditure and without any finding to the effect; 4. Depreciation on cars erred in confirming disallowances of depreciation on car purchased in the name of an employee Rs. 200,565/-; erred in not accepting the principle laid down by Hon'ble Supreme Court in Mysore Minerals Ltd. (239 ITR 775) wherein it has been laid down that beneficial owner is entitle to depreciation on asset; 5. Export to Iraq Erred in confirming disallowances of commission paid to the agent or their nominee in respect of the Exports to Iraq; Erred in applying explanation to section 37(1) to the facts of the case in respect of commission paid to the agent or their nominee since payment of commission neither an offence nor it is prohibited by any law enacted by the State or Central Government of India; 6. Deduction u/s 80HHC 6.1 Determination of profit of the business- erred in upholding the reduction the commission disallowed u/s. 37(1) from profit of the business for the purpose of section 80HHC. 6.2 DEPB I DFRC i. erred in confirming the denial of deduction u/s.80HHC in respect of DEPB of Rs.3,24,52,813/-, DFRC of Rs.93,38,463/- by applying the amended provisions of sec.80HHC(3) of the Act, without appreciating that as per the amendment to sec.28, DEPB licenses are treated at par with other export incentives received by the exporter as per the Export- Import Policy of the Govt. 6.3 10% of the Indirect Expenses erred in not accepting the appellant claim for expenses deemed to be incurred for earning income which has been reduced to arrive at profit of the business @ 10%; 6.4 Supporting Manufacturer erred in reducing the claim for 80 HHC by reducing the deduction U/s 80HHC subsection 3 for Export incentive for the export turnover declared in From 10CCAB to supporting manufacturer without appreciating the fact that Sub section 3 does not give any ambiguity for such proportionate export incentive. 6.5 Erred in not adjudicating the following grounds of appeal;
i. erred in treating Interest income in other sources accordingly reducing the 100% of the interest income as against the 90% provided in Explanation (baa) to Section 80HHC; ii. erred in not allowing the appellants claim of netting of interest paid and Interest income by considering the interest income as income from other sources without appreciating the fact that the both are related to export business and without giving opportunity of being heard in this matter; iii. erred in treating the miscellaneous income from the business of exports as other sources and accordingly denied the deduction under section 80HHC without appreciating the fact that these are from export business; iv. without prejudice to the above, erred not applying the ratio established by the learned ACIT for section 14A / 36 (1)(iii) with respect to the above income; v. erred in once again reducing the provision of doubtful debts w/back Rs. 27,23,780/- from the profit of the business without appreciating the fact that the same was reduced while computing the business income; vi. erred in reducing 90% of Income from Government Grant Rs. 57,988/-. 6.6 Write Back off advance from Debtors failed to appreciate that the write back Rs.1,11,144/- is of advance from debtors for export of goods and should be considered as profit of the business.
In the Revenue raised the following grounds of appeal: 1. “On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the A.O. not to exclude foreign exchange gain of Rs. 91,16,185/- from total turnover and export turnover for the purpose of calculating deduction u/s. 80HHC of the Income Tax Act.” 2. “On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the A.O. not to exclude 90% of foreign exchange gain of Rs. 91,16,185/- from profits of business within the meaning of clause (baa) of explanation to section 80HHC of the Income Tax Act.” 3. “On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the A.O. not to exclude 90% of sundry credit balances written back amounting to Rs.50,50,083/- and provision for doubtful debts written back amounting to Rs. 27,23,780/- from profits of business within the meaning of clause (baa) of explanation u/s. 80HHC of the Income Tax Act.”
4. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.
5. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
2. First we shall take up the appeal filed by the assessee being ITA No. 2026/Mum/2008. We have heard Ld. Representatives of the parties and perused the material on record. Ld. Authorised Representative (AR) of the assessee made the statement that assessee is not pressing the ground no.1, 3, 6.3, 6.4, 6.5(iv) and 6.6. As these grounds are not pressed by assessee, the same are dismissed as not pressed.
3. Ground No.2, raised in the present appeal in respect to prior period expenses of Rs. 61,874/-. The AR of the assessee argued that this ground of appeal is covered in favour of assessee in assessee’s own case for AY 2004-05. Copy of which is filed on record. We have perused the order of dated 04.11.2010 therein vide Ground No.1, the assessee raised the identical ground about the prior period expenditure disallowed by AO and confirmed by CIT(A) and while dealing with this ground, Co-ordinate Bench of this Tribunal held as under:
“6. We have considered the issue. As seen from the orders for A.Y. 2003- 04 the A.O. has disallowed only the net claim after setting off the prior period income. The CIT(A) has confirmed the disallowance to the extent of the net amount only, which was contested. However, in this year, while accepting the prior period income, the A.O. without verifying whether the expenditure has been accrued during the year or not, whether the liability has crystallised during the year or not, simply disallowed the amount on the basis of the accounting principles. Even though the A.O. followed the decision of the ITAT in Eveready Industries India Ltd. 78 ITD 175 (TM) for the above principle, it is not in dispute that the assessee is following the mercantile system of accounting and under that principle the expenditure relatable to earlier years when crystallised in an year cannot be allowed as deduction in any other year. In the above referred case the issue was with reference to the year of allowability of expenditure/compensation payable in M/s. Metro Exporters Pvt. Ltd. the Bhopal Gas Leak tragedy case. Even though the incident of gas leak occurred in 1984 the issue was whether the compensation was to be allowed in 1989-90 when the award was granted or in the year when the order reached finality on disposal of writ petition in A.Y. 1992-93. After analysing the case law on the issue the Third Member has agreed that the liability has to be allowed when the same was crystallised in A.Y. 1992-
This also indicates that even in mercantile system of accounting, year of crystallization of liability is important than nomenclature as prior period expenditure. There is no such finding by the A.O. with reference to the nature of expenditure and the year of crystallization. While accepting the income the A.O. not only disallowed the prior period expenditure of Rs. 3,19,780/- but also net debit of Rs. 12,891/- thereby making disallowance of Rs. 3,32,671/- more than the amount involved, which indicates that the A.O. has not applied his mind while considering the disallowance. Since the A.O. has disallowed only the net amount after accepting the prior period income in A.Y. 2003-04 and the assessee has no objection for similar treatment in this year, we direct the A.O. to disallow the amount of Rs. 12,891/- only, which is the net debit made to the P & L Account. With this direction the ground is considered partly allowed.” 4. Keeping in view the order of Co-ordinate Bench and principle of consistency, we direct the AO to allow prior period expenses in accordance with the order of Co-ordinate Bench in assessee’s case for AY 2004-05 (supra), hence, this ground of appeal
is allowed.
5. Ground No.4 raised in the present appeal is for our consideration is depreciation on Cars of Rs. 2,00,565/-. AR of the assessee further argued that this Ground of appeal is also covered in favour of assessee in assessee’s own case for AY 2004-05 in and in Mysore Minerals Ltd. vs. CIT (239 ITR 775). We have seen the order of Co-ordinate Bench in assessee’s own case for Ay 2004-05, the similar ground was raised vide Ground No.3 in the said appeal about the issue of disallowance of depreciation on Cars and claimed depreciation of Rs. 6,47,794/- and while dealing with this ground, the Co-ordinate Bench of this Tribunal held as under:
“12. Without going into the merits of the contentions whether the assessee has beneficial ownership on the assets, it is to be seen whether the said cars have been purchased by the Directors in their individual capacity or as a representative of the company. What is also required to be examined is the source of funds, whether the amounts are paid from the accounts of the Directors from their own sources and later transferred to the company or the company paid the amounts at the time of purchase even though they are registered in the name of the individual Directors. The A.O. simply disallowed the depreciation stating that the cars were registered in the names of the Directors. That alone cannot be a reason for disallowance unless it is examined whether the cars are purchased by the company but registered in the name of the Director or it is Director's vehicles purchased from their source treated as companies assets. Further the usage also has not been examined. It is also noticed that the CIT (A) in the later year has given findings that that assets have been purchased by the company and accordingly the depreciation is allowable following the decision of the Hon'ble Supreme Court in the case of Mysore Minerals Ltd. 239 ITR 775. However, there is no finding with reference to the details of payments and ownership. For these reasons, we are of the opinion that the issue has to be re-examined by the A.O. in the light of the above observations for which purpose the issue is restored to the file of the A.O. to re-examine the nature of purchase of car, source thereof and claim of expenditure, etc. to decide whether the assessee company is a beneficial owner or not. If the assessee has beneficiary ownership of the assets then the A.O. is directed to allow the depreciation. The A.O. is to decide accordingly after giving proper opportunity to the assessee. The ground is restored to the file of the A.O.”
Hence, keeping in view the order of Co-ordinate Bench and Principle of Consistency, this ground of appeal
is also allowed in favour of assessee and we direct the AO to examine this issue in the light of observation/direction given in assessee’s case for AY 2004-05 in ITA No. 2027/M/2008.
7. Ground No.5 raised in the present appeal is in respect of commission of export to Iraq. AR of assessee argued that this ground of appeal is also covered in favour of assessee by the order Hon’ble Calcutta High Court in CIT vs. Rajrani Export (AIT 2013-75- High Court) and Co-ordinate Bench of ITAT, Mumbai in NSIL Exports Ltd. vs. DCIT [2014] 44.taxman.com. 246, and Air Pac Exports Vs. ACIT (152 ITD 634), Mumbai. On the other hand, ld. DR for the revenue argued that this ground of appeal is covered against the assessee by the order of ITAT Mumbai vide to 7286/M/2007 in case titled as M/s Cipla
Ltd. Vs. DCIT. We have considered the rival contention of AR as well as DR of the parties and gone through the order passed by the Hon’ble Calcutta High Court and various Tribunals on the issue of payment of commission to Government of Iraq. The Hon’ble Calcutta High Court while dealing with the Grounds of appeal raised by Revenue held as under: “The commission on export activity had been fully disclosed in all correspondences and an activity in relation to export, the commission was paid through banking channel of RBI approval and it was paid pursuant to an agreement approved by Government of India and UN. The payment of commission was for business consideration and there was apparently no illegality in making payment of commission. Besides this, nothing has brought on record to show that the transactions relating to payment of commission are non-genuine or are excessive and unreasonable. The Volker Commission report had discussed about the utilization of money by the recipient of the commission in parting some of the fund so received as commission with the Government of Iraq and such parting of commission with the Government of Iraq was objected to by the Volker Commission report which was a pact between the Iraq Government and the UN wherein, as it appears, neither the appellant company is involved nor Government of India is involved.”
Further, the Co-ordinate Bench of ITAT in NSIL Export Ltd. Vs. DCIT [2014] 44.taxmann.com 246- Mum while dealing with similar Ground of appeal held as under: “Therefore, until and unless it is otherwise proved that the payment was an illicit payment to the Saddam Hussain regime and not to the parties it cannot be concluded that the said payments are not made for the purpose of business of the assessee. The explanation to section 37 cannot be invoked merely on the basis of some doubt about expenditure whether made infraction of law. There should be a direct and cogent evidence to show that the payment made by the assessee is contrary to law. The Authorities below failed to bring anything on record to establish that the payments in question were illegally made by the assessee to the Iraqi Authorities. On the contrary, the assessee has produced the evidence of payment to the agent who is not connected to the Iraqi authorities. Therefore, in the absence of specific finding that the payments were made to the Iraqi Authorities, it cannot be held as illegal payment infraction of law. Even if the assessee fail to prove beyond doubt that the payments in question inconsonance to the service rendered by the agent the same cannot be held as illegal in the absence of any evidence to prove that the assessee intended to pay the amount illegally through agent.”
Similar view was taken by Co-ordinate Bench of Mumbai Tribunal in Air Pac Exports V/s ACIT [152 ITD 634]-Mum in to 2983/M/2012 for AY-2001-02 to 2002-03 vide order dated 11.06.2014. We have also gone through the order of Co-ordinate Bench of this Tribunal in M/s Cipla Ltd. Vs. DCIT vide order dated 27.09.2009, relied by Ld. DR for Revenue, wherein this Tribunal has taken a contrary view. We have noticed that the order passed in M/s Cipla Ltd. was differentiated by coordinate bench of this Tribunal in NSIL Exports Ltd. (supra) holding that, Cipla was involved in illicit payment made to Iraq Government as per Volker Committee Report holding as under: “35. It is seen that the revenue authorities as well as the DR placed heavy reliance on the decision of Cipla Ltd. vs. ACIT, ITA No. 7284 to 7286/Mum/2007, wherein the coordinate Bench at Mumbai, came to the conclusion that, Cipla was involved in illicit payment made to Iraq Government, as per Volcker Report. It has been held by the coordinate Bench in Para 7.1 that the assessee has not denied payment of ASSF. In para 3 of the order, the order mentions about the payments towards ASSF and on which basis, the cases were reopened.
However, in the instant case, the facts are different. The dispute is with regard to payment made to Dalala & Company, from where, the alleged illicit payment may have been paid. In such a situation, when the facts themselves are at variance, the decision of Cipla (supra) cannot be relied upon. This argument of the department has to be rejected.”
Hence, keeping in view the above discussion and the legal position, and keeping in view the order of Calcutta High Court (supra), this Ground of appeal
is covered in favour of assessee. Hence, this Ground of appeal is allowed in favour of assessee.
9. Ground No.6, is for deduction u/s 80HHC and under Ground No. 6.1 the disallowance of commission u/s. 80HHC. This ground is similar to the Ground no.5 which is in respect of disallowance of commission on export to Iraq, hence, this ground of appeal is (consequential of earlier grounds) covered by the order of Ground No.5.
10. Ground No.6.2 is in respect of disallowance of DEPB/DEFRC. AR of the assessee argued that this ground of appeal is covered in favour of assessee in assessee’s own case for AY 2003-04 & 2004-05 by Hon’ble Apex Court in SLP No. 33224 & 33803/11. Wherein the Hon’ble Apex Court has followed the judgment of Topman Exports vs. CIT reported in 342 ITR 49. In Topman Exports, the Hon’ble Apex Court held as under: “Although four questions are raised by the appellant - assessee in appeal, counsel for the appellant states that the first three questions are covered against the assessee by the decision of this Court in the case of Commissioner of Income Tax V/so Kalpataru Colours & Chemicals reported in (2010) 328 ITR 451 (Bom). Accordingly, first three questions cannot be entertained. As regards fourth question is concerned, the Income Tax Appellate Tribunal has disallowed the claim of the assessee by following the decision of this Court in the case of Commissioner of Income Tax V/s. Dresser Rand India Private Limited reported in (2010) 323 ITR 429 (Bom). The dispute in the present case relates to the balance written back in respect of the expenditure incurred by the assessee. The Commissioner of Income Tax (Appeals) in his order has recorded a finding that in the facts of the present case, the balance written back in respect of the expenditure incurred amounting to Rs. 6,53,961/- is liable to be considered as business income eligible for deduction under Section 80HHC. In such a case, whether the decision of this Court in the case of Dresser Rand India Private Limited (supra) would apply is the question. Since this aspect of the matter is not considered by the Income Tax Appellate Tribunal, by consent, the order of the Income Tax Appellate is set aside on the fourth question and the said issue is restored to the file of the assessing officer for fresh consideration and in accordance with law. While passing fresh order, the assessing officer shall also take into consideration, the decision of this Court in the case of Commissioner of Income Tax V/s Pfizer Limited reported in (2011) 330 ITR 62 (Bom). ”
Hence, keeping in view the judgment of Hon’ble Apex Court, this ground of appeal is restored to the file of the CIT(A) for fresh consideration and to pass order in accordance with observation of Hon’ble Apex Court in Topman Exports (supra) and in accordance with law. Thus this Ground of appeal is allowed for statistical purpose.
11. Next ground(s) for our consideration are Ground No. 6.5(i),(ii) (iii) (iv) & (vi). Ld AR of the assessee argued that all these grounds of appeal were not adjudicated by CIT (A). It is further argued that for AY2004-05 in ITA 2027/M/2008, the similar grounds of appeal were not adjudicated by CIT(A) and thus all grounds were restored to the file of CIT(A). We have seen that the Co-ordinate Bench of this Tribunal, while considering the similar grounds in restored it to the file of CIT(A) with the following order: “17. It was the submission of the assessee that these issues have not been adjudicated by the CIT(A) and accordingly to restore the issue back to the file of the CIT(A). Since these grounds raised by the assessee in ground No. 5 sub- ground (vi) with reference to treating interest, technology transfer, insurance claim and miscellaneous income raised in Form 35 before the CIT(A) has not been adjudicated, these issues are restored to the file of the CIT(A) to consider them and pass necessary orders. Ground is considered allowed.” Hence, keeping in view the order of Co-ordinate Bench, the similar grounds were raised which was not adjudicated by ld. CIT(A), similarly in the year under consideration CIT(A) has not considered/adjudicated the Grounds raised in the appeal. Hence, these grounds of appeal are restored back to the file of CIT(A) to decide the same on merit in accordance with law.
12. Now we shall take up Appeal No. 2094/Mum/2008 filed by the Revenue. Wherein Ground No.1 & 2 raised by the Revenue is that CIT(A) erred in directing the AO not to exclude foreign exchange given of Rs. 91,16,185/- from total turnover for the purpose of calculating deduction u// 80HHC and profit within the meaning of clause (baa) of the Explanation to section 80HHC of the Act. AR of the assessee argued that similar issue arise in AY 2003-04 and the Co-ordinate Bench of this Tribunal made the following order in ITA No. 1285/Mum/2007 and the matter travelled up to ITAT wherein the Co-ordinate Bench of ITAT.
“3.2 The second dispute is regarding exclusion of foreign exchange gain in respect of export proceeds in the export turnover and the profit of business while computing deduction under section 80HHC. The AO had excluded the same and treated the same as income from other sources. CIT(A) has held that foreign exchange gain in respect of export made by the assessee is part of export business and therefore the same had to be included in the export turnover while computing the profit of business. Aggrieved by the said decision the revenue is in appeal.
3.2.1 After hearing both the parties we find that the issue raised is covered by the decision of the Special Bench of the tribunal in case of Prakash L. Shah (306 ITR (AT) Page-1) in which it has been held that exchange gain in relation to export proceeds has to be taken as part of export turnover and profit of business of the year in which the export was made. In this case the Learned AR submitted that the foreign exchange gain was in respect of export of relevant year only and such claim has not been contraverted before us by the Learned DR. We therefore respectfully following the decision of the Special Bench (supra) see no infirmity in the order of CIT(A) and the same is therefore upheld. 3.3 The third dispute is regarding treatment of write back of expenditure of Rs.6,53,961/- and purchases of Rs.31,491/- while computing deduction under section 80HHC. The AO had deducted 90% of such income as per Explanation (baa). CIT(A) has held that such income is very much part of business income eligible for deduction under section 80HHC. Aggrieved by the said decision the revenue is in appeal before the tribunal.
3.3.1 Before us the Learned DR for the revenue supported the order of AO and placed reliance on the judgment of Hon'ble High Court of Mumbai in case of CIT Vs Dresser Rand India Pvt. Ltd. (320 ITR 429). The Learned AR on the other hand supported the order of CIT(A). 3.3.2 We have perused the records and considered the matter carefully. The dispute is whether 90% of income on account of write back of expenditure and purchases of earlier year can be considered for deduction as per Explanation (baa). We find that the same issue had been considered by the Hon'ble High Court of Mumbai in case of M/s.Dresser Rabd India Pvt. Ltd. (supra) in which the issue was whether 90% of recovery of freight, insurance, packaging charges, sales tax set off etc could be excluded as per Explanation (baa). The Hon'ble High Court held that 90% of these receipts were independent items of income and had to be excluded as per Explanation (baa). Respectfully following the said judgment we set aside the order of CIT(A) and uphold the order of AO deducting 90% of such income from profit of business as per Explanation (baa).”
Against the above referred order of ITAT, the Revenue filed appeal before the Hon’ble High Court vide and the same was dismissed vide order dated 06.03.2013 with the following observation: “1. In this appeal by the Revenue for assessment year 2003-04, following questions of law have been proposed for our consideration.
a) Whether, on the facts and in the circumstances of the case, the Tribunal, in law was justified in setting aside the issue of inclusion of exchange rate gain on forward contract entered into by the assessee, for the purpose of computation under Section 80HHC, to the file of the AO with a direction to follow the judgment of the Tribunal in the case of CIT V/so Badridas Gauridu (P) Limited (261 ITR 256) ? b) Whether; on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of CIT (A) in favour of the assessee company, the issue of exclusion of foreign exchange gain in respect of export profit from the export turnover for the purpose of computation under Section 80HHC of the Act ?
In so far question (a) is concerned, the Tribunal by the impugned order has followed the decision of this Court in the matter of Commissioner of Income Tax V/so Badridas Gauridu (P) Limited reported in (2003) 261 ITR 256 (Bom) to hold that exchange rate gain on forward contract is business income. Accordingly; the Tribunal held that the foreign exchange gain would be export profit and, hence, cannot be excluded from export turnover under Section 80HHC of the Income Tax Act, 1961. In view of the above, we see no reason to entertain question (a).
In so far as question (b) is concerned, counsel for the parries state that this, issue is covered in favour of the assessee and against the Revenue by the decision of this Court in the matter of Commissioner of Income Tax V/so Gem Plus Jewellery India Limited reported in (2011) 330 ITR 175 (see page 183). In that view of the matter, we see no reason to entertain question (b)·”
Thus, keeping in view the order of jurisdictional High Court, in assessee’s case for AY 2003-04, grounds of appeal raised by Revenue have no merit, hence, the same are dismissed.
14. Next ground of appeal i.e. Ground No.3 is in respect of deduction from profit from business. (a) Sundry credit, balance of Rs. 5050083/- (b) Provision for doubtful debt Rs.27,23780/-
15. AR of the assessee argued that Ground No. 3(a) of appeal is covered in favour of assessee by the order of Hon’ble jurisdictional High Court in assessee’s own case in wherein Hon’ble High Court followed the case of CIT vs. Pfizer Ltd. reported in 330 ITR 62 was followed, holding as under: “The dispute in the present case relates to the balance written back in respect of the expenditure incurred by the assessee. The Commissioner of Income Tax (Appeals) in his order has recorded a finding that in the facts of the present case, the balance written back in respect of the expenditure incurred amounting to Rs. 6,53,961/- is liable to be considered as business income eligible for deduction under Section 80HHC. In such a case, whether the decision of this Court in the case of Dresser Rand India Private Limited (supra) would apply is the question. Since this aspect of the matter is not considered by the Income Tax Appellate Tribunal, by consent, the order of the Income Tax Appellate is set aside on the fourth question and the said issue is restored to the file of the assessing officer for fresh consideration and in accordance with law. While passing fresh order, the assessing officer shall also take into consideration, the decision of this Court in the case of Commissioner of Income Tax V/s Pfizer Limited reported in (2011) 330 ITR 62 (Bom).”