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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SMT.ANNAPURNA GUPTA & SHRI T.R. SENTHIL KUMAR
PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER The present appeal has been filed by the assessee against order passed by the Ld.Commissioner of Income Tax(A)-12, Ahmedabad (hereinafter referred to as “ld.CIT(A)” dated 10.4.2023 under section 250(6) of the Income Tax Act, 1961 ("the Act" for short) pertaining to Assessment Year 2003-04.
The effective grounds for adjudication raised by the assessee are ground no.2 and 3, which read as under:
“2. In law and in the facts and circumstances of the Appellant case, the learned Commissioner of Income-tax [Appeals) has grossly erred in dismissing the ground of the appellant calculating deduction u/s.80HHC of the I.T. Act after reducing claim of deduction u/s.80IA of the I.T. Act. 3. In law and in the facts and circumstances of the Appellant case, the learned Commissioner of Income-tax [Appeals) has grossly erred in
ITA No.474/Ahd/2023 2 dismissing the ground of the appellant excluding insurance claim of Rs.3,35,92,543/- while calculating deduction u/s.80HHC of the I.T. Act.”
Ground No.2 raised by the assessee relates to the claim of deduction of profits of business of the assessee, both in terms of provisions of section 80HHC and 80IA of the Act, and question for consideration being, whether the deduction under section 80HCC of the Act is to be allowed on the net profit remaining after the claim of deduction under section 80IA of the Act.
At the outset, the ld.counsel for the assessee conceded that this issue stood decided against the assessee by the Larger Bench of the Supreme Court in the case of ACIT Vs. M/s.Micro Labs Ltd., reported in 380 ITR 1 (SC). The Larger Bench’s decision has arisen in view of divergent view of the Hon’ble Judges in the said case. It was pointed out by the ld.counsel for the assessee that on similar issue the jurisdictional High Court has decided the issue against assessee in the case of CIT Vs. Atul Intermediates, 45 taxmann.com 275 (Guj), and therefore, the ld.counsel for the assessee fairly conceded that the assessee’s appeal is without any merit on this issue, and needed to be decided accordingly.
It was also pointed out an identical issue had arisen in the case of Madhusudhan Industries Ltd. in IT No.697/Ahd/2012 dated 14.6.2023 wherein considering the decision of the Hon’ble Apex Court in the matter of Nirma Ltd. (supra) and jurisdictional High Court in the case of Atul Ltd. (supra), issue has been decided against the assessee. Copy of the order of the ITAT was placed before us.
In view of the above admission of the assessee on the merits of the case, the relief sought by the assessee in ground no.2 is rejected.
ITA No.474/Ahd/2023 3 The ground no.2 is dismissed.
The next issue raised in ground no.3, relates to the claim of deduction under section 80HHC on insurance claim of Rs.3,35,92,543/-. It was pointed out that present appeal is a second round before us, and in the first round, the ITAT had restored this issue back to the AO to determine the true nature of the insurance claim, and thereafter decide, whether the same is to be included in eligible profits of business for deduction under section 80HHC of the Act. Our attention was drawn to para 8.1 of the CIT(A)’s order, wherein specific direction of the ITAT in this regard are reproduced as under:
The ld.counsel for the assessee pointed out that the AO had denied the assessee’s claim to deduction of insurance claim under section 80HHC of the Act, finding that, the assessee had adduced no evidence to show that it related to exports and the same was confirmed by the ld.CIT(A).
ITA No.474/Ahd/2023 4 8. Before us, the ld.counsel for the assessee pointed out that the Hon’ble Bombay High Court in the case of CIT Vs. Pfizer Ltd., 330 ITR 62 (Bom) held that that insurance is not in the nature of a brokerage, commission, interest, rent, charges received by the assessee, and therefore, it is not needed to be excluded from the profits of the assessee in terms of section 80HHC(1)(baa). He pointed out that in the said case, the case of the Revenue was that the insurance is not relatable to export turnover, and therefore, needed to be excluded for the purpose of determining the profits eligible for deduction under section 80HHC of the Act. He pointed out that, negating this contention of the Revenue, Hon’ble High Court held that what is to be excluded from the profits of the business of the assessee is only receipts in the nature of brokerage, commission, interest, rent, charges as enumerated in clause 80HHC(1)(baa) of the Act; that is, receipts which have no relation with the business of the assessee, and which cannot be considered to constitute profits of the business.That insurance being related to the business of the assessee cannot be excluded from the profits of the business for the purpose of calculating the profits eligible for deduction under section 80HHC of the Act for the exports carried out by the assessee. Our attention was drawn to para 3 to 11(a) of the order.
The ld.counsel for the assessee contended that in view of the above, the insurance claim received by the assessee is eligible for deduction under section 80HHC of the Act.
The ld.DR, however, relied on the orders of the Revenue authorities.
We have considered contentions of both the parties. Undoubtedly, the ITAT had restored the issue back to the AO to
ITA No.474/Ahd/2023 5 determine the nature of insurance claim received and then decide its the allowability of its deduction u/s 80HHC of the Act. The Ld.Counsel for the assessee has referred to and relied on the decision of the Hon’ble Bombay High Court in the case of Pfizer Ltd. (supra) for the proposition that insurance claim received, being received for indemnification of losses, by its very nature cannot be said to be independent source of income .
We have gone through the said decision and find that the Hon’ble High Court had found that the insurance claim had been received for stock in trade and noted that if the stock-in-trade were sold the income received would constitute the profits of the business. The Hon’ble High Court noted that the contract of insurance is a contract of indemnity and that the insurance in a sense indemnifies the assessee for loss of such stock-in-trade. The indemnification is made to the assessee so that it stands on the same footing as the income that would have been realized by the assessee on the sale of stock-in-trade. In these circumstances, the Hon’ble High Court held that the insurance claim on account of stock-in-trade did not constitute as an independent income or a receipt of a nature similar to brokerage, commission, rent, charges, interest and such receipts would not therefore be subjected to a deduction of 90% under clause (1) of Explanation (baa) of the section 80HHC. The relevant findings of the Hon’ble High court are as under:
“11. In the present case, the insurance claim, it must be clarified, related to the stock-in-trade and it is only an insurance claim of that nature which forms the subject matter of the appeal. Now, it cannot be disputed that if the stock-in-trade of the assessee were to be sold, the- income that were to be received from the sale of goods would constitute the profits of the business as computed under the head of profits and gains of business or profession. The income emanating from the sale would not be sustainable to a reduction of ninety per cent for the simple reason that it would not constitute a receipt of a nature similar to
ITA No.474/Ahd/2023 6
brokerage, commission, interest, rent or charges. A contract of insurance is a contract of indemnity. The insurance claim in essence indemnifies the assessee for the loss of the stock-in-trade. The indemnification that is made to the assessee must stand on the same footing as the income that would have been realized by the assessee on the sale of the stock-in-trade. In these circumstances, we are clearly of the view that the insurance claim on account of the stock-in-trade does not constitute an independent income or a receipt of a nature similar to brokerage, commission, interest, rent or charges. Hence, such a receipt would not be subject to a deduction of ninety per cent under clause (1) of Expln. (baa).
11A. Counsel appearing on behalf of the Revenue submitted that the insurance claim has no element of export turnover and that consequently it must sustain a reduction of ninety per cent under Expln. (baa). Now it is necessary to note that Expln. (baa) in terms does not refer to export turnover. Sub-section (1) of section 80HHC contemplates a deduction to the extent of profits derived by the assessee from the export of goods or merchandise to which the section applies. The basic issue therefore is to determine the extent of profits derived by the assessee from the export of such goods or merchandise. The formula in sub-section (3) of section 80HHC has been provided by the Parliament, for the purposes of sub-section (1) to compute the profits derived from the export of goods. Clause (a) of sub-section (3) specifies that where the export is of goods or merchandise manufactured or processed by the assessee the profits derived from the export shall be the amount which bears to the profits of business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. In other words, in determining the profits derived from the export of goods or merchandise the proportion of the export turnover to the total turnover of the business is applied to the profits of the business. The profits of the business in turn are defined in Expln. (baa) to section 80HHC. Hence, the element of export turnover is a facet which has been taken care of by the legislature in the application of the formula which is referred to in sub- section (3) of section 80HHC. In determining the profits of the business for the purposes of Expln. (baa), the incomes which are susceptible to a reduction of ninety per cent are those which are specifically prescribed by the legislature. These are inter alia the incomes referred to in clauses (iiia), (iiib) and (iiic ) of section 28 and receipts by way of brokerage, commission, interest, rent, charges or receipts of a similar nature included in such profits. Therefore, before a receipt is liable to be excluded to the extent of ninety per cent, it must be a receipt of a nature similar to brokerage, commission, interest, rent or charges. For the reasons which we have already indicated, we have come to the conclusion that the claim on account of insurance for the stock-in-trade did not constitute a receipt of a similar nature within the meaning of Expln. (baa) and was therefore not liable to be reduced to the extent of
ITA No.474/Ahd/2023 7
ninety per cent. The first question will therefore not raise any substantial question of law.
During the course of hearing before us Ld.DR was asked as to how any receipt of insurance claim would qualify as income since it only indemnifies for losses. Ld.DR responded in writing by stating that the limited direction of the ITAT was only with respect to determining the nature of insurance claim and then determining the allowability of deduction thereof u/s 80-HHC of the Act. That without prejudice to the same she stated that since the loss which is indemnified is routed through profit and loss account as also the insurance claim received therefore income therefrom is included in profits and is therefore relevant for the purposes of claiming deduction u/s 80HHC of the Act. Her submissions in writing are reproduced hereunder:
“Hon'ble Bench during the last hearing had sought a clarification from the undersigned regarding whether insurance claim can be treated as being in the nature of profits or income considering that it is in nature of a compensation. Your kind attention is drawn to the fact that in the instant case, the Ld. AO has passed an order by excluding insurance claim of Rs.3,35,92,543/- while calculating deduction u/s. 80HHC of IT Act. The Hon'ble CIT (A) has upheld the decision of the Ld. AO. 2. In this regard, certain salient facts are as under. The Hon'ble ITAT had given a specific direction to the Ld. AO as follows- "the Ld. AO first determine the nature of insurance claim in the light of the above discussion, and then decide its inclusion or exclusion from eligible profit for grant of deduction under section 80HHC." 3. During the set-aside proceedings, the Ld. AO has determined after a perusal of all facts, that the insurance claim is not related to Export. Hence, the same has been treated as not being included in the eligible profits of the business of export. 4. With regard to whether such insurance claim can be treated as income or profits, it is humbly submitted that the Assessee received the aforementioned insurance claim during the relevant year for Assessment Year 2003-04. This suggests that the assessee mt have filed a claim for losses and damages, such as those resulting from theft, fire, or flood, or loss due to any extraneous circumstances pertaining to the insured property. It is usually the case that the Assessee first claims these expenses as abnormal expenditure in its P&L Account in the preceding year or years prior to the relevant Assessment Year (in this case AY 2003-04) and then credits the insurance claim in its P&L account in the year of receipt of such claim. Therefore, in the year of receipt
ITA No.474/Ahd/2023 8 of such insurance claim, the amount so received is also routed through its P&L Account giving. However, in order to claim the deduction u/s 80HHC of the Act, there should be a clear connection between the nature of the expenditure recorded in the profit and loss account (during the preceding years) and the insurance claim, specifically regarding the reimbursement of said expenditure.”
We are not impressed with the arguments of the Ld.DR and we find merit in the contentions made by the Ld.Counsel for the assessee before us. The direction of the ITAT in the first round was determining the nature of the insurance claim received for purposes of allowability of deduction u/s 80HHC of the Act. The Hon’ble Bombay High court has categorically held in the case of Pfizer that insurance claims being indemnification of losses do not have character of any income therein. Thus the Hon’ble court has interpreted the nature of insurance receipts thus. Even the Ld.DR when confronted with this position was unable to controvert the fact that insurance claims are only for indemnification of losses. She was unable to demonstrate any profit element in insurance receipts. In view of the above there is no question of the assessee having claimed any deduction u/s 80HHC of the Act on insurance claims received so as to disallow the same.
The disallowance made of Rs.3,35,92,543/- is therefore directed to be deleted.
Ground of appeal No.3 of the assessee is allowed.
In the result the appeal of the assessee is partly allowed.
Order pronounced in the Court on 3rd April, 2024 at Ahmedabad.
Sd/- Sd/- (T.R. SENTHIL KUMAR) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad, dated 03/04/2024