Case Law Details
DCIT Vs. Divine International (ITAT Delhi)- The CIT(A) has denied the deduction in respect of the addition on account of the so called sundry creditors on the ground that as per the provisions of Section 80 HHC, it is only the income derived by the assessee from the export of such merchandise which is eligible and the addition on account of creditors cannot be considered as income derived from the exports.
The contention of the CIT(A) , however, is wrong. Section 80 HHC provides the complete scheme for computing the deduction. As per the provisions of Section 80 HHC (1), where an assessee is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, deduction in computing the total income of the assessee. Further, as per sub-section (3) of Section 80 HHC of the Act, where the export out of India is of goods manufactured 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 such goods bears to the total turnover of the business carried on by the assessee. Further-more, the profits of the business have been defined in Explanation (baa) below sub-section 80 HHC (4C), to mean the profits of the business as computed under the head ‘profit and gains of business or profession’.
23. Thus, for the purpose of computing deduction under Section 80 HHC, first the profits of the business have to be computed as a whole, as per the provisions of the Act and the export profit has to be then worked out proportionately, on the basis of the ratio of the export turnover to the total turnover. Therefore, as per the provisions of Section 80 HHC, profit so computed is considered to be the profit derived from exports. The whole computation is based on the profits and gains of business. In the case of the assessee, the addition made on account of trade creditors will go to increase the profit of the business. The addition under section 68 per se does not give the nature of the income. It is only a deeming fiction whereby credit is deemed to be income of the assessee and as deemed income takes the character and nature of the income of the assessee. In the case of the assessee, which is a firm, there is no income other than the business income. Addition on account of unexplained trade creditors will accordingly enhance the business income. Accordingly, the CIT(A) was not justified in denying the deduction under Section 80 HHC despite confirming the addition on account of the trade creditors.
This issue is squarely covered by the judgement of the Honourable Calcutta High Court in the case of ‘CIT vs. Margaret’s Hope Tea Co. Ltd.’ (1993) 201 ITR 747 (CAL), wherein, on similar facts it has been held that addition on account of cash credit under Section 68 will go to add to the business income. There, the Tribunal had found that the assessee’s main activity was of cultivation, manufacture and sale of tea. The cash credit account appeared in the assessee’s business books of account. The cash credit continued throughout the accounting period. The assessee itself wanted to include such unexplained cash credits as its income from business. The Honourable High Court held that the Tribunal was justified in holding that the cash credits appearing in the books of the assessee should be treated as the income of the assessee company from its tea business and not as income from undisclosed sources.
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