If condition laid down under Section 80IA(10) are not satisfied that Sub Section cannot be invoked and no disallowance of deduction can be made

Assessing Officer has not made out any case for disallowing even a part of deduction allowable under Section 80IA. Once any condition laid down under Sub Section 10 of Section 80IA are not satisfied that Sub Section cannot be invoked and therefore no disallowance of deduction under that section can be made.(Para 15)

Assessee cannot bind the export house to export the goods within the financial year. Assessee made sale of the goods to the export house at the fag end of the year and thereafter export house is likely to take some time to physically export the same out of India. This latitude is necessary in the interest of fair play and justice and to avoid impossibility of claim of deduction under Section 80HHC either by export house or by the supporting manufacturer in such a situation. It is not the intention of the legislature to create a situation where neither the supporting manufacturer nor the export house is able to claim deduction under Section 80HHC when goods are sold on the last day of the financial year and accordingly physical export out of India is likely to take some time and which would spill over to next financial year. If the export house is able to receive foreign exchange within the time stipulated under Section 80HHC, then requirement for deduction under Section 80HHC are deemed to have been fulfilled for the supporting manufacturer and assessee being supporting manufacturer should be allowed deduction as per law.(Para 19)

Regarding trade discount we are of the considered view that it stands on similar footing as excise duty and sales tax as discount also did not form part of export turnover or total turnover. They, accordingly, should be excluded.(Para 21)

 IN THE INCOME TAX APPELLATE TRIBUNAL,
B-BENCH, AHMEDABAD.

ITA No. 2154/Ahd/2006
(Assessment Year 2002-2003)

 Date of Judgment: 23rd October, 2009.

O  R  D  E  R

Per D C Agrawal (Accountant Member): This is an appeal filed by the Revenue raising following grounds.

“1. The Ld.CIT(A) erred in law and on facts of the case in holding that the Assessing Officer failed either to arrive at the reasonable profit as stipulated u/s. 80IA(10) or to prove the excessive profit and hence rejected the disallowance of the claim of the assessee u/s. 80IB r.w.s. 80IA.

2. The Ld.CIT(A) erred in law and on facts of the case in directing the Assessing Officer to rework the deduction u/s. 80HHC by adopting the turnover at Rs. 5,46,59,005/- in the numerator and the total turnover in the denominator at Rs. 10,33,61,230/-.

3. The Ld.CIT(A) erred in law and on facts of the case in deleting the ad-hoc disallowance made by the Assessing Officer out of house keeping charges.

4. On the facts and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer.

2. Ground No. 4 and 5 are of general nature and hence rejected.

3. The facts of the case are that assessee is engaged in the commercial production of dyes and chemicals. It filed return of income claiming deduction under Section 80IA, 80IB and 80HHC. The return was processed under Section 143(1). However, the assessment was reopened on the issue of interpretation of Section 80IA(10) and consequently on claim of higher deduction under Section 80HHC. The Assessing Officer after considering the submission of the assessee and material collected by him, rejected the claim of deduction under Section 80I(10) on the following grounds:

(1) Assessee has not maintained separate books of accounts.

(2) The market value of the product sold by the assessee to his sister concerns JCIL (M/s. Jay Chemical Industries Ltd.) is at higher price resulting in incurring loss to UCIL and therefore higher profit to the assessee and accordingly provision of Section 80IA(10) are attracted.

(3) Excise refund is received by the assessee thereby increasing its profits.

(4) The profits of the eligible units are inflated as the sister concerns viz. JCIL has incurred loss.

4. Assessing Officer verified the purchase value of goods sold by Jay Industries Limited (JCIL) and found that JCIL has suffered a loss as under:

Purchase value of goods by Jay Chemicals Industries   Rs.5,65,94,787/-

Add: Rate difference given to the assessee company                Rs. 50,86,614/-

Rs.6,16,81,401/-

Less: Trade discount received from assessee company Rs. 14,08,547/-

Rs.6,02,72,854/-

Less: FOB value of goods exported by

Jay Chemical Industries                                                           Rs.5,14,41,422/-

Loss suffered by Jay Chemical Industries                                Rs. 88,31,432/-

5. It was explained by the assessee that Assessing Officer has not taken into account the benefit accrued it on account of excise duty refund and sale proceeds of DEPB which has resulted in an GP of Rs. 40.42 lacs as under:

FOB value of exports                +514.41

Purchase Price              -602.73

Excise refund                           +56.32

DEPB                                        +72.02

Gross Profit                             40.42

6. The Assessing Officer, however, rejected the contention of the assessee by raising grounds as mentioned above and accordingly disallowed the claim under Section 80IA for Rs. 44,16,293/- and also initiated penalty proceedings under section 271(1)(c).

7. Ld. Commissioner of Income Tax(Appeals) held that Assessing Officer has failed to arrive at a reasonable profit as stipulated under Section 80IA(10) or to prove that assessee has charged excessive profits and therefore wholesome disallowance of the claim of the assessee would be without any basis. There is no material on record to suggest that assessee has sold goods at higher price to the sister concerns. The Assessing Officer has not taken into consideration the excise duty refund and DEPB receipts.

8. Against this, the Learned DR relied on the reasoning given by the Assessing Officer in his order.

9. Learned AR of the assessee on the other hand submitted that requirement of maintaining separate books of accounts for the eligible unit was introduced with effect from assessment year 2003-2004 and therefore it would be incorrect to disallow the claim on this ground in an earlier year. Further profits of the assessee company and that of JCIL are calculated on commercial basis. Though the Assessing Officer has held that profits of the assessee are inflated but he has failed to work out eligible deduction on a reasonable basis as required under Section 80IA(10). He submitted that it is incorrect to say that JCIL has incurred loss. The Assessing Officer has estimated that excise refund pertained to assessee. He has ignored that excise refund and DEPB receipts are available only to JCIL.

10. He submitted that invoices of independent parties have been submitted to prove the market value. The Ld. Commissioner of Income Tax(Appeals) had sent them to the Assessing Officer under Rule 46A. No specific comments of the Assessing Officer are received in respect of the same. The Ld. Commissioner of Income Tax(Appeals) has given full opportunity to the Assessing Officer to verify the bills of the other independent parties. The Learned AR of the assessee relied on the following authorities for underlying propositions.

1. No Separate books are required to be maintained for Assessment Year 02-03.

C.I.T. V/s. Shri Krishna Pulverising Mills – 241 ITR 262 A.P.

C.I.T. V/s. Technolite – Easter P. Ltd. – 255 ITR 253

Bonguigaon Refinery & Petrochemicals Ltd. 169 Taxation 637

2. For the proposition that no adjustment to the profits of the eligible unit is required when the sales are at or around market prices.

Punjab wool combers Ltd. V/s. ACIT 250 T 622 (2004) SOT

150 T 114 2004 SOT

250 T 224 (2004) SOT

3. For the proposition that the deduction is to be allowed after taking out the excess profits i.e. The Ld. A.O. has to work out actual profits and grant the deduction.

C.I.T. V/s. Win Laboratory P. Ltd. 254 ITR 107 (Bomb)

Alembic Chemical Works Ltd. V/s. D.C.I.T. 266 ITR 47

Patwa Kinarivala Electronics 77 Taxman 399 Ahmedabad 51 TTJ 280 AHD

11. We have considered the rival submissions and perused the material on record. The Assessing Officer has mainly denied deduction under Section 80I(10) on the grounds mentioned above. For the sake of clarity we refer to Section 80IA(10) as under:

12. Thus, for the purpose of denying deduction under Section 80A(10) or recalculating the deduction, following conditions are to be satisfied.

I. There should be a close connection between the assessee carrying on the eligible business and any other person i.e. associate concerned (This condition is satisfied on the facts of the present case.)

II. Business between them is so arranged that the business transactions between them produces to the assessee more than reasonable profits, which might be expected to arise in such eligible business.

III. If these two conditions are satisfied, then Assessing Officer shall compute the reasonable profits of eligible business for the purposes of deduction under Section 80IA.

IV. For this purpose, he will work out the amount of profits as may be reasonably deemed to be derived from the business transactions between the assessee and associate concern.

13. Though the first condition is satisfied, but Assessing Officer has not proved as to how more than reasonable profit is arising to the assessee. The onus is on the Assessing Officer to collect material and give opportunity to the assessee to show that profit earned by the assessee from the sister concern is more than expected profit from its transactions. In other words, it is to be shown that the transaction between the assessee and associate concerned is not at arms length price. In the present case, Assessing Officer has only shown that J.C.I.L. has incurred losses, but that does not automatically prove that transaction between the assessee and JCIL were not at arms length price or were generating more than expected profit to the assessee.

14. The loss incurred by JCIL could be for several other reasons which could be elaborated by JCIL only. Notwithstanding, the assessee has explained that while calculating the profit of JCIL, the Assessing Officer has ignored excise duty refund and sale proceeds of DEPB licence. If they are taken into consideration, the JCIL had yielded profit. Once there is no comparison of expected profits and the profits shown by the assessee, one cannot come to the conclusion that profit shown by the assessee are on higher side. In addition to giving finding on the basis of material evidence on record that profit shown by assessee is more than expected profit from the eligible business, the Assessing Officer is required to calculate the reasonable profits and allow the deduction under Section 80IA to the assessee on that basis. The wholesome disallowance under Section 80IA(10) is uncalled for.

15. However, in the present case as discussed above, Assessing Officer has not made out any case for disallowing even a part of deduction allowable under Section 80IA. Once any condition laid down under Sub Section 10 of Section 80IA are not satisfied that Sub Section cannot be invoked and therefore no dis allowance of deduction under that section can be made. Accordingly, this ground of Revenue is rejected.

16. The next ground is about deduction under Section 80HHC. The learned Assessing Officer noted that export house to whom assessee has sold goods did not export the same during the relevant year as per disclaimer certificate issued by export house, as date of shipping is 03-04- 2002 whereas sale invoice of the assessee is 31-03-2002. As in no case the goods could be shifted by 31-03-2002, the export turnover mentioned in the second disclaimer certificate for Rs. 28,12,043/- would not be considered as part of export turnover of the assessee for working out deduction under Section 80HHC. The Assessing Officer further noted that the assessee can claim deduction under Section 80HHC only to the extent it has not been claimed by export house. The assessee had in fact submitted 2 disclaimer certificates received from J.C.I.L. for Rs. 4,46,29,379/- and for Rs. 28,12,043/-. The total of the 2 certificates comes Rs. 5,14,14,422/- being the export turnover certificated by export hose for the assessee. However, Assessing Officer noted that total turnover claimed by the assessee was Rs. 6,02,72,583/- as per column No. 5 of Form No. 10CCAC. Therefore, the Assessing Officer first treated Rs. 4,46,29,379/- only as assessee’s export turnover as per first disclaimer certificate issued on 28- 10-2002. Further in the total turnover the Assessing Officer identified Rs. 2,18,883/-, 5,89,931/- and Rs. 14,08,548/- being excise duty tax and trade discount respectively which he reduced from adjusted turnover, though the Assessing Officer treated them as part of the turnover relying on the judgment of the Tribunal in the case of Gujarat Fluoro Chemicals Limited, Baroda Vs. JCIT in ITA No. 231/A/2000 for the assessment year 1996- 1997 dated 24-08-2000. The Assessing Officer treated the trade discount also part of the total turnover and accordingly calculated the allowable deduction under Section 80HHC As a result he reduced the claim u/s 80HHC from 57,14,462/- to Rs. 45,18,787/-.

17. Ld. Commissioner of Income Tax(Appeals) held that elimination of excise duty and Sales Tax shall apply equally to both the numerator and denominator in the formula for computation deduction under Section 80HHC. The Learned Ld. Commissioner of Income Tax(Appeals) directed to include the turnover as per disclaimer certificate No. 2 also. Thus, according to him turnover in the numerator would come at Rs. 5,46,59,005/- whereas in the denominator it would come to Rs. 10,33,61,230/-. He directed the Assessing Officer to calculate deduction under Section 80HHC accordingly.

18. Before us Learned DR relied on the order of the Assessing Officer, whereas Learned AR of the assessee relied on the order of Ld. Commissioner of Income Tax(Appeals).

19. We have considered the rival submissions and perused the material on record. Regarding first issue that goods supplied by the assessee to export house were not physically transported out of India by 31-03-2002 as reflected from second disclaimer certificate, we are of the considered view that sale by the assessee to the export house would be completed within the financial year but the export by the export house can be completed thereafter but money should be released within 6 months as provided under Section 80HHC. We are in agreement with the arguments of Ld. AR of the assessee that assessee cannot bind the export house to export the goods within the financial year. Assessee made sale of the goods to the export house at the fag end of the year and thereafter export house is likely to take some time to physically export the same out of India. This latitude is necessary in the interest of fair play and justice and to avoid impossibility of claim of deduction under Section 80HHC either by export house or by the supporting manufacturer in such a situation. It is not the intention of the legislature to create a situation where neither the supporting manufacturer nor the export house is able to claim deduction under Section 80HHC when goods are sold on the last day of the financial year and accordingly physical export out of India is likely to take some time and which would spill over to next financial year. If the export house is able to receive foreign exchange within the time stipulated under Section 80HHC, then requirement for deduction under Section 80HHC are deemed to have been fulfilled for the supporting manufacturer and assessee being supporting manufacturer should be allowed deduction as per law. Therefore, we uphold the order of the Ld. Commissioner of Income Tax(Appeals) for including the export turnover of Rs. 28,12,043/- as per disclaimer certificate dated 31-03-2002 in the export turnover and allowing deduction u/s 80HHC thereon.

20. Regarding exclusion of excise duty and sales tax, we are of the view that the issue is squarely covered in favor of the assessee by the decision of the Hon’ble Supreme Court in CIT Vs. Laxmi Machine Works (2007) 209 ITR 667 (SC). It is held therein that they did not fall part of total turnover. Accordingly, they should be excluded from both numerator as well as denominator. It is exactly what Ld. Commissioner of Income Tax(Appeals) has done. The figure of Rs. 5,46,59,005/- is arrived at by reducing sales tax and duty payment of Rs. 56,13,848/- from total export turnover of Rs. 6,02,72,853/-.

21. Regarding trade discount we are of the considered view that it stands on similar footing as excise duty and sales tax as discount also did not form part of export turnover or total turnover. They, accordingly, should be excluded. Our view is supported by the decision of Hon’ble Punjab and Haryana High Court in CIT Vs. AI Schools limited (2008) 303 ITR 345 (P&H).

22. The Assessing Officer is accordingly directed to recompute the decision under section 80HHC by re-computing export turnover and total turnover.

23. Thus, the appeal of the revenue is partly allowed, but for statistical purposes.

This order is pronounced in open Court on Dated 23rd October, 2009.