Allahabad H.C : Whether the Tribunal was justified in law in holding that incentives received by the assessee are part of the export turnover and, therefore, entitled to relief under s. 80HHC despite the foreign exchange realisations being nil ?

High Court Of Allahabad

CIT vs. Himalaya Cutlery Works

Section 80HHC

Asst. Year 1988-89

R.K. Agrawal & Rajes Kumar, JJ.

IT Ref. No. 107 of 1997

5th July, 2005

Counsel Appeared

A.N. Mahajan, for the Applicant : None, for the Respondent

JUDGMENT

By the court :

The Tribunal, Allahabad, has referred the following question of law under s. 256(1) of the IT Act, 1961, hereinafter referred to as “the Act” for opinion to this Court : “1. Whether the Tribunal was justified in law in holding that incentives received by the assessee are part of the export turnover and, therefore, entitled to relief under s. 80HHC despite the foreign exchange realisations being nil ?”

2. Briefly stated, the facts giving rise to the present reference are as follows : The present reference relates to the asst. yr. 1988-89, the previous year relevant to the assessment year in question is the calendar year. The ITO in the course of the assessment proceedings rejected the claim for deduction made by the assessee under s. 80HHC primarily on the ground that the same had been claimed on the amounts received as duty drawback, cash incentive and transfer of import licence, there being no export during the year under consideration and there being complete absence of any foreign exchange earning. The ITO also noted the absence of separate set of account books pertaining to such receipts and the other business income of the assessee.

Being aggrieved with the rejection of the claim, the assessee came up in appeal before the CIT(A) and raised the following arguments which find place in para 3.1 of the appellate order as under : “In appeal before me, the learned counsel stated that the appellant is engaged in the business of export of goods. In the year under appeal it is stated that no goods were exported but on the export of the preceding year the appellant received an incentive of Rs. 1,09,388 by way of duty drawback, cash assistance and entitlements. It is pointed out that the provisions of s. 28(iiia), (iiib) and (iiic) of section, stood amended by Finance Act, 1990, wherein income by way of import entitlements, cash assistance and duty drawback were a part of the export income and accordingly 50 per cent of the incentive scheme was fully liable to be allowed to the appellant. It is also brought to my notice that the abovementioned incentives were received by the appellant in the past also and the same have been consistently assessed to tax as amounts were received in the year under appeal and, therefore, the same were entitled to deduction under s. 80HHC. Regarding the maintenance of accounts it is argued that there was no need to maintain two sets of account and it was sufficient if the appellant opened a separate account in the books of account maintained by it relating to the income under reference. It is also stated that all the other conditions laid down under s. 80HHC are fully satisfied in this case and the appellant has also filed a certificate of the chartered accountant as required by s. 80HHC. It is urged that the deduction should be allowed to the appellant.”

The CIT(A) accepted the arguments raised on behalf of the assessee and directed the ITO to allow deduction under s. 80HHC as claimed by the assessee in the following words : “I have carefully considered the submissions made before me. Having regard to the fact that export incentives received by the appellant are being subjected to tax from year to year in the case of the appellant on receipt basis there is no reason why the assessee should be denied this deduction in the year under appeal. It is a fact that the incentive amounts were received during the year relevant to assessment year under appeal. The ITO, in my opinion, was not justified by linking these incentives with the exports during the year under appeal. It is an admitted fact that in the year under appeal there was no export but it is equally correct that these incentives have been received by the appellant only in respect of exports of the earlier year which are liable to be subjected to tax on receipt basis. The ITO has subjected these receipts to tax on the same basis but has denied deduction under s. 80HHC which in my opinion is not correct. Secondly, the observation of the ITO that the appellant should have maintained two separate sets of accounts in the year to be entitled to deduction under s. 80HHC is equally irrelevant so long as the income from incentives in question has been separately credited in the books of account maintained. The other condition regarding the certificate of a chartered accountant as required under s. 80HHC is also found to be obtained by the appellant. In view of the same, the ITO is directed to allow deduction under s. 80HHC as claimed by the appellant.”

Being aggrieved, the Revenue came up in appeal before the Tribunal which after considering the submissions of both the parties confirmed the view taken by the CIT(A).

We have heard Sri A.N. Mahajan, learned standing counsel for the Revenue. Nobody has appeared on behalf of the respondent/assessee.

Learned standing counsel submitted that under s. 80HHC of the Act, deduction is admissible only from the profit derived by the assessee from the export of such goods or merchandise. Cash incentive received by the assessee cannot by any stretch of imagination be taken as profit derived from the export of the goods or merchandise and, therefore, the amount of cash incentive would not qualify for special deduction under s. 80HHC of the Act. He referred to cls. (a) and (b) of sub-s. (1) of s. 80HHC of the Act as also cl. (a) of sub-ss. (2) and (4) of s. 80HHC of the Act. He further submitted that even though under cl. (iiib) of s. 28 of the Act, cash assistance (by whatever name called) is treated as income chargeable to income-tax under the head “Profits and gains of business or profession”, the amount of cash incentive cannot be treated as profit derived from export of goods. Having given our anxious consideration to the various pleas raised by the learned standing counsel, we find that under s. 80HHC of the Act, deduction is admissible only in respect of profit derived from the export of goods or merchandise. Sec. 80HHC of the Act as it stood during relevant period is reproduced below : “80HHC. Deduction in respect of profits retained for export business.—(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, 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, in computing the total income of the assessee, deduction equal to the aggregate of— (a) four per cent, of the net foreign exchange realisation; and (b) fifty per cent of so much of the profits derived by the assessee from the export of such goods or merchandise as exceeds the amount referred to in cl. (a): Provided that the deduction under this sub-section shall not exceed the profits derived by the assessee from the export of such goods or merchandise : Provided further that an amount equal to the amount of the deduction claimed under this subsection is debited to the P&L a/c of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee. (2)(a) This section applies to all goods or merchandise, other than those specified in cl. (b), if the sale proceeds of such goods or merchandise exported out of India are receivable by the assessee in convertible foreign exchange. (b) This section does not apply to the following goods or merchandise namely,— (i) mineral oil; and (ii) minerals and ores. (3) For the purposes of sub-s. (1), profits derived from the export of goods or merchandise out of India shall be : (a) in a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profits of the business as computed under the head ‘Profits and gains of business or profession’; (b) in a case where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head ‘Profits and gains of business or profession’) the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.

(4) The deduction under sub-s. (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-s. (2) of s. 288, certifying that the deduction has been correctly claimed on the basis of the amount of net foreign exchange realisation as determined in accordance with the import and export policy of the Government of India for the relevant period. Explanation—For the purposes of this section— (a) ‘convertible foreign exchange’ means foreign

exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973, and any rules made thereunder; (b) ‘export turnover’ means the sale proceeds receivable by the assessee in convertible foreign exchange of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962; (c) ‘net foreign exchange realisation’ means the total free on board value of exports out of India of goods and merchandise, to which this section applies as reduced by the aggregate of the cost, insurance and freight value of all categories of import licenses, to be issued by the Chief Controller of Imports and Exports, Government of India to which the assessee is entitled during the previous year, either against export obligation or against exports as replenishments.”

7. From a reading of the aforesaid section, it is seen that in order to qualify for deduction under s. 80HHC of the Act emphasis is on the profit derived by the assessee from export of such goods. The words “profit derived from export of goods” came up for consideration before the apex Court in the case of CIT vs. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 237 ITR 579 (SC). The apex Court was considering the question as to whether the amount received from the sale of export (import) entitlement can be said to be profit derived from business of export of goods. The apex Court has held that the amount received from sale of import entitlement could not be said to be profit derived from assessee’s industrial undertaking. The apex Court has held as follows : “The word ‘derive’ is usually followed by the word ‘from’ and it means ‘get to trace from a source, arise from, originate in, show the origin or formation of’. The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government where-under the export entitlements became available. There must be, for the application of the words ‘derived from’, a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applied. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee’s industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under s. 80HH of the IT Act, 1961.”

8. The Delhi High Court in the case of CIT vs. Ritesh Industries Ltd. (2004) 192 CTR (Del) 81 : (2005) 274 ITR 324 (Del) while following the decision of the apex Court in the case of CIT vs. Sterling Foods (supra) has held that the duty drawback is not an income derived from industrial undertaking. Even though under cl. (iiib) of s. 28 of the Act, cash assistance (by whatever name called) which is received by an assessee against exports under any scheme of the Government of India is treated to be the income chargeable under the head “Profits and gains of business or profession”, yet it does not partake the character of “profits derived from export of goods” as envisaged under s. 80HHC of the IT Act, 1961. Thus, the incentives would not qualify and cannot be included for determining the deduction under s. 80HHC of the Act. This Court in IT Ref. No. 45 of 1988, Khan International Exports (P) Ltd. vs. CIT, decided on 6th Dec., 2004 [reported at (2006) 201 CTR (All) 165—Ed.] in which one of us (R.K. Agrawal, J.) was a Member had taken the same view. It is held as follows : “So far as question as to whether the amount of cash incentive, duty drawback and premium entitlement received by the applicant can be included in the ‘export turnover’ and deduction under s. 80HHC of the Act was available or not is concerned, it may be mentioned here that the aforementioned amount has been paid by the Government to the applicant under the ‘export promotion policy’ of the Government of India and, therefore, it will not form part of the export turnover and deduction under s. 80HHC is not available on such portion of the income.” Respectfully following the view taken by this Court in the case of Khan International Exports (P) Ltd. (supra), we are of the considered opinion that the incentives received by the respondent assessee shall not form part of the export turnover and, therefore, not entitled to relief under s. 80HHC of the Act.

In view of the foregoing discussions, we answer the question referred to us in the negative i.e., in favour of the

Revenue and against the assessee. However, there shall be no order as to costs.

[Citation : 287 ITR 505]

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