ORDER
K.C. Singhal, Judicial Member
1. These are the cross appeals by the Revenue as well as assessee which have been heard together and are being disposed off by the common order for the sake of avoidance.
2. The major issue arising from these appeals relates to the claim of the assessee under Section 80HHF of the I.T. Act, 1961 (the Act). The first aspect of the issue in dispute is whether the claim of the assessee can be denied on the ground that there is loss in the export activity if the profits from export activity are computed on standalone basis by ignoring the results of other activities.
3. Briefly stated the facts are these: The assessee company is engaged in (i) the business of producing television programmes and exporting the same to the foreign parties, (ii) acting as an agent for advertising sales for Star and Overseas media companies, and (iii) rendering services to media companies. In the year under consideration, the assessee claimed deduction of Rs. 12,97,67,452/- under Section 80HHF of the Act. In computing such deduction, the assessee applied the formula given in Sub-section (3) of Section 80HHC by taking the profits of business, export turnover and total turnover at Rs. 22,07,85,093/-, Rs. 103,09,80,065/- and Rs. 175,40,99,550/- respectively. The claim of the assessee was examined by the Assessing Officer in the course of assessment proceedings. Regarding this claim, the Assessing Officer had made the following observations:
(1) The provisions of Section 80HHF being in pari materia with Section 80HHC, the claim of the assessee is to be examined with reference to the ratios laid down by the courts with reference to Section 80HHC;
(2) The export of television programmes has no bearing on the other business activities of the assessee namely subscription commission and other income since all activities are independent activities; (3) The expression 'derived from' in Sub-section (1) of Section 80HHF must be given resented meaning as against the expression 'attributable to' as held by the Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. 113 ITR 841 (SC) and note case of Sterling Foods 237 ITR 579 (SC); (4) Since there is no nexus between the export activity and other activities carried on by the essessee, the profits from other activities would not form part of the eligible business profits for working out the deduction under Section 80HHF;
(5) Formula under Section 80HHC(3) would apply only where part of the turnover of the goods is exported and the other part of the turnover is sold locally. Therefore, such formula would not apply to the profits where the activity has nothing to do with the export. For the similar reason, the claim under Section 80HHF cannot be allowed with reference to profits from the activity not involving export turnover. Reliance was placed on various judgments of Bombay High Courts namely, (1) K.K. Doshi and Co. 245 ITR 849, (2) Kantilal Chotalal 246 ITR 439, (3). Raviratna Export Pvt. Ltd. 246 ITR 443, (4) Pravin Merita 246 ITR 455, and (5) S.G. Zaveri Consultancy Ltd. 245 ITR 854.
In view of the above observations, the Assessing Officer asked the assessee to furnish the segmented Profit & Loss A/c for all the sources of income. In response to the same, the assessee furnished the segmented Profit & Loss A/c which appears at page 7 of the assessment order. The perusal of the same shows that the assessee prepared the segmented Profit & Loss A/c without allocating the corporate expenses but after taking into consideration the expenses relating to various activities. The profit from export activity as per the segmented Profit & Loss A/c was Rs. 10,98,11,921/-. The total corporate expenses which were not allocated to either of the activities amounted to Rs. 24,46,34,966/-. The Assessing Officer, applying the ratio of turnover, determined the sum of Rs. 12,66,11,793/- as expenses relatable to the export activity. Thus, according to the Assessing Officer, the net result from the export activity was loss of Rs. 1,67,99,872/-. Applying the ratio laid down by the Hon’ble Bombay High Court in the case of Laboratories Ltd. 251 ITR 401, it was held by him that assessee was not any deduction under Section 80HHF since there was a loss in the export activity.
4. The finding of the Assessing Officer was challenged before the learned CIT(A) considering the submissions of the assessee held that the claim of the assesses could not be denied on the basis of segmented Profit & Loss A/c prepared at the instance of the Assessing Officer. It was found by the learned CIT(A) that assessee had not maintained separate books of accounts for each activity. It was only at the instance of the Assessing Officer that segmented Profit & Loss A/c was prepared in respect of each activity. It was also observed by him that decision of Hon’ble Bombay High Court in the case of Ipca Laboratories (supra) was distinguishable on facts in as much as in the case before the Hon’ble High Court there were two export activities and the assessee had loss in one of the activities which the assessee wanted to be ignored for the purpose of claiming deduction under Section 80HHC while in the present case, the assessee has only one export activity. He also took into consideration the judgment of Hon’ble Bombay High Court in the case of Bangalore Clothing Co. 260 ITR 371 wherein it was held that the operational income would form part of the profits of business as well as total turnover. In view of the same, it was held by him that assessee was entitled to deduction under Section 80HHF in accordance with the formula given in Sub-section (3) thereof. According to him, the profits of the entire business activity should be taken into consideration subject to exclusion of 90% of the gross commission which the assessee itself had excluded. Since there was positive profits as per formula given in Sub-Section (3) of Section 80HHC, he computed the deduction at Rs. 8,50,52,298/- which was directed to be allowed after verification of the working made by him. Aggrieved by the same, the Revenue is in appeal before the Tribunal.
5. The findings of learned CIT(A) has been vehemently assailed by the learned Sr. DR., Mr. Srivastava, by reiterating the stand of the Assessing Officer that deduction under Section 80HHF is available only where there is positive profit which is derived from the export of the items specified in Sub-section(l). According to him, the expression ‘derived from’ has been used in restricted sense as compared to the other expressions ‘attributable to’ or ‘in relation to’. Reliance has been placed on the decisions of the Hon’ble Supreme court in the cases: (1) Cambay Electric Supply Industrial Ltd. (supra); (2) Pandian Chemical 1962 ITR 278 (SC); and (3) Sterling Foods Ltd. (supra). Therefore, it is submitted that if there is any loss from such export activity on stand alone basis, then the deducted can not be allowed in view of the judgment of Hon’ble Supreme Court in the case up(sic) Laboratories 266 ITR 521. According to him, the entire profits of the business cannot be taken into consideration unless other activities have direct or proximate nexus with export activity. It was vehemently argued by him that various activities carried on by the assessee were independent activities without having any nexus between each other and therefore, the Assessing Officer was justified in computing the profit and loss from export activity on the basis of segmented Profit & Loss A/c furnished by the assessee in the course of assessment proceedings.
In this connection he drew our attention to various activities carried on by the assessee. The first activity is, admittedly, the export activity i.e. export of television programmes and the assessee is eligible for deduction under Section 80HHF. However, such programmes are exported at a profit margin of 5% calculated at the cost of production plus overhead expenses. If corporate expenses which are common to all the activities are allocated then there is loss in the export business. Consequently, the question of allowing deduction under Section 80HHF would not arise since there is no profit derived from such activity. The second activity carried on by the assessee is collection of advertising revenue for its principal on which assessee gets commission @ 10%. This activity is just opposite and reverse to export activity since the amount collected after deduction of commission, is remitted to its foreign principal. Thus, neither there is any export nor there is inflow of foreign exchange into India. If deduction is allowed in respect of such income then object behind the provisions of Section 80HHF would be frustrated. The third activity is collection of subscription money and channel distribution which also has nothing to do with export activity. No foreign exchange is involved. Hence the income fond his activity cannot be said to be derived from export. All activities being independent activities and only first activity being export activity, the deduction could be allowed only with reference to the profits derived from such export activity alone. case the Assessing Officer was justified in disallowing the deduction under Section 80HHF since were was loss emanating from export activity as per the segmented profit and loss account prepared in the course of assessment proceedings.
Reliance has been placed on the decision of Jurisdictional High Court in the case of Bangalore Clothing Co. (supra) for the proposition that activities other than the export activity being unrelated to export, the profits derived there-from cannot be treated as operational Income and consequently has to be excluded from the computation of profits derived from the export activity.
6. On the other hand, the learned Counsel for the assessee has strongly opposed the contentions raised by the learned Sr. D.R. It has been submitted by him that the judgments delivered by the Hon’ble Supreme Court in the case of Sterling Foods Ltd (supra) as well as in the case of Pandian Chemicals (supra) would be applicable only where the legislature has not defined expression ‘derived from’. According to him, if any expression used by the legislature is defined in the Act itself, then, its meaning must be understood in the sense in which it is defined. It was pointed out by him that the expression ‘Profits derived from business’ referred to in Sub-Section (1) of Section 80HHF has been defined in Sub-section (3) read with Explanation (f). According to Sub-section (3) read with Explanation (f), the profits of the business must be the same as computed under the head ‘Profits and gains from business and profession’ as reduced by the receipts mentioned in the Explanation (f). In view of such provisions, the business profits are to be computed in accordance with Section 28 to Section 43D which would include the profits from all the activities of business carried on by the assessee. Proceeding further, it was submitted that if the contention of the Revenue is accepted then the total turnover would never be different from export turnover and the formula given in Sub-section (3) would become unworkable. It was also submitted that Explanation (f) provides the exclusion of certain business income which itself shows that the profits of business would include not only the profits from ‘export but also the profits form the other business activities. Reliance has been placed on the decision of the special in the case of International Research Park Ltd. 50 ITD 37 (SB) which roved by the Hon’ble Supreme Court in the case of P.R. Prabhakar 284 ITR 548 (sc) while reading the decision of the Special Bench, it was pointed out by him that there was loss from export activity but there was profit in the commission activity the claim of the assessee was rejected by the Revenue authorities on the ground that there was loss from export activity. The Special Bench held that the profits of business must be computed for the entire business and accordingly, the assessee was held to be entitled to deduction under Section 80HHC despite the fact that there was loss from the export business. This reasoning was found to be acceptable by the Hon’ble Supreme Court in the case of P.R. Prabhakar (supra). Regarding the judgment of Hon’ble Supreme Court in the case of Ipca Laboratories Ltd (supra), relied upon by the learned Sr D.R., it was submitted by him that the issue before Hon’ble Supreme Court was entirely different and consequently, the same could not be applied to the present case.
7. In the rejoinder, it is submitted by the learned Sr. D.R. that reliance on the judgment of Hon’ble Supreme Court in the case of P.R. Prabhakar (supra) by the learned Counsel for the assessee is totally wrong and misplaced since that decision was rendered with reference to the pre amendment provisions of Section 80HHC. It is also pointed out that the Hon’bie Supreme Court clearly stated that the amendment effective for 1.4.1992 was prospective in nature and therefore not applicable to that case. For the similar reasons, the reliance placed on the decision of Special Bench in the case of International Research Park (supra) was also misplaced. To support his submissions, he relied on the judgment of the Hon’ble Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. v. Union of India and Ors. 155 ITR 120 wherein it was held, “…it is most unsafe to try to arrive at the true meaning of a statutory provision by reference to an interpretation which might have been placed on an earlier statutory provision which is not only couched in different language but is also structurally different.” On the other hand, it was reiterated that decision of Hon’ble Supreme Court (sic) the case of Ipca Laboratories (supra) was applicable and therefore the Assessing Officer was justified in computing the loss from export activities on stand alone basis (sic) consequently, the deduction was rightly denied.
8. Rival submissions of the parties have been considered carefully. There is no dispute between the parties that assessee is eligible to deduction under Section 80HHF of the Act. However, the deduction has been denied by the revenue authorities on the ground that computation of profit in respect of export business of television software resulted in loss, According to the revenue authorities, the deduction is available only in respect of the profits derived from the business of export of the items mentioned in Sub-section (1) of Section 80HHF. Therefore, the profits derived from other business activities cannot be taken into considerations for computing the deduction under Section 80HHF. On the other hand, the stand of the assessee has been that the profits of the entire business carried on by it must be taken into consideration since profits derived from business referred to in Sub-section (1) of Section 80HHF must be computed in accordance with the provisions of Sub-section (3) read with Explanation (f).
9. In order to appreciate the controversy, it would be appropriate to refer to the relevant provisions of Section 80HHF which are reproduced below:
Section 80HHF:
(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 or transfer by any means out of India, of any film software, television software, music software, television news software, including telecast rights (hereafter in this Section referred to as the software or software rights), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of profits derived by the assessee from such business.
(3) For the purposes of Sub-section (1), profits derived from the business referred to in that Sub-section shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.
Explanation.–For the purposes of this section,-
(f) Profits of the business” means the profits of the business as computed under the head “Profits and gains of business or profession” as reduced by–
(A) ninety per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and
(B) the profits of any branch, office, warehouse or any other establishment of the assessee situated outside India;
10. The above provisions are similar to the provisions contained in Section 80HHC of the Act. Both the parties have referred to case law relating to Section 80HHC. Therefore, it would also be appropriate to refer to the relevant provisions of Section 80HHC so that applicability of such decisions can be considered in the right prospective. Hence, the same are reproduced below:
Section 80HHC
(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, a deduction of profits derived by the assessee from the export of such goods or merchandise.
Provided that….
(3) For the purposes of Sub-section (1)-
(a) where the export out of India is of goods or merchandise manufactured [or processed) 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;
(b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;
(c) where the export out of India is of goods or merchandise manufactured [or processed} by the assessee and of trading goods, the profits derived from such export shall,-
(i) in respect of the goods or merchandise manufactured (or processed) by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion of the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and
(ii) in respect of trading goods, be the export turnover in respect of such (sic) goods as reduced by the direct and indirect costs attributable to expend of such trading goods:
Provided that….
Expiation–For the purposes of this section,-
(sic) profits of the business” means the profits of the business as computed order the head “Profits and gains of business or profession” as reduced by–
(1) ninety per cent of any sum referred to in Clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 or of any receipts by way of brokerage, commission interest, rent, charges or any other receipt of a similar nature included in such profits; and
(2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;
11. A comparison of the above provisions clearly shows that the language in both the “Sections is almost similar as far as computation of eligible profits of business is concerned. Under both the provisions, the deduction is available in respect of the profits derived from the business specified in Sub-section (1) i.e. profits derived by the assessee from the business of export of goods or merchandise (Section 80HHC), profits derived from the business of export of any film software, television software, music software, television news software, including telecast rights (Section 80HHF). Sub-section (3) of both the provisions defines profits derived from such business. Sub-section (3) under both the sections refers to ‘profits of business’ which has been further defined in Explanation (baa) of Section 80HHC and Explanation (f) of Section 80HHF in the similar manner. The only difference is that for the purpose of Section 80HHC, 90% of sum referred to in Clauses (iiia) to (iiie) of Section 28 has also to be excluded from the profits of business while such amount is not required to be deducted in computing the profits of business under Section 80HHF.
12. It is the settled legal position that when two provisions are in pari-materia, whether under the same enactment or under different enactments, the decision rendered in relation to one provision would also be relevant in relation of the other provision. In view of the same, we are of the view that decisions given by the (sic) Tribunal in relation to Section 80HHC would be relevant in adjudicating the scope of the (sic) derived from the business specified in Section 80HHF. To this extent, we are in with the finding of the Assessing Officer,
13. Coming to the issue before us, it is also pertinent to note that provisions of Sub-section 80HHC as well as provisions of Sub-section (1) of Section 80HHF are subject to the other provisions of such sections. That means that the scope of any expression used in Sub-section (1) cannot be understood in isolation but must be understood with reference to the entire provisions of the section. In this connection, reference can be made to the decision of Hon’ble Supreme Court in the case of Bharat Hari Singhania v. CWT 207 ITR 1 (SC). In that case, the court was concerned with the issue of valuation of shares under the Wealth Tax Act. Section 7 of the Wealth Tax Act provided the mechanism of valuation of the property. Such provision was subject to the rules. The Court held that valuation must be made as per rules. Therefore, it should be kept in mind that whenever a provision is subject to other provisions then other provisions would have an overriding effect. Consequently, we are of the opinion that scope of the expression ‘profits derived from the business’ referred to in Sub-section (1) of Section 80HHF cannot be understood in isolation but should be understood in the sense in which legislature has provided in Sub-section (3) of Section 80HHF read with Explanation (f)
14. Sub-section (3) of Section 80HHF provides that for the purpose of Sub-section (1), the profits derived from the business referred to in that subsection shall be the amount which bears to the profits of business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. The expression ‘profits of the business’ has been further defined in Clause (f) of Explanation to Section 80HHF which means profits of business as computed under the head ‘Profits & Gains of Business or Profession’ as reduced by the receipts/profits referred to in the above clause of all these provisions are read together then the profits derived from the business to in Sub-section (1) would mean profits of the business as computed under the head head ‘Profits & gains of business or Profession’ as reduced by the amount(sic) Sub-clauses A & B of Clause (f) of the Explanation If so construed, it is (sic) accept the contention of revenue that profits of business should be restricted to the business specified in Sub-section (1) alone. Sub-section (3) provides a formula for determining such profits on the basis of ratio of export turnover to total turnover. The formula itself shows that profits computed under the head ‘Profits & Gains of business or profession’ would include not only the profit from the business referred to in Sub-section (1) but also include the profit from other business activities. If the contention of revenue is accepted then the concept of total turnover would become irrelevant or otiose. It is the settled legal position that any interpretation which renders the provisions otiose should be avoided and the interpretation which advances the object should be preferred. Therefore, in our opinion, the profits derived from the business referred to in Sub-section (1) would mean the profits of business as defined in Sub-section (3) of Section 80HHF read with Explanation (f). Consequently, the Assessing Officer was not justified in computing the profits in respect of the business of exporting television software on the basis of segmented Profit & Loss A/c prepared at his instance and ignoring the profits from other business activities.
15. The view taken by us is fortified by the decision of Special Bench of the Tribunal in the case of International Research Park (supra) which has also been approved by the Hon’ble Supreme Court in the case of P.R. Prabhakar (supra) The Special Bench was required to adjudicate the similar issue with reference to similar provisions of Section 80HHC of the Act. In that case, the assessee declared export turnover of Rs. 2.19 crores for Assessment Year 1990-91 and export fee of Rs. 2.04 crores received on assignment of export orders to another exporter Hindustan Lever Ltd. The profits under the head ‘Profits & Gains from Business or Profession’ was Rs. 1,95,90,940/- while the total turnover was Rs. 4.24 crores. The assessee applied the formula given in Sub-section (3) of Section 80HHC and claimed the deduction accordingly. The Assessing Officer found that cost of goods exported amounted to Rs. 2.21 crores which was more than the (sic) there was loss of Rs. 2.32 lakhs. The Assessing Officer was of the view the there must be positive profit derived from export as per the provisions of Sub-section (sic) Section 80HHC in order to claim deduction under Section 80HHC. According to him, (sic) of apportionment prescribed under sub-section (3) could be applied only Where there was positive profit from export activity alone. Since there was loss in export business, he denied the deduction and refused to apply the formula given in Sub-section (3). The learned CIT(A) confirmed the order of Assessing Officer. Thus, the matter reached the Tribunal. The Special Bench was constituted to resolve such controversy The Special Bench finally concluded that in order to claim deduction under Section 80HHC, there was no need for any profit to be in existence in export business. The profits derived from export has to be computed by applying the formula prescribed under Section 80HHC(3) irrespective of the fact whether separate books of accounts were maintained or not for various activities of business carried on by the assessee. This view has been approved by the apex Court in the case of P.R. Prabhakar (supra).
16. In the case of P.R. Prabhakar (supra), the Hon’ble Supreme Court had to consider the claim of the assessee under Section 80HHC of the Act with reference to the facts given hereafter. The appellant carried on the business of export of his own products and also procured export contracts for other exporters for a commission. In the assessment year 1990-91, he derived an income of Rs. 56,69,321/- by way of commission, whereas as an exporter of goods he incurred a loss of Rs. 6,372/-. The total value of the goods exported outside India by the appellant during the assessment year was Rs. 3,67,600/- only He claimed a deduction in terms of Section 80HHC of the income-tax Act, 1961 in respect of the export income. On the basis of these facts, the Assessing Officer rejected the claim of the assessee on the ground that there was a loss in the export business since the commission income could not be treated as part of export business. The two questions were referred to the court which, inter-alia, included the question whether the assessee was entitled to deduction under Section 80HHC of the Act even though the export business (sic)loss of Rs. 6,372/- and the Supreme Court approving the decision of the tribunal the case of International Research Par Laboratories Ltd. (supra) held that (sic) as entitled to deduction under Section 80HHC since commission income formed part of the business profits for the purpose of Sub-section (3) of Section 80HHC.
17. The contention of the Revenue that legal position expressed by the Hon’ble Supreme Court in the case of P.R. Prabhakar (supra) would apply only for the pre amended period and would not be relevant for the Assessment Year 1992-93 is misconceived and therefore liable to be rejected for the reasons given hereafter. There cannot be any dispute to the legal position that a decision rendered by a court would be relevant only if the provisions considered by the court continues to remain the same. If there is any material change on account of amendment then such decision may not be relevant and therefore dispute has to be resolved with reference to the amended provisions. However, we find that there is no such material change in the provisions considered by the apex court and the provisions of Section 80HHF under our consideration except that the provisions of Explanation (baa) to Section 80HHC similar to the provisions of Explanation (f) to Section 80HHF were not before the apex court. Therefore, the question arises whether the provisions contained in the above Explanation would alter the legal position declared by the apex Court. In our humble opinion, such change does not alter the legal position declared by the apex Court in the case of P.R. Prabhakar (supra).
The provisions of Sub-section (1) and (3) of Section 80HHC as considered by the apex court in the case of P.R. Prabhakar (supra) required the assessee as well as Assessing Officer to compute the profits derived from export as per the formula given in Sub-section (3) i.e. computation of profits under the head ‘Profits and Gains from Business or Profession’. Once such profit is computed then further requirement was to apportion the same on the basis of the ratio of export turnover to the total turnover. These two steps are also contemplated by the provisions of Section 80HHF since profits derived from the business specified in Sub-section (1) has to be computed in accordance with the formula provided in Sub-section (3) thereof. Sub-section (3) has to be read along with Explanation (f) in as much as the ‘Profits of business’ referred to in Sub-section (sic) further defined in the said Explanation. Explanation (f) provides for computer tip of profit under the head ‘Profits & Gains of business or profession’. That means by has to compute first the profits of business under the head ‘Profits and (sic) form Business or Profession’ and then apportion the same on the basis of ratio of export turnover to the total turnover. These two requirements continue to exist under Section 80HHC as well as Section 80HHF. Even after the amendment in Section 80HHC, such requirements continue to exist. Therefore, it is difficult to accept the contention of learned Sr. D.R. that judgment of the apex Court in the case of P.R. Prabhakar would not apply to the present case. The only distinguishing feature is that Explanation (f) excludes certain items of receipt from the profits of business computed under the head ‘Profits & Gains of Business or Profession’. But such exclusion does not take away the requirement to compute the profits of business under the head ‘Profits & Gains from Business and Profession’. In view of the above discussion, the contention of the revenue in this behalf is rejected.
18. The judgment of the Hon’ble Supreme Court in the case of Ipca Laboratories Ltd. (supra) relied upon by the learned Sr. D.R., in our opinion, does not help the case of the Revenue for the reasons given hereafter. In that case, the assessee had declared profits of Rs. 3.78 crores in respect of export of goods manufactured by it. The assessee claimed deduction under Section 80HHC with reference to the profit of Rs. 3.78 crores ignoring the losses of Rs. 6.86 crores incurred in the export of trading goods. The Assessing Officer as well as learned CIT(A) dismissed the claim of the assessee by holding that deduction was allowable only if there was a positive profit after considering the book result in respect of the entire business. According to the tax authorities, the profit of Rs. 3.78 crores was allowable to be set off against the loss of Rs. 6.86 crores. Consequently, the deduction was not allowable as there was net loss from the export business. On the basis of these facts the Hon’ble Supreme Court was required to adjudicate the issue whether deducted can be allowed under Section 80HHC ignoring the loss from export of trading goods the (sic) before the apex Court was that the word ‘and’ in Section 80HHC(3) should be liberally construed. If so construed, then the deduction should be allowed (sic) respect of the profits from export and the loss, if incurred, should be ignored. This contention of the assessee was rejected by the apex Court by holding that the language of section was unambiguous and the profit should be computed only after adjusting the losses incurred in the business. Since, the net result was loss it was held that assessee was not entitled to deduction under Section 80HHC. The above discussion clearly shows that the issue before the Hon’ble Supreme Court was entirely different from the issue before us. It is also pertinent to note that even the Hon’ble Supreme Court considered the computation of business profits under sub Section (3) of Section 80HHC which shows that profits derived from export under Sub-section (1) should be computed in accordance with Sub-section (3) of Section 80HHC. There is nothing in the judgment to indicate that profits from export should be computed on the basis of segmented Profit & Loss A/c in respect of export activity alone ignoring the profits or losses from other business activities. Accordingly, we are of the view that the above judgment is not relevant for deciding the issue before us.
The decision of the Jurisdictional High Court in the case of Bangalore Clothing Co. (supra) is relevant with reference to either the concept of turnover or the scope of income to be excluded from the profits of business computed under the head ‘Profits and gains of business or profession’ and consequently, the said decision cannot be applied till the process of computation of business profits under the above head is completed. This decision would be referred to appropriate stage later on.
19. In view of the above discussion, it is held that for claiming deduction under Section 80HHF, the profits derived from the business as referred to in Sub-section (1) would be such profits as are computed in accordance with the provisions of Sub-section (3) read with Explanation (f) thereof. For this purpose, the profits of the entire business would be take in to consideration. Consequently, it is held that the Assessing Officer was not justified in the denying the claim on the ground that there was loss in the business of export television ware on the basis of segmented Profit & Loss A/c. The order of the learned CIT (A) is, therefore, upheld on this aspect of the issue.
20. Before parting with this aspect of the issue, it may be mentioned that certain alternate arguments were also made by the parties in support of their respective stands. Since we have decided the issue on the main argument, it is not necessary for us to deal with them.
21. The next aspect of the issue is whether 90% receipts relating to subscription received from cable operators as well as commission could be excluded from the profits of the business as computed under the head ‘Profits and Gains from Business or Profession’ by virtue of Explanation (baa). Having held that assessee was not entitled to deduction under Section 80HHF on the ground that there was loss from export activity, the Assessing Officer proceeded further to observe that without prejudice to the above finding, the assessee was also not entitled to deduction on the ground that there was loss in the business if 90% of such receipts are excluded from the profits of business computed under the head ‘Profits & Gains from Business or Profession’. Assessing Officer noted that assessee had received the following amounts 90% of which is required to be excluded:
1. Ad Sales & Commission 35,30,72,440
2. Subscription Income 63,77,38,563
3. Other Income-Subscription 1 56,43,879
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100, 64,54,882
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It was also noted by the Assessing Officer that the assessee itself had excluded 90% of net commission amounting to Rs. 5,03,81,289/- as against gross commission of Rs. 35,30,72,440/-. It was also found by him that nothing was excluded out of (sic) receipts and other income. The explanation of the assessee was that if 90% of gross (sic) are excluded then it will present a distorted picture and would lead to injustice (sic)explanation was rejected since in his view, the legislation has used the word (sic) and not the income. Accordingly, he computed loss of Rs. 63,46,43,012/-as under
Profits and gains of business Rs. 27,11,66,382
Less: 90% of gross commission(Rs.35,30,72,440) Rs. 31,77,65,196
Less:90% of gross subscription.(Rs.65,33,82,442) Rs. 58,80,44,198
—————–
Loss Rs. 63,46,43,012
-----------------
Since there was loss even as per formula under Section 80HHF(3) read with Explanation (f), the claim of assessee was rejected.
22. Before learned CIT(A), it was contended that 90% of neither cable subscription income nor Ad Sales Commission income could be excluded from the profits of business for working out deduction under Section 80HHFin view of the judgment of the Jurisdictional High Court in the case of Bangalore Clothing Co. 260 ITR 371 (Bom). Alternatively, it was contended that only 90% of the net receipt could be excluded since exclusion of gross receipt would present the distorted picture.
23. The learned CIT(A) accepted the contention of the assessee in respect of cable subscription by observing as under:
The activity of Cable subscription requires spreading of hardware net work as well as co-ordination with large number of cable operators. The receipts from cable operation are Rs. 63.77 crores which is about 30% of the total receipts. The activity is independent in itself. The appellant has also considered this activity to be major, business activity in as much as that the receipts from Cable Subscription are not reduced from the profits of business while computing the deduction under Section 80HHF. Considering the decision of Hon’ble Bombay High Court in the case of o Bangalore Cloth Trading, and the fact that the appellant had not deducted this income in the computation of income, the income/receipts from cable subscription activity shall not be excluded from the profits for working out deduction under Section 80HHF.
However, he rejected the stand of the assessee in respect of commission income. It was observed by him that assessee itself had not considered such activity as main activity of business and suo moto excluded 90% of net commission from profits of business. It was further noted (sic) assessee itself had not included the same in the total turnover also. He was also of the view that Legislature has used the word ‘receipt’ and not the word profit and the before 90% of the gross amount should be excluded. Thus, the stand of Assessing Officer was accepted in this regard. Aggrieved by the said order, assessee as well as revenue are in appeal before the Tribunal.
24. First we take up the issue arising in revenue’s appeal. The learned Sr. D.R. has contended before us that the activity of cable subscription is an independent activity by itself as held by the learned CIT(A). Having held as such, the learned CIT(A) was not justified in holding that receipts from such activity could not be excluded from the profits of business computed under the head ‘Profits and gains from Business or Profession’. According to him, the finding of the learned CIT(A) is fatal to the claim of the assessee since deduction is available only with reference to profits from export activity. Accordingly, it is submitted that considering the fact that cable subscription charges emanate from an independent activity without having any nexus with export activity, 90% of such receipts must be excluded from the profits of business computed under the head ‘Profits and gains from business or profession’ in view of the latest judgment of Hon’ble Supreme court in the case of K. Ravindranathan Nair 295 ITR 228 (SC). Reliance is also placed on the judgment of the apex court in the case of Lakshmi Machine Co. 290 ITR 667 (SC) to submit that 90% of receipts are to be excluded which do not emanate from export turnover. It was also submitted that exclusion of 90% of receipts is not restricted to the specific receipts i.e. brokerage, commission, interest, rent, charges etc. but also applicable to ‘receipts of similar nature’. According to him, the legislature’ has excluded such receipts which arise from separate and distinct activities without having any nexus with export activity. Since, activity of the distribution of channel programme through cable operator is an independent and distinct activity from the export activity, 90% of the profit from such activity must be excluded. Reliance (sic) placed on the decision of Hon’ble Madras High Court in the case of Madras (sic) 257 ITR 60 as well as on the decision of the Tribunal in the case of USV Ltd. 14 (sic) (Mum).
25. The learned Counsel for the assessee has strongly opposed the contentions of the the learned Sr. DR by contending that activity of channel distribution through cable operator is one of the main business activities as is apparent from the objects stated in the Memorandum of Association. It is also submitted that such activity has also nexus with the export activity in the sense that export activity would be of no use unless efforts are made to make the programme successful produced by the assesser for its foreign principal.’ According to him, it was in the interest of the assessee to have entered into an agreement with its principal for procuring the rights to exhibit the programmes produced by it through the cable operators. Hence, it cannot be said that such activity had no nexus with the export activity. Accordingly, it was submitted that profits emanating from such activity was operational income as per the decision of the jurisdictional High Court in the case of Bangalore Clothing Co. (supra) and consequently, no part of it could be excluded from the profits of business. No doubt such (sic) also form part of total turnover for the purpose of determining the profits of business derived from the business specified in Sub-section (1) of Section 80HHf.
26. Regarding the Judgment of the apex court in the case of K. Ravindranathan Nair (supra), it was vehemently submitted that the issue regarding the determination of profits of business as per the provisions of Clause (baa) of Section 80HHC was never before the apex court The assessee as well as the Assessing Officer proceeded on the footing that income from processing charges constituted part of business profits under Section 28 of the Act. The only dispute before the parties was whether processing charges would form part of total turnover or not for the purpose of computing deduction in accordance with the formula given in Section 80HHC(3). The assessee had not included such charges in the total turnover while the Assessing Officer not only included the same in the total turnover but also excluded 90% of such charges from the profits of business. He drew our attention to the point of dispute before the apex court by referring to page (sic) report. He reiterated that only dispute before the court was whether processing (sic) could be included in the total turnover or not. Accordingly, it was pleaded (sic) this Judgment cannot be said to lay down any ratio as to which in come (sic) could be excluded from the profits of business. In this connection, he the judgements of the apex court viz., Sun Engg. Works 198 ITR 297 (SC) and Good Year India Ltd. 188 ITR 402 (SC).
27. On the other hand, it was submitted that the issue is covered by the judgment of the jurisdictional High Court in the case of Bangalore Clothing Co. (supra) wherein it has been held that in the case of operational income emanating from the main business, nothing could be excluded from the profits of business though such receipts would form part of the total turnover. To buttress his argument, he also referred to the judgment of the apex court in the case of Baby Marine Exports 290 ITR 323 wherein the court was required to interpret the provisions of Explanation (baa) to Section 80HHC. According to him, the judgment of hon’ble Bombay High Court in the case bf Bangalore Clothing Co., was considered and approved by the apex court and, therefore, the issue must be decided in accordance with the judgment of the jurisdictional High Court in the case of Bangalore Clothing Co. (supra).
28. As against the decision of hon’ble Madras High Court in the case of Madras Motors Ltd. (supra) relied on by the learned senior DR, he relied on the later decision of the same High Court in the case of Abdul Rahman Industries 293 ITR 475 (Mad.) wherein the deduction under Section 80HHC was allowed with reference to deemed income under Section 41 of the Act.
29. Proceeding further, it was submitted that the right to exhibit the programmes telecast by TV channels owned by the Star group of companies vested in the assessee and therefore receipts from the cable operators in respect of such rights forms part of the turnover of the assessee and therefore, such recipts would form part of operational (sic) and consequently, question of exclusion in terms of Explanation (f) of Section 80HHC (sic) not arise. Reference was also made to the Judgment of hon’ble Madras high court in the case of V.C. Kuganathan 293 ITR 15 wherein it has been held that (sic) of right to exhibit film constitutes sale of goods and consequently, assessee is (sic) to deduction under Section 80HHC. Other decisions relied on are, CIT v. Giza Impex P. Ltd. , CIT v. A.V.M. Production 293 ITR 22 (Mad), Abdulgafar A. Nadiadwala v. Assistant Commissioner of Income tax and Ors. 267 ITR 488 (Bom) and the decision of the tribunal in the case of K.R. Films (P) Ltd. 100 TTJ 825.
30. Proceeding further, it was submitted that the expression ‘receipts of similar nature’ in the Explanation (f) has to be understood in consonance with the principle of Ejesdem Generis. According to him, there must be a common thread in the specific items mentioned by the Legislature which must exist in the general item to be included in the expression ‘receipts of similar nature’. According to him, the specific incomes preceding the above expression are passive incomes and therefore, income from main activities of business would be outside the scope. Consequently, cable subscription emanating from the main activity cannot be excluded, in terms of Explanation (f), from the profits of business. Another common thread is the absence of the element of turnover as classified by the circular No. 621 dated 19.12.1991 reported as 195 ITR 154 (ST). According to him, the element of turnover can be said to exist where each activity results in profit. In the case of the assessee, there are thousands of cable operators who are required to pay the subscription depending on the number of subscribers to the channel. Further, the volume of subscription depends on number of viewers as wed as the period for which license to view the programme is allowed. The activity being an organized activity, the subscription amount would partake the character of turnover. Further, Section 80HHF is service oriented section in contrast to Section 80HHC therefore, the scope of turnover should be understood with reference to the nature of services rendered by the assessee. If so understood, the cable subscription would have element of turnover and consequently, the same would form part of business profits as well as total turnover. As a result therefore, 90% of such receipt cannot be excluded (sic) the profits of business.
30. Preceding further, it was submitted that the Assessing Officer himself accepted the (sic) assessee and had not excluded the receipt from cable operators in the subsequent assessment years i.e., 2002-03 to 2004-05. In support of his submission, (sic) is placed on the following decisions:
Union of India and Ors. v. Kaumudini Narayan Dalai and Anr. 249 ITR 219 (SC).
Union of India v. Satish Panalal Shah 249 ITR 221 (SC),
Berger Paints India Ltd. v. CIT 266 ITR 99,
CIT v. Narendra Doshi 254 ITR 606,
Kadri Mills (CBE) Ltd. 76 TTJ 38 ITAT order in the case of Mckinsey Knowledge Center ITA No. 4382/Del/2005 dt. 23/11.2007.
31. Alternatively, it is contended that if receipts are held to be excluded out of the profits of business then it should be 90% of the net profits since what is included in the profits of business is the net receipt and not the gross receipt. Reliance is placed on the recent judgment of hon’ble Bombay High Court in the case of Zodiac Clothing Co. Order dated 27/2/2008 in I.T.A. No. 1596/Mum/2007.
32. In the rejoinder, it was firstly submitted by him that the claim of the assessee cannot be allowed merely on the basis that the Assessing Officer did not exclude the cable subscription in subsequent years since principle of res judicata does not apply to income tax proceedings. In fact, the claim of the assessee has been denied in the first year itself and therefore, no help can be taken from subsequent orders of Assessing Officer. Reliance is placed on the judgment of hon’ble Supreme Court in the case of Radha Soami Satsang 193 ITR 321 (SC). If any mistake has been committed by Assessing Officer in subsequent years, the Revenue can always resort to remedial actions provided under the statute.
33. Proceeding further it was submitted that the judgment of hon’ble Supreme court in the case of K. Ravindranathan Nair (supra) would apply to the facts of the case and the (sic) of Bombay High Court in the case of Bangalore Clothing Co., does not (sic) the case of the assessee. Further, the decision of hon’ble Supreme Court in the case of Baby Marine Exports (supra) was also on entirely different facts i.e., the claim of supporting manufacturer with reference to export incentives received in Indian currency. Hence, the said decision also does not help the assessee. It was also submitted by him that even the obiter dicta of the hon’ble Supreme Court is binding on the subordinate courts and tribunals and therefore, judgment of hon’ble Supreme Court in K. Ravindranathan would apply. Lastly, it was submitted that receipts by way of cable subscription would amount to receipt by way of charges and therefore, 90% of the same would have to be excluded. He also relied on the finding of the Assessing Officer recorded in paras 6.8, 6.10 to 6.20.
34. Rival submissions of the parties have been considered carefully. The issue for our adjudication is whether 90% of receipts by way of cable subscriptions should be excluded from the profits of business computed under the head ‘Profits or gains from Business or Profession’ in terms of the provisions contained in Explanation (f) to Section 80HHF, which is similar to Explanation (baa) to Section 80HHC. The stand of the revenue is that activity of channel distribution through the cable operators being independent and unconnected with export activity, 90% of receipts emanating from such activity should be excluded from the profits of business in view of the Hon’bfe Supreme Court judgment in the case of K. Ravindranathan Nair (supra). On the other hand, the stand of the assessee is that no part of any receipt emanating from an activity having element of turnover can be excluded in view of the judgment of the Jurisdictional High Court in the case of Bangalore Clothing Co. (supra). In order to appreciate the arguments of the parties, it would be appropriate to consider the history and legislative intent/object behind the amendment made by the legislature by way of insertion of Clause (baa) of Explanation to Section 80HHC which is similar to Explanation (f) to Section 80HHF.
35. (sic) Assessment Year 1991-92, the judicial opinion was that formula provided in Sub-section (3) of Section 80HHC permitted the assessee to claim deduction with (sic) the profits of the entire business even though there may be loss from the (sic) Such judicial opinion was, later on, approved by the Hon’ble Supreme court in the case of P.R. Prabhakar (supra). Such judicial opinion, according to the Revenue, was never the legislative intent since the existing formula allowed deduction even in respect of profits which emanated from activities not involving element of turnover. Accordingly, the legislature made amendment in Section 80HHC by inserting Clause (baa) in the Explanation to this Section. The intention behind the amendment was to cure the mischief in the existing formula. The purpose behind the existing formula was to determine the profit from export activity on the basis of ratio of export turnover to total turnover. This was done because common books of account were maintained by the assessee in respect of export as well as local turnover, whether of same commodity or of different commodities as there was no formula for segregating the turnover of different items. Since common accounts were maintained, it was difficult to ascertain the profits from export. So the object of the existing formula was to ascertain the export profits on the basis of ratio of export turnover to total turnover. Perhaps the legislature could not foresee the other incomes which could be earned by the assessee emanating from the activities not involving the turnover. One of the variables to be considered in the formula was the profits of business computed under the head ‘Profits or gains from Business or Profession’ which included all types of income whether emanating from the activity involving turnover or activity not involving the turnover. Thus, the formula resulted in distorted picture allowing the deduction even in respect of income emanating from activity not involving element of turnover, in order to cure this mischief, the legislature introduced Clause (baa) in Explanation to Section 80HHC as is from the CBDT Circular No. 621 dated 19.12.1991. Relevant portion of the one is reproduced as under:
32.10. The existing formula often gives a distorted figure of export profits when receipts like interest, commission, etc., which do not hove element of turnover are included in the profit and loss account.,
32.11 It has, therefore, been clarified that ‘profits of the business’ for the purpose of Section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 per cent. Deduction from such incomes is provided to account for these expenses.
32.12 Many exporters maintain branch offices, warehouses, etc., abroad. The export goods’ are first sent to these branch offices, etc., and are then sold to foreign buyers from such branch officer, etc. Certain doubts hove been raised about the point of time when such goods should be treated as having been exported.
32.13 With a view to removing the doubts in this respect, an Explanation has been inserted in Section 80HHC clarifying that, goods will be deemed to be exported out of India when they are transferred by an assessee to on overseas branch office, etc. The value of such goods declared in the shipping bill, etc., will be deemed to be the sale proceeds thereof for the purpose of computing the deduction under Section 80HHC.
32.14. It has also been clarified that ‘profits of the business’ for the purpose of Section 80HHC will not include profits, of any branch, warehouse, etc., situated overseas.
32.15. These amendments will take effect from 1st April, 1992, and will, accordingly, apply in relation to assessment year 199293 and subsequent assessment years.
(Emphasis supplied by us)
36. The perusal of the above clearly reveals that amendment was made to exclude only those incomes which do not have element of turnover. It is pertinent to note that legislature referred to element of turnover and not export turnover. Therefore, considering the above circular which is binding on the tax authorities, we are of the view that any income arising from an activity involving turnover cannot be excluded from the profits of business in terms of Explanation (baa) to Section 80HHC/Explanation (f) to Section 80HHF.
37. The next question for consideration is whether consideration received by the assessee by way of cable subscriptions amounts to turnover. The scope of the word ‘turnover’ may vary in Section 80HHC & Section 80HHF. Section 80HHC refers to goods (sic) and therefore the turnover would refer to the amount of business done in respect of goods or merchandise whereas Section 80HHF refers to different softwares as well as to (sic) cost rights and therefore, turnover would not only include sale of software but also consideration for transfer of rights therein as is apparent from the definition of export turnover given in Explanation (c) to Section 80HHF, which not only includes consideration for transfer of softwares but also consideration for transfer of software rights. What is true to export business would also be true to local business. Therefore, in our view, the amount of business done in respect of software rights would have to be treated as turnover. Section 80HHF refers to film software, music software. Television news software and television software. The purpose behind production of such softwares is to view/exhibit the programmes contained therein. Consequently, right to exhibit such programmes would certainly fall within the scope of ‘software rights Consequently, the amount of business done with reference to such right would form part of turnover. In the present case, the right to exhibit the programmes telecasted by various channels owned by ‘Star Group’ in the Indian territory is with the assessee. The cable operators are the distributors through whom such programmes are exhibited to the subscribers of the public. The consideration varies from operator to operator depending upon the number of viewers. If the cable operator stops making payment, the assessee can stop the exhibition of programmes to such cable operators through the equipments installed by the assessee. Therefore, what the assessee receives in our humble opinion, is the consideration on account of transfer of right to exhibition of programmes contained in such software and therefore, the same would amount to turnover.
38. Even as per the decision of Hon’ble Supreme Court in the case of K. Ravindranathan Nair (Supra) as well as the decision of Hon’ble Bombay High Court in the case of Bangalore Clothing Co. (supra), the cable subscription has to be treated as turnover. As per judgment of Hon’ble Supreme Court, the receipts from independent active, if found part of profits of business has to be treated as part of the total turnover. In, the (sic) case, there is no dispute that activity of distribution of channel programme is an independent activity and therefore the profits arising there from should also form part of the profits of business. Accordingly, as per the test laid down by the Hon’ble Supreme Court in the above case, the cable subscription has to be treated turnover. The test laid down by the Hon’ble Bombay High Court in the case of Bangalore Clothing Co. (supra) is that if the profits arising from an activity is in the nature of operational income then receipts from such activity would form part of profits of business as well as total turnover. There is no dispute that cable subscription activity is part of main objects of the assessee company and therefore the receipts arising from the same would form part of the operational income. Consequently, such receipt would form part of turnover.
39. Having held that amount of cable subscription involves element of turnover, the question arises whether 90% of receipts included in the profits of business can be excluded from the profit’s of business computed under the head ‘Profits or gains from Business or Profession’. The Board circular No. 621 dated 19.12.1991 clearly shows that what are to be excluded from the profits of business are those receipts which do not have element of turnover. That impliedly means that receipts having element of turnover cannot be excluded from the profits of business in terms of Explanation (f) to Section 80HHF. The Constitution Bench of the hon’ble Supreme Court in the case of Navnit Lal C. Jhaveri v. K.K. Sen 56 ITR 198 has held that circulars issued by the Board which are beneficial to the assessee are binding on the tax authorities. Keeping in mind the above binding Judgment and the circular mentioned above, it must be held that cable subscription having element of turnover cannot be excluded from the profits of business computed under the head ‘profits and gains of business or profession’. We hold accordingly.
40. Heavy reliance has been placed on the judgment of Hon’ble Supreme Court in the case of K. Ravindranathan Nair by the Revenue for the proposition that if the activity carried on by the assessee is an independent activity, then 90% of the receipts (sic) from such activity will have to be excluded from the profits of business computer under the head ‘Profits or gains from Business or Profession’ by virtue of the provision of Explanation (f) to Section 80HHF. In our opinion, this is not the ratio laid down by the Hon’ble Supreme Court in the above case in as much as the issue considered by their Lordships was entirely different. In order to appreciate the (sic) of the parties, it would be appropriate to refer to the facts of that case, the question considered by the court and the arguments raised before the court by the respective parties.
In that case, the assessee was deriving income mainly from the business as a cashew exporter. He had a factory in which he was processing the cashew nuts which were grown in his farm. After the processing, he exported the cashew nuts. Simultaneously, the assessee also processed cashew nuts which were supplied to him by the exporters on Job Work basis. After processing, the assessee returned the processed cashew nuts to the exporters. In respect of such processing on job-work basis, he earned processing charges. The assessee claimed deduction under Section 80HHC. In his return, he indicated the business profits at Rs. 1,94,08,220/- which included the processing charges (on job work basis) amounting to Rs. 1,54,68,811/-. Even though the processing charges were included in the profits of business, the assessee did not include the same in the total turnover. The Assessing Officer did not accept the working of the assessee since he was of the view that such processing charges should be included in the total turnover. Accordingly, he included the processing charges in the total turnover. The Assessing Officer also excluded 90% of the receipts from the profits of business in terms of Clause (bad) Lo the Explanation in Section 80HHC. The working of the Assessing Officer was confirmed in appeal by the learned CIT (A). However, in further appeal by the assessee, the Tribunal held that processing charges could not be included in the total turnover. Aggrieved by the said order of the Tribunal, the following questions were referred to the Hon’ble High Court for its opinion:
1. Whether on the facts and circumstances of the case, while computing the relief under Section 80HHC of the I.T. Act, 1961, the processing charges can be excluded from the turnover of the business?
2. Whether, on the facts and circumstances of the case and in view of the Explanation (ba) to Section 80HHC and Clauses (iiia), (iiib) and (iiic) of Section 28, will not (sic) over take into account all other receipts other, than excluded items of receipts?
(emphasis by us)
41. The Hon’ble Kerala High Court upheld the order of the Tribunal by holding that charges could not be included in the total turnover The Revenue filed an appeal before the Hon’ble Supreme court against the said judgment of the Hon’ble High Court.
42. The contention of the Revenue before the apex court was to the effect that when the processing charges were includible in the business profits, the same were also includible in the total turnover in the formula prescribed by the legislature for computing the deduction under Section 80HHC. Reliance was placed on the Clauses (ba) and (baa) to the Explanation to Section 80HHC. On the other hand, the contention of the assessee before the apex court was that assessee had two independent businesses. In one case, he processed and exported his own products and in the other, he processed the raw material supplied by the third parties against job charges. According to the learned Counsel for the assessee, the income from works contract by way of processing charges was not includible in the denominator (total turnover) in the formula provided in Section 80HHC(3). It was also contended that if the processing charges were to be included in the total turnover then the export incentives would stand reduced and that would defeat the very object behind the enactment of Section 80HHC(3). These contentions appear at page 232 and 233 of the report.
Their Lordships of the Hon’ble Supreme Court referred to the scheme of Section 80HHC and the Board Circular No. 621 dated 19.12.1991 and then finally observed as under:
In our view, for the above reasons, the said processing charges, which was part of grass total income, was an independent income like rent, commission, brokerage, etc., and, therefore 90 per cent, of the said sum had to be reduced from the gross total income to arrive at the business profits and since the said processing charge was in important component of business profits, it also had to be included in the total turnover in the said formula to arrive at the business profits in terms of Clause (baa) the said Explanation.
43. The perusal of the above observations indicate that 90% of the processing (sic) is to be excluded from the profits of business and the processing charges is also to be included in the total turnover in the formula under Section 80HHC.
44. Now the question arises as to what is the ratio of the above judgment. In this connection, reference can be made to the judgment of the Hon’ble Supreme Court in the case of Goodyear India Ltd. v. State of Haryana 188 ITR 402 which has been relied upon by the learned Counsel for the assessee. In that case, it has been held that – (1) the precedent is the authority only for what it actually decides and not what may remotely or even logically follow from it and (2) the decision on the question which has not been argued cannot be treated as a precedent. In view of these observations. Their Lordships held that earlier decision of the Supreme Court in the case of Tamilnadu v. Kandaswami (M.K.) could not be said to be authority for the proposition that mere dispatch of goods is within the ambit of expression ‘disposal of goods’. The second proposition was based on the earlier Judgment in the case of Rajpur Ruda Meha v. State of Gujarat (1980) 2 SCR 353. The constitution bench of the apex court in the case of State of Orissa v. Sudhanshu Sekhar Misra AIR 1968 647 has held that the decision is only an authority for what it actually decides. What is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in it. Similar observations were made by the apex court in the case of Union of India v. Dhanvanti Devi . Reference can also be made to another decision of the Hon’ble Supreme Court in the case of Sun Engg. Works Pvt. Ltd. 198 ITR 297 wherein it was observed as under:
It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme court takes its colour from the questions involved in the case in which it is rendered and, ascertain the true principle laid down by the decision.
(emphasis supplied by us)
It is clear for the above decisions that each and every observation in a decision is not a precedent is only the ratio which is considered as precedent. Therefore, any (sic) made unconnected with the question referred to the court for its opinion and the argument made by the parties cannot be said to be the ratio of the decision and consequently cannot be treated as precedent as held by the apex court in the case of Goodyear India Ltd. Even the decision in the case of Sun Engineering Works (P) Ltd. clearly lays down that Judgment of a court has to be considered in the light of the question before the court.
45. In the case of Ravindranathan Nair (supra), the scope of Explanation (baa) to Section 80HHC was not before the court. The only question referred to the court for its opinion was whether labour charges received by the assessee on account of job work could be treated as part of total turnover. The issue whether 90% of such labour charges could be excluded from the profits of business in terms of Explanation (baa) was neither before the court nor any argument was advanced on this aspect of the matter by either of the parties. Therefore, this decision cannot be said to be a precedent for the proposition that in case of an independent activity involving element of turnover, 90% of the receipts should be excluded from the profits of business. This decision is a precedent only for the proposition that in such case the receipt would form part of total turnover in terms of Section 80HHC(3) of the Act.
46. For the reasons given in the preceding para, we are also unable to accept the contention of the learned Counsel for the assessee that the judgment of Hon. Bombay High Court in the case of CIT v. Bangalore Clothing Co. (supra) has been approved by the Hon. Supreme Court in the case of CIT v. Baby Marine Exports (supra). In that case also, the Supreme Court was not concerned with the scope of Explanation (baa) to Section 8OHHC. The question before the Court was whether the export incentives received (sic) the supporting manufacturer from the export house could be considered as fart of the sale proceeds for claiming deduction under Section 80HHC. The contention of the (sic) that export incentive was received independently in Indian currency (sic) any link or nexus with any foreign earning and therefore the same could considered as part of the sale proceeds. Consequently, deduction under Section 80HHC(IA) could not be allowed. On the other hand, the contention of the assessee was that under the contract between the assessee and the export house, the assessee was entitled to receive the export incentives as part of sale consideration and therefore, it was entitled to deduction in respect of such amount. Though the judgment of Bombay High Court in the case of Bangalore Clothing Co. was referred to by the learned Counsel for the assessee but the said judgment does not find any place in the operative part of the judgment of the apex court. The entire operative part of the judgment related to the interpretation of Section 80HHC(1A). After interpreting the said provisions, the court held that the tribunal was justified in holding that export incentive was integral part of sale price realised by the assessee. Therefore, it cannot be said that the said judgment of the Bombay High Court stands approved by the apex court.
47. In view of the above discussion, it has to be held that there is no judgment of the apex court on the scope of Explanation (baa) to Section 80HHC. However, we find merit in the contention of the Id. Counsel for the assessee that the scope of the above Explanation was considered by the Hon’ble Bombay High Court in the case of Bangalore Clothing Co. (supra). In that case, the assessee was exporting garments manufactured by it in its own factory. In addition, the assessee was also doing the same work on job work basis for other parties. The job work charges formed part of the business profits computed under the head “Profits and Gains from Business and Profession”. The question before the Court was whether 90% of job charges could be excluded from the profits of business in terms of Explanation (baa) to Section 80HHC. The Hon’ble court held that activity of manufacturing resulted in operational income irrespective of the fact whether goods were manufactured of its own or on job work basis. It was also held, that the case of operational income, job charges would form part of total turnover as well as profile of business. The court further held that in such cases, where element of turnover, was involved, 90% of job charges could not be excluded from the profits of business there fore, this judgment is a precedent for the proposition that where a business activity carried on by the assessee results in operational income then such receipts would form part of the total turnover and consequently, no part of it could be excluded from the profits of business computed under the head “Profits and Gains from Business and Profession” in terms of the Explanation (baa) to Section 80HHC. This decision clearly fortifies the view taken by us.
48. In view of the above discussion, the order of the CIT(A) is upheld on the issue discussed above. This would dispose of ground no 2 raised by the revenue.
49. The next aspect of the issue relating to deduction under Section 80HHF is whether 90% of commission received by the assessee is to be excluded from the profits of business in terms of Explanation (f) to Section 80HHF. The Ld. Counsel for assessee has fairly submitted that this issue has already been heard at length by the tribunal. ‘B’ bench in assessee’s own case for A.Y. 2002 03 on 5.2.2008 and therefore, the A.O. may be directed to follow the same. In view of the above request and considering the consistency in the matter, the order of CIT(A) is set aside on this aspect of the matter and consequently, the A.O. is directed to decide the issue in the light of the order of the tribunal discussed above. This would dispose of the ground no 4 in assessee’s appeal.
50. The next issue relates to the disallowance of Rs. 21,98,989/- representing the expenditure on account of lease holding improvements.
51. Briefly stated, the facts are that the assessee had entered into a leave and licence agreement with Precision Components Ltd. (PCL) for occupying the premises known as masterpiece building. In the year under consideration, the. assessee had incurred expenditure of Rs. 21,98,589/- on account of repairs, renovation, etc. of the (sic) building. This expenditure was claimed as deduction in computing the business income. The Assessing Officer asked the assessee to show cause as to why such expenditure be not treated as capital expenditure. The contention of the assessee before the Assessing Officer was that such expenditure was allowable under Section 30(a)(i) of the Act in as much as all the conditions stated in that section were satisfied. Reliance was placed on various decisions namely, B.B. Ramchandrappa 191 ITR 34 (Karnataka), Allied Metal Products 137 ITR 689 (Punjab), Ramkrishna Steel Rolling Mills 95 ITR 97 (Delhi), Installments Supply Pvt. Ltd. 149 ITR 52 (Delhi) and Modi Spining and Weaving Mills Ltd. 200 ITR 544. The Explanation of the assessee was rejected by the Assessing Officer on the ground that the expenses incurred by the assessee were in the nature of capital expenditure. It was also observed by him that though no new asset had come into existence yet it has resulted in enduring benefit to the assessee which is clear from the notes to the accounts of the assessee wherein it was stated that leasehold improvements were amortised on a straight line method over a period of 5 years The Assessing Officer also invoked the provisions of Explanation 1 to Section 32 of the Act for coming to the conclusion that assessee is to be treated as deemed owner in respect of such expenditure. Consequently, the claim of the assessee as revenue expenditure under Section 30 was disallowed. However, depreciation @ 10% was allowed by the Assessing Officer which had resulted in net disallowance of Rs. 19,78,730/-.
52. The matter was carried in appeal before learned CIT(A) before whom it was contended that – (i) as per the terms of the agreement, the assessee was required to keep the interior walls, floors, ceilings, windows etc. in a good order and condition and therefore no expenditure incurred under such obligation was allowable as deduction under Section 30; (ii) the major expenditure was in respect of false ceiling and interior fittings from making the roof water proof to prevent water leakage; (iii) there was no (sic) In view of the same, it was submitted that the expenditure incurred by the assessee was revenue in nature. The learned CIT(A) accepted the contention of the assessee deleted the disallowance of Rs. 19,78,730/- made by Assessing Officer by observing as under:
I have considered the arguments of appellant and contentions of the Assessing Officer. The appellant is a tenant and has to bear the repair expenses as per the agreement. By incurring the expenses on leasehold premises appellant has not acquired new asset nor ownership of the premises. Even the Assessing Officer has not disputed the fact that no new asset has come into existence and only the already existing assets have been improved upon. The claim of the appellant has been rejected on the ground that the appellant acquired enduring benefit by incurring the expenditure. As per the Assessing Officer the expenditure should have been consumed within one year only to entitle the appellant for claiming the deduction. Appellant is in the business where a better presentation of the office is very important. The improvement in the working atmosphere was essential requirement for the appellant to carry on business effectively. The contentions of the Assessing Officer that the expenditure on repair must be consumed in one year cannot be sustained as such. Even a simple repair may last for several years. The expenditure on water proofing the roof is essential to avoid damage to the office premises and the records. The false ceiling provided in the office improves the air-conditioning and conceals the shabby objects.
Aggrieved by the same, the Revenue is in appeal before the Tribunal.
53. The learned Sr. D.R. has submitted before us that provisions of Section 32 Explanation 1 are deeming provisions and therefore if the expenditure incurred in relation to the building not owned by the assessee which are capital in nature then assessee shall be deemed to be the owner of the building to’ the extent of such expenditure incurred by the assessee. He relied on the judgment of the Hon’ble Supreme Court in the case of Ballimal Naval Kishore and Anr. 224 ITR 414 (SC) wherein the renovation expenditure has been held to be capital in nature. On the other hand the learned Counsel for the assessee has submitted that it is not the case of lease of of immovable property in as much as the agreement between the assessee and the other parties on leave and license basis. Consequently, the provisions of Explanation 1 to Section (2) may not be applicable. It is further submitted by him that no new fixed (sic) come into existence as agreed by the Assessing Officer also. Since the agreement was for merely 3 years, it could not be said that assessee had obtained the enduring benefit. It was also submitted by him that water proofing is normally done on annual basis as mentioned by the learned CIT(A) which is not in dispute. Regarding the decision of Hon’ble Supreme Court in the case of Ballimal Naval Kishore and Anr. (supra), it was submitted by him that the said decision is distinguishable in as much as the expenditure was incurred by the owner. On the other hand, he relied on the decision of Hon’ble Supreme Court in the case of Madras Auto Service Pvt. Ltd. 233 ITR 468 for the proposition that even the expenditure on construction of property could be considered as revenue expenditure in the case of leased premises. He also referred to certain Tribunal decisions in support of the above submission.
54. Rival submissions of the parties have been considered carefully. The question for our consideration is whether the expenditure incurred by the assessee in respect of premises taken on leave and licence basis can be allowed as deduction either under Section 30 or under Section 37 of the Act as contended by the assessee or should be capitalised and only depreciation should be allowed in view of Section 32 r/w Explanation I of the Act as contended by the learned DR. It would be appropriate to mention that the Explanation I to Section 32 of the Act was brought on the statute book w.e.f. 1.4.1988 by Taxation Laws (Amendment and Misc. Provisions) Act, 1986. The said Explanation reads as under:
Explanation 1.–Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement the building, then, the provisions of this clause shall apply as if the said (sic) or work is a building owned by the assessee.
A (sic) perusal of the above Explanation shows that it refers to only capital expenditure incurred in relation to premises not owned by the assessee i.e., (i) incurred on constriction of any structure, (ii) incurred on doing of any work in or in relation to (sic) by way of renovation or extension of or improvement to such building. If such expenditure is incurred then such structure or work shall be deemed to be a building owned by the assessee. The provisions being deemed provisions are to be applied strictly and therefore, if any expenditure incurred in respect of such premises does not fall under the above description, then the same shall be considered for allowance under Section 30 or Section 37 of the Act. On the contrary, if the expenditure is covered by the above description then such expenditure will have to be treated as capital expenditure on building owned by the assessee and consequently only depreciation shall be allowed irrespective of the nature of expenditure. Such legal position is effective from assessment year 1988-89.
55. Prior to assessment year 1988-89, the expenditure incurred by the assessee on rented building was held to be allowable even if such expenditure was capital in nature. The reason for such allowance was that no capital asset was created in favour of the tenant assessee since the expenditure incurred even on capital account always belonged to landlord. The best example of such expenditure can be seen from the Judgment of the apex court in the case of CIT v. Madras Auto Services Pvt. Ltd. 233 ITR 468 (SC). In that case, assessee took on lease a property for 39 years at a nominal rent of Rs. 1000 per month for first 15 years, Rs. 1500 per month for next 10 years, Rs. 1650/- per month for the next 10 years and Rs. 2000/- per month for remaining years. Under the terms of the agreement, the assessee was entitled to demolish the building and construct the new building at its own expense but the new construction, right from the beginning, vested in the lessor. Since no asset was created in favour of the assessee, the Court held that the expenditure was revenue in nature. This Judgment is an authority for the proposition that an expenditure, though per se capital in nature, would he treated as revenue expenditure where the expenditure is incurred in respect of leased property on the ground that no new asset is created in favour of the assessee. Similarly on the case of CIT v. Laxmi Talkies 275 ITR 125 (Guj.), the expenditure by way of (sic) and repair was incurred by the assessee in respect of leased property the court that the expenditure was revenue in nature as it did not bring into existence any new asset to the assessee. On the contrary, it was held that the expenditure was incurred to facilitate its business operation and, therefore, amounted to revenue expenditure allowable under Section 37 of the Act. Since these decisions were rendered with reference to the provisions of Act prior to the insertion of the Explanation I to Section 32,the same cannot be applied to the cases pertaining to assessment year 1988-89 and onwards the post amendment cases will have to be decided considering the provisions of Explanation I to Section 32 of the Act.
56. At this stage, it may be pertinent to note that Explanation 1 to section 32 applies only to capital expenditure. That means it is only those expenditures which are per se capital in nature that are covered by the provisions of the said Explanation. The expenditures which are per se revenue in nature would remain outside the ambit of such Explanation-and consequently would be allowable as deduction either under Section 30 or 37 of the Act. Thus, routine repairs carried out by the assessee to the building cannot be brought within the scope of such Explanation. For example, expenditure on white washing or painting of building even by the landlord are per se revenue in nature and therefore, would be allowable as deduction whether the assessee is landlord or tenant. Similarly, minor repairs carried out to restore the original condition would also be per se revenue expenditure not falling within the scope of Explanation I. On the other hand, the expenditure by way of renovation of the building per se would be capital in nature and cannot be allowed as deduction under Section 37 of the Act in view of the Judgment of hon’ble Supreme Court in the case of Ballimal Nawal Kishore v. CIT 224 ITR 414 (SC). Though such expenditure, per se, is capital in nature was held allowable as revenue expenditure in the case where the assessee was lessee on the ground that no new asset reacted in the hands of the assessee (275 ITR 125, Guj.). So, such distinction has to (sic) Thus, the nature of the expenditure has to be seen with refepence to the expense incurred by the owner of the building. Therefore, if the expenditure inured (sic) of the building is per se capital in nature, it shall be brought within the scope of the provisions of Explanation I to section 32 if such expenditure is incured (sic) On the contrary, if the expenditure incurred as an owner is per se revenue in nature then such expenditure would be outside the scope of Section 32 Explanation I even if incurred even by the lessee. The contention of the assessee that the premises are on leave and licence basis is of no relevance since Explanation is applicable where premises is not owned by the assessee. The decisions relied on by the assessee are not relevant as the same were rendered with reference to the provisions prior to insertion of the Explanation to Section 32 of the Act.
57. In view of the above discussion, we are of the view that if the expenditure incurred by an assessee who is not the owner of the building but such building is used for the purpose of its business then the assessee would only be entitled to capitalise such expenditure and consequently entitled to depreciation as per rules if:
(1) such expenditure is per se capital in nature,
(2) such expenditure is incurred on-
(a) construction of any structure,
(b) doing of any work by way of renovation or extension of or improvement of such building.
In view of the above finding, it is further held that if the expenditure incurred falls within the scope of the provisions of Explanation 1 to Section 32 then assessee would be entitled to depreciation only but if it is found that expenditure per se was revenue in nature, then the same shall be allowable as per the provisions of Section 30/37 of the Act.
58. In view present case, necessary facts are not on record for determining the nature of expenditure incurred by the assessee. It would be appropriate that necessary details and relevant materials are brought on record for ascertaining the nature of expenses. According by the order of CIT(A) is set aside on this issue and the matter is restored to the (sic) of A.O. for fresh adjudication of the matter after giving fair opportunity of being heard to the assessee. This would dispose of ground no 1 of the department’s appeal.
59. The next issue relates to the disallowance of Rs. 2,99,64,439/- in respect of bad debts written off which has been deleted by the learned CIT(A).
60. Briefly stated, the facts are that assessee had claimed deduction on account of bad debts in respect of amount due from Siti Cable to the tune of Rs. 2,99,64,439/. In the course of assessment proceedings, the assessee was asked to submit as to when these amounts were shown as income for tax purpose. The assessee vide letters dated 05.03.2003 and 12.03.2003 submitted as under:
As per letter dated 5.03.2003 ‘Bad debts written off during financial year 1999-2000 in respect of Siti Cable were to the tune of Rs. 29,964,439/-. This pertain to amounts receivable from Siti Cable which were accrued in prior years as well as current year. As and when invoices were raised ‘on Siti Cable, income was accrued and accordingly offered for tax in the respective years.
As per our books of account, an amount of Rs. 72,144,092/- was received from Siti Cable as on April 1, 1999 i.e. at the beginning of the year and further Rs. 32,081,278/- was accrued during the year, aggregating to Rs. 104,225,370/-. Siti Cable disputed the above amounts payable to them to us on account of 2 reasonsnumber of subscribers and the rate to be applied per subscriber. A settlement was done with Siti Cable as a result of which an amount of Rs. 29,964,439/- was written off. This amount represents the difference between the outstanding shown in Siti Cable books and our books.’
As per letter dated 12.03.2003
‘No written agreement was entered with Siti Cable. The above write-off was done on the basis of oral negotiations.
61. Order to verify the claim of the assessee, the copy of assessee’s account in the(sic) Cable Network Ltd. for the year under consideration, was obtained and from the (sic) of the same, it was seen by the Assessing Officer that Siti Cable had not returned back any amount which was payable to Star TV/News Television. In view of the same the assessee was again asked to substantiate its claim for bad debts. In response to the same, the assessee vide letter dated 25th March, 2003 submitted that conditions prescribed in Section 36(1)(vii) were satisfied. The Assessing Officer was not satisfied with the explanation of the assessee for the reasons – (i) that assessee had not proved that such amount had been offered to tax in the earlier years by producing any documentary evidence, (ii) that no efforts had been made by the assessee to realize the said amount from Siti Cable, (iii) there was no written agreement with the Siti Cable (iv) no evidence was furnished by the assessee to prove that the amount written off was irrecoverable, (v) that there is nothing in the Act that any debt can be written off as bad debt. In support of his conclusion, the Assessing Officer relied on the decision of the ‘ Tribunal in the case of India Thermit Corporation 56 ITD 307 (Delhi). Accordingly, the aforesaid amount was disallowed by the Assessing Officer.
62. On appeal, the-learned CIT(A) confirmed the order of the Assessing Officer on this issue by observing as under;
3.3 I have considered the arguments of appellant and contentions of the assessing officer. The appellant has not maintained ledger account for individual debtors. Therefore, individual debtor’s outstanding or the quantum of services booked for individual debtor cannot be ascertained. The appellant has also not produced any correspondence from M/s. Siti Coble to substantiate the claim that the amount receivable from them was disputed nor any evidence is produced that the amounts shown receivable from Siti Cable were of any time acknowledged by them. It is obvious that appellant claims some unidentified receivables to have been offered for taxation and claims a part of such amount as Bad debts. The claim of the appellant remains unsubstantiated. In view of the above, the claim of the appellant can not be accepted. The action of the Assessing Officer is sustained. This ground of appeal is rejected.
Aggrieved by the same, the learned CIT(A) is in appeal before the Tribunal.
63. The learned Counsel for the assessee has submitted that for claiming deduction under Section 36(1)(vii), it is sufficient if the debt is written off as irrecoverable and no further onus lied on the assessee to prove that the debt has actually become bad. Reliance is place on the decision of Special Bench in the case of Oman International Bank 100 ITD 285, it was further submitted by him that this income had been offered in the earlier years as income and therefore, question of disallowance does not arise. He also referred to page 1 to 9 of the paper book to point out that the amount had been offered as income in the earlier years and to prove that he aforesaid amount was not being paid by Siti Cable despite the correspondence made with the party. On the other hand, the learned D.R. has relied on the orders of lower authorities particularly contending that both the authorities had given a finding that no evidence was produced to prove that such amount was offered as income in the earlier years.
64. The submissions of both the parties have been considered carefully. The issue whether assessee is required to prove that the debt has become bad or not is now covered by the decision of Special Bench in the case of Oman International Bank (supra) wherein it has been held that provisions of Section 36(1)(vii) would stand complied with if the amount receivable from the debtor is written off as irrecoverable in the books of accounts of the assessee. Respectfully following the same, it is held that lower authorities were not justified in disallowing the claim on the ground that assessee failed to prove that the debt had become bad. It may be mentioned at this stage that still there is dispute on this issue since there is divergence of opinion between the High Courts in as much as the Hon’ble Delhi High Court has taken the view in favour of the assessee laying down the same proposition as given by the Special Bench while the Hon’ble Rajasthan High Court has decided in favour of the Revenue by holding that assessee is still required to prove that the debt has become bad. However, there is no judgment by the jurisdictional High Court or by the apex Court on this issue. Therefore, following the judgment of Hon’ble Supreme Court in the case of Vegetable Products 88 ITR 192, the issue has to be decided in favour of the assessee. However, the claim under Section 36(2)(vii) is subject to the provisions of Section 36(2). Section 36(2) provides that the declaration is to be allowed only where the amount claimed as bad debt had been offered is income in the earlier years. The Assessing Officer as well as learned CIT (A) have (sic) a categorical finding that assessee could not substantiate this aspect of the (sic) Though certain details are filed in the paper book, but in view of the specific landing given by the lower authorities, the claim cannot be allowed at this stage unless this aspect is verified by the Assessing Officer. In our opinion, the interest of justice would be met if an opportunity is given to the assessee to prove this aspect before the Assessing Officer. Consequently, the order of learned CIT (A) is set aside on this issue and the matter is remitted to the file of Assessing Officer with the direction that if the assessee is able to prove that the amount claimed as deduction on account of bad debts was offered as revenue receipt in the earlier years, then he shall allow the claim of the assessee. It is clarified that the assessee would not be asked to prove that debt has become bad unless any decision by the jurisdictional High Court or the apex court is delivered to the contrary. This discussion will dispose of ground no 1 in assessee’s appeal.
65. The next issue arising from the appeal of assessee relates to the addition of Rs. 6,85,15,145/- in respect of commission income (wrongly mentioned as addition of Rs. 23,64,41,347/- in the ground no 2 raised by the assessee). Briefly stated, the facts are that assessee was acting as an agent for booking advertisements on behalf of its principle against which it was entitled to commission. In Assessment Year 1997-98, it was noticed by the Assessing Officer that up to Assessment Year 1996-97, the assessee was offering commission income on the basis of invoice amount billed on the advertisers and the income was declared in the year in which the invoices were raised. However, from Assessment Year 1997-98, assessee was of the view that commission income accrued only when the amount was collected or received by it from the advertisers. Consequently, the assessee started offering the commission income in the year in which the amount was received from the advertisers. The Assessing Officer, for the reasons given in his order for the Assessment Year 1997-98, held that it was a case of charge of method of accounting from Mercantile system to cash system of accuracy which was not permissible. It may be noted at this stage that up to assessment Year 1997-98, the assessee was acting as an agent of Satellite Television Asia Region Advertising Sales B.V. However, in the year under consideration, the assessee was acting as an agent of Star Ltd., Hongkong under the agreement effective from 1.4.1999. The Assessing Officer had noted the relevant clause of the agreement which appears on page 10 of the assessment order. On perusal of the agreement, Assessing Officer was of the view that income accrued to the assessee the moment the invoice was raised. It was also noted by him that appeal of the assessee for the Assessment Year 1997-98 was dismissed by the learned CIT(A) vide order dated 8th January. 2003. Therefore, following the assessment order for the Assessment Year 1997-98, the Assessing Officer computed the commission income at Rs. 42,15,87,575/- being the amount (@) 15% of the invoice amount. Since the assessee had offered the commission income of Rs. 35,30,72,440/-, the addition of Rs. 6,85,15,135/- was made. On appeal, the learned CIT(A), confirmed the addition following his earlier order for the Assessment Year 1997-98 as well as the orders for the Assessment Year’s 1998-99 and 1999-2000. Aggrieved by the same, the assessee is in appeal before the Tribunal.
66. After hearing both the parties, we find that the issue arising in the appeal for Assessment Year 1997-98 has been decided by the Tribunal in favour of the assessee vide order dated 28th July, 2006 by holding that income accrued in the year in which the amount was received by the assessee or paid by the advertisers even under the Mercantile system of accounting. Since the lower authorities had relied on their orders for the preceding Assessment Year’s, the addition cannot be upheld since the Additions made in the earlier years on this account have been deleted by the Tribunal. However, the learned D.R. has submitted before us that there is a change in the terms and conditions of payment of commission and that the same may be considered. In view of the same it would be appropriate to refer the relevant clauses of the agreement for the (sic) of this order. The Clause (8) of the agreement dated 31st day of May, 1994, which was considered by the Tribunal in the appeals relating to Assessment Year’s 1997- 98 to 1999-2000 read as under:
The agent shall be entitled to retain 15% of the net invoiced amount paid by the (sic) as commission
67. On the other hand, the relevant Clause (E) of the agreement dated 1st April, 1999 reads as under:
E. COMPENSATION: 1. Commission : Subject to the other provisions of this Section, Representative shall be paid commission of fifteen percent of "Net Billed Advertisings" 'actually collected by it or received by STAR for advertisements solicited by the Representative during the term of this Agreement. 2. Expenses : All expenses such as salaries, rent and travel within the Territory involved to the solicitation of advertising by Representative for STAR shall be paid for by the Representative and not reimbursed by STAR.
3. Identification of Commissionable Transactions: Advertising orders on which Representative shall be eligible to a commission shall be those solicited by Representative in the Territory even though obtained in collaboration with STAR’s personnel or its promotional activities. For the avoidance of doubt, no commission shall be payable on orders derived from multinational entities in which the alternate decision for releasing the advertising order was made outside of India. No commission will be paid to Representative on any transaction which STAR determines to have been initiated and consummated by anyone other than Representative. No commissions shall be due to representative against amounts not received. Representative will use its best efforts to ensure the receipt of unpaid accounts by STAR.
68. After going through the relevant terms under both the agreements, we do not find any material difference since under both the agreements, the commission is to be paid on the basis of amount collected by the assessee. Clause (E)(4) specifically provides that no commission shall be due to the assessee against the amounts not received. Therefore it is clear from the terms of both the agreements that commission income accrued to, the assessee only when the invoiced amount was received by the assessee on behalf of in principle. Therefore there is no reason to deviate from the earlier order of the Tribunal. Following the said decision of the Tribunal for earlier years, the issue is decided is favour of the assessee by holding that accrual of commission income arose in the year in which the invoiced amounts were received by the assessee even under the Mercantile System of accounting. The order of learned CIT(A) is therefore, set aside on this issue and consequently, the addition confirmed by him is hereby deleted.
69. The next issue, common to both the appeals, relates to the disallowance of Rs. 21,78,87,244/- in respect of advertisement expenditure. The disallowance was made by the Assessing Officer, following his orders for the earlier years, on the ground that this expenditure was not incurred wholly and exclusively for the purpose of business as provided in Section 37 of the Act. On appeal, the learned CIT (A), following his orders for the earlier years, allowed partial relief to the tune of Rs. 6,33,97,222/-. Aggrieved by the same, the assessee as well as Revenue are in appeal before the Tribunal.
70. After hearing both the parties, we find that this issue is covered in favour of the assessee by the decision of the Tribunal for Assessment Year’s 1997-98 to 1999-2000 (supra) wherein it has been held that such expenditure was incurred wholly and exclusively for the purpose of business and therefore no disallowance could be made in this regard. Since the matter is covered by the earlier decision of the Tribunal in assessee’s own case, we have refrained ourselves from narrating the necessary facts and details in this regard. Following the decision of the Tribunal for earlier years, the issue is decided in favour of the assessee. The order of learned CIT(A) confirming the disallowance is hereby set aside and consequently, the disallowance confirmed by him is hereby deleted. This would dispose of ground No. 3 in the appeals of the assessee as well as Revenue.
71. In the result, both the appeals shall be treated as partly allowed.