ORDER
J. KATHURIA. :
This appeal by the assessee pertains to asst. yr. 1992-93.
2. The assessee derives income from manufacture and sale of cycles and their parts. For asst. yr. 1992-93, the accounting period ended on 31st March, 1992. Ground No. 1 has two components – 1A and 1B. Ground No. 1A has 10 sub-grounds. We shall first of all deal with these 10 sub-grounds from (a) to (j). Sub-ground (a) is against the confirmation of disallowance of Rs. 25,000 out of staff welfare expenses. The AO found that as against the expenditure of Rs. 17,90,247 on staff welfare in the immediately preceding year, the claim of the assessee for the year under consideration was Rs. 14,21,835. The AO further noted that the main expenditure was on account of sugar, maida, atta, etc. The AO observed that in asst. yr. 1991-92, an addition of Rs. 25,000 was made by treating these expenses as entertainment expenses on account of providing tea and food to customers. It was also found by him that for asst. yr. 1990-91, an addition of Rs. 20,000 was made which was confirmed in the first appeal. Looking to the past history of the case, the AO made an addition of Rs. 30,000 under s. 37(2A) of the Act. The learned CIT(A) upheld the disallowability of such expenditure but reduced the quantum from Rs. 30,000 to Rs. 25,000.
3. Shri Subhash Aggarwal, the learned counsel for the assessee, submitted that the disallowance of Rs. 25,000 was excessive particularly when the total expenses in this account had gone down from Rs. 17,90,247 to Rs. 14,21,835. The learned Departmental Representative relied on the orders of the authorities below.
4. Since the claim of the assessee in respect of staff welfare expenses is much less as compared to the preceding year, we uphold the disallowance to the extent of Rs. 20,000 only. The assessee gets itself of Rs. 5,000.
5. Sub-ground (b) is against the confirmation of disallowance of Rs. 73,340 out of sales promotion expenses. The AO found that the assessee had claimed sales promotion expenses on domestic sales at Rs. 8,94,335. The AO found that the assessee had debited a sum of Rs. 73,340 on account of expensive items such as silver vessels, silver glasses, etc. As per the AO, the assessee had no objection to the disallowance of Rs. 73,340. The AO accordingly made a disallowance of Rs. 73,340.
6. Before the learned CIT(A), the assessee, however, submitted that it had never agreed to the disallowance of Rs. 73,340. On merits, the learned CIT(A) relying on the Kerala High Court decision in the case of CIT vs. Allepey Co. (1994) 207 ITR 598 (Ker) held that any expenditure on presentation of articles would constitute an expenditure on entertainment. He accordingly held that the aforesaid amount of Rs. 73,340 had been correctly disallowed under s. 37(2A) of the Act.
7. Shri Aggarwal submitted that silver vessels and glasses were distributed only to dealers numbering more that 2,000 on their visit to Ludhiana. The learned counsel for the assessee invited our attention to the details of these expenses placed at page 63 of the assessees compilation. The learned counsel for the assessee further pointed out that the Tribunal vide order dt. 28th January, 1987, for asst. yr. 1983-84 allowed the same as deduction. It was submitted that though the items of presentation were different but since these items were presented to the dealers in respect of certain scheme for sales promotion, these were allowed as a deduction by the Tribunal. The learned counsel for the assessee also relied on the Tribunals decision dt. 27th June, 1994 in the assessees own case for asst. yr. 1986-87 in ITA No. 802/Chd/1989 in which the expenses incurred on the gifts to the dealers in appreciation of the work done by them had been allowed as a deduction by the Tribunal. Reliance was also placed on the Bombay High Court decision in the case of CIT vs. Kirlosker Engines Ltd. (1986) 157 ITR 762 (Bom), where presentation of articles to foreign distributors when they visited the assessees factory were held to be business expenses.
8. The learned Departmental Representative relied on the orders of the authorities below.
9. After carefully considering the submissions of both the sides, we are of the opinion that since the presentation articles were given to the dealers, these were in appreciation of the work done by them by lifting the goods from the assessee and were, therefore, a business expenditure. The Tribunal has also taken a similar view in the assessees own case for the earlier years as pointed out by the learned counsel for the assessee. We, therefore, hold that the disallowance of Rs. 73,340 was not called for. It is hereby deleted.
10. Sub-ground (c) is regarding the confirmation of disallowance of Rs. 11,890 on account of taxis provided to the dealers. Sub-ground (d) which is also connected with sub-ground (c) is regarding the confirmation of disallowance of Rs. 8,351 being 1/4th of the airfare of dealers. Both these sub-grounds are dealt with hereinafter.
11. The AO noted that the assessee had spent a sum of Rs. 33,407 under the head sales promotion expenses on account of airfare of dealers. He treated 25 per cent of the same as entertainment expenses. Similarly, the AO noted that the assessee had spent a sum of Rs. 11,890 on providing taxis to the dealers. This was also held to be expenditure in the nature of entertainment. Thus, the AO made an addition of Rs. 20,241 (Rs. 8,351 + Rs. 11,890) as entertainment expenses. The learned CIT(A) confirmed the disallowance.
12. Shri Subhash Aggarwal, relying on the decision of the Bombay High Court in the case of CIT vs. Kirloskar Oil Engines Ltd. (supra), submitted that neither taxi fare nor airfare could be treated as entertainment expenditure. In the said decision, the Bombay High Court was dealing with the issue of expenditure incurred on travel, boarding and lodging of distributors in a seminar arranged by the assessee of foreign local distributors. It was held that the expenditure in question was business expenditure. It was submitted that the learned CIT(A) had raised irrelevant issues as to whether the dealers had come on their own visit or in connection with the business of the assessee and that the very fact that the AO himself had allowed 3/4th of the airfare clearly showed that the dealers had come for business purposes of the assessee. Reliance was also placed on the Tribunals decision reported in Usha International Ltd. vs. Asstt. CIT (1995) 53 TTJ (Del) 408.
13. The learned Departmental Representative supported the impugned order and relied on the Kerala High Court decision in the case of CIT vs. Alleppey Co. Ltd. (supra) for the proposition that the expenses incurred for providing lodging facilities to foreign buyers would be entertainment expenditure for purposes of s. 37(2A) of the Act.
14. We find substance in the arguments of the learned counsel for the assessee. The AO himself has allowed 3/4th of the airfare expenses and disallowed only 1/4th of the same. This means that the AO himself has substantially conceded that the airfare was in connection with the business purposes of the assessee. No element of entertainment has been proved by the Revenue. Similarly, for taking the dealers to and fro by taxis would not amount to entertainment expenditure. Following the ratio of the Bombay High Court decision in the case of Kirloskar Oil Engines Ltd. (supra) we order the deletion of both the disallowances.
15. Sub-ground (e) is against the confirmation of disallowance of Rs. 56,777 being the cost of coins distributed to dealers. The AO noted that the assessee had distributed coins worth Rs. 56,777 to its dealers. The said expenditure was held to be entertainment expenditure. The learned CIT(A) confirmed the action of the AO.
16. Shri Aggarwal submitted that the coins had been distributed to the dealers under a scheme only in the Delhi Zone. It was pointed out that 50 per cent of the expenditure was recovered from the distributors. It was also submitted that a similar issue had arisen in the earlier years and this expenditure was allowed by the Tribunal for asst. yrs. 1983-84 and 1986-87 vide orders dt. 28th January, 1987 and 27th June, 1994, respectively. It was pointed out that in the order dt. 28th January, 1987 for asst. yr. 1983-84, the distribution of shirts, TVs, cycles, cardigans, pullovers, etc. was allowed as deduction. It was also pointed out that for asst. yr. 1986-87, the Tribunal vide order dt. 27th June, 1994 held that the gifts were for business purposes and hence allowable. The learned counsel drew our attention to pp. 1 to 15 of the assessees compilation which are cash memos of the silver coins purchased. It was submitted that the total amount spent on the coins amounted to Rs. 1,13,494 out of which the share of the distributors was Rs. 56,777, the balance being paid by the assessee. It was submitted that these coins were given in pursuant to a scheme on the basis of the cycles sold by the dealers. The list of the dealers to whom the coins were given was also available from pages 4 onwards. It was, therefore, argued that these expenses were purely business expenses and were, therefore, allowable as a deduction.
17. The learned Departmental Representative submitted that the details filed by the assessee were not complete.
18. We have carefully considered the submissions of both the sides. The entire expenditure on the purchase of coins is properly vouched. The assessee has borne only half the expenditure. Details have been furnished by the assessee to show that the coins were given to the dealers as an incentive on the sales effected by them. In our opinion, the expenditure in question was actuated by business expediency. On similar ground, the expenditure on items gifted for asst. yr. 1983-84 and 1986-87 was allowed as deductible by the Tribunal in the assessees own case. We, therefore, order the deletion of disallowance of Rs. 56,777.
19. Sub-ground (f) is against the confirmation of disallowance of Rs. 50,000 out of silk suits, shawls and other items distributed to dealers. The AO noted that the assessee had distributed silk suits, shawls and sweaters to its dealers totalling an expenditure of Rs. 99,570. He, therefore, disallowed a sum of Rs. 50,000 as entertainment expenditure. The details of the expenses of Rs. 99,570 are exhibited in annexure A to the assessment order. The learned CIT(A) upheld the disallowance.
20. Shri Aggarwal submitted that the assessee had distributed the items like silk suits, shawls, etc. to its dealers on their visit to Ludhiana. It was also pointed out that similar expenditure shown by the assessee in the past had been allowed as admissible and deductible for asst. yrs. 1983-84 and 1986-87. It was also submitted that such expenses could not be treated as entertainment expenditure and that there was no justification for disallowing a sum of Rs. 50,000 out of the total expenditure of Rs. 99,750.
21. The learned Departmental Representative relied on the Kerala High Court decision in the case of Alleppey Co. Ltd. (supra).
22. In our opinion, the expenditure in question was incurred on the dealers with a view to boost the sales of the assessee. In the modern day business world, such expenses are bound to be incurred on the dealers in the interest of the assessees business so that they work with great zeal and vigour and the assessees sales in a competitive business world do not suffer but instead increase. The expenditure in question is undoubtedly vouched and expenditure of this nature has been allowed by the Tribunal in asst. yrs. 1983-84 and 1986-87 in the assessees own case. We accordingly order the deletion of this disallowance of Rs. 50,000.
23. Sub-grounds (g) and (h) are against the confirmation respectively of Rs. 69,000 being the cost of velvet blankets and Rs. 77,614 being the cost of Titan watches given to dealers. The AO held that both the aforesaid expenses were not for business purposes of the assessee. He accordingly disallowed the expenses. The learned CIT(A) confirmed the action of the AO.
24. Shri Aggarwal submitted that the expenditure of Rs. 69,000 on the purchase of velvet blankets was fully vouched as per the two purchase vouchers placed at pp. 16 and 17 of the assessees compilation. It was submitted that the velvet blankets and Titan watches were distributed to the dealers on the occasion of Diwali, that it was customary to do so to keep the dealers in good humour and that the expenditure in question was business expenditure.
25. The learned Departmental Representative submitted that the recipients were not identifiable and that the expenditure in question was neither under a scheme nor for business purposes but was purely entertainment expenditure. Reliance was placed on the Kerala High Court decision in the case of Alleppey Co. Ltd. (supra).
26. After carefully considering the submissions of both the sides, we are of the opinion that such expenditure incurred on the gifts to the dealers on the Diwali occasion is customary and has to be allowed as business expenditure. We accordingly hold that both the items of expenditure were allowable as deduction and delete the disallowances of Rs. 69,000 and Rs. 77,614.
27. Sub-ground (i) is against the confirmation of disallowance of Rs. 92,609 being the amount spent through Diners Cards. The AO observed that the assessee had incurred an expenditure of Rs. 92,609 through Diners Cards, details of which were not forthcoming and disallowed the entire expenditure. The learned CIT(A) confirmed the disallowance.
28. Shri Aggarwal submitted that 25 per cent of such expenditure was allowed in the past by the Tribunal.
29. The learned Departmental Representative relied on the impugned order.
30. We find that for asst. yr. 1983-84, a similar issue had arisen and the Tribunal vide order dt. 28th January, 1987 in para 11 thereof held that 25 per cent of the Diners Club expenses were admissible. Taking a consistent view of the matter, we order the allowance of Diners Cards expenses to the extent of 25 per cent. The balance disallowance shall stand confirmed.
31. Sub-ground (j) is against the confirmation of disallowance of Rs. 3,000 as entertainment expenses on the sweaters and silk suits distributed to foreign visitors. The AO noted that a sum of Rs. 6,985 was claimed as sales promotion expenses in the export wing. The AO disallowed a sum of Rs. 3,000 out of the same as entertainment expenses. The learned CIT(A) confirmed the same.
32. For the reasons mentioned by us above while dealing with sub-grounds (f) and (g) we hold that there was no justification for confirming the disallowance of Rs. 3,000, which is hereby deleted.
33. Ground No. 1B only challenges all the aforesaid sub-grounds being wrongly treated as entertainment expenses. Since we have specifically and individually dealt with sub-grounds (a) to (j), this ground has become infructuous and is dismissed as such.
34. Ground No. 2 is against the confirmation of disallowance of Rs. 4,81,000 being the amount spent on research and development. The facts indicate that the assessee paid a sum of Rs. 4,81,000 to its sister concerns Avery Freewheel on 28th March, 1992. On enquiries from the AO, it was submitted that the aforesaid amount was paid to the sister concern for developing multi-speed freewheels. The AO disallowed the expenditure as the assessee was not manufacturer of freewheels. The AO observed that the expenditure on scientific research was allowable under s. 35 of the IT Act if it was spent on research relating to the business of the assessee or any amount paid by the assessee to recognised institutions. Since the expenditure in question had neither been incurred for assessees own business nor paid to any recognised institution, the AO disallowed the same.
35. The learned CIT(A) noted that the assessee was not a manufacturer of freewheels and hence the development in this regard was not for the business purposes of the assessee. It was found that the assessee purchased freewheels from its sister concern Avery Freewheel (P) Ltd. at the market price and had also purchased the same from other parties for export purposes. Thus, according to the learned CIT(A), since the assessee was only a trader of freewheels, the expenditure of Rs. 4,81,000 had been rightly disallowed.
36. Shri Aggarwal drew our attention to the details of jigs and tools, samples and minor product adoptions and trial runs in respect of 7 items aggregating to Rs. 4,81,000 as per details at p. 22 of the assessees compilation. These details also stand reproduced in para 3 of the impugned order at p. 7. It was submitted that the assessee had explored the foreign market for multi-speed freewheels and for this purpose, the assessee entered into an oral agreement with its sister concern Avery Freewheel (P) Ltd. It was submitted that the multi-speed freewheel was tested and manufactured by the sister concern and all the goods manufactured were to be sold only to the assessee company. It was submitted that in the next year the assessee had exported sales of multi-speed freewheels. It was also pointed out that the assessee-company and the sister concern were both limited companies paying the same rate of tax and hence there was absolutely no manipulation in suppressing/reducing the profits of the assessee-company. Drawing our attention to p. 24 of the assessees compilation, it was submitted that the sister concern did show a sum of Rs. 4,81,000 as income from miscellaneous receipts and that the assessee had shown an equivalent amount as its expenditure. It was submitted that the expenditure was claimed not under s. 35 of the Act but under s. 37 because it was a business expenditure and was allowable as such. The learned Departmental Representative relied on the orders of the lower authorities and submitted that there was no agreement between the parties and some of the expenditure was in the alternative said to be capital in nature.
37. After carefully considering the submissions of both the sides, we are of the opinion that the assessee was justified in claiming the expenditure of Rs. 4,81,000 as business expenditure. The assessee in fact did export multi-speed freewheels in the next year and these freewheels were purchased from sister concern Avery Freewheel (P) Ltd. All agreement between the parties need not necessarily be in writing. Both the assessee-company and the sister concern are limited companies paying the same rate of tax. While the assessee-company claimed an expenditure of Rs. 4,81,000, the sister concern showed a sum of Rs. 4,81,000 as its miscellaneous income. The expenditure was necessitated by business considerations as the assessee-company had explored the foreign market for supply of multi-speed freewheels. There was no element of capital expenditure in the said expenditure of Rs. 4,81,000. The major expenditure was on tools, dies and jigs (Rs. 1,96,000) and improvement and modifications of production machines (Rs. 1,74,000). In our opinion, such expenditure could not be treated as capital expenditure of the assessee. We, therefore, hold that the expenditure of Rs. 4,81,000 was revenue expenditure and was allowable as such in the hands of the assessee. We direct accordingly.
38. Ground No. 3 is against the confirmation of disallowance of Rs. 2,70,000 being the interest calculated on advance of Rs. 15 lacs to Shri Hans Raj Pahwa, managing director of the assessee-company. The AO noted that the assessee had advanced interest free loan of Rs. 15 lacs to Shri Hans Raj Pahwa, managing director of the assessee-company, during the period relevant to asst. yr. 1990-91. The said amount had been shown as security by the assessee and had been utilised by Shri Pahwa for acquiring property at Safdarjang Enclave, New Delhi. The AO disallowed a sum of Rs. 2,70,000 as interest on the ground that the money had not been advanced for purpose of business of the assessee and that the assessee had paid interest to the bank and others on the amounts borrowed by it which had been utilised for interest – free loan to Shri Pahwa.
39. The learned CIT(A) observed that the AO had not brought on record the complete and relevant facts in this regard. The learned CIT(A) collected more facts and observed that the amount of Rs. 15 lacs had been advanced to Shri Pahwa on 8th July, 1989, that the total cost of the property at New Delhi was Rs. 60,60,000 and that the assessee-company took the property on rent of Rs. 2,500 per month w.e.f. April, 1991. It was also noted by him that there was no agreement entered into between the assessee and Shri Pahwa while advancing the interest-free loans and that there was nothing to establish that the said advance was given with clear agreement that Shri Pahwa would give the premises to the assessee at a lesser rent. It was also observed that there was time gap between the date of advance of Rs. 15 lacs and the date of taking the property on rent and that even if the advance was treated as security the same was abnormally high being equivalent to 600 months rent. Relying on the Allahabad High Court decision in the case of CIT vs. H. R. Sugar Factory (P) Ltd. (1991) 187 ITR 363 (All), he further observed that difference between the interest paid to banks and the interest recovered from the directors was not allowable as an expenditure under s. 36(1) (iii) of the Act. Taking all these factors into consideration, the learned CIT(A) confirmed the disallowance.
40. Shri Aggarwal submitted that the total cost of construction on the Delhi property belonging to Shri Pahwa came to Rs. 60,60,000 and the advance of interest – free loan was a mere Rs. 15 lacs which was less than 25 per cent of the total cost. It was submitted that Shri Pahwa had agreed to rent out the premises of the Delhi property to the assessee-company at a nominal rent of Rs. 2,500 per month in spite of the fact that even apart from the interest-free loan of Rs. 15 lacs, Shri Pahwa incurred a further amount of more than Rs. 45 lacs. It was, therefore, submitted that in a way the advance of Rs. 15 lacs to Shri Pahwa was not an interest-free advance but there was a quid pro quo for the same, inasmuch as, the assessee-company had to pay a nominal rent of Rs. 2,500 per month in respect of a property in Delhi where the market rent was much higher. It was pointed out that the total area of the plot at Delhi property was 450 sq. yards and the construction consisted of ground floor, first floor and second floor. It was submitted that it was purely a business transaction between the assessee-company and Shri Pahwa and hence the ratio of the Allahabad High Court decision in the case of H. R. Sugar Factory Pvt. Ltd. (supra) did not apply. It was also submitted that the Revenue had not established any nexus between the amounts borrowed by the assessee-company on which interest was paid by it and the aforesaid amount of Rs. 15 lacs which was advanced to Shri Pahwa, interest-free. It was, on the other hand, contended that the amount of Rs. 15 lacs was advanced out of the assessees own funds and not out of the borrowed funds. Our attention was also drawn to copy of the resolution passed at the meeting of the board of directors of the assessee-company held on 6th July, 1989 which is available at p. 28 of the assessees compilation. According to this resolution, a sum of Rs. 15 lacs was to be given as security to Shri Hans Raj Pahwa for taking on rent property situated at Safdarjang Enclave, New Delhi, being purchased by Shri Pahwa on rent to be settled later on. It was clearly indicated in the resolution that while fixing the rent for the property, the amount of security given be taken into consideration. It was, therefore, submitted that there was no justification for disallowing the sum of Rs. 2,70,000 as interest.
41. The learned Departmental Representative relied on the orders of the authorities below and submitted that there was no agreement between the assessee-company and Shri Pahwa, that the total area of the property purchased at New Delhi was not known and that the learned CIT(A) was justified in confirming the addition of Rs. 2,70,000.
42. We have carefully considered the submissions of both the sides as also the facts on record. The resolution passed by the assessee-company on 6th July, 1989 clearly shows that a sum of Rs. 15 lacs was to be advanced to Shri Pahwa as security and in consideration for the same the property at New Delhi was to be given on rent to the assessee-company and while fixing the rent for the property, the amount of security was to be taken into consideration. The advance was given on 8th July, 1989 i.e. two days after the passing of the said resolution. The element of quid pro quo is visible from the resolution itself. The assessee company did not pass on a sum of Rs. 15 lacs to Shri Pahwa gratia. On the contrary, it expected Shri Pahwa to give the property on a nominal rent which ultimately turned out to be Rs. 2,500 per month. In matters like this where the transaction is between the assessee-company and the managing director, written agreements may not always be there. As a matter of fact, the property in Delhi was given on rent to the assessee-company subsequently and that itself indicates/confirms the existence of an agreement. Moreover, Shri Pahwa had spent a sum of more than Rs. 60,00,000 on the said property whereas the amount advanced by the assessee-company was less than 25 per cent of the same and the rent of Rs. 2,500 per month of a property consisting of ground floor, first floor and second floor with a land area of 450 sq. yards was peanut as compared to the actual market rent prevalent in Safdarjang Enclave, New Delhi. The advance of Rs. 15 lacs by the assessee-company was, therefore, actuated by business and commercial considerations and was not for any extraneous or non-commercial considerations. Moreover, the Revenue authorities have not established any nexus between the amount borrowed by the assessee-company on which interest was paid and the interest-free advance of Rs. 15 lacs to Shri Pahwa. Taking all these circumstances into consideration, we hold that there was no justification for making/confirming a disallowance of Rs. 2,70,000 which is hereby directed to be deleted.
43. Grounds Nos. 4 and 5 are in respect of the assessees claim under s. 80HHC of the Act. Relevant facts in this regard are these. For asst. yr. 1992-93, the assessee-company filed its return on 28th April, 1993 on total income of Rs. 66,86,860. In this return, claim under s. 80HHC of the Act was made at Rs. 1,30,09,312. The assessee revised this claim of deduction under s. 80HHC to Rs. 1,73,51,788 on the basis of the report of its auditors H. K. Chitkara & Co. dt. 16th December, 1994. Copy of the audit report under s. 80HHC of the Act is placed at pp. 50 to 55 of the assessees compilation. Assessment was completed on 24th January, 1995 on total income of Rs. 2,16,80,747. Claim under s. 80HHC was allowed by the AO at nil as per annexure B to the assessment order. While computing the assessees claim under s. 80HHC, total turnover was taken at Rs. 99,91,12,804. Profit of business was taken at negative figure of Rs. 3,65,29,054. Indirect expenses attributed to the trading goods were worked out at Rs. 1,52,24,684. Loss from export of trading goods was quantified at Rs. 1,39,30,057 (marked as X). Profit from export of goods manufactured had been computed at a negative figure of Rs. 53,13,293 (marked as Y). 90 per cent of export incentive was worked out at a positive figure of Rs. 1,67,02,263 (marked as Z). The AO worked out the deduction under s. 80HHC at nil because the sum total of X+Y+Z i.e. Rs. (-) 1,39,30,057 + Rs. (-) 53,13,293 + Rs. 1,67,02,263 came to a negative figure of Rs. 25,41,087. The learned CIT(A) broadly confirmed the action of the AO in this behalf by holding that the deduction under s. 80HHC was allowable to the assessee only on the profits of export business and not in respect of some of segments of export business. The learned CIT(A) further held that the provisions of s. 80HHC were to be read neither liberally nor rigidly but keeping in view the intention behind such provisions.
44. Shri Aggarwal argued the case valiantly. It was submitted that the Revenue authorities by a queer logic had disallowed the assessees claim under s. 80HHC altogether. It was submitted that total sales of the assessee for asst. yr. 1992-93 worked out to Rs. 1,01,21,30,206 which consisted of sales in India of Rs. 66,37,12,808 and export sales of Rs. 34,84,17,398. The submission, therefore, was that though the assessee had made export sales of about Rs. 35 crores, the Revenue authorities had held that the assessee was not entitled to any deduction under s. 80HHC of the Act which on the very face of it looked illogical. Referring to sub-s. (3) of s. 80HHC of the Act, it was submitted that one had to see first profit from export of manufactured goods. It was admitted that in the assessees case, this came to a negative figure. It was pointed out that the next step was to work out profit from export of trading goods. It was admitted that under this head also the profit came to a negative figure. The contention of the learned counsel was that to these items was to be added 90 per cent of export incentive in proportion to the export turnover to the total turnover of the business. According to the learned counsel, this came to a positive figure and since the profit from export of manufactured goods and profit from export of trading goods was negative, those figures had to be completely ignored and the 90 per cent of export incentive had still to be taken into consideration for working out the claim under s. 80HHC of the Act. It was submitted that the term “profit” had not been defined anywhere in the IT Act. The dictionary meaning of profit meant an advantage whereas loss meant disadvantage. It was submitted that as per the proviso to cl. (c) of sub-s. (3) of s. 80HHC, it was stipulated that the profits computed under cl. (a) or cl. (b) or cl. (c), shall be further increased by the amount which bears to 90 per cent of any sum referred to in cl. (iiia), the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. It was, therefore, submitted that the insertion/use of the word “increased” was significant. According to the learned counsel, the loss worked out in terms of cl. (a) and cl. (b) of sub-s. (3) of s. 80HHC could not be increased by the amount of 90 per cent referred to in the proviso by making an algebraic sum total of the items. It was submitted that if under cl. (a) and/or cl. (b) of sub-s. (3) of s. 80HHC the resultant figure was a negative figure, then those figures had to be taken at nil but 90 per cent export incentive as mentioned in the proviso had to be allowed to the assessee. It was vehemently argued that the logic of the Revenue authorities in this regard was rather strange. It was also submitted that provisions of s. 80HHC being incentive provisions had to be liberally construed. Reliance in this regard was placed on the decisions of the Supreme Court in the case of CIT vs. Straw Board Mfg. Co. Ltd. (1989) 177 ITR 431 (SC), CIT vs. Cellulose Products of India Ltd. (1991) 192 ITR 155 (SC) and CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC). The learned counsel also placed reliance on certain articles written by eminent authors, namely, S/Shri S. Rajarathnam, V. Ranganathan and P. N. Shah. Copies of the articles are placed at pp. 56 to 70 of the assessees compilation. Reliance was also placed on the decision of the Cochin Bench of the Tribunal in the case of A. M. Moosa vs. Asstt. CIT (1996) 54 TTJ (Coch) 193.
45. The learned Departmental Representative strongly relied on the orders of the authorities below and submitted that it is the algebraic sum worked out under cls. (a) (b) and (c) of sub-s. (3) of s. 80HHC which had to be taken into consideration while allowing deduction under s. 80HHC of the Act. It was submitted that since such a sum total or aggregate was a negative figure, no deduction under s. 80HHC was admissible to the assessee. It was also pointed out that the construction put upon by the lower authorities was quite correct and there was no question of liberally construing s. 80HHC of the Act. As regards the articles of certain authors on which reliance was placed by the learned counsel, it was submitted that those articles did not lay down the law but only express the personal opinion of the authors.
46. We have carefully considered the submissions of both the sides and perused the material on record. It would indeed be a sad day if an assessee who is exporting goods of around Rs. 35 crores in a year is denied deduction under s. 80HHC on the basis of the construction put upon by the Revenue authorities on the legal provisions as in the present case. The learned counsel has cited three authorities for the proposition that provisions giving relief or incentive to the assessee have to be liberally construed. We are in agreement with his submissions in this regard. According to us, the plain reading of s. 80HHC shows that the negative profit worked out under cls. (a) and (b) of sub-s. (3) of s. 80HHC cannot be “increased” by a positive profit. A negative figure cannot be increased by a positive figure. It can be adjusted not increased. The plain reading of the proviso to cl. (c) of sub-s. (3) of s. 80HHC provides clue that the negative profit or loss worked out under cls. (a) and (b) has to be ignored. If there is a profit under cls. (a) and (b), there is no difficulty in increasing the same by the 90 per cent export incentive as stipulated in cl. (c) but if the profits under cls. (a) and (b) are negative, then harmonious construction suggests that those losses cannot be increased by a positive figure under cl. (c). Even if there is a ambiguity the same has to be interpreted in favour of the assessee. The interpretation placed by us on the provisions contained in sub-s. (3) of s. 80HHC gets further support from the decision of the Cochin Bench of the Tribunal in the case of A.M. Moosa (supra). The headlines in that case on which we rely are reproduced as under.
“It is a bounden duty to liberally construe the provisions of sub-s. (3) and the proviso thereunder of s. 80HHC as the section was enacted to give a fillip to the exporters who earned precious foreign exchange. In addition to this stand of thought, cl. (baa) of the Explanation has given a statutory definition of “profit of the business”. According to the Explanations, in order to arrive at the “profits of the business”, the profit as computed in terms of the provisions of the IT Act should be reduced by certain sums specified in the Explanation. As the exercise is only to quantify the “profits of the business” in terms of the definition given, one is not empowered to arrive at a loss in such an exercise. If loss is confronted with as a result of the exercise, the same should be ignored and should not merit consideration. In the light of the discussions, the assessee did not have the statutory “profit of business” as defined in the Explanation and, therefore, in terms of the main provisions of sub-s. (3) he is not entitled to the deduction of such profit (which is nil) there being no profit. In the context and setting of the enactment and the objects of the section, the proviso should be read as an independent provision to advance the cause rather than to defeat it. Thus construing the proviso to sub-s. (3) of s. 80HHC as an independent provision, the assessee would be entitled to the deduction in an amount equal to 90 per cent of the sums referred to in cl. (iiia) (not being profits on sale of a licence acquired from any other person), and cl. (iiib) and cl. (iiic) of s. 28, the same proportion as the export turnover bears to the total turnover to the business carried on by the assessee. From another point of view even if the proviso to sub-s. (3) of s. 80HHC is viewed only as a proviso, still the assessee cannot be denied the deduction. This is because under the main provisions of sub-s. (3) the statutory profit of business is to be taken as Nil there being no profit. This should be increased by the amount specified in the proviso to sub-s. (3). As a result, a positive figure will emerge. Thus from any point of view the assessee succeeds.”
The AO is accordingly directed to allow the assessees claim under s. 80HHC on the basis of 90 per cent of export incentives as worked out under proviso to sub-s. (3) of s. 80HHC by ignoring the loss under cls. (a) and (b) of the said section. In other words, the claim of the assessee in principle duly supported by the tax auditors is hereby approved.
47. The only other controversy is with regard to the turnover which is to be taken into account while working out the relief under s. 80HHC of the Act. The AO took the total turnover at Rs. 96,17,13,277 as shown by the assessee itself. There is, therefore, no dispute about this figure. The AO, however, added the following five items to the total turnover amounting to Rs. 3,73,99,527 :-
Rs.
(I) Sale of scrap
2,32,79,391
(II) CST and ST
1,24,33,956
(III) Trade discount
4,31,658
(IV) Misc. income
9,36,795
(V) Insurance claim
3,17,727
3,73,99,527
This action of the AO was confirmed by the first appellate authority.
48. Shri Aggarwal submitted that he was conceding that sale of scrap was part of the total turnover and hence this issue be decided in favour of the Revenue. As regards the remaining four items, it was submitted that the same could not form part of the total turnover. It was for instance pointed out that CST and ST collected from the dealers could not be part of the total turnover of the assessee. It was submitted that though the Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. vs. CIT (1973) 87 ITR 542 (SC) had held that the sales-tax collected was part of the trading receipt, according to the learned counsel, the Supreme Court had nowhere held that the sales-tax collected formed part of the total turnover. Reliance was placed on the decision of the Calcutta Bench of the Tribunal in the case of Chloride India Ltd. vs. Dy. CIT (1995) 53 ITD 180 (Cal) for the proposition that while computing deduction under s. 80HHC, octroi, sales-tax and excise duty paid by the assessee should be excluded from the total turnover since they were excludible from the total turnover.
49. As regards the next item of trade discount of Rs. 4,31,658 it was submitted that the trade discount was received on the quantity of goods purchased from the buyers which went to reduce the cost of relevant material but did not form part of the total turnover. As regards the miscellaneous income of Rs. 9,36,795, it was pointed out that the assessee had common facilities for gas and air with the allied units and a sum of Rs. 9,36,795 had been received being the cost of gas and air used by the allied units. It was submitted that this item can not form part of the total turnover because essentially this receipt would reduce the expenditure on gas and air claimed by the assessee. As regards the last item, namely, insurance claim of Rs. 3,17,727, it was submitted that claims in question were received from the insurance company against damage of cars, etc. and that such claims in fact are to be set off against the expenditure in the repairs of accidented cars and these receipts cannot be considered as part of the total turnover.
50. The learned Departmental Representative relied on the Supreme Court decision in the case of Chowringhee Sales Bureau (P) Ltd. (supra) and submitted that CST and ST formed part of the total turnover. As regards the other items, reliance was placed on the impugned order.
51. After carefully considering the submissions of both the sides, we hold that sale of scrap shall be treated as part of the total turnover and to this proposition the learned counsel has also agreed. As regards the CST and ST, the same shall not be treated as part of the total turnover in view of the submissions made by the learned counsel and as supported by the decision of the Calcutta Bench of the Tribunal in the case of Chloride India Ltd. (supra). Trade discount miscellaneous income and insurance claim shall also not be treated as part of the total turnover for the reasons mentioned by the learned counsel with which we agree.
52. In view of the above discussion, the AO is directed to work out the relief under s. 80HHC admissible to the assessee.
53. Ground No. 6 regarding the non-allowance of deduction under s. 80M on dividend income from SBI Mutual Fund was not pressed at the time of hearing and is accordingly treated as dismissed.
54. Ground No. 7 which is the last effective ground is against the upholding of levy of interest under s. 234B. Brief facts in this regard are these. The AO directed the charging of interest under s. 234B of the Act. Interest under the said section was accordingly charged. The learned CIT(A) upheld the action of the AO.
55. Shri Aggarwal submitted that before charging interest under s. 234B of the Act, the AO is duty bound to give an opportunity of hearing to the assessee which in the present case was not allowed and hence the charging of interest was bad in law. Reliance in this regard was placed on the Tribunals decision in M. Mani vs. Asstt. CIT in (1995) 51 TTJ (Coch) 273.
56. The learned Departmental Representative supported the impugned order.
57. We have carefully considered the submissions of both the sides. Interest under s. 234B is chargeable for defaults in payment of advance-tax. The section is couched in mandatory terms. Charging of interest under s. 234B is part of the process of assessment. Reliance in this regard is placed on the ratio of the Supreme Court decision in the case of Central Provinces Manganese Ore Co. Ltd. vs. CIT (1986) 160 ITR 961 (SC). No separate notice is necessary to be given by the AO before levying the interest. Reliance is also placed on the ratio of Patna High Court decision in the case of CIT vs. Bishwanath Tulsyan (1996) 220 ITR 178 (Pat). In that case, the Tribunal deleted the interest charged under ss. 139(8) and 217 of the Act by observing that it was charged without any show-cause notice. The High Court held that levy of interest was part of the process of assessment and issuance of show-cause notice was not a condition precedent before charging the interest. We accordingly uphold the action of the lower authorities in charging the interest under s. 234B. Consequential relief may, however, be allowed to the assessee as per law.
58. In the result, the appeal is partly allowed.