ORDER
J. Sudhakar Reddy, Accountant Member
1. These are appeals filed by the assessee directed against the separate orders of the Commissioner of Income-tax (Appeals), Hyderabad dt. 15-9-2000, for the assessment year 1994-95 and 195-96.
2. As the issues arising in both these appeals are common, for the sake of convenience, they are heard together and disposed of by way of this common order.
3. The effective grounds of appeal for the asst. year 1994-95 are as follows:-
1. The order of the CIT(A) IV, Hyderabad is holding that the import duty benefit of Rs. 3,67,25,867 credited by the appellant forms part of “turnover” for the purpose of relief Under Section 80 HHC is unsustainable in law.
2. Without prejudice to ground No. 1, the ld.CIT(A) IV, Hyderabad ought to have held that only a sum of Rs. 31,99,431 (Rs. 3,67,25,867 – Rs. 3,35,26,436) formed part of Turnover as a sum of Rs. 3,35,26,436 was debited as import duty benefit A/c under Raw materials a/c against the credit of Rs. 3,67,25,867, which was accepted by the CIT(A) IV Hyderabad while considering the deduction permissible Under Section 88HH and O-I at paragraphs 4.7 and 4.8 of the order.
3. Alternatively, the CIT(A) IV, Hyderabad having held that the sum of Rs. 3,67,25,867 was notional entry ought to have given a clear finding that the entry being notional was not a taxable receipt and therefore ought to have directed it’s exclusion from Total Income.
4. Alteratively, the Import entitlement benefit is to be treated as falling under receipts of the nature specified Under Section 28 iii(a), iii(b) or iii(c) of the I.T. Act 1961 and 90% of such suns should be added to profits in the same proportion as the export Turnover bears to Total Turnover as laid down in proviso to Section 80 HHC of the I.T. Act, 1961.
5. The ld.CIT(A) IV, Hyderabad erred in excluding the following receipts from the profits of the Industrial undertaking while computing the deductions Under Section 80 HH and 80 I of the I.T. Act, ’61 on the ground that they are not profits derived from the industrial undertaking:-
Import entitlement benefit Rs. 31,99,431-para 4 Interest on Deposit Rs. 1,07,266 Rs. 61,200 Discount received Rs. 38,960 Foreign exchange fluctuation Rs. 2,77,233 S.Tax refund Rs. 12,717 6. The ld.CIT(A) IV, Hyderabad failed to note that the character of trading receipts mentioned in ground No. 5 were profits derived from the industrial undertaking and therefore qualified for deduction Under Section 80 HH and 80 I of the I.T. Act, 1961. Similarly, the effective grounds of appeal for the assessment year 1995-96, are as follows:- 1. The order of the CIT(A) IV, Hyderabad in rejecting the revised claim of the appellant at Rs. 9,12,371 towards deduction Under Section 80HHC (1A) as a supporting manufacturer is unsustainable in law.
2. The ld.CIT(A) IV had failed to note that the deduction Under Section 80HHC (1A) at ‘nil’ as per audit certificate flew from a wrong interpretation of Excise Duty rebate of Rs. 40,58,618 Which was classified wrongly as Duty-Draw Back and the deduction was claimed at ‘nil’ as per 10CCAC Certificate.
3. The ld.CIT(A) IV, Hyderabad failed to note that the requisite certificate Under Section 10CCA is only a condition precedent for the grant of deduction but the figure determined in the certificate are not binding and that the appellant was entitled to the deduction as per the provisions of Section 80HHC.
4. The ld.CIT(A) IV, had failed to note that under similar circumstances in the appellate order passed for 94-95 assessment year of even date the ld. CIT(A) IV, Hyderabad at paragraph 4.7 of the order held that no part of excise duty rebate is to be excluded on the principle of matching debits and credits and therefore ought to have upheld the claim of the Appellant to deduction at Rs. 9,12,371 as a supporting manufacturer.
5. The ld.CIT(A) IV, Hyderabad ought to have held that the appellant was entitled to 80HHC deduction on its direct export sales at Rs. 2,57,156 which was computed by the appellant ignoring the deficit figures of Rs. 16,67,888(-) shown at Annexure-I to the assessment order.
6. The ld.CIT(A) IV, Hyderabad erred in holding that the following income were not part of profits derived from the industrial undertaking:-
Interest on Deposits .. 254852 Interest on Loans .. 240616 Foreign Exchange .. 341595 Fluctuation
4. The brief facts of the case as gathered from the record are as follows. The assessee is a public Ltd. Co. and is carrying on the business of manufacture and export of drugs. For the assessment year 1994-95, it filed its return of income on 11-12-1994 declaring ‘nil’ income. The assessing officer while completing the assessment, restricted the relief claimed by the assessee Under Section 80HHC of the I.T. Act, 1961. For the asst. year 1995-96, the assessing officer rejected the revised claim of the assessee for enhanced deduction Under Section 80HHC. Aggrieved of the above, the assessee went in appeal without success and thus the matter is before us now.
5. Ld. counsel for the assessee, Shri K.C. Devdas made the following submissions first for the asst. year 1994-95. The first issue as per him is, whether the “Import Entitlement Benefit Account” amounting to Rs. 3,67,28,867 credited by the appellant firm forms part of “turnover” for the purposes of relief Under Section 80HHC of the I.T. Act, 1961. He vehemently contended that this amount of Rs. 3,67,28,867 does not form part of “turnover.” Alternatively, he argued, that in case this import entitlement benefit, which he admits as income is treated as ‘turnover’ by this Tribunal, only net amount of import entitlement benefit account should be taken into consideration i.e. after deducting the debits which were made to purchase account. He referred to pages 34 to 36 of the paper book filed along with the appeal and explained the scheme of Import entitlement benefit.”
He took us through para-5 of the assessment order, which consists all the reasons given by the assessing officer for restricting the deduction Under Section 80HHC of the I.T. Act, 1961 to Rs. 66,22,624 as against the claim of Rs. 86,19,76. He submitted that the assessing officer has wrongly treated the import entitlement benefit account as part of ‘turnover’ and this has been wrongly confirmed as such by the ld.CIT(A). He submitted that the assessing officer has wrongly relied on the proviso to Explanation (ba) to Section 80HHC. He submitted that a perusal of the Explanation would show that it seeks exclusion of 3 categories of receipts stipulated Under Section 28(iiia) (iiib) and (iiic) which deal with profit on sale of import licences, cash assistance against exports and any duty of customs or excise re-paid or repayable as drawback and argued that if the sum of Rs. 367,25 lakhs is treated as falling under any of the aforesaid three categories, then it has be excluded from the purview. He further argued that this sum does not fall under any of the 3 heads i.e. 28(iiia) (iiib) and (iiic) of the Act. He submitted that this credit has been prevailing since the inception of the company, from the asst. year 1991-92 and that the claim made Under Section 80HHC has always been allowed. He further submitted that for the asst. year 95-96, the same receipts were treated as part of turnover, and to demonstrate the same, he drew the attention of the bench to page-32 of the paper book filed along with the appeal for the asst. year 95-96. He took this bench through the scheme as well as the accounting policy followed by the company and submitted that the sum of Rs. 367.25 lakhs does not form part of the turnover and that it does not represent any realisation on sale of import licences.
6. He argued that the term “total turnover” as defined in Explanation (ba) to Section 80HHC is not exhaustive. It merely states what items should not form part of turnover. He referred to financial statements published by the ICAI and submitted that the term “sales turnover” has been defined therein as the aggregate amount for which sales are effected or services are rendered by an enterprise. He thus, argued that by no stretch of imagination, the sum of Rs. 367.25 lakhs can form part of the turnover. He further argued that the export benefit/incentives are accounted for by the assessee company on accrual basis and such benefit of entitlement of customs duty as a result of export has been credited to the Profit and Loss Account and were shown under the Schedule of turnover under the caption “export incentives.” He submitted that when imports are made, the customs duty benefit accrued is debited to the Purchase Account. Thus, its claim that out of the total receipt shown of Rs. 3.67 lakhs, an amount of Rs. 3.35 lakhs was debited to Purchase account, which results in a net credit of Rs. 31,99,431. The debit to purchase account, he argued is an integral and invisible part of the transaction. He further argued that the sum of Rs. 3.67 lakhs has been offered as income but at the same time, it cannot form part of the turnover as it has got nothing to do with the sale of pharmaceutical products. He argued that the entire benefit that accrues on export by way of duty free custom is off set on import of raw materials and that both relate to statutory levies and that the customs duty payable is remitted by exports. For this proposition that the credit in question is income but cannot be taken as ‘turnover’ he relied on the judgments of the Hon’ble Bombay High Court, in the case of CIT v. Pink Star 245 ITR 757 (Bombay) wherein the High Court has found that the premium received on surrender of licences purchased by the assessee from the open market was held by the Tribunal as not forming part of the turnover but has to be considered as profits for purposes of Section 80HHC. He further relied on the judgment of the Hon’ble Bombay High Court in the case of CIT v. Sudarshan Chemicals Ltd. reported in 245 ITR 269, wherein excise duty and salestax was held as not includible in total turnover for the purposes of deduction Under Section 80HHC. He submitted that export turnover which the numerator in the formula for computing deduction Under Section 80HHC does not include excise duty and salestax and that the total turnover being the denominator in this formula, should also exclude salestax and excise duty for the formula to be workable. He pleaded that the same principle should be applied to the facts of the case and submitted that customs duty exemption is on par with excise duty and salestax. He argued that there is no profit in these entries and that the import duty benefit entitlement account gets squared up as and when imports are made. He explained that at the end of the financial year, there is accredit balance left in the account after set off of the debits and that this balance is offered as income in that year and claimed as expenses as and when imports are made of raw materials. He further relied on the judgment of the Calcutta High Court in CIT v. Plywood India Ltd. reported in 256 ITR 625. He further referred to guidance notes on tax audit Under Section 44 AD of the I.T. Act, 1961 which is at pages 30 and 33 of the paper book-1 and submitted that total turnover is the aggregate amount for which sales are effected by the company and that the total turnover was including sale after deducting goods returned, freights etc. Thus, he submits that the sum of Rs. 3.67 crores does not form part of turnover for purposes of computing deduction Under Section 80HHC.
7. Alternatively, Shri K.C. Devdas contended that only the net amount of Rs. 31.99 lakhs alone ought to be considered as credit. He further relied on the published accounts of Indian Products Ltd. which is at page 46A of the paper book filed, to show that the net amount was credited to purchase account and therefore the sum of Rs. 3.67 crores should not form part of the turnover.
8. Shri K.C. Devdas has yet another alternative contention that the sum of Rs. 3.67 crores falls under Clause 28 (iiib) of the I.T. Act, 1961 and can be termed as cash assistance by whatsoever name called, and thus should be deducted and that 90% of this sum is to be added separately under the proviso to Section 80HHC. For this proposition, he placed reliance on the judgment of the Ahmedabad bench of the Tribunal in the case of ACIT v. Pratibha Syntex Ltd. 63 TTJ 409, which is at pages 22 to 32 of the paper-book III. He submitted that the term whatever name called extended the meaning of cash assistance and thus it falls Under Section 28 (iiib) of the Act.
9. Ld. Dept. Representative on the other hand vehemently controverted the arguments advanced by the ld. counsel for the assessee and submitted that the fact that the receipt in question is income is not disputed by the assessee and the same is in line with the judgment of the reported case in 81 ITD 553. He submitted that what the assessee received was a valuable right and this valuable right has been valued by it and that this value should go to increase the sale price of the product sold, to that extent, which necessarily means, it is part of turnover. He distinguished the judgments relied upon by the assessee and submitted that in the case of Sudarshan Chemicals supra, the Hon’ble Bombay High Court had held that excise duty and salestax are not independently includible in total turnover for the purpose of Section 80HHC, as they were statutory levies and not income of the assessee. He submitted that the judgment of the Hon’ble Calcutta High Court in the case of Plywood India Ltd. supra was also on the same lines. He argued that levy of salestax and excise duty cannot be equated with waiver of levy of customs duty. He submitted that in the case of salestax and Octroi, the assessee collects the same as the agent of the government and there is no element of profit in these collections. On the contrary, in the case on hand there is a positive benefit to the assessee, which he has reflected as income. He distinguished the judgment of the Bombay High Court in CIT v. Pink Star 245 ITR 757 and submitted that in that case, the assessee had received premium on surrender of licences purchased by it, from the open market. In the case on hand, he submitted, it was entirely different. He took this bench through the order of the CIT(A) and submitted that the assessee cannot claim exclusion of the notional saving in duty, which it suo motu credited in its profit and loss account, forms its turnover for the purposes of Section 80HHC. He took this bench through the order of the assessing officer and supported the findings therein.
10. He vehemently contended that the amount also does not come within the purview of the provisions of Section 28(iiia) (iiib) and (iiic) of the I.T. Act, 1961 and submitted that the credit in question is neither profit on sale of import licences nor cash assistance received against exports or any draw back of customs duty or excess duty paid. For the proposition that the credit in question has to be taken as turnover, he relied on the judgment of the Hon’ble Supreme Court in McDowell’s case reported in 154 ITR 148. It is his contention that the general meaning of the word “total turnover” should be given a wide connotation wherever it occurs in the Statute. He further submitted that the term “total turnover” defined under Explanation (ba) shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962. The expression “total turnover”, he submitted also excluded any sum of export incentives referred to in Clauses (iiia) (iiib) and (iiic) of Section 28 of the I.T. Act, 1961. Thus, he argued that as the sums do not fall within the export incentives referred to in Clauses (iiia) (iiib) and (iiic) of Section 28, they should be considered in the figure of “total turnover”. He urged that the order of the CIT(A) be upheld on this issue.
11. Arguing on ground Nos. 5 and 6 of the appeal for the assessment year 1994-95, ld. counsel for the assessee submitted that the case of interest on deposits, the issue is covered in his favour by the judgment of this bench of the Tribunal in the case of Shiva Shankar Granites reported in 81 ITD 106. Similarly, he submitted that foreign exchange fluctuations on account of which certain revenue is received should also be considered as profits derived from the industrial undertaking and for this proposition, he relied on the judgment of the ‘E’ Bench of the ITAT, Delhi reported in 74 TTJ 347 (Del) with specific reference to page-349.
12. Coming to assessment year 1995-96, ld. counsel for the assessee submitted that the ld.CIT(A) erred in rejecting the revised claim of the appellant for deduction Under Section 80HHC(1A) solely on the basis of the audit certificate issued Under Section 10CCA. It is his case that the requisite certificate Under Section 10CCA is only a condition precedent to the grant of deduction but the figures determined in the certificate are not binding on the assessing authorities and that the assessee was entitled to a deduction as per the provisions of Section 80HHC. He vehemently contended that the Audit Report is not sacrosanct and that the deduction rightly entitled to the assessee should be granted as per the provisions of the Act irrespective of the error or mistakes that have crept into the Audit Report.
13. Arguing on ground No. 5 for the asst. year 1995-96, ld. counsel for the assessee submitted that the issue is covered in his favour by the judgment of the Ahmedabad ‘A’ bench of the Tribunal in the case of ACIT v. Pratibha Syntex 63 TTJ 409 (Ahmd) and also the judgment of the Ahmedabad ‘C’ bench of the Tribunal in the case of Hindustan Fashions Ltd. v. ACIT reported in Vol. 104 (Magazine Section) Taxman 262.
14. On ground No. 6 for the asst. year 1995-96, he reiterated the arguments advanced in ground No. 5 for asst. year 1994-95. Ld. Deptl. Representative relied on the orders of the revenue authorities and submitted that on these issues, the same should be upheld.
15. Heard both sides. Read all the papers on record, the orders of the authorities below and the case law cited. The first issue that is to be decided is “whether for the purposes of computation of the amount of deduction Under Section 80HHC by applying the formula as provided in Clause (a) of Sub-section (3) of the said section it is necessary to exclude the amount of export benefit received under Advance Licence Scheme of Export Import Policy of the Government of India, wherein an exporter is entitled to import duty free raw material as a percentage of exports from the figure of “total turnover” of the business of the assessee. The special deduction to an exporter Under Section 80HHC has to be computed on the basis of the following formula.
Profits of business = Export turnover
—————-
Total Turnover
The benefit of deduction when worked out on the basis of this formula, is not strictly confined to the profits derived from the export of goods or merchandise. The results of export business and the domestic business are not independently evaluated for arriving at the profits or loss of each segment for the purposes of this deduction. On the other hand, the export profits are determined as a part of the composite profits of the business. This position is detailed by the learned Authors Chaturvedi and Pithisaria in the book on Income-tax Law, 5th Edition, II Volume at page-3547, paragraph-4 in Board Circular No. 564 dt. 5th July, 1990 is given, which is extracted below.
“IV. Deduction Under Section 80HHC of the Income-tax Act, 1961 – Clarifications regarding – Under the provisions of Section 80HHC of the Income-tax Act, 1961, 100 per cent deduction is allowed to exporters in respect of profits derived from export of goods or merchandise. As a measure to provide incentive to supporting manufacturers selling goods or merchandise to an export house/trading house for export, the benefit of deduction Under Section 80HHC was extended with effect from 1st April, 1989, to such supporting manufacturers.
2. The essential ingredients of Section 80HHC are as follows:-
(i) the assessee should be an Indian company or a person (other than a company) resident in India;
(ii) he should be engaged in the business of export out of India of any goods or merchandise (other than mineral oils, minerals and ores);
(iii) the deduction is also available to a supporting manufacturer who has sold his goods or merchandise to an export house/trading house provided the export house/trading house has issued a disclaimer certificate in respect of the “export turnover” in Form No. 10CCAB. The term “supporting manufacturer” shall, with effect from the assessment year 1991-92, include a processor of goods. Thus, a seafood processor, for example, or any other processing unit exporting goods or merchandise through an export house/trading house, will now be eligible to claim deduction Under Section 80HHC on the condition that he obtains a disclaimer certificate from the export house/trading house;
(iv) Under the existing provisions, deduction Under Section 80HHC is allowed if the sale proceeds are receivable in convertible foreign exchange. With effect from the assessment year 1991-92, the deduction under this section shall be allowed only if the sale proceeds are received in or brought into India within a period of six months from the end of the relevant previous year. However, in case of genuine hardship, the Chief Commissioner or the Commissioner may allow further time for the remittance of foreign exchange if he is satisfied that the assessee was unable to bring the foreign exchange within the period of six months for reasons beyond his control. While allowing further period in this regard, the Chief Commissioner or the Commissioner shall record reasons for the same in writing;
(v) the deduction shall be of the profits derived by the assessee from the export of goods or merchandise of goods or merchandise what constitutes “Profits derived from the export of goods or merchandise, out of India”, has been defined in Sub-section (3) of Section 80HHC. This Sub-section (3) lays down that the profits derived from the export of goods or merchandise shall be the amount which bears to the profits of the assessee (as computed under the head “Profits and gains of business or profession”) the same proportion as the “export turnover” bears to the “total turnover” of the business carried on by the assessee.
3. Several doubts have been expressed about how the deduction Under Section 80 HHC is to be allowed. Representations received by the Board show that there is lack of uniformity amongst authorities in respect of allowing the aforesaid deduction.
4. Sub-section (3) of Section 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of business under the head “Profits and gains of business or profession” irrespective of what could strictly be described as “profit derived from the export of goods or merchandise out of India.” The deduction is computed in the following manner:-
Profits of the business = Export turnover
—————-
Total Turnover
5. The Finance Act, 1990, has amended Section 28 by inserting therein, Clauses (iiia) (iiib) and (iiic) with retrospective effect with a view to ensuring that cash compensatory support (CCS), duty drawback (DDK) and profit on sale of import entitlement licences (I/L) shall be taxable under the head “Profits and gains of business or profession.” In view of this amendment, it is clarified that the three export incentives shall have to be included in the profits of the business for computing the deduction Under Section 80HHC.
6. The term “export turnover” under the existing provisions, means the sale proceeds (excluding freight and insurance) receivable by the assessee in convertible foreign exchange. In other words, the FOB value of exports. The Finance Act, 1990, has restricted the definition of the term “export turnover” to mean FOB sale proceeds actually received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further period as the Chief Commissioner/Commissioner may allow in this regard.
7. “Total turnover” was not defined earlier. There has been lack of uniformity amongst the assessing authorities and many assessing authorities are treating export incentives to be a part of the total turnover. The Finance Act, 1990, has therefore, clarified the position by inserting a definition for the term “total turnover” in the Explanation below Section 80HHC. According to this definition, “total turnover” shall exclude cash compensatory support, duty drawback and profit on sale of import entitlement licences.
8. To sum up, the deduction shall be allowed in the following manner:-
Profit of the Export turnover (sale proceeds
business actually received in foreign
(including exchange
export incentives) x Total turnover (excluding export
incentives)
9. Thus, in the case of an assessee who is doing export business exclusively, “export turnover” and “total turnover” would be identical, if the entire sale proceeds are brought into India in convertible foreign exchange within the prescribed time limit. In that case, the entire profit under the head “Profits and gains of business or profession” (which will include the three export incentives) will be deductible Under Section 80HHC. However, in order to arrive at the amount deductible Under Section 80HHC in the case of an assessee doing export business as well as some other domestic business, the fraction of “export turnover” to “total turnover”, will be applied to his profits computed under the head “Profits and gains of business or profession” (which again will include the three export incentives). The operation of Section 80HHC read with Section 28, as amended by the Finance Act, 1990, can be illustrated by way of the following example:
10. The Chief Commissioners and Directors-General of Income-tax may bring these clarifications to the notices of all officers working in their region.’ (Circular No. 564 dated 5th July, 1990)”
16. The principles laid down by various High Courts on what has to be taken as part of “total turnover” are as follows. The Hon’ble Bombay High Court in the case of CIT v. Pink Star 245 ITR 757 (Bombay) held that premium received on surrender of import licences constitutes export incentive and that such premium is not includible in the “total turnover” for purposes of computing the special deduction Under Section 80HHC. The Hon’ble Bombay High Court again in the case of CIT v. Sudarshan Chemical Industries Ltd. reported in 245 ITR 796 (Bombay), held that excise duty and salestax are not includable in the “total turnover” for proposes of computation of special deduction Under Section 80HHC.
The Hon’ble Calcutta High Court in the case of CIT v. Chloride India Ltd. reported in 256 ITR 625 (Cal) also held that octroi, salestax and excise duty are to be excluded from “total turnover” for purposes of computing the special deduction Under Section 80HHC.
17. With this background we examined the facts of the case of the assessee. For a clear understanding, we extract hereunder the Advance Licence Scheme as stated by the assessee, which is not disputed by the Revenue.
“Under the Advance Licence Scheme of the Export Import Policy of the Government of India an exporter exporting goods outside India is entitled to import Duty free Raw Material as a percentage of exports.
As the goods have to be manufactured for exports and as the entitlement to import duty, the Raw Materials is dependent on exports the appellant Primarily purchases locally made Raw Materials for manufacturing goods which are exported.
The locally purchased raw materials is higher in cost and is debited to Raw Materials Account. Once Exports are made the right to receive the Import Duty free raw materials is evaluated as otherwise the locally purchased raw materials is higher in cost while the sales via exports are made at lower cost. If the import entitlements are not evaluated on the basis of an accounting entry the trading results will show a loss.
The Company has a licence to evaluate the Import Entitlement on the following:-
(i) Quantity Based Advance Licences
(ii) Value Based Advance Licences.
Under (i) the quantities are specified and under (ii) the value of Raw Material to which we are entitled is determined on the basis of value Addition.
The Company has adopted both the methods for evaluation.
We may also add that right from the inception of the Business from 90-91 financial year and till date, none of the Import Entitlement have been sold. This is an Important Factor which seems to have escaped the attention of the D.C. inadvertently.
As regards the accounting policy followed by the company from the inception without any change is:-
(i) At the time of exports the value of import entitlement benefit is debited to “Import entitlement Benefit Account” and the Account is reflected under “Current Assets” in the Balance Sheet and the credit entered is given to “Import Entitlement Benefit Account” which is reflected as a separate item in the Schedule of Turnover.
(ii) At the time of import of “Raw Material Benefit received account” is debited and is credited to “Import Entitlement Benefit account.”
The raw material benefit received account is reflected in the accounts under “Raw Material Account” and is debited to Manufacturing Account.
To illustrate what has been stated above, suppose the Company exports Rs. 100 value of drugs then in terms of value addition of 25% which is Rs. 25 it is eligible to import raw materials worth Rs. 75.
Rs. 100 is credited as Export Sales, Rs. 75 is debited to Raw Materials Purchases Account and credited to Supplier’s Account.
When the Export Sales of Rs. 100 is made the duty computed which is about 30% (approx) of eligible Import, i.e. 30% of Rs. 75 in our illustration. 30% of Rs. 75 is Rs. 22.50. This is credited to Import Entitlement Benefit Account and debited to Import Entitlement Accrued Account. The former is grouped under Sales and the latter as a Current Asset in Balance Sheet.
When Imports of Rs. 75 are made then the Raw Material received Account is debited by 30% of Import Value and credited to “Import Entitlement Benefit Account”
17. The assessee-company had maintained its account on accrual basis which has been made mandatory by the amendment of Section 209(3) of the Companies Act, 1956 w.e.f. 15-6-1988. It followed the opinion formulated by the Institute of Chartered Accountants of India on this issue of accounting. (Compendium of Opinions-Vol. 10)-Query No. 1.15.
18. The judicial consensus on the issue appears to be that, the emphasis should be on the words “profits derived from exports” and that weightage must be given to such profits and that such special deduction cannot be reduced artificially by introducing or including certain elements in the denominator while excluding the same in the numerator.
19. For examining whether the benefit received by the assessee in the form of export incentives is to be included in the denominator it would be helpful to examine substance of this transaction vis-a-vis the accounting entries passed by the assessee in its books of account. When the assessee imports raw material without payment of any customs duty due to this incentive scheme, what really happens is, the cost of purchase on raw material is reduced. If the accounting of the assessee on this import entitlement is ignored, for a moment, the profits of the assessee would reduce to the extent of that recognised on accrual i.e. Rs. 31,99,431 in the case of this assessee for the assessment year 1994-95 and there would be no inflation either in the figure of “total turnover” or in the figure of “export turnover” by this credit to the import entitlement benefit account. In other words, by this series of entries, the assessee company accounted for accrued benefits on account of import entitlement to the extent of Rs. 31,99,431 only. This figure is arrived at by netting off the entry both on the debit and credit side of the P&L Account, which is as follows:
Credit Debit Import Entitlement Import Entitlement Benefit Account Benefit A/c debited to Purchases. Rs. 3,67,25,867 Rs. 3,35,26,436
20. Thus, on exports being made, the right to receive import duty free raw material has been evaluated and taken as a credit. Contra to this entry is reflected in the current assets in the balance sheet as import entitlement benefit account. So, if the accrual system of accounting had not been adopted by this company, the export benefit would have been worked out in the following manner:
74,26,357 x 3,10,86,944
———–
11,85,30,524 = Rs. 19,47,707
i.e. the profits would have been less by Rs. 31,99,431, being the amount recognised only on account of accrual system of accounting from the profit taken and Rs. 1,06,25,788. Similarly, the “total turnover” would be less by Rs. 3,67,25,857 as the entry would never have been there in the books of account. There would be no change in the figure of export turnover. This example is only in relation to deduction of direct exports. Similarly, deduction as available to a supporting manufacturer and on duty drawbacks has to be calculated as turnover taken at Rs. 11,85,30,524. The assessee’s claim in case of direct exports appears to be as follows:
1,06,25,788 x 3,10,86,944
———–
– 11,85,30,524 = Rs. 27,86,820.37
The assessing officer’s computation on the first aspect of direct exports is as follows:
1,06,25,798 x 3,10,86,944
————
15,52,56,391 = Rs. 21,27,598-75
In all these cases, the accounting entries do not affect the figure of “export turnover.” By adopting accrual concept of accounting, the assessee has inflated profits of the business by Rs. 31,99,431 and the assessing officer while accepting this, has inflated turnover by Rs. 3,67,25,867. The Notional buffer entry on both sides of the P&L Account, amounting to Rs. 3,35,26,436 has created a situation wherein the export incentive claimed by the assessee company gets reduced. Had these entries not been passed by the assessee company, then even taking accrual system of accounting into consideration, the only amount that would have come into the credit side of the P&L Account would be Rs. 31,99,431. In other words, we can say, the entry of Rs. 3,35,26,436 has no element of profit whatsoever in it. This is a contra entity passed or both sides of the P&L A/c.
21. The principle underlying in the method of calculating the export incentive as propounded by various High Courts is, like should be compared with like and when numerator does not include an item than the denominator should not also include the same, to bring parity between the two. Even the CBDT has expressed the same in its Circular No. 621 dt. 19-12-91, at para 32.18, which is, as under:
“Whereas the definition of the term “export turnover” excludes freight and insurance attributable to transport, no such exclusion has been specified in respect of the term “total turnover”. As a result, in CIT transactions, while the export turnover is taken at FOB value, the total turnover includes the sale proceeds of exports at CIF value.”
Thus, to our mind, though the benefit in question is not pari materia with statutory levies such as excise duty, salestax, octroi etc. the (SIC) based on which they are excluded from total (SIC) hold (SIC) the substance of the accounting entries have to be gone into for arriving at the truth of the matter and deduction should not be restricted to the assessee merely for following the opinion given by the ICAI on the method of accounting of the import benefits which recommended passing of certain notional entries. The truth of the matter is that only a net amount of Rs. 31,99,431 has been recognised as income by the assessee during this year as receivable under the accrual system of accounting and the profit of the import entitlements utilised by way of reduction in the cost of raw material imported due to elimination of an element of cost i.e. custom duty in kthe P&A Account. Thus, one way of looking at the problem is, as profits of business is increased by Rs. 31,99,431 and this is also a numerator the same figure should be added to the (SIC) “turnover” of Rs. 11,85,30,524. This is exactly the alternate claim of the assessee where he says that the net credit only should be taken into the “total turnover.” In out considered opinion, this is the correct method of calculating the benefit Under Section 80HHC i.e. to ignore the conta credit and debit entries passed by the assessee-company for the purpose of adopting accrual system of accounting, or otherwise the profits of business may have to be inflated by a figure of Rs. 3,35,26,436 which would not in our opinion be correct. The notional entry of Rs. 3,35,26,436 appearing on both sides of the P&A Account is to be ignored. This opinion of our derives strenght from (SIC) a recent judhment of a Special Bench of the Tribunal in the case of IFB Agro Industries Ltd. v. DCIT(Cal) (SB) reported in 83 ITD 96(Cal) (SB), wherein at page-110, para-25, it is held as follows:
“In view of the aforesaid discussion, we are of the opinion jthat though “total turnover” may include the receipts of excise duty and specific statute, because of jits wider coverage in the definitions given there-under, it has jto be given a restrictive meaning while only that jpart of the receipt for sale consideration has an element of profit therein and, accordingly, the include an element of profit should be excluded from “total turnover.”
The submissions of the Revenue are answered in this judgment, wherein it was held that the judgment of the Hon’ble Calcutta High Court, in the case of McDowell & Co.Ltd. v. CTO (1977) 1 SCR 914 and the judgments of the apex court in the case of Chowringhee Sales Bureau (P) Ltd. v. CIT (1973) 87 ITR 542 (SC) and Sinclair Murray & Co. (P) Ltd. v. CIT (1974) 97 ITR 615 (SC) are distinguishable and do not hold good for the purposes of Section 80HHC. Thus, ground No. 2 of the assessee for the assessment year 1994-95 is allowed, Ground Nos. 1 and 3 are dismissed in view of our findings given in ground No. 1. Coming to ground No. 4 of the assessee that the receipt is in the nature specified Under Section 28 (iiia) (iiib) or (iiic) of the I.T. Act, 1961, in that is specifically falls under (iiib) of Section 28 i.e. cash assistance by whatever name called, we are of the considered opinion that the definition cannot be extended to the benefits on hand, though the judhment of the Ahmedabad bench of the Tribunal in ACIT v. Pratibha Syntax Ltd. 63 TTJ 409(Ahmd) is in the assessee’s favour. If all export benefits have to be brought under this clause, there was no requirement for jthe legislature to have Sub-clauses (iiia) or (iiic). Thus, this ground of the assessee fails, though the (SIC) of exclusion of these export benefits from the term “total turnover” help in our arriving at a decision on ground No. 2 of the assessee that only net benefit should be taken as part of “turnover.”
22. Coming jto ground No. 5 of the assessee i.e. challenging jthe exclusion of hthe following receipts from the profits of the industrial undertaking, while computing the deduction Under Section 80HH and 80I of the Act, on the ground jthat they are not profits derived from the industrial undertaking, we hold as follows:
1. Import entitlement Benefit Rs. 31,99,431. This issue is covered against the assessee by the judgment of the Hon’ble Supreme Court in the case of CIT v. Sterling foods reported in 237 ITR 579 (SC). Respectfully following the judgment of the apex court supra, the issue is decided in favour of the revenue and against the assessee.
2. Asst. Year 1994-95:
Interest on Deposit Rs. 1,07,266
61,200
Asst. Year 1995-96:
Interest on Deposits Rs. 2,54,852 Interest on Loans Rs. 2,40,616
We find that the issue is coveredin favour of the assesse by the judgment of this bench of the Tribunal in the case of Shiva Shankar Granites reported in 81 ITD 106 (Hyd) and also by the judgment of the Third Member of the tribunal, reported in 79 ITD 41 (TM) Part 2.) Respectfully following the judgments of the Tribunal supra, the issue is decided in favour of the assessee and against the revenue.
3. Asst. Year: 1994-95
Discount received Rs38,960
Foreign exchange fluctuation 2,77,233
Salestax refund Rs. 12,717
Asst. Year 1995-96:
Foreign exchange fluctkuation Rs. 3,41,595
we find that these issues are covered in favour of the assessee by the judgment of the Delhi bench of the Tribunal in the case of Rolla Tainers Ltd. v. DCIT 69 TTJ 8, wherein the judgement of the Hon’ble Supreme Courtin Ashok Leyland v. CIT, reported in 224 ITR 122 (SC) was followed. The issue of jforeign exchange fluctuation, being jpart of profits of the industrial undertaking is also decided in favour of the assessee by the judgment of the Delhi ‘E’ bench of the Tribunal in Smt. Sujatha Grover v. DCIT, reported in 74 TTJ 347 (Del). Respectfully following these judgments, we direct the assessing officer to treat all these receipts as derived from the industrial undertaking, while computing the deduction Under Section 80HH and 80I of the I.T. Act. 1961.
23. Coming to ground Nos. 1 to 4 of the appeal for the assessment year 199(SIC) of the assessee, i.e. against the CIT(A) rejecting the revised claim of the appellant for deduction of Rs. 9,12,371 Under Section 80HH (1A) as a supporting manufacturer, we agree with the contention of the assessee that deduction has to be granted as per the provisions of the Act only. The figures determined in the Certificate are not binding on the assessing officer and on the other hand the assessing officer is duty bound to allow the deduction only on accordance with jthe Act. The Mumbai ‘B’ bench of the tribunal in the case of Rasiklal B.Shah v. ITC reported in 112 Taxmann, Magazine 187 clarifies the position in this regard. Thus, this aspect of the case is set aside to the file of the assessing officer with a direction to grant the deduction as allowable under the Act.
24. Coming jto ground No. 5 of the appeal of the assessee jfor the assessment year 1995-96, we find that the issue is covered in favour of the assessee by the judgment of the Ahmedabad bench of the Tribunal in the case of ACIT v. Pratibha Sntax reported in 63 TTJ 409 as well as the judgment of the Ahmedabad ‘B’ bench of the Tribunal in the same assessee’s case reported in 75 TTJ 124. The issue is also covered in favour of the assessee by the judgment of the Ahmedabad bench ‘C’ in the case of Hindustan Fashions v. ACIT reported in 104 Taxman 262 (Magazine Section). Respectfully following the above judgments, the issue is decided in favour of the assessee.
25. In the result, appeals of the assessee are partly allowed.