[Citation -1985-LL-0930-6]

Citation 1985-LL-0930-6
Court ITAT-Ahmedabad
Relevant Act Income-tax
Date of Order 30/09/1985
Assessment Year 1979-80
Judgment View Judgment
Keyword Tags value of any benefit or perquisite • mercantile system of accounting • profits and gains of business • cash system of accounting • business or profession • computation of income • method of accounting • promissory estoppel • chamber of commerce • composite business • weighted deduction • sale consideration • engineering goods • accrual of income • national interest • audited accounts • foreign exchange • export business • export turnover • trading account • trading receipt • advance payment • cash assistance • stock-in-trade
Bot Summary: The sales are partly in India and partly by exports abroad. The export turnover is substantial and in the account year under appeal the CIT value of the goods exported is shown at about Rs. 1.40 crores. The manner in which the total financial effect of each export transaction ought to be recorded in the account books or more particularly the manner in which the financial effect of the right to claim export benefits, which is embedded in each exporter transaction, ought to be recorded when recording the export turnover of the trade, is the main subject matter of the dispute. In short, the view is that the three export benefits are an integral part of the export sales proceeds and when the invoice price is being shown on credit side on accrual basis, the three benefits receivable must also be shown on credit side on accrual basis in the same account year in the accounts. To state briefly, his observations are, any student engaged in the study of the export trade, no doubt, will take into account the export benefits of each lot, alongwith the export sales proceeds of that lot but that did not mean that the export benefits were part and parcel of the export sale proceeds. ' The correct view is that the export benefits are revenue receipts of the export business, but they did not constitute part and parcel of the export sale proceeds, benefits, arise as a consequence of the export sale and not as a part of the sale, they arise from Govt. The entire export earnings came into existence as a result of export sales of the accounting period. The Rules show that as soon as the goods are exported, the exporter is entitled to the drawback.

P.J. GORADIA, A.M. ORDER This appeal is directed against order passed by CIT(A), Surat in his appeal No. CAS(1)/V-16/82-83, order is dt. 12th Nov., 19 82. effective grounds taken are as under : 1. "On facts and in circumstances of case and in law, ld. CIT(A) has erred in deleting addition of Rs. 54,80,149." 2. "On facts and in circumstances of case and in law, ld. CIT(A) has erred in directing to allow weighted deduction under s. 35B in respect of expenses of Rs. 12,773 and Rs. 59,745." 2. relevant facts and stand of Revenue as found in order of CIT(A) are as follows: "(a) appellant company is engaged in manufacture and sale of fabrics, especially sarees. sales are partly in India and partly by exports abroad. export turnover is substantial and in account year under appeal CIT value of goods exported is shown at about Rs. 1.40 crores. (b) Under rules and schemes of different government Deptts. in force n exporter of goods is entitled to claim certain financial benefits which are described in general as export benefits. three main benefits are (i) drawback. (ii) cash assistance, and (iii) replenishment licences. Brief notes regarding each of these schemes are as under : (i) Drawback IAC (Asst.) has written short note on this point in para 13 of assessment order. For sake of convenience same is repeated below: "All goods imported into India attract levy of Customs duty by virtue of provisions of s. 12 of Customs Act, 19 62 (Act 52 of 19 62). Such duty is levied at rates specified in India Tariff Act, 19 34 or any other law for time being in force. Normally import levy is intended to be attracted only by goods that are imported for being used or consumed in India. Similarly, large number of goods manufactured within India attract internal levy in form of Central Excise Duty under Central Excise and salt Act, 19 44 (Act 3 of 19 44) and central excise Rules, 19 44 framed thereunder. Such duty is also intended to be levied only on goods that are produced or manufactured for being used or consumed within India. imported duty paid goods may be reexported out of India in same form as they were imported; or they may be used either as raw materials or components of some other articles manufactured in India for being exported to Foreign countries. Similarly Central Excise duty Paid materials may be used in articles exported out of India. Whenever, such duty paid goods are exported out of India, part of amount of duty collected either as import or internal levy is refunded to or allowed to be drawn back from government by exporter of goods. Such refund or draw-back of duty once paid is termed and known as "Drawback". (ii) Cash Assistance IAC (Asst.) has written short note on this point in para 13 of assessment order. For sake of convenience, same is repeated below: "Cash Compensatory Support Scheme (C. C. S.) Exporters, registered with appropriate registering authority as given in Appendix I are eligible for claiming cash compensatory support. scheme of grant of cash Compensatory Support on exports of specific non-traditional products to make Indian goods competitive in international market has been in operation since 19 66. This form of assistance is given primarily with view to compensating exporters for unrefunded taxes and levies which he has paid on export goods and on inputs going into manufacture of goods. extent of support available on product to product basis does not normally go beyond 25 per cent of value added. products which are given cash compensatory support (CCS) include engineering goods, chemical and allied products, sports goods plastic gods, processed food goods, fish and fish products synthetic fabrics and garments , carpets and handicrafts, leather goods, natural silk made ups and garments etc. list of products on which cash compensatory support is given in tables." (iii) R.E.P. Licences. Depending upon f.o.b. value of goods exported and nature of goods, exporter is entitled, under certain schemes, to claim issue of import licences to him which entitle him to import only certain category of goods free of import duty. This entitlement to import goods free of duty is also financial advantage which exporter gets entitled to as result of exports carried out by him. (c) manner in which total financial effect of each export transaction ought to be recorded in account books or more particularly manner in which financial effect of right to claim export benefits, which is embedded in each exporter transaction, ought to be recorded when recording export turnover of trade, is main subject matter of dispute. assessee follows mercantile method of accounting for recording sale proceeds. purchasers account is debited and sales account is credited with invoice price of goods as soon as goods are despatched. export benefits as at b(i) & b(ii), however, are taken credit for in accounts only as and when actually received. For R. E. P. licences no entry is passed when export sale is completed or even when licenses are received. financial effect of advantage of receiving R. E. P. licence automatically gets reflected in accounts when assessee imports goods free of duty because then debit to Trading account is that such loss and profit reflected is that much more." According to IAC (Asst.), when assessee exported goods, it automatically got entitled to proportionate duty drawback, cash assistance and R. E. P. Licenses which will result in saving of import duty on goods to be imported and licences to be issued. Therefore, when export sales are recorded in books of accounts, value of benefits which assessee is entitled to as aforesaid should also be included in income for purpose of assessment and since this value is not recorded as soon as export sales are effected and recorded only on basis of receipts of various amounts representing claims by assessee in future, profits disclosed by assessee do not reflect true profits because method of accounts does not bring to books "complete trading receipts" of each year. He, therefore, recast credit side of trading account as under : Rs. "1. F.O.B. Value of Export 1,34,91,954 Rs. 5, 19 2. Freight, Octroi & Insurance ,104 3. Cash assistance applied for in respect of sales of Rs. accounting period 15,91,277 Rs. 4. Drawback -do- 27,34,880 Rs. Total : 1,83,37,215 5. Company gets Rep. Lics. 50 per cent of F.O.B. value is admissible limit for getting Rep. Lics. of that CIF value entitling import of Polyester Filament Yarn. These Rep. Lics. have privilege of exemption of basic import duty on import (this is return in kind, convertible into cash). Valuation of this portion of trading receipt is equal to exemption attached with those Rep. Lics. (a) Such privileged Rep. Lics. applied for on 38,64,336 account of sales C.I.F value of Lics. (b) Value of exemption of basic import duty vide 46,37, 19 Govt. Notification 120 per cent of 38,64,336 3 Rs. . 2,29,74,408" Accordingly, he worked out short-fall of Rs. 89,63,350. As against this, trading account contained credits aggregating to Rs. 34,84,201 pertaining to export benefits attributable to exports of current years as well as of earlier years taken into account on cash basis and therefore, required to be excluded to arrive at true profits and therefore, made addition of Rs. 54,80,149 in computation of income as concealed income. This amount is dispute amount. 3 . CIT(A) approached issues involved on following lines as mentioned in Para-IV of his order: "(a) Now question to be answered as at part II(a) is whether IAC(Asst.) is right in his view that method of accounting followed by assessee does not reflect true profits of business. That, however raises question, what then is correct meaning of "true profit" as under-stood under IT Act as different from profits revealed by method of accounting followed? (b) It must be noted that IAC (Asst.) does not say that accounts are not correct and complete. In that case he would have had recourse to s. 145(2) but that is not case. view taken is that accounts are correct and complete but method followed does not reflect true profits. (c) This means that IAC (Asst.) has his own concept about what according to law ought to appear as "True Profits" on these facts and he rejects method of accounting because he finds that method does not reflect figure which is his concept of "True Profits". (d) What exactly is concept of "True Profits" as understood by IAC (Asst.) in this regard has been explained by me in detail in sub-para "A" to "n" of para III above. (e) In short, view is that three export benefits are integral part of export sales proceeds and when invoice price is being shown on credit side on accrual basis, three benefits receivable must also be shown on credit side on accrual basis in same account year in accounts. If this is not done, and if, on other hand, export benefits are shown in accounts in some other years as and when received then accounts do not show "True Profits" for any year." 4. He then went on to examine concept of 'true profit' as developed by IAC and came to conclusion in Para-V of his order that (a) if amount of profits shown over number of years were to be considered, then all profits whether by way of export sales or by way of export benefits do get reflected over all years (b) In case of Ltd. Cos., since rates were constant, there is really no revenue gain or loss at stake in real sense. 5. In para-VIII, he considered aspect whether export benefits form integral part of trading receipts as observed by IAC(Asst.). To state briefly, his observations are, (i) any student engaged in study of export trade, no doubt, will take into account export benefits of each lot, alongwith export sales proceeds of that lot but that did not mean that export benefits were part and parcel of export sale proceeds. (ii) trader may voluntarily sell goods at loss in hope of earning profit is some other form and Department could to insist that in all such cases benefit that is to arrive as consequence of loss will be treated as part and parcel of sale proceeds. He, therefore, did not agree with proposition that such benefits must necessarily be included as export sales in turnover to arrive at 'total trading receipts.' (iii) correct view is that export benefits are revenue receipts of export business, but they did not constitute part and parcel of export sale proceeds, benefits, arise as consequence of export sale and not as part of sale, they arise from Govt. Rules and Schemes and export sale is determining factor which gave rise to and determine extent of benefits. next question considered by him was with regard to nature of receipts by way of export benefits, vide para-IX. stand of assessee was that duty drawback and cash assistance formed independent and separate sources of income as different from export business. This plea was rejected by him relying upon Seth Shiv Prasad vs. CIT ( 19 72) 84 ITR 15 (All). 6. next question considered in para-X is when does 'income' which is embedded in these revenue receipts accrue to assessee, after considering various authorities and for reason recorded in paras-XII, XIII & XIV, following decision of Gujarat High Court in Ahmedabad Manufacturing & Calico Printing Co. Ltd. vs. CIT ( 19 81) 25 CTR (Guj) 263 : ( 19 82) 137 ITR 616 (Guj), he came to conclusion that IAC(A) erred in bringing to tax in this accounting year itself, estimated amount of future advantage represented by duty exemption attached to REP Licences issued in respect of export sales of this year. 7 . He further went on thus. As regards drawback duty and cash assistance, question is same. benefits for which debt becomes due by Govt. is created in favour of assessee only when Govt. deptt. sanctioned drawback or cash assistance. For this, he drew support from case of Topandas Kundanmal vs. CIT ( 19 76) CTR (Guj) 507 : ( 19 78) 114 ITR 237 (Guj), CIT vs. Ashok Lungi Mart ( 19 79) 120 ITR 413 (Mad) as also decisions in ITA No. 745/Ahd/80 and 1405/Ahd/80 decided on 29th May, 19 81 in cash of M/s Hindustan Fashions (P) Ltd. Since he held that case assistance and drawback accrue only subsequent to sales, he refrained from deciding about point of time when exactly cash assistance accrued. 8 . In para-VIII to XVII of his order, CIT(A) considered aspect of cash system of accounting for recording export benefits and after considering scheme of taxation ss. 4, 5 & 147 of IT Act and relying upon CIT vs. E.A.E.T. Sundaraj ( 19 75) 99 ITR 226 (Mad), he came to conclusion that assessee was at liberty to follow cash system rejecting stand taken by IAC(A) to bring certain business income within field of taxation of particular year vide ss. 4 & 5 of IT Act. Reliance placed by IAC on CIT vs. A. Krishnaswami Mudaliar & Ors. ( 19 64) 53 ITR 122 (SC) was displaced holding that same did not support. After summarising his findings in para XIX, he again clarified that method of accounting followed by assessee did reflect true profits of export business for accounting year in question and method of accounting cannot be rejected as not reflecting true profits just because different method of accounting would have reflected different figure. IT Act did not envisage that for any particular year for particular business, there can be one and only one figure of true profit, irrespective of any method. 9 . ld. standing counsel for Revenue opening his submissions stated that there was no decision of any High Court on issue involved. issue involved concern invoking proviso to s. 145(1) of IT Act. At this moment, learned counsel for assessee Shri K. C. Patel submitted that Bench of Ahmedabad Tribunal had rendered decision in case of Reshamwala Rayons (supra) Ltd. ITA No. 2624/Ahd/83 following earlier decision in case of Hindustan Fashions (P) Ltd. referred to earlier. Besides, even case of Bajaj Auto Ltd. decided by three Hon'ble Members of Tribunal as reported in ( 19 84) 19 TTJ (Bom) 19 8 (SB) : ( 19 84) 8 ITD 296 (Bom) (SC) governed facts of case. After going through decision in 8 ITD 296, learned Standing Counsel was of opinion that decision was factually wrong because right to claim drawback of duty is statutory one. He then referred to Central Excise Rules 19 71 consequent to statutory enactment and then submitted that at least drawback accrued to assessee, moment export was made. decision of Tribunal in case of Hindustan Fashions (P) Ltd. (supra) was distinguishable on account of fact that claim was dependent upon sanction of Cotton Mills Federation which is not case here. He then placed reliance on r. 3 of Central Excise Rules and made detailed submissions as follows: 1. Income of assessee is to be computed under head 'profits and gains of business or profession' (s. 28). There is no dispute between parties on this point. assessee if carrying on business of sale and purchase of cloth as well as manufacturing of fabrics and Paris. Sales are made in home market as well as in foreign market. 2. income referred to in s. 28 is to be computed in accordance with provisions contained in ss. 30 to 43A. 3. Profits and gains of business carried on by assessee-company during previous year should be brought on record and should include value of any benefit or perquisite, whether convertible into money or not, arising from such business. 4. Profits of business are what is gained by business. term implies comparison between state of business at two specific dates, separated by interval of year, and fundamental meaning is amount of gain made by business during year and can only be ascertained by comparison of he asset of business at two dates, increase shown at latter date compared to earlier date representing profits of business (CIT vs. Ahmedbhai Umarbhai ( 19 50) 18 ITR 472 at 502,) Mahajan, J. 5. There is no controversy in respect of profits earned by assessee company in domestic market. However, question arises about profits earned from export and sales made in accounting period. (a) It is Department's view that goods sold by export in accounting period give rise to following trade proceeds: C.I.F. value of goods exported in accounting period received from foreign buyers, value is composed of FOB value on such goods and freight and insurance thereon. Customs drawbacks on goods; Cash assistance on those goods; Replenishment licences on those goods. All these items together constitute complete trading proceeds of accounting period and they are integrately connected, and they cannot be separated. (b) assessee only shows receipts of CIF value of exported goods on basis of Mercantile System of accounting adopted by him. According t o him, for purpose of Customs Drawback, cash assistance and replenishment licences, his system of accounting is cash basis and when he receives cash income therefrom he shows same in relevant assessment year. entire export earnings came into existence as result of export sales of accounting period. Customs Drawback on goods exported: (a) (Para 12 and para 26 of assessment order shows what is Customs Drawback) Secs. 74 and 75 of Customs Act provide for drawback allowable on re- export of duty-paid goods. Under s. 76, if exported goods are manufactured out of articles chargeable to duty and on which duties have been paid, whole of such duty or such sum as specified under Rules as average amount of duty paid shall be payable to exporter by way of drawback. Customs and Central Excise Duties Drawbacks Rules, 19 71, are framed under s. 75 of Customs Act r/w s. 7 of Central Excise and Salt Act, 19 44. Rules 3, 4, 6 & 11. Rules show that as soon as goods are exported, exporter is entitled to drawback. Cash Assistance: (a) (Para 13 and para 27 of CIT's order in paper book) object of same is to pay cash assistance and freight subsidy across counter soon after each shipment, and optional system of fortnightly payment has been provided. scheme also shows that on exports made, assessee is entitled to cash compensatory benefit. Import Entitlement: (Paper Book page 6) replenishment entitlements are determined on basis of FOB value o f goods sold by export. Book on Import Policy Chapter XVIII deals with manner of providing import replenishment of materials required in manufacture of products exported. case law shows that cash assistance and customs drawback have direct nexus with export of goods and is so connected with export of goods. In support of above, reliance was placed on Ahmedabad Manufacturing & Calico Printing Co. Ltd. vs. CIT ( 19 81) 25 CTR (Guj) 263 : ( 19 82) 137 ITR 616 (Guj), Gwaloir Rayons Silk Mfg. (Wvg.) Co. Ltd. vs. CIT ( 19 83) 37 CTR (MP) 233 : ( 19 83) 143 ITR 590 (MP), CIT vs. Wheel & Rim Co. of India Ltd. ( 19 77) 107 ITR 168 (Mad), Kesoram Industries & Cotton Mills Ltd. vs. CIT ( 19 78) 115 ITR 143 (Cal), Jeewan Lal ( 19 29) Ltd. vs. CIT ( 19 82) 26 CTR (Cal) 60 : ( 19 83) 139 ITR 865 (Cal), Jeewan Lal ( 19 29) Ltd. vs. CIT ( 19 82) 30 CTR (Cal) 50 : ( 19 83) 142 ITR 449 (Cal), Cochin Co. vs. CIT 19 75 CTR (Ker) 104 : ( 19 78) 114 ITR 822 (Ker), O. K. Industries & Ors. vs. CIT ( 19 84) 42 CTR (Ker) 82, CIT vs. Swadeshi Cotton Mills Co. Ltd. ( 19 80) 15 CTR (All) 81 : ( 19 81) 121 ITR 747 (All), Hindustan Lever Ltd. vs. CIT ( 19 79) 12 CTR (Bom) 55 : ( 19 81) 121 ITR 951 (Bom), Metal Rolling Works (P) Ltd. vs. CIT ( 19 82) 31 CTR (Bom) 116 : ( 19 83) 142 ITR 170 (Bom), Kamani Engineering Corpn. Ltd. vs. CIT ( 19 83) 37 CTR (Bom) 214 : ( 19 84) 150 ITR 586 (Bom), ITAT vs. B. Hill & Co. (P) Ltd. ( 19 82) 29 CTR (All) 301 : ( 19 83) 142 ITR 185 (All), CIT vs. Krishnaswami Mudaliar, A. & Ors. ( 19 64) 53 ITR 122 (SC). On method of accounting vis-a-vis powers of ITO, he made following submissions : Sec. 145 empowers ITO to arrive at true profits if system of accounting does not correctly reflect same. Balapur Vibhag Jungle Kamdar Mandali Ltd. vs. CIT ( 19 81) 22 CTR (Guj) 214 : ( 19 82) 135 ITR 91 (Guj), Tara Singh & Co. vs. CIT ( 19 81) 127 ITR 8 19 (P&H). Under Companies Act'Under s. 217, Board of Directors are required to make report regarding state of company's affairs. Sec. 211 talks of contents of balance sheet and profit and loss account. Schedule VI Part III talks of requirement as to profit and loss account. Clause (3)(i)(a) may be seen and under this clause, duty is case to disclose information in respect of turnover, i.e., aggregate amounts for which sales are effected by company. Turnover does not merely include net invoice sales but also all sums received and receivable as result of company's trade, whether normal or received and receivable as result of company's trade, whether normal or abnormal case. 19 51(1) King's Bench 563 relied upon to suggest that report of Board of Directors produced at page 75, wherein it has been mentioned that Company has followed practice of accounting such benefits and incentives on cash basis and not on accrual basis and therefore this system of accounting gives different picture of Company's performance. ld. counsel for assessee at outset brought to our notice facts found and not disputes i.e. to say (a) assessee followed hybrid system in sense that incentive benefits were shown on receipt basis, since asst. yr. 19 74-75 (b) book results shown in aforesaid manner were accepted after scrutiny till asst. yr. 19 78-79 (c) provisions of s. 145(2) of IT Act are not applied and (d) that REP licences were not transferred by assessee to any one and not licence was used for import of capital goods. According to him material aspects required to be considered were whether income accrued or arose during previous year and whether it is in consonance with system of accounting regularly followed by assessee. This again shall have to be based after keeping in mind mechanism of various facts of claim pertaining to draw back and cash assistance. With regard to REP licence, it was stated that value of benefit if any, could be obtained by assessee only in future and that too only if raw material was imported not otherwise. Therefore, Revenue was seeking to tax notional gains which is not permitted. Bringing to our notice, endorsements on various licences under which goods were imported, it was stated that at various occasions assessee could not utilise licences for purpose of import of goods. Again incentives offered by way of duty drawback and cash assistance were not under statute, but only because of policy pronounced by Controller of Imports and Exports from time to time, as stated vide p. 224 to 239 in assessee's paper book. Dealing with aspects of how claims of assessee were required to be made and processed by various government agencies, it was stated thus first of all relevant authorities could make frequent changes in rates of incentives as could be seen from relevant notification issued from time to time and even could withdraw incentives declared earlier. This was so because scheme of export incentives is dependent on many factors like availability of funds with Govt., proprietary of scheme in national interest and foreign exchange reserve of Government. Dealing with aspect of various formalities were required to be complied with. First of all gods meant for export is subject to scheme of inspection by Textiles Committee and after inspection only goods which are passed are eligible for CCS. This is with purpose to check export of inferior quality fabrics. Then application is required to be submitted to Regional Licensing Authority within six months of export, application is to be made in prescribed forms with various documents. Such applications are scrutinised by joint CCI & E at Bombay and then incentive amount is determined. Again cut off point is barometer to decide rate of CCS which does not go beyond 25 per cent of value added. Again, there is cut in percentage of assistance according to period of delay and applications made beyond three months are considered as time-barred. Regarding duty drawback, he drew our attention to pp. 268 to 273 regarding supporting evidence. Here, it was suggested that proving of case by assessee was necessary because in case of export of Rayon and Synthetics fabrics, it is countervailing duty which is imposed to protect indigenous industry and that is refunded as duty drawback, when CVD paid goods are exported. Again application has to be accompanied with various documents evidencing proof not only with regard to exports, but also with regard to weight and in case of difference in weights, refund claim is allowed only on lower weight and therefore, there is invariably difference between amount for which application is made and amount sanctioned for refund. Only after adjudication of claim of assessee, order for refund is passed. Bringing to our notice one instance, where application was delayed by three months by Textile Committee for issuing final inspection report, application was treated as time-barred. On appeal, Appellate Collector also rejected claim as time-barred. This was unique case where assessee suffered even because of lapse on part of Govt. officials. Vide press cutting dt. 18th April, 19 82, it was sought to be argued that withdrawal of duty concession was instance of unilateral action by Govt. without prior notice to trade. Again as per public notice dt. 15th March, 19 82 no drawback was disbursed for past six months because claimants were required to bring evidence to prove that proper Central Excises duty had been paid without protest by manufacturers and this was impossible task for claimants. notice dt. 8th April, 19 81 appearing at p. 234 was pressed into service to support fact that capitalised import licence was declared for duty exemption, again authorities revised stand and demanded payment of duty. This will prove that government had resorted to demand duties at any time. Reverting to factual aspect of REP Licences, it was stated that assessee had not utilised some licences either in whole or in part and licences expired without yielding any benefit to assessee. 10. Referring to case laws relied upon by learned standing counsel, it was stated that all cases related to actual receipts of incentives and some of them with regard to whether trading receipts or not. decision of Supreme Court in CIT vs. A. Krshnaswami Mudaliar & Ors. ( 19 64) 53 ITR 122 (SC) was distinguishable because of fact that issue involved was regarding defect in value of stock-in-trade which was never valued and shown. decision of Delhi Tribunal reported in Indo Asian Switchgears (P) Ltd. vs. IAC of IT ( 19 85) 44 CTR (Trib) 1 (Del) was concerned with claim regarding reward under s. 10(17B) and this very case decided issue regarding REP Licences in favour of assessee. Regarding mention in Director's report, it was only to conform to requirements of Sch. VI of Companies Act, 19 56 and concept under two statutes were altogether different. For rest, order by CIT(A) was supported. Various decisions were cited in support of stand of assessee viz., CIT vs. North Arcot District Cooperative Spinning Mills Ltd. ( 19 84) 148 ITR 406 (Mad), Shiv Prasad Ramsahai vs. CIT ( 19 66) 61 ITR 124 (All), J. K. Bankers vs. CIT ( 19 74) 94 ITR 107 (All), CIT E.A.E.T. Sundaraj ( 19 75) 99 ITR 226 (Mad), Gemini Pictures Circuit Ltd. vs. CIT ( 19 58) 33 ITR 547 (Mad), CIT vs. Western Engineering Co. ( 19 71) 81 ITR 712 (Guj), Harish Mahindra & Anr. vs. CIT ( 19 81) 24 CTR (Bom) 168 : ( 19 82) 135 ITR 19 1 (Bom), CIT vs. Tata Iron & Steel Co. Ltd. ( 19 77) 106 ITR 363 (Bom), CIT vs. Nagri Mills Co. Ltd. ( 19 58) 33 ITR 681 (Bom), Lal Umesh Bahadur Pal & Ors. vs. CIT ( 19 72) 86 ITR 751 (SC), Seth Shiv Prasad vs. CIT ( 19 72) 84 ITR 15 (All), ITO vs. Bhandari, N. M. ( 19 82) 1 ITD 280 (Bom), Saligram Kanhayalal vs. CIT ( 19 82) 133 ITR 915 (P&H), CIT vs. Devi Films (P) Ltd. ( 19 82) 31 CTR (Mad) 341 : ( 19 83) 143 ITR 386 (Mad), CIT vs. Jai Prakash Om Prakash & Co. Ltd. ( 19 61) 41 ITR 718 (Raj), CIT vs. Kalicharan Jagannath ( 19 61) 41 ITR 40 (All), CIT vs. Swadeshi Cotton & Flour Mills (P) Ltd. ( 19 64) 53 ITR 134 (SC), Dharangadhre Chemical Works Ltd. vs. CIT 19 77 CTR (Bom) 180 : ( 19 77) 100 ITR 473 (Bom), Ahmedabad Manufacturing & Calico Printing Co. Ltd. vs. CIT ( 19 81) 25 CTR (Guj) 263 : ( 19 82) 137 ITR 616 (Guj), CIT vs. Gajapathy Naidu, A. ( 19 64) 53 ITR 114 (SC). 11. In reply standing counsel for Revenue stated that withdrawal of any incentive would only be prospective as per principles of promissory estoppel. On query from Bench, regarding limitation factor of time, regarding claim for refund etc., it was stated that same could be considered appropriately in future by way of deduction as business loss. decision of Gujarat High Court in CIT vs. Godhra Electricity Co. Ltd. (Guj) ( 19 83) 32 CTR (Guj) 141 : ( 19 83) 140 ITR 657 (Guj) in case of Godhra Electricity was pressed into service to support that claim of assessee was backed by law and not backed by contract. In directors report, there was binding statement as clarified to shareholders and this supported Revenue's stand regarding real income theory. 1 2 . We will take first aspect of integrated or composite business receipts. Reference is required to be made to sub-cl. (iv) of s. 28 of IT Act. said sub-clause was inserted by Finance Act of 19 64 w.e.f. 1st April, 19 74. It read as under : "The following income shall be chargeable to income-tax under head "profits and gains of business or profession". (i) profits and gains of any business or profession which was carried on by assessee at any time during previous year; (iv) value of any benefit or perquisite whether convertible into money or not, arising from business or exercise of profession." In our opinion export incentives and benefits will more appropriately fall in sub-cl. (iv). sale proceeds of export invoices will undoubtedly fall for consideration in sub-cl. (i) of s. 28. This classification will remove base, if any, for treating export sale consideration and export benefits to be treated as single composite receipt. This is not to suggest in any way that before amendment w.e.f. 1st April, 19 64 such benefits or receipts were not taxable. They were taxable on receipt basis as revenue receipts or supplementary business receipts or trading receipts as held by various judicial pronouncements. But very fact that so many Court decisions are available, indicates that such export benefits cannot form part of export sales. Some importance is attached to practice i.e. interpretation placed by Revenue on fiscal laws especially when practice is in favour of assessee, it acquires sanctity. It can be inferred that legislature is aware of such practice. It can readily be concluded therefore that assessee was entitled to follow any systems of accountancy of its choice. In this case its choice (of cash basis) is accepted by Department in past and therefore, Revenue cannot change its stand on system of recording such benefits on accrued basis even if it is assumed that they accrued to assessee. 13. approach of revenue is erroneous gets reflected if viewed from another angle also. Under contract for sale there are only two parties, namely assessee and importer. government, disbursing export benefits on basis of fiscal policies cannot be part to agreement. scheme framed by government only provides one more factor to be considered by assessee while evaluating pros and cons of trading in international market together with other factors to be considered. Therefore, sale consideration as per invoices cannot embrace benefits flowing from consideration extraneous to sale contracts. That is why usually rebates/discounts. etc. (not as per terms of contract but as per practice) are shown by traders only on receipt basis. 14. theory of integrated business receipts cannot find place in science of recording transactions known accountancy though it forms part of vital cord of business economics. For it will be impossible to forecast and envisage and also evaluate incidental gains of export sales because at relevant time it will not even be known by traders what benefits in totality would accrue and materialise, not to talk of evaluation in money terms. e.g., amount of reduction in tax incidence on account of lower rate of tax incidence on account of lower rate of tax such as found in s. 80HHC with amendments from time to time. There may of tax such as found in s. 80HHC with amendments from time to time. There may even be similar incentives offered by government of country of importer because of preferential or favourable treatment in respect of Indian goods. Who is going to enumerate such benefits from export transactions so as to determine and include value together with export business receipts ? income sought must be capable of being processed as was held in B. M. Kamdar, in re 14 ITR 10 (Bom). 15. This needs thinking about propriety of system of accountancy (in relation to benefits). reference is required to be made to guidance note or opinion of expert committee or research committee of Institute of Chartered Accountants of India. According to Institute of Chartered Accountants as can be gathered from at least two opinions expressed in 19 63 n d 19 83 published in 'Compendium of opinions' such benefits should be recorded on basis of receipts and in cases where it is necessary mention regarding expected amounts from such benefits be made in directors report attached to audited accounts so as to give comprehensive picture to shareholders, is advised. But such mention cannot be decisive to involve proviso to s. 145(1) of Act. 16. Again no amount can be included in income unless it accrues, arises or received. slippery words here are 'accrues' meaning thereby that debt gets created in favour of assessee. Accrual of income presupposes vesting of right. right gets vested on production of proof of exports accompanied by claims as prescribed under respective rules. proposition is well settled by Supreme Court in decision of ED Sassoon & Co. & Ors. vs. CIT ( 19 54) 26 ITR 27 (SC). proposition can be understood by various ways e.g. whether enforceable right is created in favour of assessee ? Whether there is absolute obligation on part of payer to make payment ? Whether receiving of income is conditional or unconditional ? Whether right to receive income is clearly settled or not ? 17. As soon as export is made 'source' gets divided and income to be received flows from different sources; one main and other supplemental to main. In one form exporter receives sale consideration and in another form he obtains 'bundle of rights' to claim export incentives in various forms. Former one is income having accrued as debt is created on basis of invoice and later one is income taxed when right of claim is exercised by offering proof of export, as per terms of export-incentive scheme. 18.1. "Dictionary for Accountants' by Kohler (5th edition) defines: "Accounting and accountancy are often synonymous terms; latter, of less frequency in literature may refer to entire body of theory and practice; "accounting" is usually all-inclusive term; but, when used adjectively, it may have restricted area of reference; as ,the field of accountancy, school of accountancy, journal of accountancy; but profession of accounting, accounting system, course in accounting, accounting supervisor." Again same book gives meaning of 'Accounting System' as follows: "Accounting system: principles, methods and procedures relating to incurrence, classification, recording and reporting of transactions of organisation. 2. Hence process of operating, testing and accumulating, under such system, in accordance with controlling internal administration policies, and with any regulatory requirements of higher authority. 3. books, records, vouchers, files and related supporting data resulting from application of accounting process; accounting records." 18.2. In above context, proviso to s. 145(1) gives power to ITO to determine income in his own way provided he gives finding that 'method' employed is such that income cannot properly be deduced. This would require him to evaluate and appraise trading results reflected depending upon 'method' of 'accounting'. Here word 'method' is used to denote 'technique' so as to reflect financial data properly to facilitate computation of income. meaning of word used here is not synonymous to 'system' (mercantile, cash, etc.) nor it refers to classification of systems. System of accountancy may be proper but 'method' for purpose of taxation may not be proper, to facilitate computation of income. For example, considering nature of business where different percentages of gross profits on various nature of business where different percentages of gross profits on various activities/such as percentage on trading, percentage on consultancy and, percentage on job work are obtained and where assessee has maintained only consolidated account of 'sales and receipts' wherein innumerable transactions are taken credit of and from where necessary details cannot be analysed, such situation would fall for proviso to s. 145(1), though here system of accountancy is proper. Similarly, assessee carrying on business in number of commodities where trading results give rise to various percentages of gross profits with wide variations and separate trading account of each commodity having not been kept and it being not possible also to get relevant details, ITO will have discretion, nay duty bound, to resort to option. Therefore, class or system of accountancy is matter of choice of assessee, decision in respect of manner (or method) to deduce correct income is left with ITO and that is only when 'method' does not permit deducement of income properly. In case before us, admittedly such cannot be position. There is no dispute regarding proper system of accountancy followed by assessee i.e. hybrid. Even on aspect of method also, there cannot be dispute because income sought to be combined emerges form two categories specified in cl. (i) and cl. (iv) of s. 28, flowing distinctively from different direction, for which two different systems of accountancy, mercantile for sales and cash basis for benefits are adopted, choice of which is entirely with assessee. 19 . To elaborate on time of accrual, same having not been decided by CIT(A), assessee made out case indicating number of constraints including process of adjudication of claim required to be undergone before order for refund is passed i.e. claim gets accepted. On top of this instance is also cited where because of delay on part of officials in office of Textile Commissioner, refund claim got time-barred and even on appeal, it was decided as such. With these facts, we are unable to appreciate support drawn by Revenue (probably referring case of Motilal Pdampat Sugar Mills ( 19 79) 118 ITR 326 (SC) regarding promissory estoppel coming into operation. We may clarify that this principle is made fluid by subsequent decision of Supreme Court reported in AIR 19 80 SC 1285. It is accepted fact that various notifications so as to give effect to decisions and changes therein are issued from time to time, based on policy decisions on account of various factors like amount of subsidies to be disbursed, changes in fiscal policies, foreign exchange reserve, export trade of India, vis-a-vis import etc. These decisions are taken by those concerned with policy regarding imports and exports trade. Even if it is accepted for sake of argument that assessee is entitled to refunds no sooner export sales are effected, same is required to be valued after ascertaining whether such refund is certain or not and even if certain, what amount of variation in value is likely to be, depending upon what will be period of time of receipt, amount of efforts required to be put in by assessee, administrative hardships, hazards, etc. It is not case of instant refund, like instant incentive such as deduction under s. 80C of IT Act. To give analogy again from statute like IT Act, claim would be in nature of interest on refund of advance payment of tax under s. 214 of Act. It is common experience that even if as per return of income, assessee claims excess amount of tax paid or to take extreme case even if assessment order is passed to refund excess tax, unless and until order for grant of interest on excess tax paid is passed, which is usually after reminders, no interest is treated to have accrued and that is why same is taxed on receipt basis as per practice of Department. cases where such interest is never received by assessee are not very few. 20. Keeping in mind, ratio of decision that, may be another view of law is possible, but, law is not mere mental exercise as was laid down in CIT vs. Balkrishna Malhotra ( 19 71) 81 ITR 759 (SC) at page 762, doctrine of approbate and reprobate so far as applicable to conduct of parties in litigation should go against Revenue, even though there is no estoppel against provision of statute. Because receipt basis of taxing benefits is accepted in past. 2 1 . It is worth remembering by all concerned, wisdom in following utterances by Shri Krishna Iyer, J. in Indian Chamber of Commerce vs. CIT ( 19 75) 101 ITR 796 at 800 (SC): "We dare say that achieving greater simplicity and clarity in statute law will be taken up by draftsman of legislative bills to avoid playing linguistic games in Court and promotion of interpretative litigation. Lawyers and legislators must stop confusing each other and start taking to their real audience people, so that communication problems may not lead to prolific forensic battles." 22. Having added as above, we do not see any reason to interfere with order passed by CIT(A), on this ground and therefore, same is upheld. 23. second ground is in relation to allowance of weighted deduction under s. 35B of IT Act in respect of expenses of Rs. 12,773 & Rs. 59,745. 24. In our opinion, CIT(A) has rightly allowed claim of assessee and therefore, we do not see any reason to interfere with decision taken by him. 25. In result, appeal is dismissed. *** INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX v. I. C. GANDHI SILK MILLS LIMITED
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