Commissioner of Income-tax v. Godavari Drugs Ltd
[Citation -2014-LL-1202-1]

Citation 2014-LL-1202-1
Appellant Name Commissioner of Income-tax
Respondent Name Godavari Drugs Ltd.
Court HIGH COURT OF HYDERABAD FOR THE STATE OF TELANGANA AND THE STATE OF ANDHRA PRADESH
Relevant Act Income-tax
Date of Order 02/12/2014
Assessment Year 1994-95
Judgment View Judgment
Keyword Tags convertible foreign exchange • industrial activity • business of export • export turnover • interest earned • total turnover • raw material • actual sale • excise duty • import duty • total cost
Bot Summary: The claims of the respondent, referable to section 80HH, section 80HHC and section 80-I of the Act were not accepted by the Assessing Officer. Sri J. V. Prasad, learned standing counsel for the Department, submits that the Assessing Officer has taken the correct view of the matter in the context of excluding the interest earned on deposits made in relation to activity, referable to section 80HH and section 80-I of the Act but the Tribunal held that such interest qualifies for deduction under those two provisions, without even verifying the source thereof. Sri Pushyam Kiran, learned counsel for the respondent, on the other hand, submits that the Assessing Officer disallowed the inclusion of interest for the amount covered by section 80HH of the Act without any proper verification and that the Tribunal brought such amount under the purview of section 80HH and section 80-I of the Act after verification of the relevant records. Learned counsel further submits that the Tribunal has undertaken the extensive discussion, not only with reference to the relevant sub-sections and clauses of section 80HHC of the Act but also the circulars issued by the Central Board of Direct Taxes and applied the correct principles. Section 80HHC of the Act is intended primarily to provide incentives to Indian companies that undertake the activity of export and earn foreign exchange. We have already extracted clause of the Explanation to section 80HHC of the Act, which defines export turnover. There again, the proviso would govern the situation and amounts mentioned in the proviso cannot be added to the total turnover for the purpose of section 80HHC. The IDEB partakes of the character of the amounts covered by clause of section 28 of the Act.


JUDGMENT judgment of court was delivered by L. Narasimha Reddy J.-This is another case, in which we get occasion to deal with certain facets of section 80HHC of Income-tax Act, 1961 (for short "the Act"). respondent is exporter and is assessed to income-tax. It has been submitting returns year after year, claiming benefits under relevant provisions of law. For assessment year 1994-95, it claimed deduction under various heads. order of assessment was passed on February 28, 1997. claims of respondent, referable to section 80HH, section 80HHC and section 80-I of Act were not accepted by Assessing Officer. appeal was filed before Commissioner (Appeals). That was also rejected on September 15, 2000. Aggrieved by that, respondent filed I. T. A. No. 757/Hyd/2000 before Hyderabad Bench of Incometax Appellate Tribunal. Tribunal allowed appeal through detailed order dated January 24, 2003, and accepted claims of respondent. Hence, this further appeal under section 260A of Act by Revenue. Sri J. V. Prasad, learned standing counsel for Department, submits that Assessing Officer has taken correct view of matter in context of excluding interest earned on deposits made in relation to activity, referable to section 80HH and section 80-I of Act but Tribunal held that such interest qualifies for deduction under those two provisions, without even verifying source thereof. He further submits that respondent was not able to point out that interest yielding deposits were made in connection with business activity referred to in section 80HH and section 80-I of Act. Learned standing counsel further submits that respondent became eligible for import duty entitlement benefit (IDEB) to extent of Rs. 3,67,25,867 for concerned assessment year and same was liable to be added to its total turnover and though Commissioner has assigned cogent reasons for such inclusion, Tribunal reversed finding without any proper basis. It is urged that differentiation between accrual on one hand and actual utilisation thereof on other hand, is hardly relevant in context of application of section 80HHC of Act and that order passed by Tribunal in that behalf deserves to be reversed. Sri Pushyam Kiran, learned counsel for respondent, on other hand, submits that Assessing Officer disallowed inclusion of interest for amount covered by section 80HH of Act without any proper verification and that Tribunal brought such amount under purview of section 80HH and section 80-I of Act after verification of relevant records. It is also urged that neither Assessing Officer nor Commissioner of Income-tax (Appeals) have pointed out as to how interest does not qualify to be added for amount under those two provisions. Learned counsel further submits that Tribunal has undertaken extensive discussion, not only with reference to relevant sub-sections and clauses of section 80HHC of Act but also circulars issued by Central Board of Direct Taxes (CBDT) and applied correct principles. He submits that IDEB, in way, falls under clause (iiic) of section 28 of Act and by operation of proviso to clause (ba) of Explanation to section 80HHC of Act, it deserves to be kept outside total turnover. He contends that even otherwise, IDEB would be just in form of entitlement and it can be said to have accrued to assessee, only when it is utilised, as and when corresponding material is imported. He contends that order passed by Tribunal does not suffer from any legal or factual infirmity. respondent herein undertakes not only business of export but also indigenous one. On account of nature of business, as well as location of business activity, it is entitled to certain benefits under provisions of Chapter VI-A of Act. One of it is, deduction under section 80HH, in tandem with that under section 80-I of Act. While former gets attracted on account of establishment of business or industrial activity, in backward areas, latter becomes relevant in context of various activities mentioned in sub-section (4) thereof. specified percentage of profits derived from such activities is permitted to be deducted from total income. According to respondent, interest earned on deposits made by it also qualifies for such deduction. We perused order of assessment and orders passed by Commissioner of Income-tax (Appeals) and Tribunal. It is not clear as to whether interest claimed by respondent was on any specific deposit or otherwise. This much, however, can be said that in case amount, on which interest is paid is deposit made in connection with activity covered by those two sections, it needs to be added to profits, thereby becomes eligible for deduction. If on other hand, deposits that yielded interest are unrelated to activity, they do not qualify for deduction. In I. T. T. A. No. 216 of 2003 (CIT v. Indo Aquatics Ltd. [2014] 369 ITR 589 (T & AP)), we held that unless interest yielding deposits are made in connection with activity, referred to in particular provision, it does not qualify for deduction. Therefore, we direct that in case interest in instant case which is quantified at Rs. 1,68,466 is from any deposit made in relation to business activity referred to under section 80-I of Act, it shall qualify for deduction and otherwise not. second item is in relation to foreign exchange fluctuation. By its very nature, consideration for exported goods is received in foreign exchange. fluctuations on account of exchange rates would have their own impact on income of assessee. question as to whether amount representing fluctuation of foreign exchange rates can be treated as income of export itself was dealt with by Gujarat High Court in CIT v. Priyanka Gems [2014] 367 ITR 575 (Guj). It was held that resultant amount on account of fluctuation of foreign exchange shall be treated as profit, that becomes eligible for deduction under section 80HH of Act. We follow same and uphold view taken by Tribunal in this behalf. Now arises, bit complicated and ticklish issue referable to section 80HHC of Act. component in question is IDEB. We are not concerned with other aspects. Section 80HHC of Act is intended primarily to provide incentives to Indian companies that undertake activity of export and earn foreign exchange. amount that qualifies for deduction is broadly mentioned in sub- section (1). However, working out of such amount is complicated process. Parliament did not intend to segregate export activity of assessee, from rest of his activities, obviously because it may pose several complications. comprehensive method is stipulated thereunder. turnover of assessee, with reference to his export activity as well as total turnover of all activities are to be taken into account. profit of business, which qualifies for deduction is required to have same proportion, which export turnover would have to total turnover. amount that qualifies for deduction is to be derived through following formula. Export turnover Profits of business x Total turnover Parliament has taken care to define three different expressions that are employed in formula. "Export turnover", "total turnover" and "profits of business" are defined under clauses (b) (ba) and (baa), respectively, of Explanation to section 80HHC of Act, which read: "(b)'export turnover' means sale proceeds, received in, or brought into India by assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to transport of goods or merchandise beyond customs station as defined in Customs Act, 1962 (52 of 1962); (ba)'total turnover' shall not include freight or insurance attributable to transport of goods or merchandise beyond customs station as defined in Customs Act, 1962 (52 of 1962): Provided that in relation to any assessment year commencing on or after 1st day of April, 1991, expression'total turnover' shall have effect as if it also excluded any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28; (baa)'profits of business' means profits of business as computed under head'Profits and gains of business or profession' as reduced by- (1) ninety per cent. of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges, or any other receipt of similar nature included in such profits; and (2) profits of any branch, office, warehouse or any other establishment of assessee situate outside India;" Once these three figures are arrived at, amount which qualifies for deduction can be known. However, there are certain grey areas in context of applying definitions. Many time, serious doubt arises as to whether particular amount must be added to "export turnover" or "total turnover". Since first happens to be numerator and second, denominator, in formula, addition to one or other, would make vast difference. Many time, assessees would make endeavour to add amounts to numerator, so that resultant figure that qualifies for deduction would be large. Department, on other hand, would attempt to add it to denominator, so that taxable income would be more. export and import policy framed by Government from time to time provides for certain incentives. One of it is that exporter is extended facility of importing required raw material free of customs duty. For instance, if total cost of unit of exported item is $ 500, and raw material accounts for 60 per cent. of its cost, exporter would be entitled to import raw material worth $ 300, without payment of excise duty. If excise duty payable thereof is 40 per cent., he would stand to benefit of $120 or its equivalent Indian currency. accrual of benefit under such incentives is not immediate. It is always in form of adjustment and each exporter or assessee would follow his own accounting procedure, to ensure that benefit is properly derived. In instant case, respondent became eligible to extent of Rs. 3,67,25,867 in form of IDEB. However, it has utilised same to extent of Rs. 3,35,26,436. What remained unused is only Rs. 31,99,431. assessee did not include any component of these figures in his turnover. Assessing Officer as well as Commissioner of Income-tax (Appeals) were of view that figure of Rs. 3,67,25,867 deserves to be added to total turnover. respondent pleaded that if at all any component of this IDEB is to be added, it is only unused and left over portion of it, and not notional figure. Tribunal accepted contention. It has already been mentioned that addition of particular amount either to numerator or denominator would have its own impact. Obviously, for that reason, CBDT issued circulars explaining procedure. Tribunal took same into account and granted relief to assessee. Broadly stated, principle is that while arriving at total turnover, adequate care should be taken to avoid inclusion of amounts that are mentioned in proviso. We have already observed that IDEB is referable to clause (iiic) of section 28 of Act. Even otherwise, said amount represents notional figure and it cannot be treated as part of turnover of assessee. facility to extent of that figure would be available, only when raw material used in export goods is imported. It cannot be claimed as matter of course. Tribunal followed circular. Even in relation to such notional figure, Tribunal has taken pragmatic and practical view. It held that from figure representing IDEB, figure representing actual availment of import duty exemption must be deducted and it is only remainder that would qualify for addition to total turnover. Learned counsel for appellant is not able to convince us as to how notional figure of IDEB in its entirety can be added to export turnover. We have already extracted clause (b) of Explanation to section 80HHC of Act, which defines export turnover. It represents nothing more than actual sale proceeds of exported goods. By no stretch of imagination, incentives of duty exemption on imported goods can be treated as sale consideration for export goods much less can it become part of export turnover. Once it cannot be added to export turnover, only possibility is to add it to total turnover. There again, proviso would govern situation and amounts mentioned in proviso cannot be added to total turnover for purpose of section 80HHC. IDEB partakes of character of amounts covered by clause (iii) of section 28 of Act. By operation of proviso to clause (ba) of Explanation to section 80HHC of Act, it gets excluded from total turnover. Tribunal has taken view that balance of unused IDEB can be added to total turnover. respondent did not have any grievance about it. We do not find any basis to interfere with order passed by Tribunal. appeal is accordingly dismissed. miscellaneous petition filed in this appeal shall also stand disposed of. There shall be no order as to costs. *** Commissioner of Income-tax v. Godavari Drugs Ltd
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