1. These are in all 12 cross Reference Applications of the department and the assessee. The assessment years involved are 1979-80 to 1982-83.
These applications arise out of the Tribunal's orders dated 25-3-1988 for Assessment Year 1979-80 and three other separate orders, all dated 18-7-1988, for the Asstt. Years 1980-81 to 1982-83.
2. The assessee is M/s. Jhalani Tools (India) Pvt. Ltd. (formerly M/s.
Gedore Tools (India) (P.) Ltd.), Gedore House, 51-52 Nehru Place, New Delhi. It is a private limited company carrying on the business of manufacturing hand tools, most of which are exported. For the Asstt.
Years 1979-80 and 1980-81 the Appellate Tribunal had not upheld the assessee's claim of weighted deduction under the following heads (the amounts are different for the two years in question and are not being mentioned here): - (e) Forwarding charges on export consignment; (f) Inspection fee on exports; The Appellate Tribunal, following the decision of the Special Bench in the case of J.H. & Co. v. Second ITO [1982] 1 SOT 150 (Bom.) as also the following earlier orders of the Tribunal in the assessee's own case, did not accept the assessee's claims of weighted deduction in respect of the items mentioned above: - (1) Order dated 29-5-1985 of Delhi Bench 'D' of the Appellate Tribunal (ITA Nos. 1143/Del/1979 and 1826/Del/1979) for A.Y. 1975-76.
(2) Order dated 29-5-1985 of Delhi Bench 'D' of the Appellate Tribunal (ITA No. 696/Del/1982) for the A.Y. 1976-77.
In this connection, paras 4 to 4.3 of the order of the Special Bench for the A.Y. 1979-80 are relevant. The same view was held for the A.Y.1980-81. So far as the Asstt. Years 1981-82 and 1982-83 are concerned, the assessee's Reference Applications Nos. 1258 & 1259/Del/88 only refer to the claim at (a) above. In department's RA No. 1304/Del/88 for A.Y. 1980-81 questions are proposed in respect of the claims at (j) & (k) above.
3. So far as the A.Y. 1982-83 is concerned, the department's RA Nos.
1306 & 1309/Del/88 refer to the upholding of the order of the Commissioner of Income-tax (Appeals) allowing weighted deduction on expenses in respect of laboratory and quality control specially since the accounting year of the assessee ended on 30-6-1981 whereas Rule 6AA of the Income-tax Rules, 1962 came into effect from 1-8-1981. For the A.Y. 1982-83 this aspect of the matter has been dealt with in paras 9 and 10 of the Tribunal's order dated 18-7-1988. The Appellate Tribunal had taken the view that the assessment was pending on 1-8-1981 when Rule 6AA was introduced and therefore, the claim could not be considered thereunder.
4. For all the assessment years involved in these Reference Applications another question involved related to the claim of weighted deduction on the expenditure on packing material consumed exclusively for exports. The case of the assessee was that the expenditure was not entirely for packing materials but that special and attractive plastic wrappers used should be taken as samples for goods and that this special wrapping had been used entirely for the purpose of development of export markets. The wrappers in question, it was explained before the Tribunal, were made out of beautiful expensive plastic and were colourful and were meant to be of durable nature or they were more or like beautiful souvenirs to customers who purchased the assessee's goods. For the year prior to 1979-80 also this point had come up before the Appellate Tribunal and it was directed that these should be considered as samples and that if the assessee was in a position to separate their cost, the same should be given the benefit of deduction under Section 35B. It was also directed that the total claim of the assessee in that regard would be subject to bifurcation, if necessary, after being subjected to the scrutiny of the Income-tax Officer. For the earlier years the Income-tax Officer had, after verification, allowed 25% of such expenses on packing materials. Following the earlier order, the Special Bench of the Appellate Tribunal for the assessment year 1979-80 similarly restored this matter to the file of the Inspecting Asstt. Commissioner (Assessment) with directions to him to examine and scrutinise the expenses in respect of packing materials as in the past and to allow weighted deduction thereon accordingly. (In this connection para 4.3 of that order is relevant). The same order was followed by the Appellate Tribunal in its separate orders dated 18-7-1988 for the subsequent 3 assessment years 1980-81 to 1982-83.
5. The assessee had claimed for all the assessment years under reference weighted deduction on varying amounts paid by way of commission on export sales. The Income-tax Officer had accepted the claim of weighted deduction with reference thereto. However, the Inspecting Asstt. Commissioner (Assessment) sought the enhancement of the assessment following the decision of the Hon'ble Madras High Court in the case of CIT v. Southern Sea Foods (P.) Ltd. [1983] 140 ITR 855.
However, the learned Commissioner of Income-tax (Appeals) took the view that in the light of the law as explained by the Special Bench of the Tribunal in the case of/TO v. Bharath Skin Corpn. [1983] 6 ITD 320 (Mad.) and the Boards' operative instructions on the subject, there was no justification for enhancement of the income by withdrawing the weighted deduction allowed under Section 35B.6. The Special Bench of the Appellate Tribunal deciding the assessee's case for the assessment year 1979-80 took the view that if the Commissioner of Income-tax (Appeals) did not consider it a fit case for enhancement there was nothing wrong in his order and that it could not be made the subject-matter of appeal. In this connection, the discussion is contained in paras 6 and 6.1 of the order of the Special Bench referred to above. The same order was followed by the Tribunal for the subsequent 3 years.
7. The assessee received during the assessment years in question varying amounts as cash compensatory support (CCS), duty draw back (DBK) and by way of sale of import entitlements (IE). It also gained varying amounts for the assessment years in question as a result of fluctuation in exchange receipts, the Income-tax Officer had treated all these items as revenue receipts and therefore, taxable.
8. The CIT(A) traced the history from July 1963 when the Government of India had constituted a Market Development Fund for financing schemes and projects for the development of foreign market for Indian products and commodities. He held that the following was the nature of the 7 criteria on the balanced determination of which the rate of cash assistance was based, in view of the report of Bose Mullick Committee (appointed by the Cabinet Committee in November 1975), decision dated 29-1-1976 of the Cabinet Committee, 39th Report (1980-81) of the Seventh Lok Sabha and the letter dated 11-5-1984 received by the Commissioner of Income-tax (Appeals) from the Commerce Ministry in reply to his letter dated 23-4-1984:---------------------------------------------------------------------------------S.No. Criteria Whether capital Percentage or revenue receipt1. Export potential and domestic Capital 2% availability as well as supply2. Import content and domestic Capital 2% value added.3. Approximate implicity subsidy Revenue 2% under the Import Replenishment4. Compensation for unrefunded Revenue 1% taxes and levies.5. Difference between domestic Revenue 2% cost and international prices of6. Cost of entry into new market.
50% (Capital) 1% 50% (Revenue)7. A cut off point upto which Neither capital subsidy is to be allowed.
nor revenue --------------------------------------------------------------------------------- Since the precise quantification of the weightage given to the various disadvantages for determining the CCS rate was not possible, the learned Commissioner of Income-tax (Appeals) made an ad hoc apportionment in the form of percentage mentioned in the last column of the above table. He held that 55% of the entire cash receipts representing revenue receipts were taxable as income under Section 28(iv) of the Income-tax Act, 1961. He noticed that CCS was paid to the exporter with reference to the value of exports and therefore, the payments arose directly from the business carried on by the assessee.
He further held that the CCS was not a bounty and that there was a definite linkage between the activity of the export (which is the assessee's business activity) and the eligibility CCS from the Government. However, he held that receipts on capital account were outside the purview of Section 28(iv). So far as the DBK is concerned, the CIT(A) held that this benefit was of the same nature as benefit by way of cheaper export credit except that in the case of a bank finance, the cheaper rate of interest is a pre-determined event while borrowing while the DBK follows the export and the claim for relief. He noticed that the assessee had itself taken credit for the concessional interest by claiming only the actual interest expenditure and therefore, he held that likewise the assessee had to reduce the cost of other inputs on which DBK had been claimed and allowed or in the alternative, credit the draw-back received to the P&L Account to determine its true profits and gains of trade. He, accordingly confirmed the addition of Rs. 51,93,936. the learned Commissioner of Income-tax (Appeals) held the amount representing the sale of import entitlements to be taxable as a revenue receipt in view of the following decisions: - The gain accruing to the assessee on account of the difference in the exchange rates was held by the Commissioner of Income-tax (Appeals) to be taxable as a revenue receipt. In this connection, he relied upon the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. So far as the CCS is concerned, the assessee is aggrieved in so far as the learned CIT(A) treated only 45% of the receipt of capital account. On this point, the department was in cross appeal.
9. We may point out that in the case of the assessee in ITA Nos. 1143 & 1826/Del/79 for the A.Y. 1975-76 the view taken by a Division Bench (to which one of us was a party vide its order dated 29-5-1985 was that the CCS was distinguishable from DBK and IE; that it was paid for the purposes of the grantor i.e. to generate foreign exchange and to find developed export market for the products of Indian manufacturers; that it was neither to assist the assessee in carrying on its trade nor for any services rendered as was the case in Bengal Textiles Association v.CIT [1960] 39 ITR 723 (SC); that it was given as a bounty or a gift; that there was no trading relationship as between the assessee and the Government; and that it was not a condition of the grant that the assessee should carry on the business for the export of its products and that the receipt was de hors the assessee's business. The view taken was that CCS granted under the Ministry of Commerce letter dated 17-8-1976 was an out-right grant as an incentive to export made without consideration and was given by an administrative Act of the Government.
The Bench was also of the view that the exporter could call in aid the doctrine of promissory estoppel invoked by the Supreme Court in the case of Union of India v. Anglo Afghan Agencies AIR 1968 SC 718. It was held that the motivation of the Government was spelt out in the Export Policy Resolution of 1970. The decision of the Hon'ble Calcutta High Court in the case of Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 was held to be not binding on the ground that it was based on the following factual infirmities: - (i) In the judgment the letter dated 17-8-1966 is referred but the text of the letter dated 24-8-1966 from the Engineering Export Promotion Council to its members was given.
(ii) Treating the nature of CCS as the same as that of IE which was in issue in the earlier case of Jeewanlal (1929) Ltd. v. ITO [1981] 130 ITR 405 (Cal.).
(iii) The Karnataka High Court held in Patil Vijaykumar v. Union of India [1985] 20 Taxman 363 dissenting from the judgment of the Bombay High Court in CIT v. Smt. Godavaridevi Sara [1978] 113 ITR 589 that only the courts and the Tribunals under the High Court would be bound and not others.
However, the aforesaid Division Bench had held that DBK and IE were taxable as revenue receipts. The same view was taken by the same Bench for the A.Y. 1976-77 vide separate order of the same date in the case of the assessee in ITA No. 696/Del/1982. However, another Division Bench (to which another of us was a party) took a contrary view in the case of Reliance International Corpn. Ltd. v. no [1986] 16 ITD 43 (Delhi) for the assessment year 1979-80. However, in that case the only question involved was whether the cash subsidy granted by the Government vide its letter dated 17-8-1966 against the export of specified engineering products (as in the present case) was a trade receipt on revenue account in the hands of the recipient company. That Division Bench took the view that since the following decisions were not noticed by the earlier Bench deciding the case of the present assessee for the assessment years 1975-76 and 1976-77 (supra) that decision could not be followed and that no reference to Special Bench was also called for, for the same reason as also because the position was self-evident: - (3) Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473 (Bom.); (7) Addl. CIT v. Handicrafts & Handloom Export Corpn. [1982] 133 ITR 590 (Delhi) ;& (8) Ahmedabad Mfg. & Calico Printing Co. Ltd. v. CIT [1982] 137 ITR 616 (Guj.).
The subsequent Division Bench took the view that the decision of the Hon'ble Calcutta High Court in the case of Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 was binding as convassed by the department in view of the decision of the Hon'ble Delhi High Court in the case of All India Lakshmi Commercial Bank Officers' Union v. Union of India [1984] 150 ITR 1.
It was held that the purpose of the CCS was to reimburse part of the assessee's cost of manufacturing the exported goods and that it was linked directly with the export business of the assessee as it was computed as a certain percentage of the FOB value. It was held that the payment of CCS was directly related to the export effort of the individual and one received it only if one was doing export business of the specified engineering goods. It was, therefore, held to by purely a trading receipt received by a trader in the course of his business for the purpose of making it more competitive in the international market.
It was held that the CCS was not gratuitous but was governed by proper rules and regulations and every citizen had a right to enforce its claim under it on the principle of promissory estoppel. The nature of the CCS it was held, was the same as that of cash subsidy and that it aimed at subsidising the cost of production and to wipe out or to reduce the export losses or to increase export profits by keeping the cost of production low. It was also held that the CCS receipt was in the course of business and backed by an enforceable right and Was therefore a trading receipt and not on capital account. It was also held that CCS was linked directly with sales though it was not a part of the sale proceeds as such but was in pari materia with the same and accruing and arising at the moment the sales took place subject to the putting of the claim and its verification by the concerned authorities.
Lastly, it was held that the entire CCS was taxable because it was not an aggregation of the various computations but an integrated, indivisible whole whose assessability depended on its nature and character and not on how its measure was determined.
10. After considering the detailed submissions of both the sides based upon their respective Paper Books and the plethora of case law, the Special Bench deduced from the decisions of the Supreme Court and High Courts some of the broad principles applicable with reference to the present case. In this connection, para 9.4. of the order of the Special Bench is relevant. After examining the question of burden of proof and the history of the payments (see paras 9.5 to 9.7 of the order of the Special Bench), the Special Bench took the view that the CCS received by the assessee was on capital account and not on revenue account and not to compensate any loss incurred by the assessee in its export trade but to develop the infrastructure for increasing exports. In this connection the discussion in paras 9.8 to 9.10 is relevant. The Special Bench also examined the assessee's contention that the incentives were exempt under Section 10(17B). It held that the export policy/scheme negatived the case of the assessee as there was no declaration made by the Central Government regarding the purposes approved under Section 10(17B). In this connection para 9.14 of the order of the Special Bench is relevant. The Appellate Tribunal had also examined the case of Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 (Cal.) in respect of which the argument raised on behalf of the department was that the Special Bench was bound to follow it. The contrary argument made on behalf of the assessee was that decision could not assist the department because it was based on erroneous assumptions such as the followings:- (i) The learned judges assumed that CCS was being granted with the object indicated in the EPC's letter dated 24th August, 1966 circulated to its constituents.
(ii) The learned judges failed to notice that all the schemes for export promotion in force till 6th June, 1966 when the Rupee was devalued, had been abolished and that Cash Assistance was granted only by a letter dated 17th August, 1966.
(iii) The learned judges did not appreciate the objects that had persuaded the Government to grant CCS, as spelt out in Commerce Ministry's Circular date 23-10-1978.
(iv) The assessment year involved in that case covered the period before the new Export Policy under which the assessee is receiving such incentives, came into effect.
(v) The learned judges, although they noticed the judgment of the Supreme Court in the case of Shri Ambica Mills Ltd. Mo. 1 v. Textile Labour Association AIR 1973 SC 1081 yet failed to appreciate the meaning of 'Cash Subsidy' as approved by the Supreme Court.
(vi) The learned judges also did not proceed to examine other relevant aspect of the question evidently because they were not urged before them: (a) Whether the nature of receipt was in the nature of income at all? (c) Whether the recipient had any right to influence the criteria fixed by the Government in the matter of selection of product/or amount of grant in respect thereof? The Appellate Tribunal noticed that references against the conflicting decisions of the Division Benches in the case of the assessee for the Asstt. Years 1975-76 and 1976-77 and in the case of Reliance International Corpn. Ltd. (supra) for the A.Y. 1979-80 were already pending before the Hon'ble Delhi High Court and Special Leave had been granted by the Supreme Court against the decision of the Hon'ble Calcutta High Court in the case of Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 and the matter was pending before the Supreme Court. The Special Bench also observed that the following factors needed to be noticed in that connection: - (iii) The decision while intending to set out and proceed on the basis of the Ministry of Commerce letter dated 17-8-1966 to the Secretary E.E.P.C. reproduced a letter dated 24-8-1966 from the EEPC to its members whose contents are not in pari materia with the aforesaid letter dated 17-8-1966.
(iv) The letter dated 11-5-1978 of EEPC to the departmental representative in that case said that by the letter dated 17-8-1966 Government had announced cash assistance scheme for compensating loss to the exporters for exports of engineering goods and that that scheme was announced for the first time and was not in replacement of any existing scheme in operation.
(v) The scheme of the grant of C.C.S. underwent a structural change, with the change in the policy of the Government w.e.f. 1-4-1976. It is more to promote the infrastructure to develop exports than to compensate for losses.
On this point paras 8, 9.5 and 9.10 of the order of the Special Bench are relevant.
11. So far as the question of assessability of DBK is concerned, it noticed that though it formed part of a package of incentives, its nature was not the same as that of the CCS, since it flowed from statute. It held that in terms of Section 41(1) the assessee definitely obtained a remission or drawback which was accordingly taxable. Lastly, it noticed that DBK had all along been taxed in the hands of the assessee. Para 9.11 of the order of the Special Bench is relevant in this connection.
12. So far as IE is concerned, it was held that its nature was also different from CCS in as much as it had a statutory basis as it was given under an order made under Section 3 of the Imports and Exports (Control) Act, 1947. After referring to a large number of decisions (mentioned in para 9.12 of the order of the Special Bench) it was held that the amounts by way of sale of import entitlements were rightly taxed by the Income-tax authorities.
13. The income arising out of difference in the exchange rate were also held to be taxable. It was held that it was an item of receipt arising on revenue account, on the basis of the principles laid down by the Supreme Court in the case of Sutluj Cotton Mills Ltd. (supra).
Reference was also made to an earlier decision of the Supreme Court in the case of CIT v. Canara Bank Ltd. [196(sic)] 63 ITR 328.
14. Another question involved for all the assessment years under reference related to the reduction of the amount of Central subsidy from the cost of fixed assets for the purposes of computation of depreciation and investment allowance. The Appellate Tribunal, in view of the earlier Special Bench decision in the case of Pioneer Match Works v. ITO [1983] 3 ITD 714 (Mad.) and in view of the following decisions, held that the subsidy in the instant case also did not relate to the cost of the asset and therefore, it could not go to reduce the same: - (i) CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632/33 Taxman 505 (AP); (ii) CIT v. Bhandari Capacitors (P.) Ltd. [1987] 168 ITR 647/34 Taxman 91 (MP).
15. At the time of the hearing of these Reference Applications a preliminary objection was raised on behalf of the department by the learned Departmental Representative to the effect that the Special Bench which heard the appeals for the assessment year 1979-80 consisted of 5 Members whereas the present Special Bench hearing these Reference Applications consisted of only 3 Members and therefore, considering the fact that there was a difference of opinion amongst the Members who constituted the earlier Special Bench, the Special Bench hearing these Reference Applications should also have consisted of 5 members. After hearing the learned representatives on both the sides, we notice that rule 40 of the Income-tax (Appellate Tribunal) Rules, 1963 provides as follows: - The Bench which heard the appeal giving rise to the application shall hear it unless the President, Senior Vice-President or the Vice-President, as the case may be, directs otherwise.
It would suffice to say that in the present case since the President, acting in his administrative capacity, had directed that these Reference Applications be placed before the present Special Bench consisting of only 3 Members, the requirements of rule 40 were satisfied. The preliminary objection cannot, therefore, be upheld.16. In the assessee's R.A. No. 707/Del/88 for A. Y. 1979-80 9 questions have been sought to be raised for reference, arising out of the minority orders (i.e. the orders of S/Shri Anand Prakash, Accountant Member and S. Grover, Judicial Member). However, after hearing the learned representatives on both the sides and after considering the matter, we are of the view that such questions cannot be considered for reference as in terms of Section 255(4) it is the majority view of the Special Bench which constitutes the decision of the Tribunal for the A.Y. 1979-80. For the purposes of reference, therefore, the minority view referred to above would not be of any assistance or relevance. We therefore decline to refer any of those questions to the Hon'ble High Court.
17. On these facts, the following questions are referred to the Hon'ble High Court for its esteemed opinion: - 1. "Whether on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in holding for all the assessment years under reference that the amounts of draw back of duty received by the assessee from the Central Government were not in the nature of capital receipts and were therefore, taxable? 2. "Whether on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in holding for all the assessment years under reference that the amounts of gains from the sale of import entitlements, received by the assessee were not in the nature of capital receipts and were taxable?" [RA No. 707, and RA Nos. 1257 to 1259/Del/88] 3. "Whether on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in holding for the assessment years 1979-80 and 1980-81 (also for Asst. Years 1981-82 and 1982-83 in respect of the claim at (a)) that the following items were not entitled to weighted deduction under Section 35B: - (e) Forwarding charges on export consignment; (f) Inspection fee on exports; 1. "Whether on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in holding that the amounts of cash compensatory support (CCS) received by the assessee for the years under reference were not revenue receipts and not liable to tax? 2. "Whether on the facts and in the circumstances of the case the Appellate Tribunal erred in law in distinguishing the decision of the Hon'ble Calcutta High Court in the case of Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 on the basis of the 5 factors mentioned in para 9.10 of its order? 3. "Whether on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in taking the view that there was nothing wrong with the order of the CIT(A) if he did not consider it a fit case for enhancement (in respect of weighted deduction allowed) by withdrawing weighted deduction allowed under Section 35B on the amount paid by the assessee as commission on export sales and that it could not be made the subject matter of appeal?" [RA Nos.
776, 777 and 1304 to 1309/Del/88] 4. "Whether on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in holding that for the purposes of Section 43(1) of the Income-tax Act, 1961, the Central Subsidy received by the assessee for the assessment years under reference were not to be reduced from the cost of fixed assets for the investment allowance? 5. "Whether on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in holding that the assessee was eligible for claiming weighted deduction Under Section 35B of the Income-tax Act, 1961 and expenditure on wrappers after bifurcation by the Income-tax Officer? 6. "Whether on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in holding that the assessee was eligible for weighted deduction in respect of 50% of the expenses of postage, telegram, telephone, printing and stationary on exports? 7. "Whether on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in allowing weighted deduction for the A.Y. 1982-83 on expenses in respect of laboratory and quality control under rule 6AA which came into effect on 1-8-1981 during the pendency of the assessment proceedings for that year? 18. On the date of the hearing of these Reference Applications, on behalf of the department a Paper Book was sought to be filed which consisted, inter alia, of reports of Bose Mullick Committee, Alexander Committee and Abid Hussain Committee. We have not permitted that Paper Book to be placed on the record or to be forwarded to the Hon'ble High Court along with this Statement of the Case. Rule 45 of the Income-tax (Appellate Tribunal) Rules, 1963 only requires the Tribunal to append to the Statement of the case those documents which in its opinion form part of the case and as supplied to it by the parties. Only those annexures are being forwarded to the Hon'ble High Court which consist of the copies of the orders of the Tribunal under reference and copies of all those papers etc. Which were filed before the Special Bench by and on behalf of the assessee and the department at the time of the hearing of the appeals and which were considered by the Special Bench.
Therefore, papers which were collected after the hearing was over, by one of the members suo motu constituting the minority view do not constitute evidence considered by the Bench and are not to be forwarded to the Hon'ble High Court nor the papers sought to be placed on the Paper Book on behalf of the department at the time of the hearing of these Reference Applications. This is because only those papers form part of the Statement of the Case which were Voluntarily placed by both the parties before the Special bench Before the conclusion of the hearing for the assessment year 1979-80.
19. The following copies of the orders are annexed and form part of the Statement of the Case: - (other Papers annexed are those given in the annexure at the foot of this statement of the case) 20. Copies of the Draft Statement of the Case were sent to both the sides and the Statement of the Case was finalised after hearing the learned Departmental Representative, there being none on behalf of the assessee.