1. We find it convenient to dispose of these two appeals of the Revenue pertaining to different assessees involving some common issues by this consolidated order. We have heard the parties and perused the record.
2. The relevant facts, briefly stated, are that both the respondents are engaged in the business of manufacturing, trading and export of cycle and auto parts. The AO had made assessment under Section 143(3) in both the cases and restricted the claim of the respondents under Section 80HHC. The CIT(A) has allowed relief to the respondents. The Revenue being aggrieved is in appeal before the Tribunal.
3. We will first take up the common grounds of appeal. In Appeal No.637/Chd/2005, ground Nos. 2 and 6 are as under: 1. That the learned CIT(A)-I has erred in law and facts in directing not to reduce 90 per cent of the exchange fluctuation pertaining to the earlier years from the profit and gains of business and profession, by ignoring the fact that the same fell under the category of 'any other receipts or charges' and was required to be reduced in accordance with the Expln. (baa) below Section 80HHC(4B) of the IT Act.
6. That the learned CIT(A) has erred in law and facts in allowing deduction under Section 80HHC even if there is no profit under Clause (a), (b) or (c) of Sub-section 3 of Section 80HHC, on export of trading and manufacturing activities.
2. That the learned CIT(A) has erred in law and facts in directing not to reduce 90 per cent of the sale of DEPB from the profit and gains of business and profession, by ignoring that the same is not an export incentive covered under Clause (iiib) of Section 28 of IT Act but falls under the category of 'any other receipt or charges'.
5. That the learned CIT(A) has erred in law and facts in allowing deduction under Section 80HHC even if there is no profit under Clause (a), (b) or (c) of Sub-section 3 of Section 80HHC, on export of trading and manufacturing activities.
5. As is evident from the grounds of appeal reproduced above, the dispute raised by the Revenue is relating to calculation of deduction under Section 80HHC with reference to DEPB. It is agreed by the parties before us that in view of the amendment in Section 80HHC with retrospective effect, the issue has got to be decided afresh keeping in view the said amendment in Section 80HHC. We have restored similar issue to the AO in group of cases, namely, Asstt. CTT v. Shri Parveen Sood, Ludhiana in ITA No. 215/Chd/2005, etc. vide order dt. 21st March, 2006 to the file of the AO for fresh decision in accordance with law.
The relevant para No. 8 of the said order relating to the issue is reproduced here under for the disposal of the aforementioned grounds of appeal: 8. In view of the retrospective amendment referred to above, we consider it appropriate to remit the issue relating to deduction under Section 80HHC with reference to the premium on sale of quota and DEPB also to the file of the AO to be decided afresh in accordance with law. For the sake of ready reference, we would also like to refer to the office memorandum bearing F. No. 133/132/97-TPL dt. 23rd Feb., 1998 issued by the Ministry of Finance, Department of Revenue, CBDT on the issue whether the premium received for the transfer of export quota would be treated as part of export profit eligible for deduction under Section 80HHC of the IT Act or not. The said OM reads as under: The undersigned is directed to refer to PMO's D.O. No. 247/JS(5)/98 dt. 2nd Feb., 1998 on the subject cited above. In the representation enclosed therein a clarification has been sought by AEPC as to whether the premium received for the transfer of the export quotas would be treated as a part of export profit eligible for deduction under Section 80HHC of the IT Act or not.
2. Deduction under Section 80HHC is allowed on export profits with a view of encourage earnings in convertible foreign exchange. Since the premium payment on export quotas under electronic transfer system does not involve any earnings in foreign exchange, this amount does not qualify for deduction under Section 80HHC. 3. Technically export premium can be equated with the items mentioned in Section 28(iiia) (profit on sale of import licences), Section 28(iiib) (cash assistance) and Section 28(iiic) (duty drawback).
4. Therefore, the present item viz. the premium on sale of export quotas statutorily receive the same treatment as profit on sale of import licences, cash assistance and duty drawback.' The AO shall also take into consideration the view of the Ministry quoted above in deciding the issue afresh.
1. That the learned CIT(A)-I has erred in law and facts in directing not to reduce 90 per cent of the exchange fluctuation pertaining to the earlier years from the profit and gains of business and profession, by ignoring the fact that the same fell under the category of 'any other receipts or charges' and was required to be reduced in accordance with the Expln. (baa) below Section 80HHC(4B) of IT Act.
1. That the learned CIT(A)-I has erred in law and facts in directing not to reduce 90 per cent of the exchange fluctuation pertaining to the earlier years from the profit and gains of business and profession, by ignoring the fact that the same fell under the category of 'any other receipts or charges' and was required to be reduced in accordance with the Expln. (baa) below Section 80HHC(4B) of IT Act.
8. The relevant facts relating to the above ground of appeal are that the assessee had received sale proceeds in the foreign exchange and as a result of foreign exchange fluctuation, the assessee had received more money in Indian currency on account of sales than reflected in the books of account as a result of foreign exchange rate fluctuation.
Whereas the AO has considered the benefit of exchange fluctuation pertaining to the year under appeal as part of turnover, the portion relating to the exchange fluctuation pertaining to the preceding year has been treated as other receipts within the meaning of Expln. (baa) to Section 80HHC.9. The learned Departmental Representative contended that the CIT(A) has not given any decision in regard to the issue raised by the AO. It was accordingly pleaded that the issue may be restored to the file of the CIT(A) or view expressed by the AO upheld.10. The learned Counsel for the assessee, on the other hand, contended that the view expressed by the AO is contrary to the decision of the Tribunal in the case of Smt. Sujata Grower v. Dy. CIT (2002) 74 TTJ (Del) 347.
11. In our considered view, the issue requires reconsideration. While deciding the issue afresh, the AO shall keep in mind the decision of the Delhi Bench of the Tribunal in the case of Smt. Sujata Grower v.Dy. CIT (supra) and any other decision that may be relevant to the above issue. The assessee shall be given reasonable opportunity of being heard while deciding the issue afresh in accordance with law.
3. That the learned CIT(A) has erred in law and facts in directing not to reduce the premium on sale of DEPB which is sold after close of the Finance Act, (sic-financial year) by ignoring that the same cannot be treated to have accrued during the previous year.
3. That the learned CIT(A) has erred in law and facts in directing not to reduce the premium on sale of DEPB which is sold after close of the Finance Act (sic-financial year) by ignoring that the same cannot be treated to have accrued during the previous year.
14. The relevant facts relating to this common issue are that the assessee had received DEPB relating to exports of the current year. In the subsequent year, the DEPB licences have been sold by the assessee.
However, in the year under appeal, the assessee has reflected the sale proceeds of the DEPB as income and claimed deduction under Section 80HHC in respect of the same. The AO has pointed out that the DEPB licences Wave been sold in the subsequent year and, therefore, the same have wrongly been reflected by the assessee in the year under appeal in order to claim deduction under Section 80HHC.15. The learned Counsel for the assessee invited our attention to the Accounting Standard (AS)-12 to support the contention that the assessee is entitled to reflect the appropriate amount in respect of such earned benefits, estimated on a prudent basis. It was contended that the assessee on the basis of actual sale made in the subsequent year had shown the sale proceeds on accrual basis in the year under appeal and, therefore, the CIT(A) was justified in directing the deduction under Section 80HHC with reference to such receipts also. It was further contended that in any case the issue as to whether the assessee is entitled to deduction with reference to DEPB has got to go back to the AO for consideration in the light of retrospective amendment in Section 80HHC. In respect of the second issue, it was contended that the decision of the CIT(A) may be upheld.16. The learned Departmental Representative, on the other hand, contended that the DEPB is incentive granted by the Government with reference to exports. The assessee has sold the licences in the subsequent assessment year. The sale of DEPB licences is a different activity of the assessee than the exports. According to the learned Departmental Representative Accounting Standard AS-12 is not applicable in respect of the sale proceeds of DEPB licences.
17. We have given our careful consideration to the rival contentions.
In our considered view, the view expressed by the AO that the sale of DEPB licences having taken place in the subsequent year, the assessee was not justified in reflecting the sale proceeds in the year under appeal and claiming deduction under Section 80HHC in respect of the same is correct. We, however, agree with the alternative contention advanced on behalf of the assessee that the said amount has got to be excluded from the sale proceeds also and to be excluded from the profits and gains of the business reflected by the assessee. The Accounting Standard AS-12, in our view, is not applicable in respect of the sale of DEPB licences in the subsequent year. The assessee had received the licences in the year under appeal but the same had been sold in the subsequent year and accordingly the income relating to such transaction is assessable in the subsequent assessment year. The AO is accordingly directed to rework the deduction under Section 80HHC after excluding the sale proceeds of DEPB licences from the turnover as well as from the profits of the business. We direct accordingly.
4. That the learned CIT(A) has erred in law and facts in directing to exclude the scrap sales from the total turnover of the business for the purpose of calculating the deduction under Section 80HHC by ignoring the facts that scrap sales is a part of total turnover.
4. That the learned CIT(A) has erred in law and facts in directing to exclude the scrap sales from the total turnover of the business for the purpose of calculating the deduction under Section 80HHC by ignoring the facts that scrap sales is a part of total turnover.
20. The learned Departmental Representative relied upon the orders of the Tribunal Chandigarh Bench in the case of Asstt. CIT v. Nahar Spinning Mill Ltd. in ITA No. 750/Chd/2002, ITA Nos. 523 & 394/Chd/2003 and also in the case of Highway Cycles in ITA Nos. 468 & 644/Chd/1996 to support the plea that whereas the sale of scrap may be excluded from the turnover, the same may also be excluded from the profits of the business.
21. The learned Counsel for the assessee fairly conceded that he has no objection for excluding the scrap sales from the turnover as well as from the profits of business for the purpose of deduction under Section 80HHC. We direct the AO to recalculate the deduction under Section 80HHC accordingly.
22. There is no other ground of appeal in appeal No. 638/Chd/2005. In Appeal No. 637/Chd/2005, the only other ground surviving for our consideration is ground No. 5 which reads as under: That the learned CIT(A) has erred in law and facts in allowing deduction under Section 80HHC even if there is no profit under Clause (a), (b) or (c) of Sub-section (3) of Section 80HHC, on export of trading and manufacturing activities.
23. The AO has denied the deduction under Section 80HHC to the assessee with reference to the turnover of Rs. 61,65,919 on the ground that no evidence was furnished to establish that the time for collection of the sale proceeds in foreign exchange was extended by RBI. The CIT(A) on examination of the evidence on record has allowed deduction to the assessee, on recording the finding that the time for collection of the sale proceeds had been extended by the competent authority being concerned collecting banks.
24. The learned Departmental Representative contended that neither before the AO nor before the CIT(A) the permission from the RBI which is the competent authority granting extension of time for recovery or foreign exchange was filed by the assessee. The CIT(A), therefore, was not justified in allowing relief to the assessee.
25. The learned Counsel for the assessee, on the other hand, has invited our attention to the paper book and pointed out that certain evidence was produced before the AO to establish that the time for recovery of sale proceeds in convertible foreign exchange was granted by the competent authority. It was pointed out by the learned Counsel that the RBI was the competent authority upto 30th May, 1999. However, w.e.f. 1st June, 1999, the RBI has authorized various banks to grant extension to the exporters. The assessee has furnished evidence before the AO as mentioned at p. 16 of the assessment order from the concerned banks. According to the learned Counsel, extension has been granted by the competent authority, namely, the concerned banks, and accordingly the AO was not justified in excluding the turnover of Rs. 61,65,919 for the purpose of calculation of deduction under Section 80HHC. The learned Counsel for the assessee, however, contended that the AO not having applied his mind may be given a chance to verify the claim of the assessee.
26. The learned Departmental Representative has no objection.
Considering the rival contentions, we are of the view that the issue requires verification at the stage of the AO. The certificates from the concerned banks have already been filed by the assessee before the AO as well as before the CIT(A). The AO may satisfy himself about the claim that the foreign exchange was received by the assessee within the extended time granted by the competent banking authorities and decide the claim under Section 80HHC accordingly. We direct accordingly.