Full Judgment
14th Feb., 2005 and Under Section 250 dt. 1st Sept., 2005 (served on 5th Oct., 2005 to the appellant/assessee) wherein following disallowances have been made and upheld respectively by the aforesaid authorities disregarding/defying the relevant rulings of the higher appellate authorities and of High Courts and the Supreme Court.
(1) Telephone expenses by Rs. 39,989 (assuming 10 per cent on ad hoc basis of total/actual such expenses) alleging them as personal expenses and lamenting that 'personal use of telephones cannot be ruled out'.
(2) Generator expenses by Rs. 13,869 (assuming 10 per cent on ad hoc basis of total/actual such expenses) alleging and lamenting that 'some expenditures are not supported with vouchers', without citing any cogent instance even of any unsupported expense.
(3) Staff welfare expenses by Rs. 10,000 (assuming 10 per cent on ad hoc basis of total/actual such expense) alleging and lamenting that some expenditures are not supported with vouchers', without citing any cogent instance even of any unsupported expense.
(4) Foreign travel expenses by Rs. 1,24,760 (assuming 10 per cent on ad hoc basis of total/actual such expenses in foreign exchange) alleging them as personal expenses, based on an Tribunal ruling (for another asscssee) without confronting it with the appellant/assessee during the assessment proceedings, disregarding the primary and undeniable fact that the appellant/assessee is a 100 per cent exporter; (5) Business promotion and trade fair expenses by Rs. 2,01,154 (assuming 5 per cent on ad hoc basis of total/actual such expenses) alleging and lamenting that 'some expenditures are not supported with vouchers', without citing any cogent instance even of any unsupported expense.
(6) Repair and maintenance expenses by Rs. 34,871 alleging that 'Rs. 6,700 expenditures are not supported with vouchers', without citing any cogent instance even of any unsupported expense and lamenting that car being registered in the name of partner(s) cannot be stated to be used for business purposes of assessee firm/appellant.
(7) Miscellaneous expenses by Rs. 5,000 (assuming 20 per cent on ad hoc basis of total/actual such expenses) alleging and lamenting that 'some expenditure are not supported with vouchers', without citing any cogent instance even of any unsupported expense.
(8) Disallowance of deduction Under Section 80HHC towards interest income amounting Rs. 17,320 on fixed deposits (which were/are made with the lenders/bankers as margin-money towards credit/loans facilities for supporting and smoothening the business of 100 per cent exports of the appellant/assessee).
(9) Disallowance of interest expense amounting Rs. 59,100 on proportionate basis towards interest-free loans/advances given in earlier years to non-business parties, disregarding the other fact that partners' capital (being interest-free to appellant/assessee firm) was huge enough to absorb in their drawings.
(10) Withdrawal of deduction Under Section 80HHC by the learned CIT(A) whereas learned AO had granted it after reducing such deduction towards DEPB premium-income as against the amount of deduction claimed in the return.
The appellant also prays for grant of permission to add/alter/modify/insert/withdraw suitably/justifiably any ground of appeal hereinabove at anytime before or during the course of hearing of this appeal.
2. Rival contentions have been heard and record perused. Facts in brief are that assessee was engaged in business of export of handicrafts.
During the course of scrutiny assessment, the AO disallowed 10 per cent on telephone, general welfare and foreign travel expenses, on the plea that they are personal in nature or that supporting vouchers were not filed for verification. By the impugned order, the CIT(A) confirmed all the disallowance by observing that personal use of assets like telephone, mobile phone, ear and scooters is a hard reality. With regard to the disallowance of export promotion expenses, the CIT(A) found that most of the expenses were incurred in cash and were not properly vouched.
3. We have considered the rival contentions. Since the assessee is a no corporate assessee, personal use of telephone cannot be ruled out, therefore, disallowance of 10 per cent of telephone expenses were justified. So far as generator expenses and staff welfare expenses are concerned, no specific instance has been quoted by the AO as to which of the expenses were not supported by vouchers, we, therefore, do not find any justification for the disallowance made by the AO. As the assessee is a 100 per cent exporter and the entire income of the assessee was subject to deduction as per Section 80IIHC, we do not find any justification for disallowance of foreign travel expenses to the extent of 10 per cent on the allegation of personal use, which was incurred wholly and exclusively for the purpose of business. Keeping in view the nature of expenses, personal element cannot be ruled mat, we, therefore direct the AO to restrict the disallowance to the extent of 5 per cent in place of 10 per cent made by him.
4. With regard to the expenditure incurred on business promotion and trade; fair after pursuing the details, we found that expenditure was incurred for the purpose of business, there was no justification for making ad hoc disallowance of 5 per cent amounting to Rs. 2,01,154.
Keeping in view the nature of the assessee's business vis-a-vis the nature of expenditure incurred, we direct the AO to restrict the disallowance to the extent of Rs. 1,00,000 keeping in view the observation of AO that some of the expenditures were not supported by vouchers.
5. With regard to disallowance of deduction Under Section 80HHC, on the interest income, the issue regarding treatment of interest income while computing deduction Under Section 80HHC has been elaborately considered by the jurisdictional High Court in case of CIT v. Shri Ram Honda Power Equip and Ors. . Broad principles for determining the nature of interest income, as to whether such interest income is "business income" as computed Under Sections 28 to 44 of the Act or income from other sources as determined Under Section 56 r/w Section 57 of the IT Act were laid out. The first category of such interest income was held by the Hon'ble High Court as arising out of parking of surplus fund, such income is to be treated as Income from other sources'. The second category of cases are those where AO himself treats the interest income as 'income from business', on the plea that such interest income was not inextricably linked with the export business. Here we are concerned with first category where AO treats such income as not related to business of exports, but as 'income from other sources'.
However, the jurisdictional High Court in such situation have held that these receipts merit separate treatment Under Section 56 of the Act which is outside the ring of 'profit and gains from business and profession'. The Court has further provided that to give effect to this position, the AO while computing the profits of the export business will have to remove from the debit side of the P&L a/c, the corresponding interest expenditure that had been "laid out" to earn such income from other sources. Otherwise, this will depress the profit by an amount which is out of reckoning of Section 80HHC, a consequence not intending to be brought about. Following is the relevant observation of the Hon'ble High Court at para 19: We are therefore of the view that where surplus funds are parked with the bank and interest is earned thereon it can only be categorized as income from other sources. This receipt merits separate treatment Under Section 56 of the Act which is outside the ring of profits and gains from business and profession. It goes entirely out of the reckoning for the purpose of Section 80HIIC. To give effect to this position, the AO while computing profits of the export business will have to remove from the debit side of the P&L a/c the corresponding interest expenditure that has been 'laid out' to earn such income from other sources. Otherwise this will depress the profits by an amount which is out of the reckoning of Section 80HHC, a consequence not intended to be brought about.
6. It is quite clear from the above proposition that if the assessee has incurred any expenditure for making the FDRs, interest income of which is brought to tax under the head 'Income from other sources', such interest expenditure is to be taken out from the profits of export business, and at the same time such interest expenditure is to be deducted while arriving at net income from interest on bank deposit.
Taking out such interest income and interest expenditure out of the P&L a/c prepared for computing export profits, will change such export profit, therefore, AO is to recalculate permissible deduction Under Section 80HHC with reference to such revised export profits. On the other hand, such interest expenditure is to be allowed as a deduction while computing net interest income to be taxed Under Section 56 as income from other sources. In view of the proposition laid down by jurisdictional High Court as discussed above, the AO is required to exclude interest expenditure if any relatable to such income from the P&L a/c of export business. At the very same time such interest expenditure is required to be reduced from the interest income for bringing the net interest income to tax net Under Section 56 of the IT Act. However, before allowing such interest expenditure, the assessee is required to establish that it had incurred interest expenditure for getting the bank deposit on which interest income was earned. Only where assessee is able to prove that cheques issued for making the bank deposits had been issued out of credit facilities availed by it or out of borrowed funds, such exclusion of interest expenditure is permissible. If the AO found that no interest expenditure had been incurred for making such bank deposits on which assessee is in receipt of interest income, no deduction of interest expenditure under Section 57 is permissible, nor export profit as per P&L a/c is required to be disturbed. We, therefore, restore the matter back to the file of the AO for deciding the issue of deduction of interest expenditure out of the interest income earned by the assessee and recompilation of deduction under Section 80HHC in the light of our observation and the proposition laid down by jurisdictional High Court in the case of Shri Ram Honda Power Equipment (supra). We direct accordingly.
7. With regard to disallowance of interest expenditure of Rs. 59,100 on the plea of funds having been utilized for non-business purposes and for giving advance to the friends and relatives, we found that partners' own capital was Rs. 3.05 crores which was free of interest.
The loans and advances of Rs. 9.85 lacs given interest-free were out of own capital and whatever interest was paid by the assessee was on the bank loan which was taken for the purpose of its export business.
Credit facilities were sanctioned for the purpose of its export business and the funds were utilized in the course of business itself.
We do not find any merit for disallowance of interest paid to the bank which is deductible under Section 36(1)(iii}of the Act.
8. With regard to computation of deduction under Section 80IIIIC on account of DEPB premium, there is an amendment by Taxation Laws (Amendment) Act, 2005. which has received the assent of the President of India on 28th Dec, 2005. The following amendment was made with retrospective effect from 1st April, 1998 : (A) after the proviso, the following provisos shall be inserted and shall be inserted and shall be deemed to have been inserted, w.e.f.
1st day of April, 1998, namely-- Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under Clause (a) or Clause (b) or Clause (c) of this Sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiid) or Clause (iiie), as the case may be, of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee: Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under Clause (a) or Clause (b) or Clause (c) of this Sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiid) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,- (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme: Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under Clause (a) or Clause (b) or Clause (c) of this Sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiie) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,- (a) he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme.
Explanation-- For the purposes of this clause, 'rate of credit allowable' means the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme calculated in the manner as may be notified by the Central Government; (B) after the fourth proviso as so inserted, the following proviso shall be inserted and shall be deemed to have been inserted w.e.f.
the 1st day of April, 1992, namely: Provided also that in case the computation under Clause (a) of Clause (b) or Clause (c) of this Sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent of- (a) any sum referred to in Clause (iiia) or Clause (iiib) or Clause (iiic), as the case may be, or (b) any sum referred to in Clause (iiid) or Clause (iiic), as the case may be, of Section 28, as applicable in the ease of an assessee referred to in the second or the third or the fourth proviso, as the case may be the same proportion as the export turnover bears to the total turnover of the business carried on by the assessce'.
(ii) in the Explanation occurring at the end, w.e.f. the 1st day of April, 1998,- (I) in the proviso to clause (books of account), for the word, brackets, figures and letter 'and (iiic)', the brackets, figures, letters and word '(iiic), (iiid) and (iiie)' shall be substituted and shall be deemed to have been substituted; (II) in Clause (baa), in Sub-clause (I), for the word, brackets, figures and letter 'and (iiic)', the brackets, figures, letters and word '(iiic), (iiid) and (iiie)' shall be substituted and shall be deemed to have been substituted.
9. This amendment apparently was not available with the Revenue authorities while making the assessment and/or disposing of the appeal.
In these circumstances, it would be in the interest of justice that the matter be set aside to the file of the AO to reprocess the claim of the assessee in the light of the amendment by Taxation Laws (Amendment) Act, 2005 as aforesaid.
In the result, the appeal of the assessee is allowed in part, in terms as indicated hereinabove.