Sage Metal Ltd, v. Assistant Commissioner of Income Tax Circle 7 (1),

ITA 4013/DEL/2007 | 2002-2003
Pronouncement Date: 11-03-2011 | Result: Partly Allowed

Appeal Details

RSA Number 401320114 RSA 2007
Bench Delhi
Appeal Number ITA 4013/DEL/2007
Duration Of Justice 3 year(s) 5 month(s) 3 day(s)
Appellant Sage Metal Ltd,
Respondent Assistant Commissioner of Income Tax Circle 7 (1),
Appeal Type Income Tax Appeal
Pronouncement Date 11-03-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted G
Tribunal Order Date 11-03-2011
Date Of Final Hearing 01-07-2010
Next Hearing Date 01-07-2010
Assessment Year 2002-2003
Appeal Filed On 08-10-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH : F NEW DELHI) BEFORE SHRI G.E. VEERABHADRAPPA HONBLE VICE PRES IDENT AND SHRI A.D. JAIN JUDICIAL MEMBER ITA NOS. 4013 227 & 4014/DEL./2007 (ASSESSMENT YEARS : 2002-03 03-04 & 04-05) SAGE METALS LTD. VS. ACIT CIRCLE 7(1) 346-FIE PATPARGANJ NEW DELHI. NEW DELHI. (PAN/GIR NO.AAACS2801A) AND I.T. A. NOS.4064 & 4065/DEL./2007 (ASSESSMENT YEARS : 2002-03 & 04-05) ACIT CIRCLE 7(1) VS. SAGE METALS LTD. NEW DELHI. NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI V.P. GUPTA ADV. REVENUE BY : SHRI KISHORE B. SR.DR ORDER PER A.D. JAIN JM THESE ARE CROSS APPEALS FOR ASSESSMENT YEARS 2002-03 03- 04 AND 04-05. I.T.A. NO.4014/DEL./07 2. THIS APPEAL HAS BEEN FILED BY THE ASSESSEE TAKING THE F OLLOWING GROUNDS: 1(A) THAT THE CIT(A) ERRED IN HOLDING THAT AMOUNTS OF `25 20 839 AND `11 25 903 CREDITED TO PROFIT & LOSS ACCOUNT ON ACCOU NT OF DEPB ENTITLEMENT AND DFRC RESPECTIVELY ON A NOTIONAL BASIS REPR ESENTS THE INCOME REFERRED TO IN CLAUSES (IIID) AND (IIIE) OF SECTIO N 28 OF THE I.T. ACT AND ACCORDINGLY SAME HAD TO BE EXCLUDED FOR THE PUR POSE OF DETERMINATION OF PROFIT OF THE BUSINESS FOR CALCULATING DEDUCTION ALLOWABLE U/S 80HHC OF THE ACT. (B) THAT CIT(A) ALSO ERRED IN OBSERVING THAT WHEN THE GOVERNM ENTS HAD TRANSFERRED SUCH CREDIT TO THE APPELLANT AND ACCORDINGLY THE APPELLANT HAS CREDITED SUCH PROFIT TO THE PROFIT & LOSS ACCOUNT AND I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 2 THEREFORE IT CANNOT BE SAID THAT SAID AMOUNT HAS NOT B EEN EARNED AS PROFIT. (C) THAT THE CIT(A) ALSO ERRED IN NOT APPRECIATING THAT AMEN DMENT MADE TO SECTION 80HHC OF THE I.T. ACT TO THE EXTENT DEDUCTION IS DENIED TO THE EXPORTERS HAVING TURN OVER EXCEEDING ` 10 CRORES IN RESP ECT OF DEPB ENTITLEMENT AND DFRC IS NOT LEGALLY VALID BEING ARB ITRARY AND IRRATIONAL AND IS UNDER CHALLENGE IN THE PETITIONS BEFORE THE HIGH COURT AND THEREFORE HE OUGHT NOT TO HAVE TAKEN COGNIZANCE OF T HE AMENDED PROVISIONS WHILE PASSING THE ORDER UNDER REFERENCE. 2 THAT THE CIT(A) ALSO ERRED IN HOLDING THAT JOB CHARG ES OF `29 728 SALES TAX REFUND OF `5 26 109 AND TRADE DISCOUNT AND COMMISSION OF `12 063 CREDITED TO PROFIT AND LOSS ACCOUNT AS MISCELL ANEOUS INCOME ARE TO BE EXCLUDED IN DETERMINATION OF PROFIT OF BUSINESS IN TERMS OF CLAUSE (BAA) OF EXPLANATION TO SECTION 80HHC OF THE I .T. ACT FOR COMPUTING DEDUCTION ALLOWABLE UNDER THE ABOVE SECTION. 3. THAT THE CIT(A) ALSO ERRED IN UPHOLDING THAT GROUND OF THE APPELLANT REGARDING INITIATION OF PENALTY PROCEEDINGS IN A ROUTIN E MANNER IS PREMATURE WITHOUT APPRECIATING THAT DISALLOWANCES/ADJU STMENTS HAD BEEN MADE BY THE AO ON ACCOUNT OF LEGAL CONTROVERSIES AND DIFFERENCE OF OPINION AND NOT FOR THE REASON OF CONCEALMEN T OF INCOME OR FURNISHING OF INACCURATE PARTICULARS BY THE APPELLA NT AND THEREFORE PROVISIONS OF ABOVE SECTION WERE NOT ATTRACTED. 3. THE FIRST ISSUE INVOLVING GROUND NOS.1(A) & 1(B) CONCERNS ALLOWABILITY OF DEDUCTION U/S 80HHC OF THE I.T. ACT ON 90% OF CREDIT O F ENTITLEMENT OF DEPB AND DFRC WHICH WAS CREDITED IN THE BOOKS OF ACCOUNT ON NO TIONAL BASIS. 4. AS PER GROUND NO.1(C) THE CIT(A) HAS ERRED IN NOT A PPRECIATING THAT THE AMENDMENT MADE TO SECTION 80HHC OF THE ACT TO THE EXTENT D EDUCTION IS DENIED TO THE CUSTOMER HAVING TURNOVERS EXCEEDING `10 CRORES IN RESPEC T OF DEPB ENTITLEMENT AND DFRC IS NOT LEGALLY VALID AND IS UNDER CHALLENGE B EFORE THE HONBLE HIGH COURT AND SO THE CIT(A) OUGHT NOT TO HAVE TAKEN COGNIZANC E OF THIS PROVISION. I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 3 5. LD.COUNSEL FOR THE ASSESSEE HAS STATED AT THE BAR THAT THIS GROUND IS NOT BEING PRESSED AND IS REJECTED AS NOT PRESSED. 6. APROPOS GROUND NOS.1(A) & 1(B) THE AO EXCLUDED 90% OF THE AMOUNTS CREDITED TO THE P&L A/C ON ACCOUNT OF DEPB OF `25 20 839 DFRC OF `1125903. THE AO TOOK RECOURSE TO THE AMENDMENT TO THE PROVISIONS OF SECTION 80HHC OF THE ACT MADE VIDE TAXATION LAWS (SECOND AMENDMENT) ACT 2005 HOLDING THAT SINCE THE TURNOVER OF THE ASSESSEE EXCEEDED `10 CRORES NO DEDUCTION WAS ALLOWABLE ON INCOME OF TRANSFER OF THE DEPB LICENSE AND DFRC U/S 80HH C OF THE ACT. 7. THE CIT(A) CONCURRED WITH THE AO. IT WAS OBSERVED T HAT THE CONTENTION OF THE ASSESSEE PERTAINED TO CLAIM OF DEDUCTION U/S 80HHC ON DEP B DUE BUT NOT SOLD DURING THE YEAR UNDER CONSIDERATION AND DFRC; THAT EVEN B Y WAY OF AMENDMENT TO SECTION 80HHC NO RELIEF WAS GRANTED TO THE DEPB CREDIT OR DFRC RECEIVED BY THE ASSESSEE IN CASE HIS EXPORT WAS OF MORE THAN 10 CRORES U NTIL THE ASSESSEE FULFILLED THE CONDITIONS LAID DOWN IN THE THIRD AND FOURTH PROV ISOS TO SECTION 80HHC(3) OF THE ACT; THAT IN THE ASSESSEES CASE THE GOVERNMENT HAD TRANSF ERRED SUCH CREDIT TO THE ASSESSEE AND THE ASSESSEE HAD CREDITED SUCH PROFIT TO THE P& L A/C; THAT THEREFORE IT COULD NOT BE SAID THAT THE ASSESSEE HAD NOT EARNED ANY PR OFIT; AND THAT THE ASSESSEE WAS NOT ENTITLED FOR CLAIM OF DEDUCTION U/S 80HHC ON D EPB CREDIT AND DFRC. 8. BEFORE US CHALLENGING THE IMPUGNED ORDER IN THIS REGAR D THE LD.COUNSEL FOR THE ASSESSEE HAS SOUGHT TO PLACE RELIANCE ON THE DECISION O F BOMBAY HIGH COURT IN THE CASE OF CIT-XIII MUMBAI VS. KALPATRU COLOURS & CHEMICALS MUMBAI 328 ITR 451 (BOM.). 9. THE LD.DR ON THE OTHER HAND HAS STRONGLY RELIED ON THE IMPUGNED ORDER. 10. WE HAVE HEARD THE PARTIES ON THIS ISSUE AND HAVING P ERUSED THE MATERIAL ON RECORD WE FIND THAT IN KALPATRU COLOURS & CHEMICALS V S. CIT (SUPRA) THE HONBLE I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 4 BOMBAY HIGH COURT HAS HELD INTER ALIA THAT THERE WAS NO MERIT IN THE CONTENTION OF THE ASSESSEE THAT THE PROFITS ON TRANSFER OF DEPB IN SECTI ON 28(IIID) OF THE ACT WOULD NOT INCLUDE THE FACE VALUE OF THE DEPB SO THAT THE ASSESS EE GETS A DEDUCTION U/S 80HHC ON THE FACE VALUE OF THE DEPB. 11. UNDISPUTEDLY KALPATRU COLOUR & CHEMICALS VS. CIT (SUPRA) IS THE LAW ON THE ISSUE AS SETTLED BY THE HONBLE BOMBAY HIGH COURT. THE OBSERVATIONS THEREIN ARE REQUIRED TO BE FOLLOWED WHILE DECIDING THE ISSUE. ACCORDI NGLY THIS ISSUE IS REMITTED TO THE FILE OF THE AO TO BE DECIDED AFRESH IN ACCORDANCE WI TH KALPATRU COLOURS & CHEMCIALS VS. CIT(SUPRA) PARTICULARLY FOLLOWING THE ABOVE OBSERVATIONS OF THE BOMBAY HIGH COURT. 12. GROUND NO.2 STATES THAT HE CIT(A) HAS ERRED IN HOLD ING THAT JOB CHARGES OF `29 728 SALES TAX REFUND OF `526109 AND TRADE DISCOU NT AND COMMISSION OF `12063 CREDITED TO THE P&L A/C AS MISCELLANEOUS INCOM E ARE TO BE EXCLUDED WHILE DETERMINING THE PROFIT OF BUSINESS IN TERMS OF CLAUSE (BA A) OF THE EXPLANATION TO SECTION 80HHC OF THE ACT FOR COMPUTING THE DEDUCTION A LLOWABLE THEREUNDER. 13. AT THE OUTSET THE CHALLENGE WITH REGARD TO THE JOB CH ARGES AND TRADE DISCOUNT AND COMMISSION ARE STATED TO BE NOT PRESSED AND ARE REJECTED AS NOT PRESSED. 14. SO FAR REGARDS THE SALES-TAX REFUND THE ASSESSEE MAIN TAINS THAT THE ASSESSEE COMPANY WAS PURCHASING RAW MATERIAL ON WHICH VAT HAD BEEN PAID; THAT THE COMPANY WAS ENTITLED TO VAT CREDIT WHICH WAS LIKE MODV AT ON ACCOUNT OF EXCISE DUTY; THAT AS PER THE ACCOUNTING PRACTICE FOLLOWED BY T HE ASSESSEE COMPANY COST OF RAW MATERIAL WAS DEBITED TO THE P&L A/C INCLUDING TH E ELEMENT OF VAT; THAT THE AMOUNT OF VAT WHICH WAS AVAILABLE FOR SET OFF WAS C REDITED TO THE P&L A/C AS SALES TAX REFUNDABLE UNDER THE HEAD MISCELLANEOUS INCOME. THE AO EXCLUDED 90% OF THE SALES TAX REFUNDABLE OF `526109 FOR COMPUTI NG DEDUCTION ALLOWABLE U/S 80HHC OF THE ACT. THE CIT(A) UPHELD THE AOS ACTION F OLLOWING THE FIRST APPELLATE I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 5 ORDERS IN THE EARLIER YEARS. FOR ASSESSMENT YEAR 2001-02 IT HAD BEEN OBSERVED BY THE CIT(A) THAT THE ASSESSEE HAD FAILED TO BRING ANY EVIDEN CE TO PROVE THAT SALES-TAX REFUND WAS IN RESPECT OF THE TOTAL TURNOVER OF THE ITEMS IN WHICH THE ASSESSEE WAS CARRYING ON EXPORT BUSINESS AND THEREFORE THE ACTION OF THE AO WAS CORRECT. 15. THE LD.COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THE TRIBUNAL VIDE ITS ORDER DATED 21.7.08 FOR ASSESSMENT YEAR 2001-02 (COPY AT APB 60-69) HAS REMANDED THE ISSUE REGARDING SALES-TAX REFUND TO THE AO TO VERIFY THAT THE RECEIPTS ARE PART OF THE EXPORT BUSINESS OF THE ASSESSEE; THAT HOWEV ER THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE COMPANY BY THE DECISION O F THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ALFA LAVAL INDIA LTD. 2 66 ITR 418 (BOM.) AS UPHELD BY THE HONBLE SUPREME COURT IN 295 ITR 451 (SC). 16. THE LD.DR ON THE OTHER HAND HAS STRONGLY RELIED ON THE IMPUGNED ORDER. 17. THE MATTER IT IS SEEN IS SQUARELY COVERED IN FAVOUR O F THE ASSESSEE BY ALFA LAVAL INDIA LTD. (SUPRA). THE HONBLE SUPREME COURT H ELD INTER ALIA THAT SALES TAX SET OFF AND OTHER REFUNDS RECEIVED BY THE ASSESSEE WHICH A RE BEING ASSESSED AS PART OF BUSINESS PROFITS CANNOT BE EXCLUDED WHILE COMPUT ING DEDUCTION U/S 80HHC OF THE ACT. ACCORDINGLY THIS PART OF GROUND NO.2 R AISED BY THE ASSESSEE IS ACCEPTED. I.T.A. NO.4065/DEL./07 18. THIS APPEAL HAS BEEN FILED BY THE DEPARTMENT TAKING THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE CIT(A) ERRED IN LAW AND ON FACTS IN HOLDING THAT LOSS INCURRED ON AC COUNT OF FOREIGN EXCHANGE FLUCTUATIONS IN RESPECT OF EXPORT RECEIVABLE DEBIT ED TO P&L A/C AT THE END OF THE YEAR WAS DULY ALLOWABLE AND DIRECTI NG THE AO THAT AMOUNT OF FOREIGN EXCHANGE LOSS IS ALSO REQUIRED TO BE EXCLUDED IN TOTAL TURNOVER AS WELL AS EXPORT TURNOVER FOR THE PUR POSE OF COMPUTATION OF DEDUCTION ALLOWABLE U/S 80HHC OF THE I. T. ACT. I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 6 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTING THE AO TO REDUCE 90% OF S ALE OF SCRAP FOR `21 41 125 AND DEVELOPMENT CHARGERS FOR `35 59 976 FOR CALCULATION OF PROFITS OF BUSINESS TO COMPUTE DEDUCTI ON U/S 80HHC OF THE I.T. ACT 1961. 19. THE FIRST GROUND IN THE APPEAL FILED BY THE DEPARTMENT CONTENDS THAT THE CIT(A) HAS ERRED IN HOLDING THAT LOSS INCURRED ON ACC OUNT OF FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF EXPORT RECEIVABLE DEBITED TO THE P &L A/C AT THE END OF THE YEAR WAS DULY ALLOWABLE AND DIRECTED THE AO THAT THE AMOU NT OF FOREIGN EXCHANGE LOSS IS ALSO REQUIRED TO BE EXCLUDED IN THE TOTAL TURNOVER AS WELL AS THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION A LLOWABLE U/S 80HHC OF THE ACT. 20. THE AO OBSERVED THAT THE ASSESSEE COMPANY HAD CLAIMED D IFFERENCE IN FOREIGN EXCHANGE OF `8575055 DEBITED TO ITS P&L A/C. O UT OF THIS AMOUNT FOREIGN EXCHANGE LOSS OF `4678757 WAS CLAIMED BY THE ASSESSEE COMP ANY ON ACCOUNT OF REINSTATEMENT OF FOREIGN CURRENT LOAN/TRANSACTION IN FY 2003-04 I.E. THE YEAR UNDER CONSIDERATION. ON QUERY THE ASSESSEE EXPLAINED THA T IT WAS ENGAGED IN THE EXPORT BUSINESS; THAT ACCOUNTING ENTRIES WERE BEING CONTIN UOUSLY PASSED ON THE BASIS OF THE METHOD OF ACCOUNTING REGULARLY FOLLOWED; T HAT AS PER THE MANDATORY ACCOUNTING STANDARD RECEIVABLES REMAINING OUTSTANDING AT THE CLOSE OF THE YEAR WERE TO BE REINSTATED AT THE CONVERSION RATE OF FOREIGN EXC HANGE ON THE LAST DATE OF THE ACCOUNTING YEAR; THAT THE RESULTANT DIFFERENCE WAS AC COUNTED FOR AS INCOME/LOSS. THE AO HOWEVER DID NOT AGREE WITH THE ASS ESSEE. IT WAS OBSERVED THAT THE AMOUNT CLAIMED BY THE ASSESSEE REPRESENTED DEDUCTIO N IN NOTIONAL VALUE OF THE OUTSTANDING FOREIGN EXCHANGE REINSTATED WHICH WAS YET TO BE SETTLED AND THEREFORE IT WAS ONLY ON A NOTIONAL LOSS. ON THIS BA SIS THE AO HELD THAT THE LOSS CANNOT BE ALLOWED ON A NOTIONAL BASIS. I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 7 21. THE CIT(A) ALLOWED THE ASSESSEES GRIEVANCE IN THIS REGA RD FOLLOWING THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. WOODWO RD GOVERNOR INDIA PVT. LTD. 162 TAXMAN 60 (DEL.) WHEREIN IT WAS HELD THAT T HE INCREASE IN THE LIABILITY ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE P REVAILING ON THE LAST DATE OF THE FINANCIAL YEAR IS NOT NOTIONAL AND CAN BE ALLOWED A S A DEDUCTION IN TERMS OF SECTIONS 37/28 OF THE ACT. THE CIT(A) HELD THAT THE LOS S INCURRED ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS IN RESPECT OF EXPORT RECEIVA BLES DEBITED TO THE P&L A/C AT THE END OF THE YEAR WAS DULY ALLOWABLE. HE FURTH ER DIRECTED THE AO TO EXCLUDE THE AMOUNT OF FOREIGN EXCHANGE LOSS FROM THE TOTAL TURNOVER AS WELL AS THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUC TIONS ALLOWABLE U/S 80HHC OF THE ACT. 22. THE LD.DR HAS STRONGLY RELIED ON THE ASSESSMENT ORDER. 23. THE LD.COUNSEL FOR THE ASSESSEE ON THE OTHER HAND HAS CONTENDED THAT THE ISSUE STANDS COVERED BY THE DECISION OF THE HONBLE SUPREME C OURT IN THE CASE OF CIT VS. WOODWORD GOVERNOR INDIA PVT. LTD. (SUPRA). 24. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE MATERIAL PLACED ON RECORD. THE CONTENTION OF THE LD.COUNSEL IS FOUND TO BE CORRECT. THE LIABILITY ARISING OUT OF FLUCTUATION IN RATE OF FOREIGN EXCHANGE IS ALLOWABLE IN THE YEAR OF INCREASE IN RATE. THE AMOUNT DEBITED WHILE FINALIZING THE ACCOUNTS WAS ADJ USTED AND TAKEN INTO CONSIDERATION IN THE FOLLOWING YEAR WHEN THE ACTUAL AMO UNTS WERE RECEIVED AGAINST EXPORT INVOICES. THE DIFFERENCE TO THE EXTENT OF THE SAID A MOUNT WAS NOT CLAIMED AS A LOSS IN THE FOLLOWING YEAR. AS SUCH NO EXCESSIVE DEDU CTION OR LOSS WAS CLAIMED IN THIS REGARD. THE LOSS INCURRED ON ACCOUNT OF FOREIGN EX CHANGE FLUCTUATION IS ALLOWABLE ON ACCRUAL BASIS. I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 8 25. IN VIEW OF THE ABOVE GROUND NO.1 IS REJECTED. 26. AS PER GROUND NO.2 THE CIT(A) HAS ERRED IN DIRECTIN G THE AO NOT TO REDUCE 90% OF SCRAP SALES OF `21 41 125 AND DEVELOPMENT CHARGER S FOR `35 59 976 FOR CALCULATION OF PROFITS OF BUSINESS TO COMPUTE DEDUCTIO N U/S 80HHC OF THE ACT. 27. APROPOS BOTH THE SCRAP SALES AS WELL AS THE DEVELOPM ENT CHARGES THE CIT(A) DIRECTED THE AO TO INCLUDE THE FIGURE OF SCRAP SALES AND D EVELOPMENT CHARGES INTO THE TOTAL TURNOVER FOR COMPUTATION OF DEDUCTION U/S 80 HHC OF THE ACT AND NOT TO REDUCE 90% THEREOF FOR CALCULATING PROFITS OF BUSINESS T O COMPUTE THE DEDUCTION U/S 80HHC OF THE ACT. 28. THE LD.DR HAS CONTENDED THAT THE CIT(A) HAS ERRED IN DIRECTING THE AO TO NOT TO REDUCE 90% OF SCRAP SALES AND DEVELOPMENT CHARGES FOR C ALCULATION OF PROFIT OF BUSINESS TO COMPUTE THE DEDUCTION U/S 80HHC OF THE ACT. 29. THE LD.COUNSEL FOR THE ASSESSEE ON THE OTHER HAND HA S RELIED ON THE IMPUGNED ORDER. IT HAS BEEN CONTENDED THAT APROPOS THE SC RAP SALES IN THE PROCESS OF MANUFACTURING ELECTRICAL FITTINGS SANITARY FITTIN GS AND BUILDING HARDWARE ETC. IS GENERATED; THAT SINCE THIS SCRAP COULD NOT BE RE-UTILISED IT WAS SOLD; THAT THEREFORE THE SALE CONSIDERATION OF THE SCRAP GENERATED IN THE MANUFA CTURING PROCESS WAS PART OF THE BUSINESS PROFITS; THAT THE COST OF THE RAW-MATERI AL WAS DEBITED TO THE P&L A/C; THAT SO SALE OF SCRAP WAS ALSO PART OF BUSINESS PROF ITS AS CORRECTLY HELD BY THE CIT(A) ; THAT THE SCRAP ARISING OUT OF THE ASSESSEES MA NUFACTURING ACTIVITY WAS DIRECTLY RELATED TO THE ASSESSEES BUSINESS. RELIANCE HAS B EEN PLACED ON CIT VS. LUCAS TVS LIMITED. 308 ITR 377 (MAD.) WHEREIN IT HAS BEEN HELD THAT THE TRIBUNAL WAS CORRECT IN REMANDING THE ISSUE TO THE FILE OF THE AO TO ASCERTAIN WHETHER THE SCRAP SALES WERE COVERED BY THE SCRAP WHICH WAS DERIVED BY THE ASSESSEE WHILE MANUFACTURING THE PRODUCTS THAT WERE EXPORTED BY IT AND TO INCLUDE THE RECEIPT OF SCRAP SALES IN THE TOTAL TURNOVER IF IT WAS SO. THE A O IN THAT CASE HAD RE- I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 9 COMPUTED THE BENEFIT U/S 80HHC BY INCLUDING INTER ALIA SCRAP SALES RECEIPTS IN THE TOTAL TURNOVER. 30. THE MATTER IT IS SEEN IS SQUARELY COVERED BY LUCAS TVS LTD.(SUPRA). THE SCRAP SALES HEREIN WERE OF SCRAP UNDENIABLY DERIVED BY THE A SSESSEE WHILE MANUFACTURING THE PRODUCTS EXPORTED BY IT. THEREFORE IN ACCORDANCE WITH LUCAS TVS LIMITED(SUPRA) THE RECEIPT OF SCRAP SALES IS TO BE IN CLUDED IN THE TOTAL TURNOVER. THE AO IS DIRECTED ACCORDINGLY. 31. SO FAR AS REGARDS DEVELOPMENT CHARGES THE LD.COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THE AMOUNT WAS RECEIVED BY THE ASSESSEE COMPAN Y FROM ITS CUSTOMERS TOWARDS EXPENSES INCURRED FOR DRAWINGS MODIFI CATION/DEVELOPMENT OF NEW TOOLS DYES/JIGS AND FIXTURES REQUIRED FOR MANUFACTU RING OF NEW COMPONENTS OF PRODUCTS; THAT THE RECEIPTS WERE ALSO RELATED TO THE BUSIN ESS OF MANUFACTURE AND EXPORT OF PRODUCTS AND WERE NOT RECEIPTS OF BROKERAGE COM MISSION INTEREST ETC. AS RIGHTLY HELD BY THE CIT(A). 32. SINCE THE EXPENSES WERE INCURRED TOWARDS DRAWINGS MODIFICATION/DEVELOPMENT OF NEW TOOLS DYES/JIGS AND FIX TURES REQUIRED FOR THE ASSESSEES MANUFACTURING PROCESS THE RECEIPT OF THE DEVELOPM ENT CHARGES WITH REGARD THERETO ARE DIRECTLY RELATED TO THE ASSESSEES BUSINESS . THEREFORE THE CIT(A) COMMITTED NO ERROR IN DIRECTING THE AO NOT TO DEDUCT 90% THEREOF TO COMPUTE THE BUSINESS PROFITS OF THE ASSESSEE FOR THE PURPOSE OF DEDUCTI ON U/S 80HHC OF THE ACT. 33. ACCORDINGLY GROUND NO.2 IS ALSO REJECTED. 34. IN THE RESULT I.T. ACT 1961 NO.4014 FILED BY THE ASSESSEE IS PARTLY ALLOWED AS INDICTED ABOVE AND I.T. A. NO.4065/DEL./07 FILED BY TH E DEPARTMENT IS DISMISSED. ITA NO.227/DEL./07 35. THIS IS ASSESSEES APPEAL TAKING THE FOLLOWING GROUN DS: I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 10 1(A) THAT THE CIT(A) ERRED IN HOLDING THAT AMOUNTS OF `47 11 573 CREDITED TO PROFIT & LOSS ACCOUNT ON ACCOUNT OF DEPB ENTITLEMENT ON A NOTIONAL BASIS REPRESENTS THE INCOME REFERRED TO IN CLAUSES (IIID) OF SECTION 28 OF THE I.T. ACT AND ACCORDINGLY SAME HAD TO BE EXCLUDED FO R THE PURPOSE OF DETERMINATION OF PROFIT OF THE BUSINESS FOR CALCULAT ING DEDUCTION ALLOWABLE U/S 80HHC OF THE ACT. (B) THAT CIT(A) ALSO ERRED IN OBSERVING THAT THE GOVERNMENTS HAD TRANSFERRED SUCH CREDIT TO THE APPELLANT IN RESPECT OF DEP B ENTITLEMENT AND ACCORDINGLY THE APPELLANT HAS CREDITED SUCH PROFIT TO THE PROFIT & LOSS ACCOUNT AND THEREFORE IT CANNOT BE SAID THAT SAI D AMOUNT HAS NOT BEEN EARNED AS PROFIT. (C) THAT THE CIT(A) ALSO ERRED IN NOT APPRECIATING THAT AMEN DMENT MADE TO SECTION 80HHC OF THE I.T. ACT TO THE EXTENT DEDUCTION IS DENIED TO THE EXPORTERS HAVING TURN OVER EXCEEDING ` 10 CRORES IN RESP ECT OF DEPB ENTITLEMENT AND DFRC IS NOT LEGALLY VALID BEING AR BITRARY AND IRRATIONAL AND IS UNDER CHALLENGE IN THE PETITIONS BEFORE THE HIGH COURT AND THEREFORE HE OUGHT NOT TO HAVE TAKEN COGNIZANCE OF T HE AMENDED PROVISIONS WHILE PASSING THE ORDER UNDER REFERENCE. 2 THAT THE CIT(A) ALSO ERRED IN HOLDING THAT JOB CHARG ES OF `1 14 400 SALES TAX REFUND OF `1 76 181 AND AMOUNT `21 132 BEIN G PRIOR PERIOD INCOME CREDITED TO PROFIT AND LOSS ACCOUNT ARE TO BE EXC LUDED IN DETERMINATION OF PROFIT OF BUSINESS IN TERMS OF CLAUS E (BAA) OF EXPLANATION TO SECTION 80HHC OF THE I.T. ACT FOR COM PUTING DEDUCTION ALLOWABLE UNDER THE ABOVE SECTION. I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 11 36. THIS IS ASSESSEES APPEAL FOR ASSESSMENT YEAR 2003-04 . GROUND NO.1 CORRESPONDS TO GROUND NO.1 IN I.T. A. NO.4014/DEL./07 (SUPRA) FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2004-05. FOLLOWING THE DISC USSION THEREIN THIS GROUND IS PARTLY ACCEPTED. GROUND NO.2 STATES THAT T HE CIT(A) HAS ERRED IN HOLDING THAT THE JOB CHARGES OF `1 14 400 SALES TAX REFUND OF `1 76 181 AND PRIOR PERIOD INCOME OF `26 132 CREDITED TO THE P&L A/C ARE TO BE EXCL UDED IN DETERMINING THE BUSINESS PROFITS OF THE ASSESSEE IN TERMS OF CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC OF THE ACT FOR COMPUTING DEDUCTION ALLOWABLE THER ETO. 37. AT THE OUTSET THE LD.COUNSEL FOR THE ASSESSEE HAS CONT ENDED THAT THE CLAIM REGARDING JOB CHARGES AND PRIOR PERIOD INCOME ARE NOT PR ESSED AND IS REJECTED AS NOT PRESSED. 38. THE ISSUE REGARDING SALES-TAX REFUND HAS BEEN DEALT WI TH WHILE DISPOSING OF GROUND NO.2 IN I.T.A. NO.4014/DEL./07 ABOVE. IN ACCO RDANCE WITH THE DISCUSSION MADE THEREIN THIS GRIEVANCE OF THE ASSESSEE IS ACCEPTED. 39. IN THE RESULT THIS APPEAL OF THE ASSESSEE IS PARTLY A LLOWED. I.T. A. NOS. 4013 & 4064/DEL./07 40. THESE ARE CROSS APPEALS FOR ASSESSMENT YEAR 2002-03. IN I.T.A. NO.4013 THE FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE. 1(A) THAT THE CIT(A) ERRED IN UPHOLDING THE RE-OPENING A SSESSMENT IN THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE APPELLANT U/ S 147 OF THE ACT AS VALID WITHOUT APPRECIATING THAT THERE WAS NO MA TERIAL AVAILABLE WITH THE AO FOR FORMING THE BELIEF THAT INCOME HAS ESCAPE D ASSESSMENT. I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 12 (B) THAT THE CIT(A) ALSO ERRED IN NOT CONSIDERING AND ADJUDICATING CONTENTION OF THE APPELLANT THE ORDER OF ASSESSMENT DATED 27.10.2006 WAS PASSED BY THE AO WITHOUT CONSIDERING O BJECTION OF THE APPELLANT COMPANY REGARDING REOPENING OF ASSESSMENT AN D THEREFORE SAME WAS ILLEGAL AND BEYOND THE JURISDICTION OF THE AO AND THEREFORE OUGHT TO HAVE BEEN QUASHED. 2(A) THAT THE CIT(A) ERRED IN NOT ALLOWING CLAIM OF TH E COMPANY FOR DEDUCTION U/S 80HHC ON 90% OF CREDIT IN RESPECT OF ENTIT LEMENT OF DEPB AMOUNTING TO `17 64 845/-. HE OUGHT TO HAVE APP RECIATED THAT AFORESAID AMOUNT WAS NOT THE PROFIT ON TRANSFER O F DEPB BUT SAME REPRESENTED ONLY BOOK ENTRY IN THE BOOK ON NOTIONAL BASIS AND THEREFORE WAS NOT INCOME REFERRED TO IN CLAUSE (IIID) OF S ECTION 28 OF THE I.T. ACT. (B) THAT THE CIT(A) ALSO ERRED IN NOT APPRECIATING THAT AMEN DMENT MADE TO SECTION 80HHC OF THE I.T. ACT TO THE EXTENT DEDUCTION IS DENIED TO THE EXPORTERS HAVING TURNOVER EXCEEDING `10 CRORES IN RESPECT OF DEPB ENTITLEMENT IS NOT LEGALLY VALID BEING ARBITRARY AND IR RATIONAL AND IS UNDER CHALLENGE IN THE PETITIONS BEFORE THE HIGH COURT AND THEREFORE HE OUGHT NOT TO HAVE COGNIZANCE OF THE AMENDED PROVIS IONS WHILE PASSING THE ORDER UNDER REFERENCE. 3. THAT THE CIT(A) ALSO ERRED IN UPHOLDING THAT SALES-T AX REFUND OF `1 20 087/- WAS TO BE EXCLUDED IN DETERMINATION OF PROF IT OF BUSINESS IN TERMS OF CLAUSE (BAA) OF THE EXPLANATION T O SECTION 80HHC OF THE ACT WITHOUT APPRECIATING THAT SALES-TAX REFUND AS PART AND PARCEL OF THE BUSINESS PROFIT OF THE CURRENT YEAR. 4. THAT THE CIT(A) ALSO ERRED IN UPHOLDING THAT GROUND OF THE APPELLANT REGARDING INITIATION OF PENALTY PROCEEDINGS IN A ROUTIN E MANNER IS PREMATURE WITHOUT APPRECIATING THAT DISALLOWANCES/ADJU STMENTS HAD BEEN MADE BY THE A.O. ON ACCOUNT OF LEGAL CONTROVERSIES AN D DIFFERENCE OF OPINION AND NOT FOR THE REASON OF CONCEALMEN T OF INCOME OR FURNISHING OF INACCURATE PARTICULARS BY THE APPELLA NT AND THEREFORE PROVISIONS OF ABOVE SECTION WERE NOT ATTRACTED. 41. IN I.T.A. NO.4064 THE DEPARTMENT HAS RAISED THE FOL LOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTING THE AO TO CONSIDER SCRAP SALE OF I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 13 `9 46 804 AND DEVELOPMENT CHARGES OF `22 61 708 AS PART OF BUSINESS PROFIT FOR THE PURPOSE OF ALLOWING DEDUCTION U /S 80HHC AND INCLUDE THESE ITEMS IN TOTAL TURNOVER ALSO. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTING THE AO TO CONSIDER FOREI GN EXCHANGE FLUCTUATIONS/DIFFERENCE OF `59 36 412 AS BUSINESS INCOM E/PROFIT WHILE COMPUTING DEDUCTION U/S 80HHC OF THE I.T. ACT 1961. 42. GROUND NO.1 IN I.T.A. NO.4064/DEL./07 CORRESPONDS TO GROUND NO.2 IN I.T.A. NO.4065/DEL./07. IN ACCORDANCE WITH THE DISCUS SION MADE THEREIN THIS GROUND IS REJECTED. 43. GROUND NO.2 CORRESPONDS TO GROUND NO.1 IN I.T.A. NO.4065/DEL.07. IN ACCORDANCE WITH THE DISCUSSION MADE THEREIN THIS GROUND IS ALSO REJECTED. I.T. A.NO.4013/DEL./07 44. THE LD.COUNSEL FOR THE ASSESSEE STATES AT THE BAR THAT GROUND NO.1 CHALLENGING THE VALIDITY OF THE REOPENING OF THE COMPLETED ASSESSMENT IS NOT SERIOUSLY PRESSED. ACCORDINGLY THIS GROUND IS REJECTED . 45. GROUND NO.2 CORRESPONDS TO GROUND TAKEN IN I.T. A . NO.4014. IN ACCORDANCE IN THE DISCUSSION THEREIN THIS GROUND IS PA RTLY ACCEPTED. 46. GROUND NO.3 CORRESPONDS TO GROUND NO.2 IN I.T.A. NO.4014. IN ACCORDANCE WITH THE DISCUSSION MADE THEREIN THIS GROUND IS ACCEPTED . 47. GROUND NO.4 IS CONSEQUENTIAL. 48. IN THE RESULT I.T.A. NO.4013 FILED BY THE ASSESSEE IS PARTLY ALLOWED WHEREAS I.T.A. NO.4064/DEL./07 PREFERRED BY THE DEPARTMENT IS DI SMISSED. ORDER PRONOUNCED IN OPEN COURT ON 11.03.2011. I.T.A.NOS.4013 227 4014 4064 & 4065/D/07 (A.YS. : 2002-03 03-04 & 04-05) 14 SD/- SD/- (G.E. VEERABHADRAPPA) (A.D.JAIN) VICE PRESIDENT JUDICIAL MEMBER DELHI DATED : 11.3.2011 SKB COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-X NEW DELHI. 5.CIT(ITAT) NEW DELHI. AR/ITAT