R.V. Easwar, J.M. - (1.) THIS appeal by the assessee has been referred by the Hon'ble President, ITAT, to a Special Bench because of the conflict between two orders passed by the Mumbai Bench of the ITAT in (1) ITA No. 1555/Mum/1997, dt. 16th March, 2001, in the case of Jamnadas G. Hundalani, and (2) ITA No. 2561/Mum/98, dt. 30th July, 2001, in the case of Vinodiai Manilal & Co. Ltd.
(2.) The controversy arises this way. The assessee is a partnership firm. It is engaged in the business of export of "trading goods". During the relevant accounting year (year ending 31st March, 1995), the turnover amounted to Rs. 3,55,02,549 which consisted only of exports. In claiming deduction of Rs. 84,87,278 under Section 80HHC(3)(b), which is the appropriate provision applicable to an assessee who exports trading goods, the assessee contended that a part of the "indirect costs" has to be attributed to the export incentives received by the assessee during the year. These incentives consisted of the following : JUDGEMENT_11604_TLIT0_20020.htm 2.1. The assessee claimed that 10 per cent of the above viz., Rs. 1,09,567 must be attributed as indirect costs to the earning of the aforesaid export incentives and to that extent, the indirect expenses debited in the P&L a/c should be reduced for the purpose of computing the deduction in accordance with the formula laid down in Section 80HHC(3)(b). 2.2. The significance of the claim made by the assessee may be briefly explained. Under the above-mentioned section, an exporter of trading goods is entitled to the deduction in respect of the profits derived from such export which shall be the export turnover as reduced by the direct costs and the indirect costs attributable to such export. The smaller the figure of direct and indirect costs, the larger will be the profits derived from the export and consequently larger will be the deduction. By attributing a part of the indirect costs to the export incentives, the assessee seeks to reduce the indirect costs attributable to the export of trading goods so that it will be left with a larger amount of export profits, which it can deduct from its gross total income. The attempt of the IT authorities is to prevent this by holding that no part of the indirect costs can be attributed to the export incentives. This in brief is the bone of contention. 2.3. The following example will clarify the position (figures assumed) : JUDGEMENT_11604_TLIT0_20021.htm From the above comparative working, it may be seen that if the assessee's contention regarding the indirect costs to be deducted is accepted the deduction under Section 80HHC comes to Rs. 1 lakh, whereas if the AO's working is accepted, the deduction comes to Rs. 94,000 only. This, in a nutshell, explains the significance of the rival positions. In the present case, the AO has computed the deduction at Rs. 83,77,711. The difference is Rs. 1,09,567, which is solely due to the fact that the assessee reduced the indirect costs by 10 per cent of the export incentives, which comes to Rs. 1,09,567. In support of the claim, the learned counsel for the assessee argues like this. Under Section 80HHC(3)(b) only indirect costs which are "attributable to such export" can be deducted from the export turnover. Export incentives are not export of goods. They cannot be considered as "export turnover" as defined in Clause (b) of the Explanation below Sub-section (4B), because they do not represent any "sale proceeds". They cannot be considered as part of the "total turnover" also, within the meaning of Clause (ba) of the said Explanation, as they have been specifically omitted from the definition by the proviso thereto. Therefore, export incentives cannot, for the purposes of the deduction under Section 80HHC, be considered as "export turnover". Further, Clause (baa)(1) of the said Explanation specifically excludes 90 per cent of the "non-export" receipts, which should include export incentives also, from the "profits of the business". Thus, not only are the export incentives excluded from export turnover, but they are also excluded from the profits of the business to the extent of 90 per cent. If that is so, it would be irrational to consider the indirect costs attributable to export incentives as part of the indirect costs "attributable to such export", meaning "export turnover". Though "indirect costs" are defined broadly as costs other than direct costs, one should bear in mind the context and the setting of the definition and should interpret the same keeping in view the basic condition of 'Sub-section (3)(b) that indirect costs should be 'attributable to such export" As regards the basis for ascribing 10 per cent of the export incentives as indirect costs attributable to them, the argument was that this is the percentage attributed by the legislature itself in Clause (baa) of the Explanation below Sub-section (4B) while excluding the export incentives from the "profits of the business" and also in the proviso to Sub-section (3). Attention was also invited to the Memorandum explaining the provisions of the Finance (No. 2) Act, 1991, and the Circular No. 621, dt. 19th Dec., 1991, issued to explain the provisions of the Finance (No. 2) Act, 1991, to show that the legislature itself regards 10 per cent of the common expenses as attributable to receipts which have no connection with the exports and have, therefore, excluded only 90 per cent (and not the entire) of such receipts from the "profits of the business" and, therefore, irrespective of the actual amount of the indirect costs attributable to the export incentives, only 10 per cent may be taken to be so. Our attention was also invited to the following orders of the Mumbai Benches of the Tribunal which have taken a view in favour of the assessee's claim; (a) Jamnadas G. Hundalani (ITA No. 5348/M/2001--'E' Bench), (b) Chemocid Impex (P) Ltd. Mumbai (ITA No. 5348/M/2001--SMC Bench); (c) S. Mansukhlal & Co. (ITA No. 4370/M/2000--'J' Bench); (d) Jafferbhoy Salewhbhoy & Co. (ITA No. 1521/M/01--'C' Bench): and (e) Gill & Co. Ltd. (ITA No. 8749/B/95--'F' Bench).
(3.) THE learned CIT (Departmental Representative) put forth his case like this. It is a matter of policy that the Government have thought it fit to exclude only 90 per cent of the receipts by way of commission, interest, rent, etc. and receipts of similar nature from the "profits of the business" as per Expln. (baa) to Sub-section (4B) instead of 100 per cent of such receipts and from this it cannot be inferred that the legislature has assumed that 10 per cent of such receipts has to be treated as costs or expenses to earn such receipts. That Explanation was inserted for an entirely different purpose and is not relevant for the purpose of interpreting Clause (b) of Sub-section (3). In fact, neither the Explanation nor the Memorandum explaining the provisions of the relevant Finance Bill nor even the circular issued by the CBDT has referred to export incentives and, therefore, it cannot be assumed that 10 per cent of the export incentives should be considered as costs or expenses incurred to earn them. Further, the export incentives are not treated either as "export turnover" or as part of "total turnover" or as part of the "Export profits". THE definition of "indirect costs" as per Expln. (e) below Sub-section (3) does not exclude such costs incurred for earning export incentives. THErefore, there is no justification for excluding indirect costs, if any, incurred for earning export incentives. THE assessee in the present case is a 100 per cent exporter and, therefore, the entire expenses, both direct and indirect, can be only in respect of the export turnover or activity. Even factually, considering the nature of the export incentives received by the 'assessee, it is impossible to conceive of any costs or expenses incurred for the purpose of earning them. Section 80HHC is a special deduction and, therefore, there is no room for any inference or intendment, as held by the Delhi High Court in CIT v. Sir Sobha Singh Pulic Charitable Trust (2001) 250 JTR 475 (Del). At any rate, the actual incurring of the expenditure to earn the export incentives is a matter of evidence and proof which is lacking in the present' case. So ran the argument of the learned CIT's Departmental Representative.;