TARA AGENCIES Vs. INCOME TAX OFFICER
INCOME TAX APPELLATE TRIBUNAL
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G. Santhanam, Accountant Member -
(1.) THESE appeals relate to the assessment years 1979-80 and 1981-82. Of these appeals, two are by the assessee and two are by the revenue. As there are common grounds and allied matters arising in these appeals, a consolidated order is passed for the sake of convenience.
(2.) IT A No. 502/ Coch./88 - The assessee had received a sum of Rs. 17,72,275 from the Dy. Chief Controller of Imports and Exports as cash incentives in this export business. Out of this amount, a sum of Rs. 13,14,954 was credited to the profit and loss account as its income for the reason that the said sum was in relation to the realisation of sale proceeds. But it had carried forward a sum of Rs. 4,57,320 to the Balance-sheet being the cash incentives referable to the exports for which, however, the sale proceeds were not realised as on the date of balance-sheet. In other words initially it treated the sum of Rs. 13,14,954 as its income but did not treat the other sum of Rs. 4,57,320 as its income because the assessee was under an obligation to refund the amount to the Dy. Chief Controller of Imports and Exports in case the sale proceeds were not realised. However, in the revised return it claimed exemption for even the sum of Rs. 13,14,954 on the ground that the cash compensatory support received by it cannot be included in the profit and loss accounts of business for taxing purposes in the light of the Special Bench decision of the Income-tax Appellate Tribunal in the case of Gedore Tools (India).
The learned Assessing Officer rejected the contentions of the assessee and brought to tax the entire sum of Rs. 17,72,275 as business income: The assessee appealed. The learned CIT (Appeals) following the decision of the Delhi High Court reported in Handicrafts & Handloom Export Corpn. of India v. CIT  140 ITR 532, upheld order of the Assessing Officer. The assessee is on further appeal.
(3.) THERE are two main grounds in the assessee's appeal in relation to the taxability of cash compensatory support received from the Government and they are to be found in ground No. 4(a), (b), (c) & (d) and ground No. 5(a), (b), (c) & (d). Shri Harish, the learned Counsel fairly admitted that in view of insertion of Clause (iiib) to Section 28 by the Finance Act, 1990 with effect from 1-4-1967 he would not press the ground No. 5(a), (b), (c) & (d) opposing the taxability of the cash incentive amount of Rs. 13,14,954. As such ground No. 5(a), (b), (c) & (d) is dismissed as not pressed. The CIT (Appeals) is justified in upholding the inclusion of a sum of Rs. 13,14,954 in the income of the assessee. Shri Harish, however, submitted that the cash incentive of Rs. 4,57,320 related to the exports made by the assessee on which sale proceeds have not been realised in foreign exchange. In fact under the incentive scheme the assessee was under an obligation to return any amount received as incentive from the Dy. Chief Controller of Imports and Exports if the sale proceeds in relation to the exports on which incentive was initially granted did not materialise. As a matter of fact as on the date of balance-sheet, the sale proceeds of the exports giving rise to incentive of Rs. 4,57,320 did not materialise and took few years for it to materialise. THEREfore, as the assessee was maintaining the mercantile system of accounting and as there was an obligation to refund the incentive received in case of non-realisation of the sale proceeds in foreign exchange, the assessee cannot take up the impugned incentive as its income. It was not an unconditional grant of incentive. It was a conditional grant with a corresponding obligation on the part of the assessee. If the impugned amount which is undoubtedly an incentive is treated as income correspondingly the obligation on the part of the assessee to refund the said incentive in case of non-realisation of the sale proceeds of the exports giving rise to such incentive should be allowed as an expenditure in accordance with the mercantile system of accounting followed by the assessee. On the other hand the learned authorities have taken the view that the incentive was to be taxed on the receipt basis and any refund made thereon will be considered as an expenditure in the year in which such refund took place. This is in a way compelling the assessee to have a change in the system of accounting regularly followed by the assessee which is not permissible under the provisions of the Income-tax Act.;
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