B. Desraj v. Commissioner Of Income Tax, Salem .

Order

1. Leave granted. The short question which arises for determination in this civil appeal is whether in the facts and circumstances of the case the Tribunal was right in holding that the deduction under Section 80-HHC of the Income Tax Act, 1961 in respect of duty drawback and cash compensatory support is allowable even though no export was done by the assessee during Assessment Year 1991-1992.

2. Briefly stated the facts giving rise to the present dispute are as follows:

The appellant is the sole proprietor of M/s D.R Enterprises engaged in the business of export of textiles/fabrics since 1-2-1980. As part of his business the appellant has been exporting fabrics to Chittagong and Dhaka. Consequent upon exports made by the appellant, inward remittance came into India in foreign exchange on 21-8-1989, 11-12-1989, 28-2-1990, 16-3-1990, 29-3-1990 and 31-3-1990. In other words, inward remittance came into India during the accounting year ending 31-3-1990 (relevant Assessment Year 1990-1991). However, the appellant received cash compensatory allowance amounting to Rs 7,74,785 on 25-5-1990 (i.e in the next accounting year). He also received on the same day duty drawback of Rs 35,565. In other words, the appellant received duty drawback and cash compensatory allowance during the accounting year ending 31-3-1991 corresponding to Assessment Year 1991-1992, with which we are concerned in this civil appeal.

3. In this civil appeal we are concerned with the question as to whether the sum of Rs 7,74,785 + Rs 34,565 received by the appellant during the accounting year ending 31-3-1991 constitutes eligible income under Section 80-HHC(3) of the Income Tax Act, 1961 as it stood at the relevant time.

4. One more fact needs to be mentioned. The assessee was maintaining at the relevant time cash system of accounting. There is no dispute on that aspect. According to the assessing officer, admittedly, the appellant had not made export sales during Assessment Year 1991-1992 and therefore, the said duty drawback and cash compensatory allowance did not constitute eligible income deductible from the gross total income under Section 80-HHC.

5. Aggrieved by the assessment order the assessee had carried the matter in appeal to CIT (Appeals) who took the view that the above amounts were admittedly relatable to the sales made during the earlier year ending 31-3-1990 and consequently, the Income Tax Officer had wrongly rejected the appellant's claim for deduction under Section 80-HHC of the Act. This view of the Commissioner was also on the basis of the formula mentioned in Section 80-HHC(3) and the Circulars of CBDT No. 564 dated 5-7-1990 and 571 dated 1-8-1990 in which it has been specifically mentioned that in computation of deduction under Section 80-HHC the business profits would include export incentives. We will come to that formula later on. Suffice it to say that the decision of the Commissioner was upheld by the Tribunal.

6. Aggrieved by the decision of the Tribunal the Department carried the matter in appeal to the Madras High Court vide Tax Case (Appeal) No. 134 of 2003. By the impugned judgment the High Court overruled the decision of the Tribunal on the ground that during Assessment Year 1991-1992 the assessee had received cash compensatory support and duty drawback for the exports made in the earlier year and that there were no exports made in that year and therefore, the said amounts did not constitute eligible income for deduction under Section 80-HHC. Hence, this civil appeal by the assessee.

7. At the outset, it may be stated that by the Finance Act, 1990, Parliament has clarified that cash compensatory support and duty drawback shall be taxable under Section 28 of the Income Tax Act, 1961. By the said Finance Act, 1990, clause (iii-b) came to be inserted as one of the incomes chargeable to income tax under the head “business profits” vide Section 28. Clause (iii-b) covers cash assistance (by whatever name called) “received or receivable” by any person against exports under any scheme of the Government of India.

8. At the relevant time an issue arose as to whether cash assistance though includible in business profits under Section 28(iii-b) would or would not constitute eligible income for the purposes of deduction under Section 80-HHC. Since there was some doubt, CBDT had issued a circular (see p. 35 at p. 42 of the paper book). By the said circular, CBDT clarified that export incentives, namely, cash compensatory support and duty drawback have to be included in the profits of the business for computing the deduction under Section 80-HHC. With the issuance of this circular the point is no more res integra.

9. On behalf of the respondent Department, it is submitted that even if cash compensatory support and duty drawback constitute part of income chargeable to tax as business profits under Section 28(iii-b), still it would not be eligible income for purposes of deduction under Section 80-HHC.

10. As stated above, at one point of time this controversy did exist which led to the issuance of the said circular (Annexure P-2 at p. 42). Therefore, we have to reject the above argument advanced on behalf of the Department.

11. As stated above, the formula is indicated in Section 80-HHC(3). We quote hereinbelow the said formula:

Profit of the business (including export incentives) x Export turnover (sale proceeds actually received in foreign exchange) Total turnover (excluding export incentives)

The above formula itself shows that business profit includes export incentives. This formula is also indicated in the circular referred to above issued by CBDT.

12. The formula indicates that Parliament as well as CBDT have taken into account the insertion of clause (iii-b) in Section 28 by the Finance Act, 1990. Further, it is also relevant to note that by the same Finance Act, 1990, clause (iii-b) was inserted into Section 28 and changes were also made in Section 80-HHC(3). Therefore, Section 80-HHC as it stood at the relevant time was required to be read with Section 28(iii-b) because both the sections have been amended by the same Finance Act of 1990. This vital aspect has not at all been considered by the High Court.

13. In the circumstances, we are of the view that the words “business profit” in the above formula under Section 80-HHC(3) would include cash compensatory allowance and duty drawback and accordingly we direct the assessing officer to work out the deduction in accordance with the law as it stood during the relevant Assessment Year 1991-1992.

14. For the aforestated reasons, the assessee succeeds and the civil appeal is allowed with no order as to costs.