Citation Codes

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Case Number

ITA No. 3062.Mum/2009, (Asst. Year 2004–05)

Attorney(S)

Assessee by: Sh Reepal G Traishawala
Revenue by: Sh Sanjiv Dutt

Judges

T.R Sood, A.M
Vijay Pal Rao, J.M

Acts

sections 28 to 44D of the Income-tax Act.
section 80HHC(3) of the Income-tax Act
INCOME TAX ACT

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Smart Summary

Structured Summary of the Opinion (Appeal against CIT revision order u/s 263 — AY 2004–2005)

Factual and Procedural Background

This appeal by the assessee challenges the revision order of the Commissioner of Income-tax ("CIT") dated 24 March 2009, passed under section 263 of the Income-tax Act concerning Assessment Year 2004–2005. The assessment had previously been completed by the Assessing Officer ("AO") under section 143(3) by an order dated 29 December 2006. Thereafter the CIT issued a show cause notice dated 29 March 2007 proposing to revise the assessment inter alia on two issues:

Deduction under section 80HHC — specifically the treatment of interest receipts and whether 90% of certain interest receipts should be excluded under clause (baa) of the Explanation to section 80HHC.
Exchange gain on forward contract translation amounting to Rs. 80,72,500 — whether this amount formed part of the export turnover and therefore its treatment for computing deduction under section 80HHC.

The assessee filed grounds of appeal challenging the CIT's exercise of jurisdiction under section 263 and asserting that the AO had applied his mind, taken one of the possible views (including reducing 90% of interest under clause (baa)) and therefore the CIT had no jurisdiction to take a different view. The matter was also the subject of appellate proceedings: the Tribunal had earlier decided the issue (in favour of the assessee) for assessment years 2000–2001 to 2002–2003 and, for the year under consideration, a Tribunal order dated 10 March 2008 decided the issue favourably for the assessee.

Legal Issues Presented

Whether the CIT correctly invoked section 263 to revise the AO's assessment with respect to the deduction under section 80HHC on interest receipts (i.e., whether the AO's view was erroneous and prejudicial to the revenue or was a possible view after application of mind)?
Whether the exchange gain on forward contract translation (Rs. 80,72,500) constituted part of the export turnover for the purpose of computing deduction under section 80HHC, or whether it should be excluded (and 90% treated as excluded under clause (baa) of the Explanation to section 80HHC)?

Arguments of the Parties

Appellant's (Assessee's) Arguments

The AO had examined the interest receipts issue in detail (see assessment paragraph 4.1) and excluded 90% of interest received by applying clause (baa) of the Explanation to section 80HHC; the AO had applied his mind and relied on relevant decisions (Punit Commercial Ltd. v. CIT; Nagpur Engg Co. Ltd. v. CIT).
Because the AO applied his mind and took one of the possible views, the CIT lacked jurisdiction under section 263 to take a contrary view.
On the exchange gain, the assessee later explained that the exchange gain on forward contracts was not included in export turnover and therefore there was nothing to exclude from export turnover as directed by the CIT. The assessee filed reconciliation and computation showing the exchange gain was not part of export turnover.
The assessee referred to the AO's queries and its replies to show that the AO had considered the interest issue and that the computation pages (paper book pages 22–23) did not include the forward contract gain in export turnover.

Respondent's (Revenue/CIT's) Arguments

The CIT contended the AO's treatment was erroneous: interest received should be taxed as income from other sources (and not treated as business income for the purpose of reducing 90% under clause (baa)), relying on a series of High Court and Supreme Court decisions, including the jurisdictional High Court decision in CIT v. Damodar Mangallji Mining Co. (326 ITR 437).
On the exchange gain, the CIT held that the assessee had shown the amount as exchange gain on forward contract outstanding and that translation gains cannot be related to export turnover; therefore the AO's allowance was erroneous and prejudicial to revenue and required modification.
The Revenue relied on the assessee's reply to the show cause notice in which the assessee had taken the position that the exchange gain on forward contracts was "part and parcel" of export turnover — which supported the CIT's view that the assessee had earlier asserted it to be part of turnover.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Punit Commercial Ltd. v. CIT, 235 ITR 550 (Mumbai)	Decision relied upon by the assessee/AO in support of the AO's approach to treating certain interest receipts for purposes of section 80HHC computation.	The court noted the AO had considered this decision while reducing 90% of interest under clause (baa); the court treated the AO's reliance as part of a possible view and concluded CIT could not overturn that view under section 263.
Nagpur Engg Co. Ltd. v. CIT, 245 ITR 806	Decision relied upon by the assessee/AO as supportive authority on treatment of interest/related issue for section 80HHC.	The court recorded that the AO had considered this decision when excluding 90% of interest income; the court treated the AO's view as one of the possible views, barring CIT's revision under section 263 on that point.
CIT v. Damodar Mangallji Mining Co., 326 ITR 437	High Court authority relied upon by the Revenue to support the proposition that interest received ought to be taxed as income from other sources (i.e., not necessarily business income for 80HHC purposes).	The Revenue relied on this precedent in its show cause and submissions; the court considered the reliance but concluded that because the AO had taken a possible view after applying his mind, section 263 could not be invoked to displace that view.
Commissioner of Income-tax v. K. Ravindranathan Nair, 295 ITR 228 (Supreme Court)	Principle on interpretation of clause (baa) to the Explanation to section 80HHC — that receipts having no nexus with export turnover (independent incomes) ought to be excluded when computing export profits and that clause (baa) required deduction of 90% of such independent receipts.	The court relied on and quoted this Supreme Court decision to support the conclusion that exchange gain on forward contract translation does not form part of export turnover and hence 90% of such income must be excluded under clause (baa) when computing deduction under section 80HHC.
Commissioner of Income-Tax v. Lakshmi Machine Works Ltd. ([2007] 6 Scale 168) — cited within the quoted Supreme Court paragraph	Used in the Supreme Court discussion quoted in the opinion to illustrate the point that certain receipts (e.g., indirect taxes recovered on behalf of government) should not be included in total turnover for computing export profits.	Appears in the excerpted paragraph from K. Ravindranathan Nair; the court's opinion reproduces the Supreme Court's reasoning where this decision is mentioned as part of the interpretive context for clause (baa).

Court's Reasoning and Analysis

The court proceeded issue by issue and applied settled principles concerning the scope of section 263 and the proper interpretation and application of clause (baa) of the Explanation to section 80HHC.

On Deduction u/s 80HHC — Interest Receipts

The court examined whether the AO's order was "erroneous and prejudicial to the interest of revenue" such as to justify the CIT invoking section 263.
It noted that the AO had explicitly considered the interest income matter (assessment para 4.1), made enquiries, and ultimately reduced 90% of the interest income by applying clause (baa) of the Explanation to section 80HHC. The AO had also considered precedents relied upon by the assessee.
The court applied the settled proposition that if the AO has taken one of the possible views after application of mind, the CIT cannot substitute its own view under section 263 simply because it considers another view preferable. What matters for section 263 is whether the AO's view was a possible view and arrived at after application of mind, not whether it was the only correct view.
The court observed that the very issue had been the subject-matter of appeal in the assessee's own case for earlier years and, for the year under consideration, had been decided by the Tribunal in favour of the assessee (Tribunal order dated 10.3.2008). In those circumstances the AO's view was a possible view and the CIT's attempt to set it aside under section 263 was barred.
On this basis the court found the CIT's invocation of section 263 on the interest/80HHC point "not proper and justified" and allowed the assessee's ground on this issue.

On Exchange Gain on Forward Contract Translation

The court first noted a factual and procedural distinction: unlike the interest issue, the AO had not discussed or adjudicated the exchange-gain-on-forward-contract point in the original assessment — there was no application of mind by the AO on this issue at that stage.
The show cause notice from the CIT made clear the CIT's view that the Rs. 80.73 lakhs exchange gain arising from translation of forward contracts could not be related to export turnover and should be included only in total turnover or profit, and further that such receipts would fall within clause (baa) and therefore 90% would have to be excluded for computing deduction under section 80HHC.
The assessee's reply to the CIT's show cause notice, as reproduced in the record, expressly stated that in the year under consideration the exchange gain of Rs. 80.73 lakhs "is considered as part of export turnover" and explained the hedging mechanism and asserted a direct nexus to sales. However, in subsequent pleadings before the court the assessee took the contrary stand that the amount was never part of export turnover and therefore could not be excluded.
On examination of the assessee's own computation pages (paper book p.22), the court observed that the assessee had not included the exchange gain in export turnover or in total turnover, but had included the amount in profit from business and yet claimed full deduction as available to profit and gain of export turnover. The court held that such treatment was not consonant with the scheme of section 80HHC.
Given that the AO had not applied his mind originally, the assessment order on this point was erroneous and prejudicial to the interest of revenue. In light of the Supreme Court's analysis in Commissioner of Income-tax v. K. Ravindranathan Nair (quoted at length), the court concluded that exchange gain on forward contract translation did not have the element of export turnover or profit from export and hence had to be treated as an independent receipt under clause (baa) — meaning 90% of that income should be excluded from business profits for section 80HHC computation.
Consequently, the court held that the CIT's exercise of jurisdiction under section 263 on the exchange-gain point was proper and required modification of the assessment: the AO was directed to apply clause (baa) of the Explanation to section 80HHC to the exchange gain on forward contract translation.

Holding and Implications

Core Ruling:

The court held that the CIT's invocation of jurisdiction under section 263 in respect of the deduction under section 80HHC on interest receipts was not proper; that ground of the assessee's appeal was allowed.
The court held that the CIT's revision under section 263 in respect of the exchange gain on forward contract translation was proper; the court directed the AO to apply clause (baa) of the Explanation to section 80HHC to the exchange gain (i.e., treat the exchange gain as not forming part of export turnover and exclude 90% under clause (baa) for computing the deduction).
The appeal was therefore partly allowed.

Implications:

Direct effect on the parties: The assessee succeeds on the interest/80HHC point — the AO's approach reducing 90% of interest under clause (baa) was a possible view and cannot be displaced by the CIT under section 263. On the exchange-gain point the CIT's revision stands: the AO is to apply clause (baa) and exclude 90% of the exchange gain when computing deduction under section 80HHC.
No broader new precedent is stated to have been laid down by the court in this opinion; the court applied existing authority (including a quoted Supreme Court decision) and the settled principle limiting section 263 where the AO has taken a possible view after application of mind. The decision is tailored to the facts and the procedural posture of the two issues as recorded in the opinion.

End of summary — based exclusively on the content of the provided opinion.

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Bhavani Gems 101. Prasad Chamebrs M.P Marg Opera House Mumbai 400002 () v. The Dy. Commr. Of Income Tax Cen. Cir 35, Mumbai ().

Vijay Pal Rao, J.M:— This appeal by the assessee is directed against the revision order of the CIT dated 24 March, 2009 passed u/s 263 of the IT Act for the Assessment Year 2004–2005.

2. The assessee has filed concise grounds as under:

1. The Learned Commissioner of Income-tax erred in passing order uls. 263 of the Act without appreciating that the order of the Assessing Officer was neither erroneous nor prejudicial to the interest of revenue and hence, order passed uls. 263 of the Act is bad-in-law and liable to be quashed.

2. The Ld. CIT failed to appreciation that issue of deduction u/s. 8OHHC of the Act was examined and verified in detail by the Assessing Officer and thereafter reduced claim of deduction more particularly considering the issue of interest received and hence, the order passed u/s. 263 directing the Assessing Officer to verify is without any justification and liable to be quashed.

3. The Ld. CIT failed to appreciate that exchange gain on forward contract transaction of Rs. 80,72,500/- was never forming part of export turnover and hence, directing the Assessing Officer to verify and reduce the same from export turnover is unjustified, and liable to be quashed.

3. Ground nos 1 & 2 regarding deduction u/s 80HHC on interest receipt.

3.1 The assessment in this case was completed u/s 143(3) vide order dated 29.12.2006 Subsequently, the CIT proposed to revise the assessment order by issuing show cause notice dated 29.3.2007, inter-alia on the issue of deduction u/s 80HHC on interest receipt as under:

“It is seen that the total interest received during the year as per TDS certificate enclosed with the return of income is Rs. 53,81,082/-. However, as per the details submitted and the figure of interest considered for purpose of working of the eligible deduction u/.s 80HHC is only Rs. 47,86,487/-. Besides, it is seen from the TDS certificates that the interest received are on FDs and Securities. Accordingly, the same should have been taxed as income from other sources.”

3.2 The assessee objected to the revision of the assessment order and contended before the CIT that the Assessing Officer has made enquiry about the interest income and finally disallowed 90%a of interest under Clause (baa) of Explanation to sec. 80HHC. This issue was further raised before the CIT(A) as well as before the Tribunal. Therefore, when the issue was already considered and adjudicated by the Assessing Officer and also a subject matter before the appellate authorities, then the CIT has no jurisdiction u/s 263.

3.3 The Commissioner, referring to series of decisions of various High Courts and Supreme Court has held that interest received by the assessee has to be taxed as income from other sources and the order of the Assessing Officer, considering the same as business income and consequently excluding 90% of the said receipt for calculation of eligible deduction u/s 80HHC is erroneous and consequently prejudicial to the interest of revenue, which requires to be set aside.

4. Before us, the ld AR of the assessee has referred the assessment order and submitted that the Assessing Officer has duly considered the issue in para 4.1 and excluded 90% of the interest received from the bank as per clause (baa) of Explanation to Section 80HHC while computing the deduction u/s 80HHC. While doing so, the Assessing Officer also considered the decisions, as relied upon by the assessee, in the case of Punit Commercial Ltd. v. CIT reported in 235 ITR 550 (Mum); in the cased of Nagpur Engg Co Ltd. v. CIT reported in 245 ITR 806. He has also referred the query raised by the Assessing Officer on this issue as well as the reply given by the assessee. Thus, the ld AR of the assessee has submitted that when the Assessing Officer has applied his mind and taken one of the possible views, then the CIT has no jurisdiction to take a different view.

4.1 On the other hand, the ld DR has submitted that on the date when the Assessing Officer has passed the assessment order, the issue was settled by various decisions of the Hon'ble High Courts as well as Hon'ble Supreme Court. Therefore, the Assessing Officer was bound to follow the settled judicial pronouncements on the issue and by not following the same, the Assessment order is erroneous and prejudicial to the interest of the revenue. He has relied upon the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Damodar Mangallji Mining Co. reported in 326 ITR 437.

5. We have considered the rival contention as well as the relevant material on record. It is settled proposition of law that if the Assessing Officer has taken one of the possible views, then CIT cannot take a different view. The issue regarding the deduction u/s 80HHC on interest received on the deposits was already considered and decided by the Tribunal in assessee's own case for the AY 2000–2001, 2001–2002 and 2002–2003. The Assessing Officer reduced 90% of the interest income by applying Clause (baa) of Explanation to Sec. 80HHC and therefore, the view taken by the Assessing Officer is a possible view on the issue. By invoking sec. 263 what is required to be seen is whether the view taken by the Assessing Officer is after application of mind and a possible view and not something which cannot be disputed. Thus, when the view of the Assessing Officer is not impossible view as the issue, in the year under consideration, was pending in the appeal filed by the assessee before the CIT(A) as well as before the Tribunal and vide order dated 10.3.2008, the Tribunal has decided the issue in favour of the assessee as under:

3. “The CIT(A) has considered assessee's submission and found beyond any doubt assessee has no surplus funds with it to earn interest income but due to business compulsion and as a requirement of bank in granting credit facilities it has to deposit the money with the bank. The source of the same was from bank finance, i.e from borrowed funds (interest bearing). The activity of the assessee therefore, inextricably linked with the overall business activity of the firm. The CIT(A) further noted that in assessee's own case for earlier year in assessment years 2000–2001, 2001–2002 and 2002–2003, the CIT(A) after considering the submission of the assessee decided the issue in favour of the assessee.”

5.1 Thus, in view of the fact that when this issue was considered and decided by the Tribunal and ultimately allowed in favour of the assessee, then the view taken by the Assessing Officer by applying clause (baa) of Explanation to sec. 80HHC is, though was not upheld, one of the possible views. Therefore, the CIT's jurisdiction u/s 263 is otherwise barred on the issue, which is a subject matter of appeal before the appellate authorities.

6. In view of the above discussion we find that the jurisdiction exercised by the CIT u/s 263 on the issue of disallowance of deduction u/s 80HHC is not proper and justified. Accordingly, we allow the ground of the assessee on this issue.

7. Next ground is regarding exchange gain on forward contract translation.

7.1 The CIT while seeking revision of the assessment order on the issue of exchange gain on transaction of forward contract noted that the assessee has shown the exchange gain of Rs. 80,72,500/- on account of forward contract outstanding at the end of the year. The assessee has included the same in the export turnover. However, the said receipt cannot be considered as derived from the export sales; therefore, the said translation cannot be considered as part of the turnover.

7.2 After considering the reply of the assessee, the CIT has held that the claim of the assessee on account of forward contract translation has been part of export turnover is incorrect accordingly, the order of the Assessing Officer allowing such claim is erroneous and prejudicial to the interest of revenue and requires modification.

8. Before us, the ld AR of the assessee has submitted that the CIT has proceeded under a wrong impression that the exchange gain on forward contract translation is part of the export turnover and accordingly, directed to exclude the same from the export turnover. He has submitted that the exchange gain on forward contract was not included in the export turnover of the assessee; therefore, there is no question of reducing the same. He has referred the details of computation of deduction u/s 80HHC at pages 22 & 23 of the paper book and submitted that the assessee has not included the exchange gain on forward contract in the export turnover. Therefore, the same cannot be excluded from the export turnover as directed by the CIT in the revision order.

8.1 He has also filed a reconciliation sheet and explained the figure of export turnover. He has thus submitted that when the CIT has proceeded on a wrong fact by assuming that the exchange gain is part of export turnover, then the revision order is not justified and sustainable. The Assessing Officer has mentioned in the giving effect proceedings that the assessee has already explained all the facts before the Assessing Officer; but the Assessing Officer has passed the giving effect order by following the directions of the CIT(A).

8.2 On the other hand, the ld DR has submitted that the assessee has taken the stand for the first time and has not taken before the CIT in the 263 proceedings. He has referred the reply of the assessee to the show cause notice u/s 263 and submitted that the assessee has taken a stand that “exchange gain on forward contract translation is very much part and parcel of the export turnover of the assessee and therefore, cannot be excluded from the export turnover” therefore, the CIT has rightly revised to order on this issue. He has relied on the order of the CIT.

9. We have considered the rival contention as well as the relevant material on record. At the outset we note that the Assessing Officer has not discussed this issue while passing the original assessment. There was no enquiry or adjudication on this issue. Therefore, there is no application of mind on the part of the Assessing Officer on this issue and consequently there is no question of taking any view by the Assessing Officer and disagreeing by the CIT on the same.

9.1 In the show cause notice, the CIT has asked the assessee as under:

“It is seen from the details of exchange gain that an amount of Rs. 80.73 lacs is on account of translation of the amount involved in forward contract and accordingly the same cannot be related to the export turnover. Accordingly, this receipt should be included only in the total turnover. Moreover, it will also partake the nature of receipts covered under explanation (baa) to sec. 80HHC consequent to which 90% of the said receipts have to be excluded for the purpose of calculation of deduction u/s 80HHC.”

9.2 Thus, it is clear from the show cause notice that the assessee was asked to explain as to why this receipt of exchange gain is not to be excluded from the export turnover by applying clause (baa) of Explanation to sec. 80HHC.

9.3 In reply to the notice, the assessee has submitted before the CIT as under:

“In the year under consideration exchange gain of Rs. 80.73 lacs on account of translation of the amount involved in forward contract is considered as part of export turnover.

Mechanism of forward contracts in the foreign currency helps entity to protect itself from undue loss to the sustained because of fluctuating exchange rates. These forward contracts hedge the translation risk on account of export sales the amount of which is not realised at the end of the financial year. Since these contracts are against export receivables, the gain on the same has direct nexus to sales and the same are required to be included in the export turnover. In view of this, the gains on forward contract are not covered under explanation (baa) to Sec. 80HHC. Thus, for calculating deductions u/s 80HHC the gain on forward contact cannot be excluded from the turnover.”

9.4 From the reply of the assessee, it is clear that the assessee took a stand that the exchange gain on forward contract has direct nexus to the sales and the same required to be included in the export turnover; therefore, this amount is not covered as per clause (baa) of Explanation to sec. 80HHC.

9.5 Now, the assessee before us has taken a stand that this amount was never part of the export turnover; therefore, it cannot be reduced from the export turnover. It is to be noted that in the details of export turnover, as furnished by the assessee, at page 22 of the paper book, the assessee has not included the amount of exchange gain either in the export turnover or in the total turnover but included the said amount in the profit from business and accordingly claimed full deduction on this amount u/s 80HHC as available to the profit and gain of export turnover. The details mentioned by the assessee at page 22 are as under:

BHAVANI GEMS BHAVANI GEMS: Exports 3564259709 Deemed exports 291534847 Exchange gain 1665032 Exchange gain others 55411493 Rough exports 13775808 Total turnover (as shown in P&L A/c) 3926646889

9.6 When the assessee is claiming the deduction on the full amount of exchange gain but not included the said amount either in the export turnover over or in the total turnover, then this exercise of the assessee is not as per scheme of deduction u/s 80HHC.

9.7 Before us, the assessee is not claiming the said exchange gain as part of the export turnover but claiming as business income then, as per clause (baa) of Explanation to Sec. 80HHC, 90% of the same will be excluded from the profit and gain of business. We gainfully take the support of the decision of the Hon'ble Supreme Court in the case of Commissioner of Income-tax v. K. Ravindranathan Nair, 295 ITR 228 wherein the Supreme Court, in paras 22 has held as under:

“22. At the outset, we may state that, in the present case, we are dealing with the law as it stood during assessment year 1993–1994. At that time section 80HHC(3) of the Income-tax Act constituted a code by itself. Subsequent amendments have imposed restrictions/qualifications by which the said provision has ceased to be a code by itself. In the above formula there existed four variables, namely, business profits, export turnover, total turn-over and 90 per cent of the sums referred to in clause (baa) to the said Explanation. In the computation of deduction under section 80HHC all four variables had to be taken into account. All four variables were required to be given weight age. The substitution of section 80HHC(3) secures pro-fits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include element of export turn-over. This aspect needs to be kept in mind while interpreting clause (baa) to the said Explanation. The said clause stated that 90 per cent of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits, had to be deducted from business profits computed in terms of sections 28 to 44D of the Income-tax Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from business profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges, etc., formed part of gross total income being business profits. But for the purposes of working out the formula and in order to avoid distortion of arriving at the export profits, clause(baa) stood inserted to say that although incentive profits and “independent incomes” constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the Income-tax Act and every income may not be attributable to exports. This was the reason for this court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula (see Commissioner Of Income-Tax v. Lakshmi Machine Works Ltd. [2007] 6 Scale 168”

9.8 Undisputedly, there is lack of enquiry on the part of the Assessing Officer while allowing the claim of the assessee. Therefore, the assessment order is erroneous so far as prejudicial to the interest of revenue. Accordingly, the CIT has rightly invoked the jurisdiction u/s 263 on this issue.

10. We may clarify here that the exchange gain on forward contract translation does not have any element of export turnover or profit from export. Therefore, as per clause (baa) of explanation to se. 80HHC, 90% of the said income has to be excluded from the business profits. Hence, we modify the revision order on the point of computation of deduction u/s 80HHC and direct the Assessing Officer to apply clause (baa) of explanation to sec. 80HHC on exchange gain on forward contract translation.

11. In the result, the appeal filed by the assessee is partly allowed.

Bhavani Gems 101. Pr... v. The Dy. Commr. Of In...