Commissioner of Income Tax vs Balkrishna Exports

K.S. Jhaveri, J.—In Tax Appeal No. 58 of 2007, the revenue has challenged the order dated 26.04.2006 passed by the Income Tax Appellate Tribunal, Ahmedabad [for short "the Tribunal"] in ITA No. 45/Ahd/2005, whereby the appeal filed by the assessee was allowed by the Tribunal.

In Tax Appeal No. 1670 of 2007, the revenue has challenged the order dated 13.03.2007, passed by the Tribunal in ITA No. 214/Ahd/2007, whereby the appeal filed by the revenue was dismissed by the Tribunal.

The facts of Tax Appeal No. 58 of 2007 are that the assessee had filed its return for the Assessment Year 2001-02 on 30.10.2001, declared total income of Rs. 11,91,370/-. The Assessing Officer passed his order under Section 143(32) of the Income Tax Act on 16.02.2004 and determined the total income at Rs. 59,56,850/-. Against the said order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The CIT(A), vide order dated 13.10.2004 partly allowed the appeal of the assessee. Being aggrieved and dissatisfied with the order of the CIT(A), the assessee again filed an appeal before the Tribunal. The Tribunal vide impugned order dated 26.04.2006 allowed the appeal of the assessee. Hence, this appeal is filed at the instance of the revenue.

The facts of Tax Appeal No. 1670 of 2007 are that the assessee had filed its return for the Assessment Year 2001-02. The Assessing Officer, after scrutiny, imposed penalty of Rs. 5,50,465/- under Section 271(1)(c) of the Income Tax Act, vide order dated 24.03.2006. Against the said order, the assessee filed an appeal before the Commissioner of Income Tax (appeals). The CIT(A) allowed the said appeal and cancelled the order passed by the Assessing Officer. Being aggrieved and dissatisfied with the order of the CIT(A), the revenue filed an appeal before the Tribunal. The Tribunal vide impugned order dated 13.03.2007 dismissed the said appeal. Hence, this appeal is filed at the instance of the revenue.

While admitting Tax Appeal No. 58 of 2007 on 19.10.2007, the Court had formulated the following substantial question of law:-

"Whether the Appellate Tribunal is right in law and on facts in allowing the claim of the assessee for 10% of the expenditure relating to indirect cost for computing deduction u/s. 80HHC ?"

While admitting Tax Appeal No. 1670 of 2007, the court had formulated the following substantial question of law:-

"Whether the Appellate Tribunal is right in law and on facts in confirming the order of the CIT(A) cancelling order imposing the penalty of Rs. 5,50,465/- under Section 271(1)(c) of the I.T. Act, 1961 ?"

Learned advocates appearing for both the parties have submitted that the issue involved in these appeals is already concluded by the Apex Court in favour of the assessee and against the revenue in the case of Hero Exports, G.T. Road, Ludhiana Vs. Commissioner of Income Tax (Central), Ludhiana, .

We have heard learned advocates appearing for both the parties and perused the material on record. We have also perused the decision in the case of Hero Exports (supra). In paragraph Nos. 11 to 14 of the said decision, the Apex Court held as under:-

"11. According to the Department, the question of allocation does not arise in cases falling under section 80HHC(3)(b). We do not find merit in this contention. Firstly, clause (e) to the Explanation which refers to allocation of costs applies to sections 80HHC(3)(a), 80HHC(3)(b) and 80HHC(3)(c). Secondly, section 80HHC(3)(b) equates export profits to export turnover less direct and indirect costs attributable to the exports of trading goods. Therefore, the principle of attribution is retained. Thirdly, keeping in mind the provisions of section 80HHC(3)(b) read with clauses (d) and (e) of the Explanation it is clear that Legislature intended allocation of costs between export turnover and total turnover. It is urged that the apportionment would not apply to cases under section 80HHC(3) (b). It is true that, in most cases, it may not. But in certain cases falling under section 80HHC(3)(b), ratio still applies. For example, in the case where the assessee exports all bought-out items but brings back only a part of the export proceedings into India, in such cases, the ratio will apply and, therefore, if one is to read clause (e), it retains the words indirect costs to be allocated in the ratio of export turnover to total turnover.

The question which, however, needs to be decided is whether, in the above example, the assessee is entitled to reduction of Rs. 16,000 from Rs. 50,000 being the total indirect expenses for earning both the incomes. Department reduces the FOB value by Rs. 50,000 whereas assessee contends that it should be reduced by Rs. 34,000 (Rs. 50,000 - Rs. 16,000). Assessee claims apportionment at the rate of 10% of Other Income of Rs. 1,60,000 (in the above example). This is opposed by the Department saying that since apportionment does not apply to section 80HHC(3)(b), there is no question of applying the yardstick of 10%. According to the Department, the words "indirect costs" does not take into account the expenses to earn Other Incomes. In this case, reliance is placed on clause (e). However, the Department has failed to notice the words "attributable to exports" in section 80HHC(3)(b).

As stated above, in our opinion, the words "attributable" in section 80HHC(3)(b) in the main section itself indicates that apportionment (principle of attribution) is not omitted from the said provision of section 80HHC(3)(b). As stated above, assessee has earned Other Income of Rs. 1,60,000 apart from FOB value of exports of Rs. 6,50,000. Therefore, some expense has to be attributed to earning of Rs. 1,60,000. If so, the next question which arises is how to allocate the costs? As stated above, assessee has two incomes with one Common Pool of expenses and since "principle of attribution" has been retained in the scheme of section 80HHC, both in terms of section 80HHC(3), clause (e) to the Explanation to section 80HHC(3)(a), (b) and (c) and in clause (baa) to the Explanation to section 80HHC, instead of going into lengthy exercise of dividing such Common Expenses, the assessee has estimated the reduction of export turnover by 10% of the other income of Rs. 1,60,000 (in the above example). Ultimately, clause (baa) to the Explanation is itself based on the assumption that 10% of the income would be an expense. We make it clear that we are not reading Explanation (baa) into section 80HHC(3)(b). What we say is as a Guidance Value/Factor, 10% of the total Other Income of Rs. 1,60,000 would be fair estimate. This guidance value is not flowing from clause (baa) but from the scheme of section 80HHC read with the Memorandum to the Finance Act of 1991. Take a reverse case, if allocation of expenses is to be done on Actual Basis, it would not only be very difficult but in some cases actual apportionment may not be in the interest even of the Department.

In conclusion, we may state that under section 80HHC(3)(b) one has to balance the "principle of attribution" with the concept of "allocation". The concept of allocation is meant to reduce the incentive. However, when "allocation" has to be balanced with the "principle of attribution", the object is to reduce the incentive and not to eliminate it."

Since the issue raised in Tax Appeal No. 58 of 2007 is already concluded by this Court, no elaborate reasons are required to be assigned by us for disposing this appeal. In that view of the matter, we are of the considered opinion that the Tax Appeal No. 58 of 2007 deserves to be dismissed and the same is accordingly dismissed. The question of law raised in this appeal is answered in favour of the assessee and against the revenue. Accordingly, we hold that the Tribunal was right in law in allowing the claim of the assessee for 10% of the expenditure relating to indirect cost for computing deduction under Section 80HHC.

Insofar as the question of law raised in Tax Appeal No. 1670 of 2007 is concerned, it is a matter of fact that the penalty was levied under section 271(1)(c) of the Income Tax Act on account of the addition made in the quantum proceedings. However, the said addition was subsequently deleted by the Tribunal in ITA No. 45/Ahd/2005. Since the penalty was a consequential action of the addition made, the same would not survive when the addition itself has been deleted by the Tribunal.

In view of the same, the present appeal deserves to be dismissed and the same is accordingly dismissed. The question of law raised in this appeal is answered in favour of the assessee and against the revenue. Therefore, we hold that the Tribunal was right in cancelling the order of penalty imposed on the assessee.

For the foregoing reasons, both these appeals are dismissed.