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 All India Federation of Tax Practitioners vs. ITO (ITAT Mumbai)
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M/s. A.C. Enterprises,F/41-A, Anna Nagar East,Chennai 600 102. Vs. The Deputy Commissioner of Income Tax,Business Range XIII,Nungambakkam, Chennai 34
October, 08th 2012
                           `B' BENCH, CHENNAI.

                 Before Shri N.S. Saini, Accountant Member &
                      Shri S.S. Godara, Judicial Member

                               I.T.A. No.1304 /Mds/2012
                              Assessment Year : 2004-05

M/s. A.C. Enterprises,                        The Deputy Commissioner of Income
F/41-A, Anna Nagar East,                  Vs. Tax,
Chennai 600 102.                              Business Range ­ XIII,
[PAN:AAFFA0254R]                              Nungambakkam, Chennai 34.

                (Appellant)                               (Respondent)

                          Appellant by     :   Shri G. Stanly, Advocate
                       Respondent by       :   Dr. S. Moharana, CIT ­ DR
                       Date of Hearing     :   10.09.2012
               Date of pronouncement       :   05.10.2012



          By way of present appeal, the assessee has questioned correctness

of the order of the Commissioner of Income Tax (Appeals) XII Chennai

dated 19.03.2012 in ITA No. 320/2006-07 for the assessment year 2004-05

in proceedings under section 143(3) of the Income Tax Act 1961 [in short the


2.        The AR representing the assessee before us has assailed the order of

the CIT(A) by referring to the grounds of appeal raised and submitted that

the CIT(A) has erred in rejecting the assessee's claim of deduction under
                                          2                                1304/M/12
                                                                 I.T.A. No.1304/M/12

section 80HHC of the "Act" regarding its income from "quota" sales and in

confirming the disallowance claimed by the assessee on account of foreign


3.        On the other hand, the Revenue has supported the CIT(A)'s order on

both grounds. Since there is variance in the submission of the parties qua

validity of CIT(A)'s order, we frame following two issues for our apt


          (i)    Whether, the CIT(A) has rightly confirmed rejection of the

                 assessee's claim of deduction qua "quota" sales as held by the

                 Assessing Officer thereby holding that the same is not covered

                 by section 80HHC of the Act?

          (ii)   Whether the order of the CIT(A) in confirming the disallowance

                 made by the Assessing Officer of `.50,000/- regarding foreign

                 travel expenses claimed by the assessee is eligible to be

                 modified or confirmed?

Issue No. 1:

3.        The relevant facts pertaining to the issue are that the assessee is a

partnership firm involved in the business of purchase and export sale of

cotton garments. In its return filed for the assessment year 2004-05 on

01.11.2004, it had declared taxable income of `.51,36,529/-. In scrutiny

proceedings, the Assessing Officer took cognizance of the assessee's

account statement which had stated that the assessee had realized an
                                         3                                      1304/M/12
                                                                      I.T.A. No.1304/M/12

amount of `.20,46,793/- by resorting to "quota" sales and the same had

been taken into account by the assessee whilst computing deduction under

section 80HHC. In the Assessing Officer's opinion, the "quota" sale was not

an item of receipt, which could fall under section 28 of the "Act". The

assessee justified its account statement before the Assessing Officer by

drawing   support    from    CBDT     circular   F.No.    133/131/97-TPL         dated

23.02.1998. However, the Assessing Officer did not concur with assessee's

explanation and held that the assessee's `quota' sale could not be taken into

consideration for the purpose of computation of deduction under section

80HHC of the "Act". Accordingly, vide assessment order dated 26.12.2006

he took the `quota' sale amount realized by the out of the purview of

deduction under section 80HHC of the "Act".

4.    Aggrieved, the assessee preferred an appeal before the CIT(A),

wherein Assessing Officer's findings have been confirmed vide the

impugned order reproduced herein below:

              "The assessee before the undersigned stated that quota sales is
      integral part of the export activity and hence the same is includable in
      the eligible profits of the business. For this purpose the assessee relied
      on certain case laws.

              I have considered the above submissions of the assessee. It may
      be true that the sale of quota may be directly related to the export
      activity of the assessee. However all incomes of the export activity are
      not eligible for deduction u/ s.80HHC of the Act. What is allowable
      under sec.80HHC is income derived from export of goods and
      merchandise out of India and such sale proceeds are received/brought
      in India by way of convertible foreign exchange. The relevant
      provisions f sec.80HHC are:
                                   4                                      1304/M/12
                                                                I.T.A. No.1304/M/12

       Deduction in respect of profits retained for export business.
       80HHC. (1) Where an assessee, being an Indian company or a
       person (other than a company) resident in India, is engaged in
       the business of export out of India of any goods or merchandise
       to which this section applies, there shall, in accordance with and
       subject to the provisions of this section, be allowed, in
       computing the total income of the assessee, a deduction to the
       extent of profits, referred to in sub-section (lB), derived by the
       assessee from the export of such goods or merchandise:

       (2)(a) This section applies to all goods or merchandise, other
       than those specified in clause (b), if the sale proceeds of such
       goods or merchandise exported out of India are, received in, or
       brought into, India by the assessee (other than the supporting
       manufacturer) in convertible foreign exchange, within a period
       of six months from the end of the previous year or, within such
       further period as the competent authority may allow in this

Thus, there are two mandatory requirements before claiming deduction
u/s.80HHC. They are-

       i) The income should be from the sale proceeds of goods and
       merchandise exported out of India; and

       ii) The sale proceeds are brought into India by convertible
       foreign exchange.

       Unless the above two ingredients are fulfilled, the amounts will
not be qualified for the purpose of deduction u/s.80HHC of the Act. Any
income in which the above two ingredients are missing, will
automatically goes outside the purview of sec.80HHC of the Act. It also
makes no difference whether such income is directly linked or indirectly
linked to the export activity. In fact, this view has been clearly held by
the Hon'ble Supreme Court in the case of CIT vs. K. Ravindranathan
Nair (295 ITR 228) (SC), wherein it was held that ­

       "Profit incentives and items like rent, commission, brokerage,
       charges, etc., though formed part of gross total income had to be
       excluded as they were `independent incomes' which had no
       element of export turnover. The said items distorted the figure of
       export profits". [Para 18]
                                          5                                       1304/M/12
                                                                        I.T.A. No.1304/M/12

              In the instant case, the sale of quota licences is not on account of
      sale proceeds of goods or merchandise exported. Further the quota
      sales is not received in the form of convertible foreign exchange. In
      other words the quota sales are the sales within India and the amount
      is received in Indian currency. Thus, the above mentioned two
      necessary ingredients are totally missing and hence the quota sales is
      totally outside the purview of sec.80HHC.

             Further as held by the Supreme Court in the case of Liberty
      India vs. CIT (317 ITR 218) (SC), the immediate. source of income of
      "sale" of quota" is the particular governmental scheme and not the
      export activity. The decision of the Liberty India is as under-

             Liberty India vs. CIT(2009)(317 ITR 218)(SC):duty drawback
      receipts/Duty Entitlement Pass Book:(DEPB benefits are on account of
      statutory provisions in Customs Act/Scheme(s) framed by Government;
      therefore, profits so derived do not form part of net profits of eligible
      industrial undertaking for purpose of sections 80-IB and 80-IA.

             Though the above decision is with respect to deduction u/s 80-
      IA/IB, the ratio is applicable to the facts of the present case also.

             In view of the above decisions, it is clear that the immediate
      source of income of quota sales is the governmental scheme and not the
      export activity itself. Further in view of the Supreme Court's decision in
      the case of K Ravindranathan Nair (Supra), the assessee's claim of
      quota sales, in which the element of export of goods or merchandise
      and. receipt of proceeds by convertible foreign exchange are totally
      missing, cannot be treated as eligible income for the purpose of
      deduction u/s.80HHC.

             Therefore the Assessing Officer has rightly excluded 90% of the
      said quota sales from the eligible profits before computing deduction
      u/s.80HHC. The action of the Assessing Officer is upheld."

5.    In support of the issue, the AR before us has referred to the findings of

the assessing authority as well as CIT(A) and submitted that the assessee's

claim of deduction under section 80HHC qua the amount realized through

`quota' sale has been wrongly taken out of the purview of the deduction
                                      6                                   1304/M/12
                                                                I.T.A. No.1304/M/12

under section 80HHC. In support of the plea, the AR has also referred to

order of Chennai Bench of ITAT dated 19.01.2010 in I.T.A. No.

813/Mds/2008 pertaining to the assessment year 2003-04, wherein also, the

same very issue was involved and decided in assessee's favour. In the light

thereof, he prayed for acceptance of the issue.

6.    The DR, on the other hand, has relied upon the order of the CIT(A) as

well as the reasons contained therein. Thereafter, he prayed for upholding

the CIT(A)'s order.

7.    We have heard both sides at length and also gone through the

relevant findings as well as order of the Coordinate Bench cited by the AR of

the assessee. It transpires that in the preceding assessment year i.e.

assessment year 2003-04, the very same dispute had been arisen. We also

find that the circumstances were slightly different as the Assessing Officer

himself had allowed the assessee's claim of deduction of `.10,62,874/-

representing `quota' sales under section 80HHC of the "act", whilst finalising

the assessment under section 143(3) of the "Act". However, the CIT,

invoking section 263 of the "Act" had revised the assessment on the ground

that the Assessing Officer's order was erroneous and prejudicial to the

interest of the Revenue. The assessee carried the matter in appeal, wherein

the Coordinate Bench, whilst examining the assessee's claim of deduction

qua, the amount realized through `quota' sale, viz-a-vis provisions contained

in the "Act" under section 80HHC had held as under:
                                    7                                       1304/M/12
                                                                  I.T.A. No.1304/M/12

2.     Briefly stated, the facts of the case are that the assessee filed its
return on 30.1.2003 admitting total income of `.99,58,851/- after
claiming deduction u/s 80HHC to the tune of `.1,03,65,852/-. The
assessment was completed u/s 143(3) by accepting the claim of
deduction u/s 80HHC. In claiming the above deduction, the assessee
has included a sum `.10,82,874/- representing quota sales being an
export incentives in respect of which, according to the assessee,
deduction was allowable u/s 80HHC. As per the assessee, it was
explained during assessment proceedings that quota sales are equated
with export incentives like DDB, DFRC and other benefits in view of
CBDT Circular No,133/131/97-TPL dated 23.2.1998. The ld. CIT, after
calling for the records of the assessment order, after giving due notice
u/s 263 of the Act to the assessee and after calling for the assessee's
objections thereon, has found the order to be erroneous in so far as it is
prejudicial to the interest of the Revenue. Thus, he has set aside the
assessment order dated 31.10.2003 for assessment year 2003-04 to be
passed de novo. Being aggrieved, the assessee is in appeal before us.

3.      It was argued by the ld.AR with reference to CBDT Circular
No.133/131/97-TPL dated 23.2.1998 that this circular was available
when assessment order was passed and that according to this Circular,
`quota sales' are to be included for the deduction u/s 80HHC. It was
also argued that the ld. CIT has not finally given a finding that the
assessment order is really erroneous in so far as it is prejudicial to the
interests of the Revenue which he is bound to do. On the other hand,
the ld.DR has supported the order of the ld. CIT and has further
submitted that the assessment order in question is erroneous in so far
as it is prejudicial to the interests of the Revenue because the Assessing
Officer has not at all applied his mind to the issue of deduction u/s

4.      After carefully considering the rival submissions in the light of
the material available on record including the copy of the CBDT
Circular referred to above, we are of the considered opinion that
there is no error in the assessment order dated 23.1.2006. This is not a
case in which it can be said that the Assessing Officer has not applied
his mind. When the CBDT circular was very much in vogue and the
ITO has accepted the deduction of quota sales u/s 80HHC, it cannot be
said that the Assessing Officer has not applied his mind to this issue.
We are in agreement with the ld.DR when he says that non- application
of mind to any item of income does amount to an error in the order, but
this is not the case of non-application of mind. When there is a specific
circular for such allowances and the assessee has made a claim as per
                                        8                                      1304/M/12
                                                                     I.T.A. No.1304/M/12

      law particularly when the CBDT Circulars are binding on the
      Department, it cannot be said that the order is erroneous even if the
      Assessing Officer has not mentioned any Circular in his order. Hence,
      the decisions relied on by the ld.DR in this regard are of no avail.
      When there is a circular which is supposed to be in the notice of the
      Assessing Officer where is the need to call for further details from the
      assessee in this regard for that matter. Consequently, we set aside the
      revisional order passed by the ld. CIT u/s 263 and restore that of the
      Assessing Officer.

      5.    In the result, the appeal filed by the assessee stands allowed."

      Taking cue from the same, we of the opinion that the issue in hand is

no more res integra as without any significant change in the circumstances

pointed out by the Revenue, the amount realized from `quota' sale is

covered by section 80HHC of the "Act". Hence, in order to maintain

consistency of the judicial opinion, we are of the view that the CIT(A) has

erred in holding that the assessee is not entitled for the benefit of deduction

under section 80HHC of the "Act". Therefore, in principle, we accept the

submission of the assessee.

      At the same time, despite the fact that neither of the parties have cited

before us case law of the Hon'ble Supreme Court reported as [2012] 342

ITR 49 Topman Exports v. CIT decided on 08.02.2012, we notice that the

CIT(A) has not considered the above said case law, while passing the order

on 19.03.2012 i.e. well after the judgment of the Hon'ble Apex Court. A

perusal of the above said judgment makes it clear that it has been

categorically held that the entire sale proceeds arising from sale of DEPB

licenses cannot be taken as the profits for the purpose of assessment. Their
                                         9                                     1304/M/12
                                                                     I.T.A. No.1304/M/12

Lordships have been pleased to hold as under:

             "As the DEPB credit has direct nexus with the cost of imports
      for manufacturing an export product, any amount realised by the
      assessee over and above the DEPB credit on transfer of the DEPB
      credit would represent profit on the transfer of the DEPB credit. Thus,
      while the face value of the DEPB credit will fall under clause (iiib) of
      section 28 of the Act, the difference between the sale value and the face
      value of the DEPB credit will fall under clause (iiid) of section 28 of
      the Act. The cost of acquiring the DEPB credit is not nil because the
      person acquires it by paying customs duty on the import content of the
      export product and the DEPB credit which accrues to a person against
      exports has a cost element in it. The DEPB credit represents part of the
      cost incurred by a person for manufacture of the export product and
      hence even where the DEPB credit is not utilised by the exporter but is
      transferred to another person, the credit continues to remain as a cost
      to the exporter. When, therefore, the DEPB credit is transferred by a
      person, the entire sum received by him on such transfer does not
      become his profits. It is only the amount that he receives in excess of
      the DEPB credit which represents his profits on transfer of the DEPB

      When we apply the ratio of the above said case law vis-a-viz, facts of

the instance case, we find that the assessee's activity of `quota' sale is, in

fact, akin to sale of DEPB license. The parties before us are also not able to

point out any distinguishing feature qua the same. Similarly, in our opinion,

neither the Assessing Officer nor the CIT(A) have examined various vital

aspects of the matter i.e. face value of the assessee's `quota' sale as well as

`profits' arrived at thereof. Hence, in the larger interest of justice, we deem it

appropriate to restore the issue back to the file of the Assessing Officer, who

shall pass a fresh order in accordance with law by taking into account the

above case law (supra) after affording adequate opportunity of hearing to the

                                        10                                    1304/M/12
                                                                    I.T.A. No.1304/M/12

      The issue stands accepted in favour of the assessee for statistical


Issue No. 2:

8.    The facts apropos to this issue are that its assessment proceedings,

the assessee had raised the claim of `.5,70,626/- in the shape of foreign

travel expenses in the previous year relevant to the impugned assessment

year. The Assessing Officer disallowed the amount of `.50,000/- out of the

total amount claimed by holding the same be `personal expenditure'. In

appeal as well, the CIT(A) has upheld the Assessing Officer's finding:

      "a) Disallowance of Travelling Expenses: The first ground of the
      assessee is regarding the disallowance of travelling expenses of
      `.50,000/-. The assessee claimed `.5,70,626/- by way of foreign travel
      expenses during the F.Y.2003-04 relevant to the A.Y.2004-05. The
      Assessing Officer disallowed a round sum amount of `.50,000/- being
      expenses of personal in nature.

             I have perused the assessment order and contentions of the
      assessee. In the case of travelling expenses, especially foreign travel,
      an element of expenses of personal in nature cannot be ruled out.
      Further the expenses debited are, by way of purchase of foreign
      currency etc. The exact expenses incurred and necessary evidences for
      incurring such expenses in the foreign travel are also not available.
      Therefore the Assessing Officer's disallowance of `. 50,000/ - (which is
      less than 10% of the total foreign travel expenses) is quite reasonable
      and needs no interference. The assessee fails in its appeals in this

9.    In support of the issue, the AR has vehemently argued that the

authorities before i.e. the Assessing officer as well as CIT(A) have wrongly

rejected the assessee's claim of expenditure. To buttress his plea, the AR
                                     11                                     1304/M/12
                                                                  I.T.A. No.1304/M/12

produced copy of the Chennai Bench of ITAT in I.T.A. No. 140/Mds/2009

dated 18.09.2009 in the case of M/s. Mehar Garment International vs. DCIT

and prayed for decision of the issue in favour of the assessee.

10.   On behalf of the Revenue, the DR had supported the findings of the

CIT(A) on the basis of reasons contained in CIT(A)'s order.

11.   We have heard both parties and also perused the relevant findings.

Admittedly, the Assessing Officer has only disallowed an amount of

`.50,000/- out of total claim of `.5,70,626/-. The CIT(A) has also upheld the

Assessing Officer's finding by stating reasons that the same were in the

shape of expenses debited for purchase of foreign currency as well as

details of expenditure. In our opinion, the CIT(A)'s finding cannot be in any

way termed as perverse or illegal. There is no material made available

before us as well so as to controvert to the CIT(A)'s observations. As far as

case law (supra) cited by the assessee is concerned, in the said case the

Coordinate Bench was of the opinion that no reason has been assigned for

rejecting the concerned assessee's claim either by the Assessing Officer or

by the CIT(A). In the instant case, the facts are quite opposite to the same

as both authorities below have given due reasons in support of findings.

Accordingly, there is no illegality or infirmity in the CIT(A)'s order. We

confirm the same qua this issue.

12.   To sum up, the appeal stands partly allowed for statistical purpose

qua issue No. 1 only.
                                       12                                   1304/M/12
                                                                  I.T.A. No.1304/M/12

13.    Hence, the appeal is partly allowed for statistical purpose.

       Order pronounced on Friday, the of 5th October , 2012 at Chennai.

Sd/-                                                                  Sd/-
(N.S. SAINI)                                                (S.S. GODARA)
ACCOUNTANT MEMBER                                        JUDICIAL MEMBER

Chennai, Dated, the 05.10.2012


To: The assessee//A.O./CIT(A)/CIT/D.R.
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