GEDORE TOOLS (PVT.) LTD. VS COMMISSIONER OF INCOME-TAX, 2000 PTD-DELHI-HIGH-COURT-INDIA 3702 (1999)

(a) Income-tax---

----Income---Business income--Cash compensatory receipts from Government---Law applicable---Effect of insertion of cl. (iiib) in S. 28 and cl. (vb) in S.2(24)--Cash compensatory receipts are assessable as business income---Indian Income Tax Act, 1961, Ss.2(24)(vb) & 28(iiib).

The Finance Act, 1990, incorporated clause (iiib) to section 28 of the Income Tax Act, 1961, with effect from April 1, 1967, to the effect that cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government shall be chargeable to income-tax under the head "profits and gains of business or profession". This amendment has been made retrospectively with effect from April 1, 1967. Sub-clause (vb) in clause (24) of section 2 of the Income Tax Act, 1961, was also incorporated by the Finance Act, 1990, with effect from April 1,s 1967, that income includes any sum chargeable to income-tax under clause .(iiib) of section 28. Hence cash compensatory support receipts received from the Government would be taxable receipts in the hands of the assessee and constitute profits and gains:

CIT v. Smarts (P.) Ltd. (1998) 233 ITR 243 (Delhi) fol.

(b) Income-tax---

----Income or capital--Drawback of duty received from Central Government- Gains from sale of import entitlements---Revenue, receipts, Indian Income Tax Act, 1961.

The drawback of duty received from the Central Government and gains from sale of import entitlements are revenue receipts.

(c) Income-tax---

----Assessment---Appeal to CIT (Appeals)---Enhancement of assessment Powers of CIT (Appeals)---Notice has to be given before considering question of enhancement---Indian Income Tax Act, 1961, S-451(2).

The power for enhancement by the Commissioner of Income-tax is subject to the limitation as provided in subsection (2) of section 251 and such question could be considered only if notice was given in that regard.

CIT v. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC) fol.

(d) Income-tax---

----Appeal to Appellate Tribunal---Powers of Tribunal---Power to allow additional grounds of appeal---Income Tax Act, 1961, S.254,

The Tribunal has discretion to allow or not to allow new grounds to be raised. Even in a situation where the Tribunal is only required to consider the question of law arising from facts, which- are on record in the assessment proceedings, there is no reason why such a question should hot be allowed to be raised, when it is necessary to consider that question in odder to assess the liability to tax of an assessee correctly.

National Thermal Power Co. Ltd. v. CIT (1998) 249 ITR 383 (SC) fol.

The amount of commission paid in India though on export sales would not qualify for weighted deduction under any of the sub-clauses of section 35B(1)(b).

CIT v. International Exporters (1998) 233 ITR 23 (Delhi) fol.

(e) Income-tax--

----Export markets development allowance---Weighted deduction-- Commission paid in India---Expenditure on export promotion---Export guarantee insurance---Interest on post shipment export credit loans-- Difference in exchange rates, --- freight charges on export, consignment--Inland freight on export consignment and inspection fee on exports-- Not entitled to weighted deduction---Indian Income Tax Act, 1961, S.35B.

The expenditure under the heading "Export promotion" is not entitled to, weighted deduction under any of the sub-clause (b) of section 35B(1).

CIT v. International Exporters (1998) 233 ITR 23 (Delhi) fol.

The expenditure, on export guarantee insurance is not entitled to weighted deduction under section 3513(1).

CIT v. International Exporters (1998) 233 ITR 23 (Delhi) fol.

Interest on post-shipment export credit loan is not an expenditure entitled to weighted deduction under section 35B.

Gedore Tolls (India) (Pvt.) Ltd:-v. CIT (1998) 233 ITR 712 (Delhi) fol.

The Tribunal was correct in law in holding that the following are not entitled to weighted deduction under section 3513; (a) Difference in exchange rates Rs.1,90,744; (b) Ocean freight charges on export consignment Rs.7,22,669; (c) Forwarding charges on consignments Rs.1,19,758; (d) Instant freight on export consignments Rs.4,73,168; and (e) Inspection fee on exports Rs.29,381.

Gedore Tools (India) (Pvt.) Ltd. v. CIT (1998) 233, ITR 712 (Delhi) fol.

CIT v. Stepwell Industries Ltd. (1997) 228 ITR 171 (SC) ref.

Nemo for the Assessee.

R.D. Jolly with Mrs. Prem Lata Bansal for the Commissioner.

JUDGMENT

DEVINDER GUPTA, ACTG. C.J.---Following nine questions of law have been referred for opinion at the, behest of the Commissioner of Income-tax, Delhi-1, New Delhi:

"(1) Whether the Tribunal was right in law in admitting the additional grounds of appeal filed before it on May 25, 1982?

(2) Whether the Tribunal rightly held that the cash compensatory support (CCS) receipts from the Government did not constitute taxable receipt in the assessee's hands?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the cash compensatory support did not constitute profits and gains within the meaning of section 28(i) or section 28(iv) of the Income Tax Act, 1961, but

constituted a receipt on capital account only?

(4) Whether the Tribunal rightly upheld the Commissioner of Income tax (Appeals)'s order that the assessee was entitled to weighted deduction under section 35B of the Act on commission of Rs.12, 10,893 as export sales?

(5) Whether the Tribunal was right in, rejecting the Revenue's additional ground that though the amount of Rs.12, 10, 893 had been considered for weighted deduction in the agreement, the Commissioner of Income-tax (Appeals) should have withdrawn such deduction?

(6) Whether the Tribunal rightly held that the powers of enhancement by the Commissioner of Income-tax (Appeals) being subjected to the constraints and limitation as provided under section 251(2) of the Income Tax Act, 1961, the question of enhancement could be considered only if a notice was given in that regard?

(7) Whether the Tribunal was right in holding that the assessee was entitled to weighted deduction under section 35B on amount, of Rs.1,93,262 falling under the head 'Export promotion'?

(8) Whether the Tribunal was right in holding that the assessee was entitled to weighted deduction under section 3513 on amount of Rs.7,564 falling under the head 'Export guarantee insurance'?

(9) Whether the Tribunal was right in holding that the assessee was entitled to weighted deduction under section 35B on amount of Rs.27,375 falling under the head 'Interest paid on post-shipment export credit loans'?"

At the behest of the assessee, the following three questions have been referred for opinion:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the drawback of duty of Rs.13,30,484 received by the assessee from the Central Government was not in the nature of capital receipt and thus, taxable?

(2) Whether; on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the gains from sale of import entitlement of Rs.27,18,920 received by the assess-,` was not in the nature of capital receipt and thus, taxable?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the following items are not entitled to weighted deduction under section 35B:

The assessee is a private limited company and is engaged in business of manufacture and sale of hand tools in India. It also exported these items to various parts of the world. The accounting year was from July 1, 1973, to June 30, 1974. Related assessment under section 144 of the Income Tax Act, 1961, was framed on March 30, 1978. The assessee preferred appeal, which was decided by the Commissioner of Income-tax (Appeals)-VIII, on January 31, 1979. The assessee as well as the Revenue filed appeals before the Income-tax .Appellate Tribunal against the said order of the Commissioner of Income-tax (Appeals), Delhi, on March 30, 1979 and May 5, 1979, respectively. The assessee by a petition, dated April 27, 1982, filed on May 25, 1982, sought permission to raise six additional grounds. The Revenue also sought permission to raise additional grounds. The assessee did not object to the raising of additional grounds by the Revenue but the Revenue objected to the assessee seeking to agitate additional grounds. By a detailed order, dated September 19, 1983, the Delhi Bench of the Tribunal admitted additional grounds both of the assessee and of the Revenue. Reference was sought on behalf of the Revenue by filing application, which was rejected by the Tribunal, Delhi Bench, observing that it would be open to the Revenue to seek reference in relation to the question of admissibility of additional grounds, when a final order is passed disposing of appeals on merits. The appeal of the Revenue was partly accepted. The assessee's appeal in respect of original grounds was rejected. It was partly allowed for the additional grounds. In this back ground the Revenue and the assessee sought reference and consequently the aforementioned questions were referred for opinion.

The first question whether the Tribunal was right in law in admitting the additional grounds of appeal filed before it on May 25, 1982, is now squarely covered by the decision of the Supreme Court in National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383, holding that the Tribunal has the discretion to allow or not to allow new grounds to be raised. Even in a situation where the Tribunal is only required to consider the question of law arising from facts, which are on record in the assessment proceeding, there is no reason why such a question should not be allowed to be raised, when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. Accordingly, this question is answered in the affirmative and against the Revenue.

The second and third questions referred at the behest of the Revenue deserve to be answered in favour of the Revenue in view of the amendments incorporated in the Income Tax Act, 1961, by the Finance Act, 1990. The Finance Act, 1990, incorporated clause (iiib) to section 28 of the Income Tax Act, 1961, with effect from April 1, 1967, to the effect that cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government shall be chargeable to income tax under the head "Profits and gains of business or profession". This amendment has been made retrospectively with effect from April 1, 1967. Sub-clause (vb) in clause (24) of section 2 of the Income Tax Act, 1961, was also incorporated by the Finance Act, 1990, with effect from April 1, 1967, that income includes any sum chargeable to income-tax under clause (iiib) of section 28. Thus, the cash compensatory support (CCS) receipts received from the Government would be taxable receipts in the hands of the assessee and constitute profits and gains. This Court in CIT c. Smarts (P.) Ltd, (1998) 233 ITR 243, has also taken note of these amendments. Accordingly, the questions are answered in favour of the Revenue.

Question No.4 referred at the behest of the Revenue is now squarely covered by the decision of the Supreme Court in CIT v. Stepwell Industries Ltd. (1997) 228 ITR 171, and of this Court in CIT v. International Exporters (1998) 233 ITR 23. The amount of commission was paid in India though for export. In CIT v. Stepwell Industries Ltd. (1997) 228 ITR 171 (SC), it was held that merely because some activities took plaice outside India, the same will not qualify the exporter for deduction mentioned in section 35B of the Act. In International Exporters' case (1998) 233 ITR 23 (Delhi), this Court held that the amount of commission paid in India though on export sales would not qualify for weighted deduction under any of the sub-clauses of section 35B(1)(b) of the Act. As such the question is answered in the negative in favour of the Revenue that the assessee was not entitled to weighted deduction under section 35B of the Act.

Question No.5 need not be answered separately inasmuch as it is a mixture of questions Nos.4 and 6, which have separately been answered.

On question No.6 also the position is settled in view of the decision of the Supreme Court in CIT v. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443, that power for enhancement by the Commissioner of Income-tax is subject to the limitation as provided in subsection (2) of section 251 and such question could be considered only if notice was given in that regard. Accordingly, this question is answered in the affirmative and against the Revenue.

Question No.7 referred at the behest of the Revenue is covered by the decision of this Court in International Exporters' case (1998) 233 ITR 23, that expenditure under the heading "Export promotion" is not entitled to weighted deduction under any of the sub-clauses of clause (b) of section 35B(1) of the Act. The question thus is answered in the negative and in favour of the Revenue.

Question No.8 about weighted deduction under the heading "Export guarantee insurance' is not only covered in International Exporters' case (1998) 233 ITR 23 (Delhi), but also by another decision in CIT v. Gedore Tools (India) (Pvt.) Ltd. (I.T.R. No.49 of 1987), decided on March 9, 1998), by this Court. Thus, the question is answered in the negative and in favour of the Revenue.

Question No.9 also has to be answered in favour of the Revenue and against the assessee on the basis of the opinion rendered by this Court while answering I.T.R. No.223 of 1983, Gedore Tools (India) (Pvt.) Ltd. v. CIT (1998) 233 ITR 712, decided on March 9, 1998, that interest on post shipment export credit loan is not an expenditure entitled for weighted deduction under section 35B of the Act.

In view of the opinion rendered on questions Nos.2 and 3 referred at the behest of the Revenue, questions Nos. 1 and 2 referred at the behest of the assessee are answered in the affirmative, in favour of the Revenue and against the assessee.

Question No.3 referred at the behest of the assessee is the one on which this Court in Gedore Tools (India) (Pvt.) Ltd. v. CIT (1998) 233 ITR 712 I.T.R. No.223 of 1983, decided on March 9; 1998, rendered its opinion that expenditure on the items referred to in this question are not entitled to weighted. deduction under section 35B of the Act. On that basis, the question is answered in the negative in favour of the Revenue and against the assessee.

M.B.A./96/FC.Order accordingly.