1988-VIL-74-ITAT-DEL
Equivalent Citation: ITD 025, 193,
Income Tax Appellate Tribunal DELHI
Date: 25.03.1988
GEDORE TOOLS (INDIA) (PRIVATE) LIMITED.
Vs
INSPECTING ASSISTANT COMMISSIONER
BENCH
Member(s) : CH. G. KRISHNAMURTHY., ANAND PRAKASH., S. GROVER., F. C. RUSTAGI., V. P. ELHENCE.
JUDGMENT
1. There being difference of opinion between Members on some of the points involved as per orders annexed, the Special Bench Tribunal order is as follows :
1. 80J Relief to be recomputed within the parameters laid down by the Hon'ble Supreme Court in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308, i.e., all liabilities are to be deducted for the purpose of computing capital employed, which shall have the effect of the Revenue's appeal on the point being allowed and the assessee's rejected (Unanimous view) - Ground No. 1 in both the appeals.
2. Coming to section 35B dispute on which both the parties were in appeal, the revenue is ('S claim to be) rejected whereas the assessee partly succeeds inasmuch as, in respect of packing material expenses to the tune of Rs. 65,08,653, directions have been given that section 35B deduction should be allowed in respect of bifurcated expenses on wrappers. The directions are similar to the one given in the assessee's own case in respect of assessment year 1976-77 (Unanimous view) - Ground No. 2.
3. Ground No. 3 of the Revenue's appeal against the CIT (A)'s decision that the assessee is entitled to depreciation and investment allowance on fixed assets without reducing their cost to the extent of Central Subsidy received from the Government for moving into or setting up plants in industrially backward areas, is rejected (Unanimous view).
4. The Revenue also falls on its last ground agitating that the learned CIT (Appeals) had erred in holding that there was no justification for endorsement of income by withdrawing the weighted deduction under section 35B on Rs. 27,76,816. It is held that the power to make enhancement vests in the first appellate authority and if he does (sic).
5. Cash Compensatory Support held to be not taxable (Majority view)-Ground No. 3.
6. Draw-back of Duty is held to be taxable (Unanimous view) - Ground No. 4.
7. Import Entitlement is held to be taxable (Unanimous view) - Ground No. 5.
8. The assessee fails in respect of its claim of exemption with regard to Rs. 7,35,191 which arose out of difference in exchange rate (Unanimous view).
ORDER
Per Shri V. P. Elhence, Judicial Member - These cross-appeals for the assessment year 1979-80 arise out of the order dated28-5-1984 of the learned Commissioner of Income-tax (Appeals)-I,New Delhi.
2. The assessee is a private limited company, carrying on the business of manufacturing hand tools, most of which were exported. We first of all deal with the dispute regarding 80J relief in respect of which following grounds are raised by the assessee and revenue respectively in these two cross-appeals :
Ground raised by the assessee in its appeal :
"That the learned Commissioner of Income-tax (Appeals) has not given any direction on ground Nos. 2.2 and 3.2 filed with the memorandum of apparel before him regarding the correct determination of the capital employed with the meaning of section maintain of the capital employed within the menacing of section 80J, particularly by identifying such a capital with the total value of the assets and not the depreciated value as appearing in the books."
Grounds raised by the Revenue in its appeal :
"On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in :
1. Directing the IAC(A) to allow relief under section 80J in respect of Unit-IV (Kundli) and Unit No. V (Aurangabad) in accordance with the interpretation of the provisions of section 80J made by the Calcutta High Court in the case of Century Enka Limited reported in 107 ITR 123."
3. Brief facts in the background of the dispute regarding relief under section 80J are that the assessee, had claimed relief under section 80J in the sum of Rs. 22,50,390 in respect of its Unit No. IV known as Kundli Unit which was reduced by the Inspecting Asstt. Commissioner (Assessment) to Rs. 14,72,014. As in the past this difference was due to the application of the provisions of rule 19A. Likewise the claim in respect of Unit No. V (Aurangabad) was also reduced from Rs. 24,28,623 to Rs. 7,59,218. When the matter came up before the learned Commissioner of Income-tax (Appeals) he gave a common direction in respect of both the units for the disposal of the assessee's claim in the light of the Calcutta High Court's decision in the case of Century Enka Ltd. v. ITO [1977] 107 ITR 909. However, he also observed that in the case the retrospective amendment of section 80J and the validity of rule 19A were upheld by the Supreme Court the Inspecting Assistant Commissioner (Assessment) should revise the allowances and restrict them to the amount actually allowed.
3.1 After hearing the learned counsel on both the sides we find that the issue regarding the validity of the retrospective amendment of section 80J has since been laid to rest by the Supreme Court in the case of Lohia Machines Ltd. An identical issue was before the Tribunal in the assessee's own case for the assessment year 1976-77 in ITA No. 696 (Delhi) of 1982 when vide its order dated 29th May, 1985 the appellate Tribunal had the matter restored back to the file of the assessing officer with the direction that section 80J relief be recomputed in the light of Supreme Court's decision in the case of Lohia Machines Ltd. The Inspecting Asstt. Commissioner (Assessment) is accordingly direction to recompute the relief under section 80J in accordance with the amended provisions as applicable for the assessment year in question.
4. The next ground relates to the claim of weighted deduction under section 35B. The assessee and the revenue have raised the following grounds :
Ground raised by the assessee in its appeal :
"That the learned CIT (Appeals) erred in not allowing the full amount claimed by the appellant for deduction under section 35B of the Income-tax Act, 1961 particularly with regard to expenditure as interest paid o n Post-Shipment export credit loan; loss incurred owing to the fluctuation in the rate of exchange; inland freight and ocean freight on Export consignment forwarding charge on Export consignment; and Packing Materials consumed exclusively for Exports only."
Ground raised by the Revenue in its appeal :
"On the facts and in the circumstances of the case, the learned CIT (Appeals) had erred in :
Holding that the assessee was entitled to 35B relief on the following amounts and also erred in directing to allow the relief as claimed by the assessee which in fact in not according to the guidelines set out in the case of J. Hem Chand & Co. by the Special Bench of the Tribunal :
Rs.
1. Inspection fee on export 2,13,583
2. Insurance charges regarding exports 2,10,618
3. Bank charges on export 2,31,591
4. General charges regarding exports 19,612
5. Telephone regarding exports 1,19,590
6. Printing and stationery regarding exports 31,761"
4.1 The facts are that the assessee had claimed weighted deduction in the sum of Rs. 75,34,187 which was restricted by the Inspecting Asstt. Commissioner (Asst.) only to Rs. 10,68,499. The details of such disallowance are given in paragraph 3 of the order of the learned CIT (A). The learned CIT (Appeals) further allowed weighted deduction to the extent of Rs. 12,81,188.
4.2 Both the sides place reliance on the decision of the Special Bench of the Tribunal in the case of J. Hem Chand & Co. v. Second ITO [1982] 1 SOT 150 (Bom). They also sought to rely on the other decisions of the Tribunal for example, in respect of packing material the learned counsel for the assessee submitted that though the said expense was held to be not entitled to weighted deduction by the Special Bench, but due to peculiar circumstances in the assessee's own case it was allowed by the Tribunal in the earlier assessment year. Similarly regarding the assessee's claim in respect of commission paid on exports the learned Departmental Representative relied on the decision of the Hon'ble Madras High Court in the case of CIT v Southern Sea Foods (P) Ltd. [1983] 140 ITR 855. We have considered the rival submissions and the nature of the assessee's trade as also the earlier orders of the Tribunal in the assessee's own case. Following with respect the aforesaid Special Bench decision and the earlier decision of the Tribunal in the assessee's own case we are of the view that the assessee is not entitled to any weighted deduction on the following items :
(1) Interest on post-shipment export credit loan;
(2) Exchange rate difference;
(3) Inland freight and Ocean freight on export consignment;
(4) Ocean freight on export consignment; and
(5) Forwarding charges on export consignment.
Identical issues had come up before the Special Bench, as also before the Division Bench of the Tribunal in the assessee's own book I. Therefore, the order of the learned CIT (A) in respect of the above 5 items is confirmed.
4.3 So far as packing material is concerned, though the Special Bench had adjudicated the issue against the assessee in the case of J. Hem Chand & Co. the Division Bench of this Tribunal in the case of the assessee for the earlier years had observed as under in paragraphs 10 and 11 of the order :
"10. However, in respect of packing materials, we are inclined to take a different view. In the court before us, the assessee has pleaded that it was not entirely the packing material but the goods were exported in attractive plastic wrappers which are more taken as samples of goods. It was explained to us that the tools with wrappers are packed in boxes and if at all the box packing with wrappers are packed in boxes and if at all the box packing material would be dis-entitled for weighted deduction relief, rather the wrappers, which appealed to us also as attractive samples. The case before us is a peculiar one and when for the Revenue it was not dispute that the assessee was interdicting fresh evidence, we are inclined to direct the ITO that to that extent the assessee spent money for preparing wrappers for putting the tools for the purpose of exporting them, these would be entitled to weighted deduction because it was entirely for the purpose of development of export markets that the assessee proposed of development of export markets that the assessee prepared beautiful and expensive plastic and colourful wrappers, which were more or less of durable nature and not wrappers and the terms is generally understood. What was exhibited in the Court before us was that set of tools were neatly arranged in plastic containers, which were termed as samples for tools. Considering the type of wrappers, we direct that these should be considered as samples and if the assessee is in a position to separate its cost, the same should be given the benefit of destine under section 35B of the Act. The total claim is in respect of Rs. 25,02,836 but it shall be subject to bifurcation, if necessary, after it is subject to the scrutiny of the ITO.
11. We like to mention here that the CIT (A) disallowed the claim by observing that packing expenses were incurred in the year. As observed above, if part of the expenses reach the customers as beautiful souvenirs along with goods sold, these should better be considered in the category of samples of goods for export."
It was in view of the above observations that the learned counsel for the assessee prayed for an identical finding and he also stated that after verification the Income-tax Officer had allowed 25 per cent of such expenses on packing material. Following the Tribunal's earlier order we similarly restore this matter to the file of the IAC (Assessment) with directions to him to examine and screens the expenses in respect of packing material as in the past and to allow weighted deduction thereon accordingly. In respect of Revenue's appeals again following the decisions of the Special Bench, we are unable to confirm the findings of the Commissioner of Income-tax (Appeals) in respect of the following items :
(1) Inspection fee no export;
(2) Insurance charge regarding exports;
(3) Bank charges on export; Now we come to the following three items :
(1) General charges regarding exports;
(2) Telephone regarding exports; and
(3) Printing and stationery regarding exports.
We find that the Commissioner of Income-tax (Appeals) had allowed the total claim of the assessee in respect of the above three items though even if the assessee were a hundred per cent exporter, it could be entitled to weighted deduction on 50 per cent of the amounts only. The Special Bench observed as follows in paragraph 25 of its order :
"....... though a major part of the work done by the assessee's employees may be classified as activities coming under one or the other of the sub-clauses of section 35B(1)(b), it cannot also be overlooked that as part of their duty they could not have avoided attending also to such work as fall within the excluded category in sub-clause (iii). That being so, on the principles outlined by us, a part of the salary paid to them inIndiashould be apportioned and attributed as expenditure incurred on such excluded activities. On the facts and circumstances of the case, we also feel that the apportionment adopted by the Appellate Assistant Commissioner is quite fair and is in accord with what we have opined as the correct principles to be following in such cases..... For the same reason we confirm also the Appellate Assistant Commissioner's finding that only 50 per cent of the expenditure incurred or stationery is allowable."
Following the said principle and also on the basis of specific finding in respect of Postage and Telegrams in paragraph 32 of the said order, we direct the Inspecting Assistant Commissioner (Assessment) to restrict the assessee's claim to 50 per cent of the expenses on the aforesaid three categories of items.
5. Ground No. 3 in the revenue's appeals is in respect of the reduction or the amount of central subsidy from the cost of fixed assets for the purposes of computation of depression and investment allowance. The learned Departmental Representative was fair enough to admit that this issue was covered against the Revenue by the decision of the Special Bench in the case of Pioneer Match Works v. ITO [1983] 3 ITD 714 (Mad.) and his attempt was to keep the matter alive. In the aforesaid decision the Special Bench had noticed that the assessee had incurred the cost first and then only the subsidy was given. The subsidy in the instant case also did not relate to the cost of the asset and it could, therefore, not go to reduce the same. This has been the consistent view of the Tribunal and has been affirmed in the following decisions :
(i) CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632 (AP); and
(ii) CIT v. Bhandari Capacitors (P). Ltd [1987] 168 ITR 647 (MP).
Following with respect the said Special Bench decision we find no warrant or justification for interfering with the order of the learned CIT (Appeals) on this point. The Revenue, therefore, fails on this ground.
6. The last ground in the Revenue's appeal, reads as under :
"On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in holding that there was no justification in the enhancement of income by withdrawing the weight ed deduction under section 35B on Rs. 27,76,816 already allowed to the assessee. The CIT (Appeals) had wrongly given the figures at Rs. 12,10,893 in the order."
In respect of this ground, the learned Departmental Representative relied on the decision of the Madras High Court in the case of Southern Sea Foods (P) Ltd. and submitted that though the assessee was held entitled to weighted deduction on the commission paid, but in the light of said decision the payment of inland commissioner could not be held to be held to be entitled to weighted deduction and therefore, the request of the Inspecting Assistant Commissioner (Assessment) at the stage of first appeals was in order and that the Commissioner of Income-tax (Appeals) should have enhanced the income by withdrawing the relief granted by the Inspecting Assistant Commissioner (Assessment) in respect of the allowance of weighted deduction on commissioner. Shri G. C. Sharma the learned counsel for the assessee however submitted that if the learned Commissioner of Income-tax (Appeals) declined to make enhancement it was within his powers and such an order was not appealable. He also submitted that the learned Commissioner of Income-tax (Appeals) had not given any notice of enhancement to the assessee as he rejected the request of the Inspecting Assistant Commissioner (Assessment) at the very outset. He also submitted that the Inspecting Assistant Commissioner (Assessment) has to right to insist on enhancement. On merits he submitted that on facts also the decision of the learned CIT (A) was right because out of the total commission of Rs. 27,76,816 only Rs. 12,10,893 was the amount of commission paid to Indian agents and the balance was paid to outsiders.
6.1 After considering the rival submissions of both the sides on this point we are of the view that there was nothing wrong with the order of the CIT (A) because under sec. 251 he had the power to enhance after giving notice if he chose it fit to exercise the same on the facts of if the learned CIT (A) did not consider it a fit case for enhancement, there was nothing wrong in his order and it could not be made the subject-matter of appeal.
7. The assessee received during the AY 1979-80 in question (17-7-1977 to 30-6-1978) Rs. 1,33,82,158 as Cash Compensatory Support (CCS), Rs. 51,93,326 as Duty Drawback (DBK) and Rs. 16,73,519 by way of sale of import entitlement (IE). It also gained a net amount of Rs. 7,35,191 as a result of fluctuation in exchange rates. All these 4 items had been declared by the assessee as income in it original return filed on27-6-1979. However, in the revised return filed on30-10-1981the assessee claimed that each of these receipts arose to it on capital account which had to be excluded from its income. The Income-tax Officer however treated them as revenue receipts and therefore, taxable.
7.1 The CIT (A) traced the history from July, 1963 when the Government of India had constituted a Market Development Fund for financing schemes and projects for the development of foreign market forIndiaproducts and commodities. He held that the following was the nature of the 7 criteria on the balance determination of which the rate of cash assistances was based, in view of the report of Bose Mullick Committee (appointed by the Cabinet Committee in November, 1975), decision dated 29-1-1976 of the Cabinet Committee, 39th Report (1980-81) of the Seventh Lok Sabha and the latter dated 11-5-1984 received by the CIT (A) from the Commerce Ministry in reply to his letter dated 23-4-1984 :.
-----------------------------------------------------------------------------------
Sl. Criteria Whether capital or Percentage
No. revenue receipt
-----------------------------------------------------------------------------------
1. Export potential and domestic Capital 2%
availability as well as supply
elasticity of the product
2. Import content and domestic value Capital 2%
added
3. Approximate implicit subsidy under Revenue 2%
the Import Replenishment Scheme
4. Compensation for unrefunded taxes Revenue 1%
and levies
5. Difference between domestic cost and Revenue 2%
international prices of indigenous in-
puts and raw material
6. Cost of entry into new market. 50% (Capital) 1%
50% (Revenue)
7. A cut-off point up to which subsidy is Neither capital -
to be allowed. nor revenue
-----------------------------------------------------------------------------------
Since the precise quantification of the weightage given to the various disadvantages for determining the CCS rate was not possible, the learned CIT (A) made an ad hoc apportionment in the form of percentage mentioned in the last column of the above table. He held that 55 per cent of the entire cash receipts representing revenue receipts were taxable as income u/s. 28(iv) of the Income-tax Act, 1961. He noticed that CCS was paid to the exporter with reference to the value of exports and therefore, the payment arose directly from the business carried on by the assessee. He further held that the CCS was not a bounty and that there was a definite linkage between the activity of the export (which is the assessee's business activity) and the eligibility to CCS from the Government. However, he held that receipts on capital account were outside the purview of section 28(iv).
7.2 So far as the DBK is concerned, the CIT (A) held that this benefit was of the same nature as benefit by ways of cheaper export credit except that in the case of a bank finance, the cheaper rate of interest is a pre-determined event while borrowing while the DBK follows the export and the claim for relief. He notice that the assessee had itself taken credit for the concessional interest by claiming only the actual interest expenditure and, therefore, he held that likewise the assessee had to reduce the cost of other inputs on which DBK had been claimed and allowed or in the alternative, credit the draw-back received to the P & L Account to determine, its true profits and gains of trade. He, accordingly, confirmed the addition of Rs. 51,93,936.
7.3 The learned Commissioner of Income-tax (Appeals) held the amount of Rs. 16,73,519 representing the sale of import entitlements to be taxable as a revenue receipt in view of the following decisions :
(1) CIT v. Wheel & Rim Co. of Indian Ltd. [1977]107 ITR 168 (Mad.);
(2) Agra Chain Mfg. Co. v. CIT [1978] 114 ITR 840 (All.); and
(3) Kamani Engg. Corpn. Ltd. v. CIT [1983] 37 CTR (Bom.) 204.
7.4 The gain accruing to the assessee on account of the deference in the exchange rates was held by the CIT (A) to be taxable as a revenue receipt. In this connection he relied upon the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1.
7.5 So far as the CCS is concerned, the assessee is aggrieved in so far as the learned CIT (A) treated only 45 per cent of the receipt of capital account. On this point, the department is in cross appeal.
7.6 We may point out that in the case of the assessee in ITA Nos. 1143 and 1826/Del/79 for the A. Y. 1975-76 the view taken by a Division Bench (to which one of us was a party) vide its order dated 29-5-1985 was that the CCS was distinguishable from DBK and IE; that it was paid for the purposes of the grantor, i.e., to generate foreign exchange and to find developed export markets for the products of Indian manufacturers; that it was neither to assist the assessee in carrying on its trade nor for any services assist the assessee in carrying on its trade nor for any services rendered as was the case in Bengal Textiles Association v. CIT [1960] 39 ITR 723 (SC); that it was given as a bounty or a gift; that there was no trading relationship as between the assessee and the Governmental and that it was not a condition of the grant that the assessee should carry on the business for the export of its products and that the receipt was dehors the assessee's business. The view taken was that the CCS granted under the Ministry of Commerce letter dated17-8-1976was an outright grant as an incentive to export made without consideration and was given by an administrative act of the Government. The Bench was also of the view that the exporter could call in aid the doctrine of promissory estoppel invoked by the Supreme Court in the case of Union of India v. Anglo Afghan Agencies Air 1968 SC 718. It was held that the motivation of the Govt. was spelt out in the Export Policy Resolution of 1970. The decision of the Hon'ble Calcutta High Court in the case of Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 was held to be not binding on the ground that it was based on the following factual infirmities :
(i) In the judgment the letter dated17-8-1966is referred but the text of the letter dated24-8-1966from the Engineering Export Promotion Council to its member was given.
(ii) Treating the nature CCS as the same as that of IE which was in issue in the earlier case of Jeewanlal (1929) Ltd. v. ITO [1981] 130 ITR 405 (Cal.).
(iii) The Karnataka High Court held in Patil Vijaykumar v. Union of India [1985] 20 Taxman 363 dissenting from the judgment of the Bombay High Court in CIT v. Godavaridevi Saraf [1978] 113 ITR 589 that only the courts and the Tribunals under the High Court would be bound and not others. However, the aforesaid Division Bench had held that DBK and IE were taxable as revenue receipts. The same view was taken by the same Bench for the A. Y. 1976-77 vide separate order of the same date in the case of the assessee in ITA No. 696/Del/1982. However, another Division Bench (to which another of us was a party) took a contrary view in the case of Reliance International Corpn. Ltd. v. ITO [1986] 16 ITD 43 (Delhi). However, in that case the only question involved was whether the cash subsidy granted by the Govt. vide its letter dated 17-8-1966 against the export of specified engineering products (as in the present case) was a trade receipt on revenue account in the hands of the recipient company. That Division Bench took the view that since the following decisions were not notices by the earlier Bench deciding the case of the present assessee for the assessment years 1975-76 and 1976-77 that decision could not be followed and that no reference to Special Bench was also called for, for the same reason as also because the position was self- evident :
(1) Ratna Sugar Mills Co. Ltd. v. CIT [1958] 33 ITR 644 (All.);
(2) H. R. Sugar Factory (P.) Ltd. v. CIT [1970] 77 ITR 614 (All.);
(3) Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473 (Bom.);
(4) Wheel & Rim Co. ofIndia's case;
(5) CIT v. Swadeshi Cotton Mills Co. Ltd. [1980] 121 ITR 747 (All.);
(6) Anglo Afghan Agencies' case;
(7) Addl. CIT v. Handicrafts & Handloom Export Corpn. [1982] 133 ITR 590 (Delhi); and
(8) Ahmedabad Mfg. & Calico Co. Printing (P.) Ltd. v. CIT [1982] 137 ITR 616 (Guj.). The subsequent Division Bench took the view that the decision of the Hon'ble Calcutta High Court in the case of Jeewanlal (1929) Ltd.'s case was binding as canvassed by the department in view of the decision of the Hon'ble Delhi High Court in the case of All India Lakshmi Commercial Bank Officers' Union v. Union of India [1984] 150 ITR 1. It was held that the purpose of the CCS was to reimburse part of the assessee's cost of manufacturing the exported goods and that it was linked directly with the export business of the assessee as it was computed at a certain percentage of the FOB value. It was held that the payment of CCS was directly related to the export effort of the individual and one received it only if one was doing export business of the specified engineering goods. It was, therefore, held to be purely a trade receipt received by a trader in the course of his business for the purpose of making it more competitive in the international market. It was held that the CCS was not gratuitous but was government by proper rules and regulations and every citizen had a right to enforce its claim under it on the principle of promissory estoppel. The nature of the CCS, it was held, was the same as that of cash subsidy and that it aimed at subsidising the cost of production and to wipe out or to reduce the export losses or to increase export profits by keeping the cost of production low. It was also held that the CCS receipt was in the course of business and backed by an enforceable right and was therefore a trading receipt and not on capita; account. It was also held that CCS was linked directly with sales though it was not a part of the sale proceeds as such but was in pari materia with the same and accruing and arising at the moment the sales took place subject to the putting of the claim and its verification by the concerned authorities. Lastly, it was held that the entire CCS was taxable because it was not an aggregation of the various computations but an integrated, indivisible whole whose assessability depended on its nature and character and not on how its measure was determined.
8. However, before addressing the arguments on merits a preliminary objection was raised on behalf of the assessee by the learned Advocate Shri G. C. Sharma. He submitted that the finding regarding CCS was essentially a finding of fact and because in the case of the assessee for the A. Yrs. 1975-76 and 1976-77 a view had been taken that the CCS was not taxable as a revenue receipt but was a mere bounty, the present Special Bench was bound to follow that decision on the principle of stare decisis. He also submitted in that connection that on the basis of the following decisions of the Appellate Tribunal and of the High Courts and particularly as the Subsequent Division Bench in the case of Reliance Co., had violated the principle of judicial propriety in not following the earlier decision of the Division bench of the case of the assessee and in not also agreeing to the reference of that case to a Special Bench, the subsequent Division Bench order in the case of Reliance International Corpn,. Ltd. could not be looked into :
(1) CIT v. s. Devaraj [1969] 73 ITR 1(Mad.);
(2) CIT v. L. G. Ramamurthi [1977] 110 ITR 453 (Mad.);
(3) First ITO v. Grahalakshmi & Co., [1985] 11 ITD 711 (Mad.)(TM);
(4) Export House v. ITO [1985] 13 ITD 687 (Asr.)(TM).
(5) CIT v. Hari Nath & Co. [1987] 168 ITR 440 (All.); and
(6) Ujagar Prints v.UnionofIndia[1987] 167 ITR 904 (SC).
On the other hand a counter preliminary objection was sought to be raised behalf of the department by Shri P. N. Misra, Advocate that the present Special Bench was bound to follow the decision of the Hon'ble Calcutta High Court in the case of Jeewanlal (1929) Ltd., in view of the decision of the Hon'ble Delhi High Court in All Lakshmi Commercial Bank Officer's Union's case and of the Hon'ble Bombay High Court in the case of Godavaridevi Saraf. We have considered the rival submissions as also the decisions referred to above. No doubt as held by the Hon'ble Madras High Court in the case of S. Dev Raj, it is not proper for the Benches of the Tribunal to pass contradictory orders. Ordinarily and earlier order of the Bench in the case of the assessee itself is not be ignored and the decision of another Bench in another case cannot be followed, as held in the 3rd Member case of Graha Lakshmi & Co. In the case of L. G. Ramamurthi it was held by the Hon'ble Madras High Court that the Appellate Tribunal should not come to a different conclusion for a subsequent year but to make reference to the special Bench, if necessary. In the case of Hari Nath & Co. also the same view has been expressed by the Hon'ble Allahabad High Court. The same principle is also expressed in the decision of the Supreme Court in the case of Ujagar Prints. In fact it is only due to the fact that there were conflicting decisions of two Benches of the Tribunal that it was considered fit and proper by the President to constitute the present Special Bench u/s. 255(3) of the Income-tax Act, 1961. The position as clarified by the Third Member in the case of Export House namely that when conflicting decisions are there, the decision of the Special Bench, though it does not over-rule the decision of a Division Bench, is entitled to be respected, is correct and we reiterate the same. The argument of Shri Sharma, based on the doctrine of stare decisis, is in a sense self-contradictory in that he wanted us to follow the Tribunals earlier decision in the case of the assessee only in regard to the taxability of the CCS and not in regard to DBK and IE. We are of the clear view that the doctrine of stare decisis cannot operate as bar to the Special Bench considering the matter afresh in the light of contradictory decisions of two Benches of the Tribunal in regard to the same point. The principle of stare decisis is derived from "stare decisis et non quieta movere" (to abide by and adhere, to decide and not to unsettle things which are established). This rule is not so imperative or inflexible as not to permit a departure therefrom in any case. Therefore, its application has to be determined in each case by the desecration of the Court and the previous decisions need not be followed to the extent that error may be perpetuated and grievous wrong may result (vide Maktul v. Mst. Manbhari AIR 1958 SC 918). Under the stare decisis rule a principle of law which has become settled by a series of decisions is generally binding on the Courts and should be followed in similar cases. This rule is based on expediency and public policy and although generally it should be strictly adhered to by the Courts, it is not universally applicable. Thus the principle of stare decisis really is that the Court must always hesitate to over-rule decisions which are not manifestly erroneous or mischievous and which have stood for many years unchallenged and which from their nature, may reasonably be supposed to have affected the conduct of a large portion of the community in matters relating to rights of property. Having regard to the nature of the principle of stare decisis, we are of the view that it will not come in the way of the Special Bench in considering the matter afresh specially when the conflicts between 2 decisions of the Division Benches against which references are pending decision before the high Court. Even against the decision of the Hon'ble Calcutta High Court in the case of Jeewanlal (1929) Ltd. special leave to appeal to the Supreme Court has been granted and the matter is pending before the Supreme Court. In the case of Godavaridevi Saraf, the Hon'ble Bombay High Court had held that if at the time when the Tribunal decides a question, no other High Court in the country has taken a contrary view, the view of a High Court even if it is not the jurisdictional High Court, can be followed by it. However the Hon'ble Karnataka High Court in the case of Patil Vijaykumar has take the view that the decision of a High Court operates only in the territorial area of that High Court and that it does not operate in any other territorial area however incongruous, unlike the case of a decision rendered by the Supreme Court. So far as the decision of the Hon'ble Delhi High Court in the case of All India Lakshmi Commercial Bank Officers' Union is concerned, it was only held therein that the income-tax authorities acting anywhere i India have to respect the law laid down by a High Court, whether in the State in which they are functioning or in a different State, in the absence of any contrary decision of any other High Court. The Appellate Tribunal is not an income-tax authority as defined in section 116 of the Income-tax Act, 1961. Both the parties are, therefore, free the canvass their respective view points before the Special Bench regarding the ratio disdained of the various decisions of the High Courts, of the Supreme Court, the House of Lords and of the Appellate Tribunal having regard to the facts and circumstances of the case and the material on the record. The earlier decision of the Tribunal and in the assessee's own case is no doubt entitled to greater respect, should be followed, in view of the Madras High Court decision in the case of L. G. Ramamurthi but the other decision expressing a contrary view is equally entitled to respect. In view of the fact that two decisions taking opposite views to exist, the principle of stare decisis cannot be invoked, and this conflict in views had to be resolved. Viewed in this context, we find no force in the respective preliminary objections raised on both the sides. We hold accordingly.
9. On merits Shri G. C. Sharma, the learned counsel for the assessee, submitted that the finding was to be essentially of fact. Tracing the history of the export incentives right from 1963 he explained that the object and the source of all the three incentives were the same although they differed subtlety in their nature factually. These incentives, he pointed out, were the result of the export policy of the Government and did not flow from any statute. In particular, he pointed out that CCS did not flow from section 3 of the Import and Export (Control) Act, 1947. He submitted that whereas the earlier schemes could be said to have aimed at compensation for certain disadvantages suffered by the exporters the scheme as relevant and operative of the assessment year in question had the sole idea to improve and build up the export earning apparatus so as to earn 'foreign exchange' and that the benefit resulting to the assessee was only incidental. He submitted that the CCS was a part of a package of incentives offered by the Government but after1-4-1976the position had materially changed. He explained that the amount of the CCS was determined not by any profit earned or loss incurred by an exporter but was connected only with the net amount of 'foreign exchange realised', which proves the object namely earning of foreign exchange for the country. Thus, one had to look at the dominant purpose and object of the Government behind the incentives, Shri Sharma said. According to him it could not be intended to levy tax on the CCS as it would amount to taking away with one hand what was given with the other. He submitted that the CCS was a capital receipt and not a trading receipt though trade occasioned it and that the division attempted by the learned CIT (A) into revenue and capital account as percentages was arbitrary and without any basis or justification. He explained that no expenditure was recouped by these incentives. Elaborating further he explained that the Government was only providing to the exporters stimulii to export more in order to enable it to realise its national objective of securing the targeted exports and of the expansion of the exports and of the export market to which a very high priority had been accorded in the plan. The objective, he said, was to putIndiaon the export map in a much better way and to increase foreign exchange earnings. In this connection two illustrations were given by him. The first illustration was that if I ask another person to jump high and tell him that I will indemnify him for all his incapacities and losses, I give him stimulus to see how well he does it and that similar was the position of the jumper (exporter) here vis-a-vis the Government and no taxation could be involved on the amount of such stimulus. The second illustration given by Shri G. C. Sharma was that supposing he was arguing a matter before a court and someone standing by, i.e., other than his client, and hearing those arguments benefited, by them and therefore paid Shri Sharma some amount, that amount would not be taxable in the hands of Shri Sharma as he did not get it in the course of his profession. Next, he submitted that the enterprise of exports was not a free enterprise and that the right to export was not free trade but was on the mercy of the Government. According to him stimulii are provided in the shape of incentives, before the commencement of business as promissory payments. He argued that each transaction of export was Government controlled. According to him, the source of the receipt was not the fact of carrying on business by a promise or assurance held out by the Government to carry on business before the business (each transaction) commences. Next, he submitted that the receipt neither fell under section 28(i) nor under section 28(iv). Referring to section 80E which uses the expression 'attributable to' he explained that that expression had the widest connotation compared to the expression 'arising from business' used in section 10(3)(ii) which was less wider and lastly the expression 'profits and gains of business' used in section 28(iv) which had a limited sense. Reference was also made by him to the provisions of section 28(iv) which refers to expressions like 'profits retained for export business' and 'profits derived by. He also explained that what was a trading receipt was not defined anywhere and that the Income-tax Act did not use that expression. Next, he submitted that profits and gains of business had to arise from a business transaction, i.e., of purchase/sale/rendition of service between two parties and that they could not arise in vacuo. He explained that unless there were two parties, the profits and gains of business do not arise as there cannot be a unilateral business transaction. Next Shri G. C Sharma submitted that all receipts of a person who is carrying on business, are not profits and gains of business though they may be attributable to or be incidental to it. He submitted that a reward for greater export could not be taxed under section 28 read with section 145. Next, he pointed out that the payments were voluntary and made out of the consolidated Fund of India under the head 'Export Promotion'. According to Shri Sharma there could be no such grant out of public funds to augment a private gain. He submitted that there was no nexus between the grant and the private gain. He also submitted that every pecuniary benefit could not be construed as a business gain. Reference was also made by him to the 10 per cent outright grant scheme, 1971 of the Central Government for setting up industries in backward area, whereunder, the receipts had been held by the CBDT, the Appellate Tribunal (SB) and the High Courts to be only of a capital nature. He referred to the papers relating to the grant of these incentives, the factual aspects and the written submissions of the assessee on CCS. DBK and IE separately as also a plethora of decisions of the House of Lords, the Supreme Court, the High courts and of the appellate Tribunal having a bearing on these incentives (lists given). He submitted that DBK was given under section 75 of the Customs Act, 1962 and section 37 of the Central Excises & Salt Act, 1944 and the rules framed thereunder. He submitted that DBK was discretionary as to the products and that it was not taxable under section 41(1) as the person who imposed that duty did not grant any rebate or refund in any assessment proceedings or appeal. He also submitted that DBK was not related to any particular duty and that there was no identity between the duty levied and the drawback allowed. He also pointed out that the ITO had not taxed DBK under section 41(1) but under section 28(i). So far as the Import Replenishment Licences are concerned, Shri Sharma submitted that it was an incentive unilaterally granted by the Government in the form of licences related to the value of exports. He submitted that these licences were saleable and were issued under the Import-Export Policy and not under section 3 of the Import and Export (Control) Act, 1947. He submitted that no profit was generated by the assessee. Next, he submitted that the right to export was converted into a stock-in-trade (import replenishment licence) which cost the assessee nothing. He argued that valueless stock-in-trade was not known and, therefore, no tax was leviable. He argued that it was not a part of the assessee' original business and that IEs were actually capital receipts. Shri Sharma argued that the licences came to the assessee de hors its original business. He explained that there were in fact two transactions and that income arose to the assessee only from the second transaction, i.e., of the sale of IE He submitted that if capital was converted into stock-in-trade, it had to be valued at the market rate at which it was sold and that no income could result from a valueless stock.
9.1 Shri Pradip Dinodia, the learned counsel for the intervener, M/s Aero Traders (P.) Ltd.,Delhiadopted the submissions made by Shri G. C Sharma. Additionally he submitted that whether it was a backward area or other area, the incentive schemes were for achieving the national objective and purpose, i.e., for a self-reliant and balanced growth. He submitted that the varied nature of the measure of the incentives could not affect the true nature and purpose for which these incentives were given. He also emphasised the dominant purpose test and submitted that the fact that incidental gain resulted to the assessee, could not change the nature of the receipt.
9.2 Shri P. N. Misra, Advocate, the learned Special Counsel for the department took us through the various papers relating to these incentives also through various decisions, of which a list was given. He argued that the export incentive schemes were floated to overcome difficulties and that the object of the Central government was not to earn foreign exchange. He submitted that the concessions were all given towards the trading activities of the assessee. He argued that the CCS did assist the assessee continuing its business as the business transaction took place only after the benefits provided by the schemes before the assessee were taken into account before making its bilateral transactions of export. Next, he submitted that the fact that the Government had the power to enhance or withdraw CCS showed that it was only a recompense. In this connection Shri Misra pointed out that even the assessee had offered all these disputed receipts for taxation before the ITO and that it is only afterwards that it was claimed that they were not taxable. Shri Misra submitted that the object of the Government Export Policy Resolution of 1970 was to assist the assessee in making the exports more convenient and profitable. He argued that the idea was to compensate the exporters for the financial handicaps. He said that there was no concept of outright special grant to the exporters. He also wondered as to how the Government could have decided to give an outright grant to a few for earning foreign exchange/exports. Referring to the nature of the receipt. he submitted that it was neither voluntary nor paid under a contract, or for services rendered or out of natural love and affecting. He pointed out that the assessee was to get the benefit under the policy if the conditions and stipulations regarding CCS were met. He submitted that the financial support was not de hors the export business but had a direct nexus with it. Referring to the decisions in the case of the assessee for the earlier assessment year 1975-76 and 1976-77 Shri Misra submitted that the Bench deciding the cases had not examined the materials and the decisions analytically and so the CCS had been treated as an outright grant. He also pointed out that certain decisions of the High Courts had also not been considered. In this connection he placed reliance on the decision of the Appellate Tribunal in the case of Reliance International Corpn. Ltd. in which a contrary view had been taken. He also submitted that the decision of the Hon'ble Calcutta High Court in the case of Jeewanlal (1929) Ltd. was a direct authority which should be followed. He argued that there was no contrary view of any other High Court and therefore the Appellate Tribunal was bound to follow it.
9.3 In reply Shri G. C. Sharma submitted that the object of the scheme must influence our decision in the matter. He explained that competitiveness in the international market depended upon several factors like cost, market image, etc. He reiterated that in the instant case the grant had taken the national difficulty in view and not merely the difficulties of an individual. He submitted that no identification with the losses, etc., was perceivable and that rather the identification had undergone a disfiguration by the method employed for the determination of the amount. He submitted that a grant-in-aid meant a grant to aid something which was specific and identifiable and that the CCS in the present case was not a grant-in-aid but only a stimulus or incentive. He said that the expression "supplementary trading receipt" presumed the existence of a primary trading receipt which it sought to supplement, which was absent in the present case. Summing up his arguments, Shri G. C. Sharma said that (i) the nature of the business was of export whose development was the Govt.'s avowed objective, (ii) the nature of the income was a receipt promised by the Govt. before the commencement of each transaction, and (iii) the nature of the right lay not under any statute but in promissory estoppel. Shri Sharma argued that the matter had to be decided in the light of the settled principles and the decisions of the House of Lords and of the Supreme Court. He also submitted that the decision of the Hon'ble Calcutta High Court in the case of Jeewanlal (1929) Ltd. on which heavy reliance was placed on behalf of the revenue, could not assist the department because it was based on erroneous assumptions as the following :
(i) The learned judges assumed that CCS was being granted with the object indicated in the EPC's letter dated24th August, 1966circulated to its constituents.
(ii) The learned judges failed to notice that all the schemes for export promotion in force till6th June, 1966when the Rupee was devalued, had been abolished and that Cash Assistance was granted only by a letter dated17th August, 1966.
(iii) The learned judges did not appreciate the objects that had persuaded the Govt. to grant CCS as spelt out in Commerce Ministry's Circular dated23-10-1978.
(iv) The assessment year involved in that case covered the period before the new Export Policy under which the assessee is receiving such incentives, came into effect.
(v) The learned judges, although they noticed the judgment of the Supreme Court in the case of Shri Ambica Mills Ltd. v. Textile Labour Association AIR 1973 SC 1081 yet failed to appreciate the meaning of 'Cash Subsidy' as approved by the Supreme Court.
(vi) The learned judges also did not proceed to examine other relevant aspects of the question evidently because they were not urged before them :
(a) Whether the nature receipt was in the nature of income at all ?
(b) Whether the receipt in the nature of bounty ?
(c) Whether the recipient had any right to influence the criteria fixed by the Govt. in the matter of selection/of product/or amount of grand in respect thereof ?
9.4 We have carefully considered the rival submissions of both the sides based upon their respective paper books and the plethora of case law. The controversy existing between capital and revenue receipts had defied solution and courts have found it difficult to lay down any general considerations which would conclusively determine whether a certain receipt falls under one or the other category or both. As held by the Hon'ble Supreme Court in the case of CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148 "it is not possible to lay down any single test as infallible or any single criterion as decisive... the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision". In the final analysis, the controversy has to be resolved in the light of the facts and circumstances of each individual case. The distinction between a capital and revenue receipt though fine, is real. The dividing line may be thin, and often at first sight imperceptible. The decision of the question is however not left to the application of any arbitrary standards. There are certain broad principles which guide the determination of the character of the receipt. Some of those broad principles applicable with reference to the present case as deduced from the decisions of the Supreme Court, etc., are the following :
(i) The nature of the receipt is to be determined from a commercial point of view [National Cement Mines Industries Ltd. v. CIT [1961] 42 ITR 69 (SC)]
(ii) The name given to the transaction which is the source of the receipt, is not conclusive though it may be useful in ascertaining the intention of the parties. [National Cement Mines Industry Ltd.'s case and Karam Chand Thapar & Bros. (P.) Ltd. v. CIT [1971] 82 ITR 899 (SC)]
(iii) The nature of the receipt is to be seen in the hands of the receiver and not in the hands of the payer. [CIT v. Kamal Behari Lal Singha [1971]82 ITR 460 (SC)]
(iv) The nature and quality of the payment is to be seen and the motive of the payer is not material though motive may be enquired into. Whether the amount was large or was periodic in character, they do not determine its quality. [P. H. Divecha v. CIT [1963] 48 ITR 222 (SC)]
(v) Profit motive is not decisive of the question whether a particular receipt is capital or income [A.K.T.K.M. Vishnudatta Antharjanam v. CAIT [1970] 78 ITR 58 (SC)].
(vi) The fund out of which the money came is not material. [IRC v. Trustees of Reid [1949] 17 ITR Suppl. 41 (H. L.)]
(vii) The question whether the payer is compellable to pay has no relevance the determination of the character of the receipt. It may be that the payee has no legal claim for payment and the payment is made voluntarily. Yet the receipt may be of revenue character.' [P. Krishna Menon v. CIT [1959] 35 ITR 48 (SC)]
(viii) The measure and method of payment is not decisive of the character of the payment. [Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC)]
(ix) A voluntary payment its a profit of employment if it accrues by virtue of the employment notwithstanding that there may not be any legal obligation to make the payment. If, however, the payment is in the nature of a personal gift to him, it is not regarded as a payment for services but as a mere present. [P. Krishna Menon's case]
(x) A voluntary payment to a lawyer by a person who was not a client but who had benefited by the lawyer's professional services to another is taxable. [Susil C. Sen, In re. [1941] 9 ITR 261 (Cal.)]
(xi) General payments made by way of donation to a company out of benevolence or feeling of charity would not entail income in the hands of the recipient. [Seahem Harbour Dock Co. v. Crook 1931 16 T. C. 333 (HL)]
(XII) Payments take their colour from the receipts which are supplemented, augmented or compensated for. Thus, they would not be revenue receipts if they are of the following nature :
(a) Paid prior to the commencement of trading activities (for administrative expenses). [CIT v. State Trading Corpn. ofIndia[1973] 92 ITR 294 (Delhi)]
(b) Given to discharge the losses of the business of the subsidiary company to enable it to tide over the loss of capital. [Handicrafts & Handloom Export Corpn. of India v. CIT [1983] 140 ITR 532 (Delhi) and Handicrafts & Handloom Export Corpn.'s case
(c) Given to enable the assessee to run its business economically. [Siddhartha Publications (P.) Ltd. v. CIT [1981] 129 ITR 603 (Delhi)]
(d) Given with the idea that men might be kept in employment. [Seahem Harbour Dock Co.'s case]
(e) Given to meet the cost of construction of one's capital works. [Seahem Harbour Dock Co.'s case]
(f) When the receipt is in connection with an activity which does not constitute business. [Senairam Doongarmall's case]
(g) When the payment has nothing to do with the conduct of the assessee's business. [CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC)]
(h) If the activity may have helped to earn the income or profit in an indirect or remote manner. [Cochin Co. v. CIT [1978]114 ITR 822 (Ker.)]
(xiii) The payments would be of a revenue nature if they were given specifically to reimburse or compensate for :
(a) Any specified expenditure or trading expenses. [V. S. S. V. Meenakshi Achi v. CIT [1966] 60 ITR 253 (SC), CIT v. Malayalam Plantations Ltd. [1987] 168 ITR 63 (Ker.) and CIT v. West Coast Industrial Co. Ltd. [1987] 168 ITR 72 (Ker.)]
(b) Any loss of profits. [Ratna Sugar Mills Co. Ltd.'s case]
(c) Cost of inputs. [Ahmedabad Mfg. & Calico Printing Co. Ltd.'s case].
(xiv) The payment would be of a revenue nature if they were given specifically :
(a) To start early crushing or sugarcane. [H. R. Sugar Factory (P.) Ltd.'s case]
(b) For goods sold by way of export. [Swadeshi Cotton Mills Co. Ltd.'s case]
(c) To carry on business in a commercial manner so as to yield profits. [Dhrangadhra Chemical Works Ltd.'s case, Kesoram Industries & Cotton Mills Ltd. v. CIT [1978] 115 ITR 143 (Cal.), Hindustan Lever Ltd. v. CIT [1980] 121 ITR 951 (Bom.) and Wheel & Rim Co. of India Ltd.'s case]
(d) To assist in carrying on his business and to supplement his trading receipts. [Pontypridd & Rhondda Joint Water Board v. Ostine [1946] 14 ITR Suppl. (HL) 45, Bengal Textiles Association's case and Dhrangadhra Chemicals Works Ltd.'s case]
(xv) If compensation has been paid in respect of two distinct matters, on taking the character of a capital receipt and the other of a revenue receipt, nothing prevents the apportionment of the income between the two matters on accounting principles or on actuarial valuation or on reasonable estimates consonant with general and equable principles. Even if there be difficulty in making such apportionment, it cannot be a ground for rejecting the claim either of the revenue or of the assessee. [CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11 (SC)]
(xvi) The fact that the amount might be used as capital in the hands of the assessee is irrelevant for considering it to be not a revenue receipt. [Kesoram Industries & Cotton Mills v. CIT]
9.5 The burden of proof lies on the department to establish that a particular subsidy receipt bears the character of a revenue receipt. Thereafter the burden shifts to the assessee to prove that it is exempt [Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC); Addl. CIT v. s. Krishnaswamy Reddiar [1978] 115 ITR 505 (Mad.)]. We have therefore to first examine the true factual nature of they receipt and the circumstances under which the assessee received the amount in question and then to judge as to whether it is a capital or a revenue receipt or a receipt of a composite nature and whether it would be taxable wholly or partly or not at all. As we observed earlier, reference against the contrary decisions of the Division Benches in the case of the assessee for the assessment years 1975-76 and 1976-77 and in the case of Reliance International Corpn. Ltd. for the assessment year 1979-80 are already pending before the Hon'ble Delhi High Court. The decision of the Hon'ble Calcutta High Court in the case of Jeewanlal (1929) Ltd. in which it was held that CCS was taxable as revenue receipt, is pending decision before the Supreme Court in appeal.
9.6 We must now revert to the history of these payments to find out as to what occasioned these payments to the assessee. A Special Export Promotion Scheme of cash assistance was devised by the Govt. in 1963 known as the Scheme of Market Development Assistance. It provided, inter alia, for supply of the raw materials of iron and steel at concessional rates to enable the manufacturers to produce exportable engineering goods at cheaper rates so as to make them competitive in the international market. This is intended to promote exports in order to reduce the deficit in balance of payments. In order to overcome price resistance to many of the exports in foreign markets the Govt. had tried many measures during the earlier years. For example, the Govt. had been subsidising exports in several ways by import entitlements to exporters, by direct subsidies and by tax credit certificates. On the devaluation of the Indian rupees with effect from6-6-1966all the incentives granted under the erstwhile Special Export Promotion Scheme were withdrawn. In this connection the Finance Minister's broadcast of5-6-1966is relevant. Thereafter the Scheme of Cash Compensatory Support (CCS) was introduced by the Govt. with effect from6-6-1966as per Ministry of Commerce Circular letter dated17-8-1966. That letter was addressed to the Secretary, Engineering Export Promotion Council. The Govt. announced its decision of granting cash assistance against exports of specified engineering goods, effected from6-6-1966. The list of products eligible for such assistance, with the percentage of assistance (on the basis of the difference between F. O. B. price realisation and the marginal cost of production) was annexed with that letter. However, it was made clear that there would be no concessional supply of iron and steel. Then came the Export Policy Resolution of 1970 enunciating the Government's resolve to promote exports. It was laid on the table of the two Houses of the Parliament on30th July, 1970. The text of that resolution contains, inter alia, the following points :
(i) To achieve national reliance and to refuse dependence on external assistance, export earnings need to be expanded at a high rate. (Compound rate of expansion envisaged in the Fourth Plan being 7 per cent per annum).
(ii) In pursuing that aim (generation of expanding surpluses of industrial products) every effort will be made to assist export oriented units in the private and public sectors to achieve economics of scale, improve efficiency of production, reduce costs and adopt production to meet the requirements of their customers abroad.
(iii) Every effort will also be made to secure that indigenous industrial raw material required for export production are made available in right quality and quantity and at fair prices.
(iv) To improve their competitiveness in the international market, to defend their unit value and to improve to the extent possible, their export performance. Attention will also be paid to modernising our marketing and promotional techniques and improving the efficiency of exporting firms engaged in this sector.
(v) Govt. will strengthen, expand and intensify its policy of compulsory quality control and pre-shipment inspection.
(vi) A part of the production must always be made available to earn needed foreign exchange through, if necessary, temporary restraints on home consumption.
(vii) A new organisation is being set up in the public sector to provide package assistance to individual enterprises to build up export potential and to earn and sustain the confidence of overseas customers.
(viii) The aim will be to induce entrepreneurs to expand and adopt their production with a view to entering into enduring relationships with overseas importers....
(ix) Among the inadequacies of existing infrastructure, for exports, that of shipping facilities needs to be emphasised.
(x) A steady growth of export earnings @ 7 per cent per annum can be achieved only if adequate export performance is accepted as a national goal of very high priority. In its letter dated23-1-1976to the Secretary, Engineering Export Promotion Council, the Ministry of Commerce no doubt clarified that the phrase "Cash Compensatory Support" used in its letters dated15-10-1975and16-10-1975, was in no way different from the cash assistance scheme. However, much cannot be read into this letter as it also clarified that the scheme of registration of export contracts for cash assistance purposes also covered products, the exports of which qualified for the grant of CCS. This letter is therefore not of assistance to us regarding the contents of the Scheme of CCS. A perusal of paras 1.59, 1.61 and 1.63 of the 39th Report (1980-81) Seventh Lok Sabha shows that the position adopted by the Secretary, Ministry of Commerce before the PAC was that from 1-4-2976 there were seven factors which went to determine the cash assistance (they are enumerated in para 7.1 of this order). It said that unless there was some motivation for a fellow to export, why should he ? The Bose Mullick Committee appointed by the Cabinet Committee in Nov. 1975 recommended that : (a) the system of cash assistance be suitably revised as a means of boosting our effort, (b) the determination of the cash assistance be based on a balanced determination of the above-mentioned seven factors.
9.7 The Cabinet Committee on export decided on29-1-1976that the cash assistance from1-4-1976in respect of different products be given on a balanced judgment with reference to the seven point criteria mentioned above. It was also said by them that the detailed cost study conducted till31-3-1976to determine the marginal cost of production had become irrelevant for subsequent years. The Ministry of Commerce had issued a Circular dated 23-10-1978 mentioning that Dr. Alexander Committee, which had been set up to review the import-export policies and procedures with special reference to the role of instruments such as CCS, duty drawback, etc., identified the following three basis principles for cash compensatory support :
(a) The level of CCS should fully compensate for the various types of unrefunded indirect taxes, sales tax, etc., which the exporter has to pay.
(b) CCS should be such as to encourage him in adopting adequate marketing strategies and to neutralise the disadvantages of freight, etc., so as to be competitive in the market.
(c) In the case of new products in new markets the magnitude of CCS should be adequate to take care of the initial promotional costs. The Ministry explained that the main object of CCS should be to neutralise the handicaps faced by the Indian exporters in the shape of (i) indirect sales tax, etc., on inputs imported or domestically purchased, (ii) higher rate of interest payable on working capital employed on export production, and (iii) higher cost of domestic capital goods used in export production. It appears that regarding the nature of the CCS the learned CIT (A) had addressed a letter dated 23-4-1984 (copy not filed but the substance mentioned in para 7.11 of the CIT (A) order) to the concerned Joint Secretary in the Commerce Ministry and had discussions in that Ministry on 4-5-1984 and as a result, the position as emerged as summed up by the Joint Secretary in the Ministry of Commerce in his letter dated 11-5-1984 was as follows :
[Copy on the file and also quoted in para 7.11 of the impugned order of the CIT (A)]
(i) The concept of Cash Assistance was modified w.e.f. 1-4-1976 when it was delinked from mere compensation for losses arising to the trader from exports (as was the position till then) and was made more broad-based to subserve the development of the infrastructure for improving exports of specific products on a continuing basis.
(ii) Certain elements such as labour intensiveness of the industry, nature of the products, nature of the industry (whether small scale or cottage) are given due weight age while determining the CCS rate, subject to budgetary constraints of the Govt.
(iii) Precise quantification of the weightage given to the various disadvantages separately for determining CCS rate was not possible.
9.8 The first thing to be notices is that we have to examine the scheme relevant for the assessment year in question. Next, it has to be borne in mind that the assistance offered by the Government to the exporters is in the form of a package. Availability of adequate foreign exchange resources is an important factor for a planned growth of a developing country likeIndia. A major chunk of foreign exchange accrues by way of exports. Various measures have therefore been taken by the Government of India for export promotion. The package consists of CCS, DBK, IE, etc. It forms part of the export policy of the Government. No doubt, such policy is non-statutory but DBK flows from statute. In relation to any goods manufactured inIndiaand exported it means the rebate of duty chargeable on any imported materials or excisable materials in the manufacture of such goods inIndia. This definition occurs in rule 2(a) of the Customs and Central Excise Duties Drawback Rules, 1971 framed under section 75 of the Customs Act, 1962 and section 36 of the Central Excise and Salt Act, 1944. So far as IE is concerned, it also has a statutory basis in so far as it is given under an order made under section 3 of the Imports and Exports (Control) Act, 1947. Through the import replenishment licences the exporters are allowed to import limited permissible items and canalised items of raw materials as well as packing materials required for export production. IE is saleable. Only registered exporters are eligible to claim replenishment licences and also other export incentives such as CCS. The rate of CCS also varies according to the different items and different classes of exporters. The statutory or non-statutory nature of these instruments of export promotion however does not affect their-taxability. Such incentives, for the sake of stability, were offered for the 3-year period-1-4-1976-31-3-1979-so far as the assessment year in question is concerned. There is no dispute on the point that the claims in regard to these incentives can be founded in courts of law on the principle of promissory estoppel. The fact that the right to claim these incentives can be legally enforced, also does not affect their taxability. No doubt, the Government can revoke or withdraw the incentives but not retrospectively perhaps and as we said earlier, they would be normally stable for 3 years. However, we do not accept the argument sought to be raised on behalf of the department that the power to enhance/withdraw CCS showed that it is only a recompense. The Government's discretion regarding revision / reduction / withdrawal of the incentives is therefore not an aspect which would affect the nature of the receipt under the laws in question. There are certain salient aspects which are common to all these incentives. It is not a payment under any mutual or commercial arrangement or contract nor for any services rendered nor can it be said to flow out of love and affection. However, it can also not be treated to be a pure bounty or a gift paid out of sheer benevolence of the Government. However it cannot be said that unless the Government had a bilateral arrangement no receipt from it to the assessee could be considered as taxable. The Export Policy Resolution, 1970 put the compound rate of 7 per cent per annum of the expansion of export earnings during the Fourth Plan period as a notional goal of very high priority. It was intended to achieve economics of scale, improve efficiency of production, reduce costs and adopt production to meet the requirements of the customers abroad. It also referred to the objective to improve the competitiveness of the exporter in the international market. A restriction was envisaged on domestic consumption with a view to export more. It also refers to the build up of the export potential and to earn and sustain the confidence of overseas customers. The Export Policy Resolution, 1970 referring to the inadequacies of the existing infrastructure for exports emphasised that shipping facilities needed to be improved. The fact that the infrastructure for exports was required to be developed is again emphasised in the letter dated11-5-1984of the Joint Secretary, Ministry of Commerce addressed to the CIT (A). It is also clear that with effect from1-4-1976the CCS was delinked from mere compensation or losses arising to the trader from exports and was made more broad-based. It was to be determined on a balanced judgment with reference to the seven criteria referred to in the exports of Bose Mullick Committee, Cabinet Committee on export and Dr. Alexander Committee. The Alexander Committee did say that the level of CCS should fully compensate for various types of unrefunded indirect taxes, sales tax, etc. But it also said that the CCS should be such as to encourage the exporter in adopting adequate marketing strategies and to neutralise the disadvantages of freight, etc., so as to be competitive in the market. In his letter dated11-5-1984to the CIT (A) the Joint Secretary, Ministry of Commerce clearly said that the precise quantification of the weightage given to the various disadvantages separately for determining the CCS rate was not possible. This was said in reply to a specific query from CIT (A). This letter cannot be lightly brushed aside. It was a letter from a senior officer of the Government in the concerned Ministry and would bind the Government. We fail to understand as to how and on what basis, then the learned CIT (A) could be in a position to estimate the ad hoc apportionment as attempted by him in paras 7 and 10 of his order to say that 55 per cent of the CCS receipts represented revenue receipts. The decision of the Supreme Court in Best & Co. (P.) Ltd.'s case would not assist the department in such a situation. In fact even the finding of the divisions bench which decided the case of Reliance international Corpn. Ltd. was that the CCS was "not an aggregation of various computations but an integrated, indivisible whole whose assessability will depend on its nature and character and not how its measure was determined". The learned CIT (A) has rightly mentioned in para 8 of his order that the CCS receipts were the result not of equalising the domestic cost of the product with the FOB value realised but to encourage the firm (the assessee) and the product and undertaking the disadvantages arising out of Government's policies. While dealing with the "cost of entry into new market", the learned CIT (A) observed in para 8 of the impugned order that that cost could take two forms : viz. (1) to incur capital expenditure so as to improve the infrastructural facilities such as construction of godown and warehouse in the vicinity of their foreign market, and (2) to incur extra expenditure on advertisement, publicity, etc., for the promotion of the product. He also noticed that the assessee had constructed in the subsequent years a warehouse in theUSAto have adequate storage of its products for ready supplies on indents and had similar plans of constructing warehouses in some centres ofEurope. This fact has not been disputed on behalf of the department. This suggests the giving and the necessity of the CCS in the capital field. Having regard to the above facts it is clear that in the light of the broad principles guiding the determination of the character of a receipt and doing so from a commercial point of view, that though the assessee received CCS in its capacity as registered exporter of specified engineering goods, the CCS receipts in question could not be treated as supplementary trading receipts received by it as a trader in the course of its business. It cannot also be said that though these receipts did not form part of the assessee's sale proceeds, they were linked directly with its sales or that they accrued or arose at the moment of the sales themselves. In respect of CCS receipts it cannot be said that they were received by it specifically by way of recompense or reimbursement of any specified losses or specific expenditure or specifically to carry on business in a commercial manner so as to yield profits. No identification can be perceived precisely between the CCS receipts and the costs or profits earned or the losses incurred or the inadequacies or hardships faced by the assessee. In fact identification undergoes a complete disfiguration by the method employed. In the case of an exporter some formula or method had to be devised to calculate the amount of the assistance. The mere fact that the assessee would not have got CCS if it did not export goods, does not lead to the irresistible inference that the receipts were revenue receipts (and not de hors the export business) or that a direct causal and taxable nexus existed between the exports and the granting of CCS. We are therefore of the view that though the CCS could not be treated as a mere bounty or gift, it was not a revenue receipt taxable under section 28(iv) of the Income-tax Act, 1961 but only a capital receipt given to improve and build up its capital base and to remove the inadequacies in its export apparatus or infrastructure. We agree with the submission made on behalf of the assessee that the dominant object of granting CCS was the targeted expansion of its export earnings as a national goal of a very high priority to fulfil which even the domestic sales were to be restricted for increasing exports. The dominant purpose was also to gear up and improve the foreign exchange earning set up of the Government in which the assessee's contribution and co-operation was enlisted as the enterprise of export is not a free on but is State controlled. The benefit resulting to the assessee as an exporter was incidental and that too in the capital filed. We are inclined to agree that the expression "profits and gains of business" has a limited sense under section 28(iv) and that the expressions "arising from business" used in section 10(3)(ii), or "derived from" or "attributable to" or "arising from the exercise of business or profession" are wider. In this connection the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 is relevant. However, we do not agree that each transaction of export is of such a nature that the CCS is treatable as given to assist the assessee to start its business or "before the commencement of business" so as to make it a capital receipt in the sense in which the Hon'ble Delhi High Court was treating it in the case of State Trading Corpn. of India Ltd.
9.9 The Central Government had announced in 1971 a separate scheme known as the "10 per cent Central Outright Grant of Subsidy Scheme 1971" for industrial units to be set up in certain selected backward districts/areas. It was given primarily for helping the growth of industries and not for supplementing their profits. Under that scheme the quantum of subsidy was determined with reference to the fixed capital and not the profits. The working capital was specifically excluded from the computation of fixed capital for this purpose. One of the conditions for the grant of that subsidy was that the undertaking must remain in production at least for a period of 5 years after it went into production. The CBDT vide its Circular No. 142 datedAugust 1, 1974had held that since it was intended to be a contribution towards capital outlay of the industrial unit, the subsidy was to be regarded as being in the nature of a capital receipt in the hands of the recipient. The same view was taken by a Special Bench of the Appellate Tribunal in the case of Pioneer Match Works. In fact in the case of Reliance International Corpn. Ltd. the Division Bench of the Tribunal had also held that such subsidy was clearly of a capital nature. In Godavari Plywoods Ltd.'s case the A. P. High Court took the same view while considering a similar scheme of AP, viz., Andhra Pradesh State Incentive Scheme, 1976 along with the Central Subsidy Scheme, 1971. The Hon'ble A. P. High Court approved the decision of the Special Bench of the Appellate Tribunal in the case of Pioneer Match Works. Y. V. Anjaneyulu, J. held that the subsidy was granted more as a recompense for the hardships and inconveniences which the entrepreneur may encounter while setting up industries in backward areas. His Lordship observed that infrastructural facilities were also lacking in backward areas. It is interesting to note that Jeevan Reddy, J. said in that case while concurring with Anjaneyulu, J. He took the view that the matter was capable of being understood on both the hypotheses as the subsidy was granted after the industry was set up and went into regular production. His Lordship made the following observations :
"It is for this reason that I said that both the views, canvassed respectively by the Revenue and the assessee, are plausible. It cannot be said that the interpretation placed by the Revenue is the only plausible interpretation and that the other interpretation is not plausible or reasonable. In such a situation, I am of the opinion that the interpretation favourable to the assessee must be adopted. For the above reasons I agree with the answer proposed by my learned brother."
In Bhandari Capacitors (P.) Ltd.'s case, the Hon'ble M. P. High Court took the same view of the Central Subsidy Scheme, 1971 as taken by the Hon'ble A. P. High Court in the case of Godavari Plywoods Ltd. In the case of CIT v. Dusad Industries [1986] 162 ITR 784 (MP) sales tax subsidies in backward areas were held to be only by way of incentive of capital investment. Two inferences are deductible from these cases. The first is that if subsidy is granted more as recompense of the hardships and inconveniences in the setting up of the industry the subsidy can be justifiably taken as on capital account. The second point is that in the case of subsidies if both views are plausible, we would be justified in adopting the interpretation which is favorable to the assessee. In this sense the decision in the case of Godavari Plywoods Ltd. also would help the assessee.
9.10 We may, before parting, with the discussion on this point, also refer to certain decisions not already discussed. In the case of Kesoram Industries & Cotton Mills Ltd. the A. Y. involved was 1963-64. There, under the export promotion scheme (prior to6-6-1966) the exporter of cotton cloth or yarn was eligible for the grant of import licences to the extent specified. Similar was the case in Swadeshi Cotton Mills Co. Ltd.'s case which dealt with the cotton textile export incentive scheme announced by a press note dated.22-11-1958. The assessee had received import entitlements which were partly utilised and partly surrendered to get cash. In the case of Handicrafts & Handloom Export Corpn. loss incurred by the subsidiary company was reimbursed by the holding company to enable the former to tide over the loss of capital. It was construed as a case of discharge of another person's debt out of affection. The decision in the case of Handicrafts & Handloom Export Corpn. ofIndiawas the same. In the case of Jeewanlal (1929) Ltd. no doubt, it was held that the cash assistance received by the exporters was inextricably connected with the act of exportation and that it was incidental to and supplemental to the trading receipts. However, the following factors need to be notices in regard thereto :
(i) That decision is pending before the Supreme Court in appeal.
(ii) The assessment years involved there were 1967-68 and 1968-69.
(iii) The decision while intending to set out and proceed on the basis of the Ministry of Commerce letter dated17-8-1966to the Secretary, EEPC reproduced a letter dated24-8-1966from the EEPC to its members whose contents are not in pari materia with the aforesaid letter dated17-8-1966.
(iv) The letter dated 11-5-1978 of EEPC to the departmental representative in that case said by the letter dated 17-8-1966 Govt. had announced cash assistance scheme for compensating loss to the exporters of exports of engineering goods and that that scheme was announced for the first time and was not in replacement of any existing scheme in operation.
(v) The scheme of the grant of CCS underwent a structural change, with the change in the policy of the Govt. w.e.f.1-4-1976. It is more to promote the infrastructure to develop exports than to compensate for losses. In the case of Shri Ambica Mills Ltd. No. 1 the question involved was whether a subsidy could be taken into consideration for the purposes of the Payment of Bonus Act. It held that the grant of subsidy could not be included in the competition of profit out of which bonus was payable to the workers. It was observed that these schemes were intended by the Govt. for the benefit of the country and that the subsidy payments were not for services rendered. In the case of Seahem Harbour Dock Co. the Unemployment grants Committee sanctioned from time to time for the extension of the dock of the dock co. The House of Lords held that the grants did not constitute trade receipts as they were made with the idea that by its use men might be kept in employment. Their Lordships observed that they were paid to and received by the dock co. without any special allocation to any particular part of their property-capital or revenue-and did not bear any resemblance to a trade receipt. In the case of CIT v. Sahney Steel & Press Works Ltd. [1985] 152 ITR 39 (AP) dealing with refund of sales tax on purchase of machinery and raw materials and on the sale of finished goods, it was held, that it was not a voluntary payment but one connected with the assessee's business and therefore assessable under section 28 and 41(1). In the case of Dusad Industries under a scheme framed by the Govt. of M. P., the Govt. granted sales tax subsidies to industries set up in backward areas. It was held that the same was given by way of an incentive for capital investment and not by way of addition to the profits of the assessee. In Malayalam Plantations Ltd.'s case and West Coast Industrial Co. Ltd.'s case subsidy received from Rubber Board towards reimbursement of expenditure incurred in replantation, development, maintenance and upkeep of rubber tree was held to be a revenue receipt. In respect of backward areas, the a subsidies were held to be not deductible in determining actual cost of assets under section 43(1) in the case of Pioneer Match Works. In Vispro foundry Engineers (P.) Ltd. v. ITO [1984] 7 ITD 721 (Mad.), it was held that where an assessee (a newly set up small scale industrial undertaking) was allowed concessional rate for current consumption under an incentive scheme offered by the State-owned industrial corporation, the refund (which related to earlier years) was not taxable under section 41(1). In ITO v.GujaratHandicraft & Handloom Development Corpn. Ltd. [1984] 9 ITD 488 (Ahd.) grants and subsidies for carrying out specified objectives were held not to constitute income. In Tirumalesa Bricks & Tiles Factory v. ITO [1986] 15 ITD 703 (Hyd.) subsidy received by the assessee from the State Govt. for setting up new industries (not in backward area) was held not to amount to the assessee's income. The principle laid down by these rulings and the view expressed by the CBDT with regard to taxing of subsidy given by the Govt. to promote industries in backward areas, lead us to believe that CCS or subsidy by whatever name it is called, is to encourage the establishment of capital assets, be it to promote exports or industrialise backward areas, and, therefore, the receipt is of capital nature on capital account, and not of revenue nature and on revenue account. Maybe in arising at the amount, of CCS the other disadvantages are also taken into consideration. But that by itself will not make it a receipt on revenue account, as we have to see the policy behind the grant of it, and the predominant object. If the various factors that went into the computation of the CCS are identifiable, then a view can be taken to apportion it is proportion to the factors identified. But, when Govt. themselves (by the letter of Joint Secretary) say that such identification is not possible, we should not attempt to make one, as it would be not only not legitimate but also irrational and arbitrary. Thus, to our mind, the dominant object of the Govt. in granting CCS had undergone a change. Since the decision of the Tribunal in Reliance International Corpn. Ltd.'s case, that change in policy has to be kept in view in deciding the issue, we therefore hold that the CCS received by the assessee was on capital account and not on revenue account and not to compensate for any loss incurred by the assessee in its export trade. This view incidentally accords with the view taken in the assessee's own case for an earlier year though for other reasons.
9.11 We now take up the question of the assessability of DBK. We have already noticed that though DBK forms part of a package of incentives, its nature is not the same as that of the CCS. It flows from statute. In relation to any goods manufactured in India and exported, DBK as defined in rule 2(a) of the Customs & Central Excise Duty Drawback Rules, 1971 (framed u/s 75 of the Customs Act, 1962 and section 36 of the Central Excise & Salt Act, 1944) means the rebate of duty chargeable on any imported materials or excisable materials in the manufacture of such goods in India. The learned CIT (A) is right in observing that the nature of the benefit by way of DBK is the same as benefit by way of cheaper export credit except that in the case of a bank finance, the cheaper rate of interest is a predetermined event while borrowing, while DBK follows the export and claim for relief. The factual position also is that the assessee had itself taken credit for the concessional interest by claiming only the actual interest expenditure and, therefore, the assessee had reduced the cost of other inputs on which DBK had been claimed and allowed or in the alternative credit the drawback received to the profit and loss account to determine its true profits and gains of trade. Having regard to the definition of DBK we do not accept the submission made on behalf of the assessee that it was not taxable u/s 41(1) as the person who imposed that duty did not grant any rebate of refund in any assessment proceedings or appeal. It cannot be said that that DBK was not related to any particular duty or that there was no identity between the duty levied and the rebate or the drawback allowed. The fact that the ITO had not taxed DBK u/s 41(1) but u/s 28(i) would not make any difference. The identity is established by the very definition of DBK as noticed above. In te rms of section 41(1) the assessee definitely obtained a remission or drawback which was accordingly taxable. In the case of Sahney Steel & Press Works Ltd., the A. P. High Court held that refund of sales tax on the purchase of raw materials and on the sale of finished goods was assessable u/s 28 read with section 41(1) of the Income-tax Act, 1961. DBK has all along been taxed in the hands of the assessee. Accordingly, we find no force in this ground.
9.12 The next point relates to IE. We have already notices that the nature of IE is also different from CCS inasmuch as it has a statutory basis as it is given under an order made u/s 3 of the Imports & Exports (Control) Act, 1947. Therefore, the assessee is not right in arguing that IE is secured under the Import-Export Policy and that it is not statutory. Even if it be accepted that IE is secured by the assessee without any cost, that fact is not material for the purposes of taxation of the proceeds of the sale of IE. A valueless stock-in-trade is not unknown as there may be cases where the stock-in-trade does not cost the assessee anything though his business consists of the same. An example of the same would be that of an assessee dealing in the sale of animals like cows, buffaloes, horses, etc. When the assessee acquires the off-springs of cows, buffaloes, horses, etc., and sells them in the market, it cannot be said that the sale receipts would be exempt from income tax. It can also not be successfully argued on behalf of the assessee that the IE is received by the assessee de hors its original business. In the following decisions the proceeds of the sale of import entitlements have been held to be taxable as revenue receipts and there are decisions to the contrary :
(1) Wheel & Rim Co. of India Ltd.'s case; (2) Agra Chain Mfg. Co.'s case; (3) CIT v. Ashoka Lungi Co. [1979] 120 ITR 413 (Mad.); (4) Swadeshi Cotton Mills Co. Ltd.'s case; (5) Shardlow India Ltd. v. CIT [1981] 128 ITR 571 (Mad.); (6) Jeewanlal (1929) Ltd.'s case; (7) ITAT v. B. Hill & Co.(P.) Ltd. [1982] 29 CTR (All.) 301; (8) Kamani Engg. Corpn. Ltd. v. CIT [1983] 37 CTR (Bom.) 204 and (9) O. K. Industries v. CIT [1987] 163 ITR 51 (Ker.). No doubt, in the following cases when the department sought to levy capital gains on the sale of import entitlements, it was held by the various High Courts, on the 128 basis of the well-known decision of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 that since the cost of its acquisition was nil, no capital gains tax could be levied. (The import entitlement was no doubt considered as a capital asset) :
(1) CIT v. T. Kuppuswamy Pillai & Co. [1977] 106 ITR 954 (Mad.); (2) K. N. Daftary v. CIT [1977] 106 ITR 998 (Cal.); (3) Addl. CIT v. K. S. Sheik Mohideen [1978] 115 ITR 243 (Mad.)(FB); (4) Nonsuch Tea Estates Ltd. v. CIT [1981] 129 ITR 28 (Mad.); (5) CIT v. Anglo India Jute Mills Co. Ltd. [1981] 129 ITR 352 (Cal.) and (6) CIT v. Modiram Laxmandas (P.) Ltd. [1982] 30 CIT (Bom.) 209. Thus, even if IE was a mere right (capital asset) its sale yielded income. The proceeds of the sale of import entitlements have also been held by the Appellate Tribunal all along to be taxable. In this connection, we may also refer to the special Bench decision of the Appellate Tribunal in the case of Indo Asian Switchgears (P.) Ltd. v. IAC [1985] 12 ITD 65 (Delhi). We are, therefore, clearly of the view that the amount of Rs. 16,73,519 by way of sale of import entitlement was rightly taxed by the Income-tax authorities.
9.13 So far as the income arising out of the difference in the exchange rate is concerned, the same is also taxable. It is an item of receipt arising on revenue account, on the basis of the principles laid down by the Supreme Court in the case of Sutlej Cotton Mills Ltd. In this connection, reference may also be made to an earlier decision of the Supreme Court in the case of CIT v. Canara Bank Ltd. [1967] 63 ITR 328. We accordingly uphold the taxation of the amount of Rs. 7,35,191 in the hands of the assessee.
9.14 In the grounds of appeal the assessee had also contended that the incentives were also exempt under sec. 10(17B). However, sec 10(17B), in terms, refers to payments (whether in cash or in kind) as a reward by the Govt. for such purposes as may be approved by the Central Government in this behalf in the public interest. The export policy/scheme negatives the case of any such reward. There is also no declaration made by the Central Govt. regarding the purposes approved under sec. 10(17B). This contention of the assessee is, therefore, not sustainable.
9.15 To sum up, our finding is that though in terms of the export policy of the Government for the assessment year in question the three incentives (CCS, DBK and IE) were offered as a package to the exporters like the assessee, their basis, nature and incidents were not the same. Whereas in respect of DBK and sale of IE the exact identification with reference to the specific rebate/drawback of duty and income receipts respectively is duly established, no such pinpointed or specific identification is discoverable, presumable or established in respect of the CCS with reference to any particular recompense, loss or assistance, the cash compensatory support extended being for making up the deficiencies, inadequacies and hardships generally in the export infrastructure and export set up. Therefore, whereas the DBK and receipts by way of sale of the IE constitute supplementary trading receipts by way of income, the CCS receipts are to be treated in their entirety as capital receipts. It is not possible to pinpoint or specifically identify any defined portion or component of the CCS as income or a supplementary trading receipt. Even if two views were possible on this point the benefit had to go to the assessee.
9.16 In the end we would like to acknowledge the valuable assistance rendered to the Bench by the very able, detailed, sustained and persuasive arguments, paper book and case law on both the sides.
10. In the result the appeals are partly allowed.
Per Shri Anand Prakash, Accountant Member - These are cross-appeals pertaining to assessment year 1979-80 for which accounting period of the assessee commenced on1-7-1977 and ended on30th June, 1978.
2. The first ground of appeal of the assessee pertains to its claim under section 80J of the Income-tax Act, 1961. My brother Shri V. P. Elhence has dealt with the claim of the assessee in this regard vide paragraphs 3 and 3.1. I agree with his finding on this subject and, therefore, it is not necessary for me to elaborate further on this issue.
3. The second ground of appeal pertains to the assessee's claim regarding weighted deduction in terms of the following items :
Amount Rs.
1. Interest on post-shipment export credit loan 4,50,983
2. Exchange rate difference 10,55,379
3. Inland freight on export consignments 33,90,473
4. Ocean freight on export consignments 53,60,193
5. Forwarding charges on export consignments 8,95,760
6. Packing materials consumed exclusively for exports 65,08,653
4. So far as item Nos. 1 to 5 are concerned, they came for consideration of the Income-tax Appellate Tribunal in the assessee's own case for assessment year 1975-76 vide ITA No. 1143/Del/79 and 1826/79 and in respect of assessment year 1976-77 being ITA No. 696/Del/82. In the note submitted by the assessee, it has been conceded and rightly that the Tribunal had rejected the assessee's claim for weighted deduction in respect of the above items. Respectfully, following the reasoning given by the Tribunal while rejecting the assessee's claim in respect of the above items, I disallow the assessee's claim. In regard to the packing materials consumed, it was pleaded by the assessee before the Tribunal in the course of appeal hearing for assessment year 1976-77 (vide paragraph 10 of the Tribunal's order) that the expenditure in question was not entirely for the packing material but the special and attractive plastic wrappers used should be taken as samples for goods, and that this special wrapping was used entirely for the purpose of development of export markets. The wrappers in question were, it was explained to the Tribunal made up of beautiful expensive plastic and were colourful and were meant to be of durable nature and they were more or less like beautiful souvenirs to the customers who purchased the assessee's goods. In view of this, it was observed by the Tribunal that "if the assessee is in a position to separate its cost from the total packing expenses, the same (special wrapping) should be given the benefit of section 35B of the Act...." At the time of hearing, the assessee submitted that the ITO had since given effect to the above order and had bifurcated the expenses and allowed weighted deduction in respect of the special packing material.
5. When the matter came up for hearing before the present Special Bench, the assessee conceded that the expenditure may not amount to sending samples but that it amounted to doing advertisement. Any body who saw the special wrappers would be attracted and catching attention of others was the essence of advertisement and, therefore, even though the special wrappers may not be treated as samples, but they may be treated as advertisement.
6. The above argument of the assessee was opposed by the revenue and the learned D. R. submitted that packing was packing and it was an element of cost of production and as such, it could not be eligible for weighted deduction in terms of the ratio of J. Hemchand & Co.'s case. According to the revenue, therefore, the order of the learned CIT (Appeals) was correct and, therefore, the Bench should not interfere with it.
7. In my opinion, the element of advertisement is discernible in the special packing that is done by the assessee with a view to attract attention of the potential customers. Any body who looks at the packing in a foreign shop might get attracted towards the packing and thereby the goods got advertised. In this sense, it is possible to uphold the assessee's viewpoint and for this reason, I would express my agreement with the finding of my learned brother Sh. V. P. Elhence with regard to this item. The assessee is eligible to succeed on this in the same manner as it did for assessment year 1976-77.
8. The 6th ground of appeal of the assessee is with regard to the taxability of Rs. 7,35,191 arising out of difference in exchange rate. According to the assessee, it was not business income and that it represented capital receipt of the appellant. My learned brother Shri. V. P. Elhence has dealt with this ground in paragraph 9.13 of his order. Inasmuch as, I am in entire agreement with the finding given by him there, that the receipt in question is business receipt, I do not consider it expedient to elaborate further on this issue.
9. That leaves ground Nos. 3, 4, and 5. They deal with the following receipts in respect of which the assessee has claimed exemption from taxation :
Description of the receipts Quantum of receipts
Rs.
1. Cash compensatory support 1,33,82,158
2. Draw-back of duty 51,93,926
3. Income from sale of import entitlement 16,73,519
My learned brothers Sh. V. P. Elhence has held that whereas the items at 2 and 3 above are taxable being revenue receipts and item No. 1 is not taxable as it is a capital receipt. He has also held that "the benefit resulting to the assessee as an exporter (in the form of cash compensatory support) was incidental". It was so because, according to him "the dominant object of granting CCS was the targeted expansion of its export earnings as a nation a goal of a very high priority to fulfil which even the domestic sales were to be restricted for increasing exports. The dominant purpose was also to gear up and improve the foreign exchange earning set up of the Government in which the assessee's contribution and co-operation was enlisted as the enterprise of export is not a free one but is State-controlled..."
10. As in my opinion, the nature of all the three items listed above is identical, all three of them had to be treated as revenue receipts, I am assigning my reasons foe holding the above view in detail in what follows.
11. First of all, I would like to deal with the aforementioned theory of "dominant object" of national benefit as if it is different opposed to the benefit of the individual units who do export business. The economic activities of a country, according to me have to be viewed at two levels-macro (i.e., an overall view of the activities of the nation as a whole) and micro (i.e., the activities of individual units of production whose interaction constitutes the aggregate (i.e., macro) economy of the country. There is no duality in the two views-they being of the some activity viewed from two different levels-there is no conflict between them, both of them tend to act in the same direction and in the same sense. The national intervention in the economic activities has been more and more visible since after the great depression of 1930s when the theory of new deal based on Kensein Theory of Economics took shape and it was realised that if free rein was given to the inter-play of individual initiative based on the motive power of profit alone disasters as that of 1930s may reoccur. It was, therefore, felt that the national Government must take a hand in the shaping of the development of the country's economic activities with a view to impart to them such thrusts and directions as were desirable from the point of view of the nation as a whole. The medium of implementation of these broad policies was, of course the individual entrepreneurs, and it was through his development that the economy as a whole was to be developed. There is no duality in the nation's development on the one hand and the development of individual units on the other, and, in any case, one is not at the cost of the other. It is only macro and micro views of the same process, and as such, in my opinion, it would be wrong to view the national goal as distinct from the individual unit's goal, particularly in the field of export development, especially when means adopted are not coercive, but in the forming of provision of incentives and removal of disadvantages from the path of individual entrepreneurs. The underlying principle is that the benefits of individuals will add up to the benefit of the nation in this regard.
12. The next point which deserves to be emphasised at the outset is that export means nothing more than sales of the goods of an individual in the foreign market, as opposed to the sales of the goods of the same individual in the internal market. The exports are in fact as good sales as the sales in the internal market. There is no difference in the nature of the two at all. Therefore when Government endeavours to increase the exports of our country what it does is to ensure that the individual units are encouraged to sell their goods more and more in the foreign market. To view exports as a category apart, and as if it is something different from the sakes in the internal market may not be correct. Its essential nature, as emphasised earlier, is nothing but that of sale on one's goods. It is true that in the case of sale to the foreign markets, there are more restrictions than in the case of sales so goods in the internal market, but the intervention of these restrictions does not transform the nature of the exports which remains that of sales.
13. Economic development of a country involves mobilisation of resources both internally from within the country and externally from foreign countries. In the monetary economy money provides the purchasing power : it is through money that the country's resources are mobilised. Internally the customers pay for the goods and services in our own currency but when the entrepreneur in our country need goods from foreign countries for their manufacturing activities and other developmental activities, the goods from the foreign markets can be purchased only by paying for the said goods in the currency of the countries in question wherefrom the goods are purchased. In order to pay for them, it is apparently necessary to have foreign exchange of those countries or such freely convertible foreign exchange as may be acceptable to all exporters to out country for example, Dollar. With the foreign exchange so earned, goods are bought from the foreign market and imported into the country for its development. The exports are thus one of the important means to finance the imports and of mobilising external resources for the development of our country.
14. At the end of World War II, we had huge sterling balances at our disposal in the U. K. and so long as it lasted, our country does not have to bother much about earning foreign exchange through increasing the exports to foreign countries. This position could not, however, last long and as early as 1954, need to improve our foreign exports was felt and the Export Promotion Councils were set up for textiles, silk and rayon and a scheme was devised to give drawback of import duty on raw materials and components utilised in the manufacturing of several articles which were exported such as linoleum and artificial silk. In June 1958, the them Governor of the Reserve Bank ofIndia, Sh. R. V. R. Iyengar, speaking on the subject 'Foreign Exchange Situation inIndia' observed, inter alia, as follows :
"The best method of financing an enlarged flow of imports is to maximise exports...; World markets will remain highly competitive buyers' markets in which exporters have continuously to rely on additional incentives to exports ...."
In March 1959 "an important development in the field of import control for promoting exports was the liberalization by the Government of the policy for import of cotton by mills under the Cotton Textile Export Incentive Scheme. Under the announcement all exporting mills would be granted with effect from the quarter ended March 1959 import quotas for raw cotton equal to 60 per cent of the F. O. B. value of their exports. Under the modified Scheme of the imports the eligible mills will be allowed to retain only 10 per cent for their own use as against 15 per cent allowed under the Old Scheme; the balance being made available to the Textile Commissioner.....". In September 1959 a new Scheme for the promotion of exports of engineering goods was announced. According to the Scheme, "it was open both to established and to prospective exporters. Manufactures could obtain their requirements of raw materials, indigenous steel and pig iron, tools, components, etc., for fulfilling the export targets agreed to by them....". In their report for the period1-7-1960to30-6-1961, the Central Board of Directors of the Reserve Bank ofIndia, reported, inter alia, as below :
".... The relatively poor export performance reflected the severe competition that all major exporters had to face abroad and emphasized the imperative necessity to reduce costs and improve quality at the same time as the volume of output is increased and the range of export products is diversified....."
15. Thus, from the review of the above efforts at increasing exports, it would be seen that the emphasis all along has been on reducing the cost (apart from improving quality) of goods which are exported from this country, and, for this purpose, not only duty draw-back and rebate of central excise, etc., is granted in respect of the components which go in the manufacturing of the commodity in question, but import entitlements are also provided to enable the industries in question to import raw materials at international prices, which go into the manufacturing of finished goods, which are then exported to the foreign countries. The report of the Central Board of Directors of the Reserve Bank ofIndiafor the period1-7-1960to30-6-1961referred to above highlights this approach. Inasmuch as the above means were not proving adequate to encourage exports from our country and as the value of the rupee in terms of the other currencies was dwindling because of the demand for India rupee being less in the foreign market, the country resorted to devaluation of the rupee on 5-6-1966, whereby the value of the Indian goods in the foreign markets was sought to be brought at a lower competitive figure while at the same time making imports costlier.
16.1 After the devaluation of the rupee in June, 1966, the current schemes referred to above were suspended for the time being and a hard look was given to the various schemes, which could provide effective incentive to the Indian exporters to sell goods abroad. The foreign importers will purchase Indian goods only if they have competitive prices and are of good quality, and the Indian exporter will sell goods abroad if he makes profit from their sale equal to, if not more than, in the Indian market. To create favourable conditions capable of achieving the above objective has been the underlying motive force shapingIndia's import and export trade policies right from the very beginning up to date.
16.2 The time tested policies of replenishment entitlements, duty drawbacks of customs, duty rebates of Central excise, etc., were therefore continued even after devaluation; for these measures went to a considerable extent in setting off certain disadvantages, which were otherwise keeping the cost of the Indian exportable goods at a higher pitch. In addition to these policies, it was realised that further steps will have to be taken to provide case assistance to the exporters with a view to provide them incentive and also to neutralize some of the disadvantages which they were still facing and which were not removed by the above mentioned policies and on account of which the cost of production of the said goods was at a higher level. Export policy resolution of 1970 of the Govt. of India took note of the various disadvantages faced by the Indian exporters in expanding their exports in the foreign markets. It noted the crucial role of the export earnings for financing the ongoing plans for the country's economic development in the form of placing at its disposal the foreign resources and it pointed out that "to achieve national self-reliance and to reduce dependence on external assistance export earnings needs to be expanded at a high rate....". It then identified the various field of the country's economy which would provide fruitful domain for augmenting export efforts. After referring to the agricultural sector, horticultural sector, export of sea foods, Indian forest products, mineral produce of the country and textile industry, it referred to the diversifying of industrial production and the improvement of its economic efficiency, and pointed out that in achieving the industrial growth of the country "every effort will be made to assist export-oriented units in the private and public sectors to achieve of economies scale, improve efficiency of production, reduce cost and adopt production to meet the requirements of their customers abroad. In this context the policy resolution referred to the labour intensive products and skills ofIndia's artisans and craftsmen and then observed as below :
"Indian industries have begun to compete in international markets on the strength of their own inherent efficiency. The main responsibility for the task of further improving their competitive ability industrially rests with producing units. Government will, however, provide the necessary assistance to build up efficiency, production and in the meanwhile endeavour to compensate exports for the temporary handicaps that stand from transitional difficulties inherent in a developing economy and to evaluate disadvantages arising from our domestic fiscal policies or tariff barriers in importing countries..."
17. Export policy resolution, further noted that in order to keep up the India's hold on export markets, it might be necessary sometimes to restrict the domestic consumption in case there is shortfall in overall production of a commodity in the country. The relevant observations were as below :
"Exportable surpluses do not always arise automatically. Sometimes when there is a shortfall in production or indigenous production on an adequate scale is yet to be developed, there tends to be temporary conflict between domestic consumption and export. Since export markets once lose can hardly be gained, a part of the production must always be made available to earn needed foreign exchange through. if necessary, temporary restraints on home consumption....."
18. The export policy resolution, may it be noted did not specifically refer to individual schemes that were either in vogue or which were to be introduced in future by the Government of India. It merely indicated the broad directions in which effort had to be projected.
19. Cash assistance came to be given by the Government of India for the first time from August 1966. The communication conveying the Government's decision to grant cash assistance to the engineering industries was dated17-8-1966and was addressed to the Engineering Promotion Council. It read, inter alia, as below :
"(1)(i) The Government has decided to grant cash assistance against exports effected from6-6-1966of specified engineering products. A list of products eligible for such assistance with the percentage of assistance in annexed. There will be no concessional supply of iron and steel in addition....".
The cash assistance was to be given as a percentage of FOB value. The above communication may it be noted did not indicate the basis on which cash assistance was to be given.
20. The said Engineering Export Promotion Council to whom the aforesaid communication dated17-8-1966was addressed wrote in its turn to its Members on24 August, 1966stating, inter alia, as below :
".... As Members are aware, the special export promotion scheme for engineering goods was abolished by the Government w.e.f.6-6-1966, the Government has since announced a new scheme under which exporters will get cash assistance against exports effected from6-6-1966. In addition, exporters would also be eligible for replenishment for the exported material to the extent of single export content...."
May it be noted that even the above communication did not indicate as to what was the basis on which cash assistance was to be awarded to the exporters of engineering goods.
21. The first inkling of the basis taken into account by the Government for granting cash assistance is to be had from the report of the Bose Malik Committee which was set up by the Government of India on 6-11-1975, with a view to undertake a review of the import policy particularly the Registered Exporters Policy, in order to strengthen the production base for exports and to provide necessary incentives for increasing exports as well as to examine the suitability of introducing an import entitlement scheme or reorganizing the current schemes of cash assistance as effective export promotion measures..."
In paragraph 4 of its report, the Committee examined the viability of the incentive to exporters provided by an import entitlement scheme. On this point, it had, inter alia, the following observations to make :
"The incentive to exporters provided by any import entitlement scheme would depend on the market premia on the entitlements which in turn would depend on the market premia on the importable items under the entitlement scheme. The Committee felt that a major disadvantage of an entitlement scheme was the instability and uncertainty of such a premia...."
After considering the pros and cons of introducing an import entitlement scheme, which was freely transferable and on the basis of which anything could be imported depending on the wish of the importer, the Committee came to the conclusion that :
"... The scheme for import entitlements for exporters which are not in the nature of import replenishment in the products exported or in the group of products related to the products related to the products exported for strengthening the base of production of export-oriented industries, but which are in the nature of freely transferable entitlements against export earning may not be introduced as effective exports promotion measures, particularly in the current stage of our economic development..."
22. In paragraph 5 of the report, the Committee then examined the question of allowing import of raw materials to remove the disadvantages to our exporters with regard to the quality and cost of the raw materials and stated, inter alia, as below :
"In many export products, the profitability from exports is low and our indigenous costs are high mainly because of the high cost of domestic raw material and intermediates. In such cases, it is much better to remove the disadvantages to our exporters at the source by making available inputs at international prices, if necessary through imports provided value added is reasonable.... In such cases, where the import replenishment is pushed up to order to accommodate inputs at international prices which the exporter has at present to procure from the high cost domestic market, the rates of cash assistance should be suitably adjusted downwards."
23. In paragraph 6, the Committee went on to discuss the present basis of determining cash assistance, the inadequacy thereof and laying down the criteria for begin adopted in future while determining case assistance for individual industries. It is important to note the content of paragraph 6 in entirety to appreciate the background which weighed with the Members of the Committee when they recommended the 7 criteria to which reference has been made by my learned Brothers Sh. V. P. Elhence in his order. It reads, inter alia, as below :
"6. Supply of inputs at international prices may provide sufficient incentive for exports of a number of products by raising profitability in the export market. However, for products where we face disadvantages that cannot be fully neutralised by supplying inputs at international prices, it would still be necessary to have a fairly wide ranging system of cash assistance to improve our competitiveness and to make export activity profitable. Thus, the committee recommended that the system of cash assistance suitably revised as a means of boosting our exports effort should continue since the scheme of import entitlement did not provide a viable alternative. For this purpose, the Committee felt that the determination of the rates of cash assistance should not be based on any mechanical application of a rigid formula like the difference between the F. O. B. price realisation and the co-called marginal cost of production. It is extremely difficult to determine the marginal cost of production for an industry as a whole even when full information regarding cost and production from all the units in any industry be available. In practice, the information is available only from a few units and their cost efficiency and scale of production vary from unit to unit as well as from time to time. As a result, any attempt to determine the marginal cost of industry and comparison of such cost with a fluctuating F. O. B. price introduces an element of ad hoc judgment even if it is concealed under the mechanical formula of marginal cost F. O. B. price comparison. Further, unless a particular export production activity has an excess capacity and the excess capacity is also only due to lack of effective demand, the determination of case assistance on the marginal cost will not neutralise the disadvantages, sought to be removed by this assistance. The Committee, therefore, felt that it would be much better to examine the requirements of cash assistance for exports of a particular industry from a number of different angles which would require a detailed examination of the disadvantages suffered by an industry and the methods by which such disadvantages can be removed. Accordingly, the committee felt that the rates of cash assistance should be determined by a balanced judgment of several criteria such as :
(a) export potential and domestic availability as well as supply elasticity of the products;
(b) import content and domestic value added;
(c) approximate implicit subsidy, if available under the import replenishment scheme;
(d) compensation for irrecoverable taxed and levies;
(e) difference between the domestic cost and international price of indigenous inputs and raw materials;
(f) costs of entry into new market; and
(g) a cut off point up to which subsidy is to be allowed."
23.1 From the above, it will be seen that up to31-3-1976, the rates of cash assistance were determined with reference to the difference between the F. O. B. price realization and the marginal cost of production. Marginal cost of production is equal to the cost of raw material plus conversion cost plus variable product expenses and the fixed overhead expenses. Marginal cost has not been defined. But as can be seen from the circular issued by the ministry of Commerce, Civil Supplies and Co-operation dated23rd October, 1978addressed to all Export Promotion Councils, the formula for determining the marginal cost and F. O. B. value was as below :
"Per unit of production
Total cost
Rs.
(1) Raw Materials :-
1.
2.
3.
(2) Conversion charges :
(i) Direct salaries & wages.
(ii) Indirect salaries & wages.
(iii) Power.
(iv) Fuel.
(v) Repairs & Maintenance.
(vi) Consumable stores.
(vii) Other overheads :
(a) works.
(b) Admn.
(c) H. C.
(viii) Depreciation :
(a) works.
(b) Admn.
(c) Total of (2).
(3) Selling overheads.
(4) Packing charges.
(5) Freight & forwarding total of (1) to (5).
(6) Interest on working capital.
(7) F. O. B. cost.
Less :
(a) Drawback (also indicate whether All Industry Rate or Branch Rate).
(b) Economic recovery of scrap (enclose a self-contained note).
(c) By-product utilisation (enclose a self-contained note).
(d) Premium on import entitlement.
(e) Any fiscal relief available on exports, such as railway freight concession, etc., if
so, indicate the amount per unit or production. Net F. O. B. cost.
(8) F. O. B. value.
Less : commission
Net F. O. B. realisation.
(9) Shortfall on net F. O. B. cost.
(10) Shortfall as a percentage of net F. O. B. realisation.
Date : Signature
Place : Name
Designation."
23.2 As has been pointed out by the Committee itself, in practice, it was very difficult to ascertain the marginal cost or production of a certain industry. Apparently, the figure which emerged was an average figure on the basis of such information as the various production units submitted to the Costing Bureau of the Govt. of India, Ministry of Finance. Making good the losses is not necessarily the result of the aforesaid method, increasing the margin of profit, however, is. The Bose Malik Committee in terms said so, "Cash assistance..... to make export activity profitable." In the case of some units, the cost may itself be less than the F. O. B. value and there may, therefore, be a profit in such a situation and not a loss (as, indeed, it has been in the present case. Brother Grover has highlighted it in his order). There may be other cases where the loss might be the actual result. The scheme, therefore, envisaged not the reimbursing of the losses, but reduction of the marginal cost of the commodity, so that a favourable competitive base might be provided to the industrial unit. In the report of the Bose Malik Committee there is no reference at any stage to the principle of reimbursement of losses as the basis of cash assistance. Apparently, it is a gloss, which has been provided by the Joint Secretary, Ministry of Commerce in his letter to the CIT (Appeals) dated 11-5-1984, referred to at page 15 of CIT (Appeals)'s order.
24. It may be a simplified way of saying that one was trying to reduce losses, when in fact one was trying to reduce cost. The end result may be reduction of loss or increase of profit; but what was being sought to be achieved was the reduction of cost of production by eliminating as far as possible certain identifiable factors which escalated cost of production of the Indian exporters.
24.1 While interpreting the recommendations of the Bose Malik Committee, it would in my opinion be wrong to go by the gloss of the Jt. Secretary in his letter to the CIT (A) referred to above. It is trite law that the appellate authorities have to infer the meaning of the document in controversy by applying their own mind. The Bose Malik Committee never stated that prior1-4-1976cash assistance was given to make up the losses of the exporters and that from1-4-1976the focus shifted to criteria which had nothing to do with the cost of production. Seeing the difficulty in ascertaining marginal cost, the Bose Malik Committee expressed the opinion that "it would be much better to examine the requirement of cash assistance for exports of a particular industry from a number of different angles which would require a detailed examination of the disadvantages suffered by an industry and the methodology by which such disadvantages can be removed...." Accordingly, the Bose Malik Committee shifted the focus from the totality of the cost to certain specific elements of costs which according to it were more readily tractable and amenable to remedial action and would due to their visibility be more readily measurable. For example, reference may be made to clause (d) of their recommendation :
"compensation for irrecoverable taxes andlevis". Apparently reference here is to taxes like sale tax, octroi, etc. which are not reimbursed to the producer through Duty Drawback schemes or rebate of Central excise scheme, etc. Clause (e) similarly takes into account the difference in cost of international prices of the inputs and the indigenous prices thereof. Clause (f) similarly takes into account the costs which one has to incur in order to make an entry into the new market in the form of high-pressure, publicity, travelling expenses to those countries, appointment of agents, etc., in those countries to canvass orders and the like. Item No. (a) merely indicates the criterion for selecting the product for export for awarding cash assistance. If it has export potential and if its domestic availability is proper and if its supply is elastic, namely, the production of the item can be increased indefinitely in response to the demand therefor, the item in question should be chosen for award of cash assistance. Criterion mentioned at No. (b) takes note of the well established value-added concept to which reference has been made by the Committee. Even if the components of a product have to be imported, if the value added to the imported components is high and thereby much more foreign exchange is earned than is spent on importing the components it would be preferred for awarding cash assistance. Criterion.(b) is, therefore, again relevant for selecting the item for awarding the cash assistance and does not by itself lay down a basis for computing the cash assistance. Criterion (c) is the direct result of the recommendation of the Bose Malik Committee in paragraph 5 of its report, referred to earlier, namely, that where import content is allowed to be more on account of value-added content being more and import replenishment scheme provides for import of such components, the subsidy, which is already provided to the exporter in the form of getting components at international prices in India, should be taken into account while determining the quantum of cash assistance and the cash assistance to be granted should be decreased correspondingly. Criteria mentioned at (c), (d), (e) and (f), therefore, are alone relevant to determine the case assistance and all of them refer to nothing but the elements of costs, e.g., the levy of sales tax or higher domestic price than the international price, etc. None of them is on capital account.
24.2 The change-over recommended by the Bose Malik Committee Report thus shifts the focus from the earlier principle of determining cash assistance with reference to difference between the F. O. B. value and marginal cost of production to identifying some of the elements of cost of production which were causing the disadvantages to the Indian exporters and trying to remove them by paying cash assistance. The rationale for the change-over has been explained by the Committee in detail as noted earlier namely that it was very difficult to find out the marginal cost of production for a product vis-a-vis an industry and that in comparison it was easier to identity and measure individual elements of costs referred to above, and to spell out practical policies on their basis.
24.3 The search was, thus, for a suitable measure to determine cash assistance; the rationale of cash assistance continued to be the same as earlier, namely to assist the exporter by removing his impediments and disadvantages vis-a-vis the cost of production with a view to improve the acceptability of the Indian Exports in the international market and to induce the Indian exporters to sell more and more of their exportable goods to foreign countries by making "export activity profitable". To confuse the change in the measure of cash assistance with change in its rationale would be confusing the root for the branches.
25. In view of what has been stated above, it is not understood as to how could the CIT (A) regard criterion No. (a), (b) & (f) referred to above as on capital account. Apparently, he did so because he did not have before him the Bose Malik Committee Report. He was misled by what was told to him by the Jt. Secretary of the Ministry of Commerce who gave his own interpretation by adding his own gloss to the recommendations of the Bose Malik Committee. For the reasons stated above, I am unable to go by the inference drawn by the CIT (A) from the recommendations of the Bose Malik Committee's Report, nor am I able to take cognizance of the slant given by the Jt. Secretary to the report of the Bose Malik Committee. Instead of making available the Bose Malik Committee's Report an other related literature to the CIT (A), the Jt. Secretary gave him his own interpretation of the said recommendations which the learned CIT (A) took to be the recommendations of the Committee itself.No Courtcan go by such interpretation of a document in controversy even if the interpretation in question came from a highly positioned Government officer. Instead of accepting the Jt. Secretary's version, on its face value, the CIT (A) should have applied his own mind to the recommendations in question and to the background material which had led to the appointment of the Committee and formulation of its recommendations. In so far as he did not do so, he in my opinion erred.
26. The report of Bose Malik Committee has also unfortunately has been looked into by my learned Brother Sh. V. P. Elhence and the other two Brothers namely the Hon'ble President and the Hon'ble J. M. Sh. F. C. Rustagi even though they have discussed its presumed contents at length in their order taking their cue from the Jt. Secretary's report referred to above and have drawn on the basis thereof an inference that the Bose Malik Committee had recommended awarding of cash assistance for providing infrastructure to the individual units of the industry. The following observations at page 43 of the order of my learned Brothers is the result of such presumption :
"We are, therefore, of the view that though the CCS could not be treated as mere bounty or gift, it was not a revenue receipt taxable u/s 28(iv) of the Income-tax Act, 1961 but only a capital receipt given to improve and build up its capital base and to remove the inadequacies in its export apparatus or infrastructure."
It would not be out of place to re-emphasise that none of the six criteria laid down by Bose Malik Committee refer to building up of capital base or to removal of inadequacies in the export apparatus or infrastructure. This idea was foreign to the concept of awarding cash assistance as visualised by Bose Malik Committee. I am unable to comprehend as to wherefrom my learned Brothers gathered the above impression. It could not have been from the report of the Bose Malik Committee and it may be clarifies that there was no other report on the basis of which the cash assistance measure might have been formulated for the period1-4-1976to31-3-1979. For building up capital base and removing the inadequacies in the infrastructure there may be other schemes in operation. For example in September 1959, the new import policy, as announced, provided for "the introduction of a new licensing category in respect of capital goods (issue of licences for the import of capital equipment and machinery under this category would be liked to additional exports of a promotion nature...." Similarly to neutralise the disadvantages of freight differential formation of indigenous shipping companies was encouraged and Shipping Corpn. ofIndiawas incorporated. Railways also provided concessional tariff for carrying goods from the manufacturing centre to the port of loading. Alexander Committee devoted a full Chapter to consider tariff system. To mix up the object of these separate schemes with the rationale of cash assistance would not, in my opinion, be correct.
27. In the case of Jeewanlal (1929) Ltd. the question of the nature of cash assistance came to be considered in respect of asstt. years 1967-68 and 1968-69. There the revenue's stand was that cash assistance was given to the exporters to enable them to meet their losses. M/s Jeewanlal (1929) Ltd. had also taken the cash assistance to be of the above nature as board of directors had reported to the shareholders in their report that the Govt. of India had introduced the cash assistance scheme for exporters to meet their losses. On the basis of this report, the revenue's plea was that cash assistance was given to meet the losses which were caused to the exporters in the act of exports. Apart from the report of the board of directors to the shareholders, the revenue had also relied upon a letter dated11-5-1978written by the Engineering Export Promotion Council to the authorised representative of the department, in which the following was, inter alia, stated :
"We would confirm that after devaluation of the rupee, which took place on6th June, 1966, Government announced cash assistance scheme for compensation loss to the exporters for exports of engineering goods from the country in the above letter. This scheme was announced for the first time and it was not in replacement of any existing scheme in operation."
On behalf of the assessee, the above plea was opposed and it was urged before the Hon'ble High Court, on behalf of the assessee by the assessee's counsel that : "as to how a party had treated the amount was not determinative to ascertain the character of a particular sum. It must be determined by the true character on legal principle and not merely, by the conduct of the party, in whichever way the party might have treated the sum". It was further submitted by the assessee that : "One assessee might have treated it as a compensation for losses suffered and another might have treated it differently", and therefore, it was submitted that whether the sum was given as cash assistance to the exporters to meet their losses or whether it was given to promote export industries or not, must be determined on the general nature and not by what the parties had treated them to be or by what the Export Promotion Council had explained it to be for. The above submissions of the assessee's learned counsel were accepted by their Lordships of the Hon'ble Calcutta High Court who observed in this connection as follows at page 455 of the report :
"..... We are inclined to accept this contention of the assessee that, it must be determined on the true basis and character of the cash assistance and the true nature of the receipt. It is, therefore, necessary for us to determine what is the true character of the receipt..."
28. It will thus be seen from the above extract from the aforesaid judgment that the plea that the purpose of granting cash assistance was to compensate the exporters for their losses was not accepted as the correct interpretation of the scheme of cash assistance and that their Lordships went to consider the nature of the cash assistance de hors the above consideration on general principles regarding its character, etc.
29.1 Cash assistance and cash compensatory support are interchangeable phrases as would be clear from the clarification issued by the Ministry of commerce in their letter dated23-1-1976wherein the following observations were, inter alia, made by the Ministry :
"It is clarified that the phrase 'cash compensatory support' used in the instructions, referred to above is no way different from cash assistance scheme.....".
Even the Bose Malik Committee in its report described cash compensatory support as cash assistance all along. It would, therefore, be erroneous to contend that cash assistance scheme which was admittedly in vogue up to31-3-1976was in any way different in character and its nature from the cases compensatory support as the scheme came to be termed later. I have already noted above that it was the Bose Malik committee Report which held the field from1-4-1976to31-3-1979and in this report the committee referred not to cash compensatory support but to cash assistance. The contention, therefore, that there was basic difference in the cash assistance scheme and the cash compensatory support scheme is devoid of factual basis and apparently has been adopted without keeping in focus the attending circumstances including the report of the Bose Malik Committee. One has merely gone by description on the basis of the gloss but on the scheme of cash assistance by the Jt. Secretary's letter.
29.2 In this deposition before the Public Accounts Committee of Parliament, the Secretary, Ministry of commerce did not say that whereas earlier to1-4-1976, the cash assistance was based on the principle of reimbursing the losses to the exporter after1-4-1976, the aforesaid basis was given up. What he had stated was as below :
"As you will notice, in the efforts made to develop exports, cash assistance has been an important component and the concept of cash assistance has changed over the times. From April 1976, there was a total consideration of seven factors which went to determine the quantum of cash assistance. Prior to that, there was the concept of differential between the cost of production and that of F. O. B. earnings. Gradually, as domestic requirements increased and the installed capacity did not keep pace, there is the problem of 'pull' of the domestic market. One has to take into account all these factors to see that there is sufficient increase in export earnings also. Plan document talks of 10 per cent growth unless there is some motivation for a fellow to export, why should he ? In that background, there was a distinct change in the concept of cash assistance w.e.f.1-4-1976."
This submission as would be readily noted reiterates what the report of the Bose Malik Committee had stated excepting that the Secretary has tried to simplify the position by referring to the difference between the F. O. B. earnings and the cost of production whereas the Bose Malik Committee refer to F. O. B. earnings and marginal cost of production. The above position of the Secretary was interpreted by the Joint Secretary to mean as follows in his letter dated11-5-1984to the CIT (A) quoted by him at page 15 of his order :
"It would be correct to interpret as the commerce Secretary has already testified before the PAC, that the concept of cash Assistance was modified w.e.f. 1-4-1976 when it was delinked from the mere compensation for losses arising to the trader from exports as was the position till then and was made more broad based to subserve the development of the infrastructure for improving exports of specific products on a continuing basis."
The reference to development of the infrastructure from improving exports of specified products on a continuing basis is entirely a new element which has been introduced by the Jt. Secretary in the aforesaid letter which was never one of the factors taken note of by the Bose Malik Committee as would be clear by reference to the seven criteria indicated by them in their report and quoted by us in extenso above. The Jt. Secretary may be high enough official to speak on behalf of the Ministry of Commerce but certainly, when it is a question of interpreting as to what the Bose Malik Committee meant to say in its report, it would be wrong in my opinion to go by merely the expression of opinion of the Jt. Secretary requiring it without taking note of the specific recommendations of the Bose Malik Committee. What the Bose Malik Committee never said cannot be put into its mouth even by the high official like Jt. Secretary and it would be wrong for a Court to stop enquiring into the reality merely because a certain statement was made by the Jt. Secretary of the ministry of commerce to the CIT (A). He was at the best giving his won interpretation and impression of what the Bose Malik Committee meant to recommend. It cannot be taken as the gospel truth. In fact it is his unwarranted and erroneous reference to the development of the infrastructure which has given a totally uncalled for twist to the nature and the recommendations of the Bose Malik Committee and as such it is necessary to take precaution on this count and it would in my opinion be wrong to be misled by the impressions of the Jt. Secretary when the report itself can be examined for ascertaining as to what it had said; and the Jt. Secretary's statement is demonstrably based on what the Committee had never said.
30. Even the Alexander Committee which was appointed by the Govt. of India on 1st November, 1977 "to review the present structure of import and export policies and their formulation with special reference to the role of policy instruments such as licensing, quotas, tariffs, taxes, duty drawbacks and cash assistance and to suggest improvements in the structure and use of the instruments of policy and rationalisation" did not link up cash assistance with the development of infrastructure. Its report to the Govt. of India on31-1-1978. Chapter IV of this report deals with Export Policy. In paragraph 1 of the said Chapter, the Committee noted as follows :
"Export Policy as conscious effort in influencing the volume and commodity composition of export trade was explicitly recognised in the trade policy system from the year 1962. Along with the recognition of export promotion as one of the important objectives in the Five year Plans various supporting measures were introduced with a view to promoting exports. Export entitlement scheme, duty drawback, cash compensatory support are some of the export incentive measures introduced in this period. The measure of devaluation in 1966 was also to a large extent aimed at correcting the overvaluation of domestic currency thereby providing differential encouragement to exports as against imports..."
While dwelling on basic issues of Export Policy, the Committee observed in paragraph 4.6 as below :
"Export Policy should be designed with a long-term perspective in regard to the various aspects of the export activity. Choice of products for promotion or control should be based on the principles of long-term comparative advantage rather than short-period potentialities or problems. Export products should be such that they can sustain themselves in the export market on their own after an initial period of assistance in the form of cash support and concessions. Encouragement of wrong types of export products-those with short period potentials-may imply high assistance costs in the long period. Policies towards market development should also recognise the need for sustenance of contacts in the long-term. The Committee suggested that this attitude in export management should inducted in the economy through proper training and services."
It may be noted in the passing that the underlined principles highlighted in paragraph 4.6 supra by the Alexander Committee are more or less the same as were noted by the Boss Malik Committee through criteria (a) and (b) in its report, referred to earlier, namely, export potential and domestic availability as well as supply elasticity of the products and import content and domestic value added.
31. In paragraph 4.8 while discussing rational and scope of export promotion policies, the Committee made, inter alia, the following observations :
"Export promotion effort of the country can be considered in two parts. Firstly, export incentives with a view to assisting the exporter in overcoming his disadvantages as against his competitors in the world market. Secondly, export services which enable him to reduce the degree and dimension of the disadvantages themselves... In regard to the export incentives, one should recognise that some of the disadvantages of the exporter arising on account of various factors could be internal to the exporter himself and others referring to the economy as a whole. Exports are the final effect of the interactions of product characteristics, firm characteristics, national factors and the international features. The product and firm characteristics include the technology of production, management, conversion costs of production, packaging and marketing. A firm which has identified the right export product with all its specifications for the external market, has adopted the right kind of technology comparable with the producer in the competing country and has identified the effective packaging and marketing techniques would be subjected to the lowest level of disadvantages arising out of its own making. The disadvantages arising out of the economy-wide factors include the effect of domestic policies of indirect taxation, import and industrial licensing, price control, as also other national endowment factors such as availability of skilled labour, capital, natural resources, power supply, infrastructural facilities such as transport and communications and smooth labour management relations... The Committee was of the view that the disadvantages arising out of economy-wide (sic) and policy factors should be fully naturalised so that the competitiveness of the product does not suffer because of the total framework of the economic environment. For example, if indirect taxes on the inputs, and poor image of the country as a capable source of supply, hinder the competitiveness of a product, there is a case for neutralising these sources of disadvantage by appropriate services and assistance..."
32. In paragraph 4.17, the Committee evolved and recommended three principles of cash assistance for exports. The said paragraph deserves to be noted in extenso for ready reference ad is accordingly, extracted here as below :
"4.17 As discussed earlier, cash assistance should essentially aim at neutralising the disadvantages arising out of policy factors and also the characteristics of the firm and the product. It is also important to recognise that cash assistance (CA) should be available only for a limited period during which the relevant disadvantages, to the extent possible, could be eliminated by conscious efforts. In any case, cash assistance should not be continued for indefinite period. The Committee felt that the magnitude and pattern of cash assistance should be identified on the basis of well defined principles. After discussing various alternatives of approaches in this regard the Committee has identified the following three basic principles for cash assistance scheme :
(a) The level of cash assistance should fully competent for the various types of indirect taxes, sales taxes, etc., which the exporter has to pay on his inputs imported or domestically purchased and which are not refunded. This will enable him to be on par with foreign competitors;
(b) Cash assistance should be such as to encourage him in adopting adequate marketing strategies and to neutralise the disadvantages of freight, etc., so as to be competitive in the export market; and
(c) In the case of new products in new markets the magnitude of cash assistance should be adequate to take care of the initial promotional costs."
33. In paragraph 4.18, the Committee stated, inter alia, as below :
"These principles highlight the importance of the fact that export industry should make its production activity competitive on its own, after these three categories of disadvantages are taken care of. These principles also imply that even if the export industry is supplied all its inputs at competitive international prices, its disadvantages in regard to marketing and promotional efforts need to be compensated until the export of the particular product becomes a stable feature in the trade flows...."
It was recommended by the Committee that the above principles of cash assistance be adopted w.e.f.1-4-1979. It will be seen from the above recommendations of the Committee that it was laying more emphasis on criteria (d), (e) and (f) of Bose Malik Committee's recommendations. Criteria (a) and (b) of Bose Malik Committee were in fact the guidelines for selecting the product for awarding cash assistance and they did not affect the quantum of cash assistance or the computation thereof. Criteria (a) and (b) have already been endorsed by the Alexander Committee in paragraph 4.6 of their report while indicating as to how the products for supporting export effort therefore should be selected. The essential nature of the cash assistance scheme as visualised by Alexander Committee thus continues to be the same as was visualised by the Bose Malik Committee and in none of the three criteria evolved by P. C. Alexander Committee, there is reference to any of the items which might be constituting the capital cost or the cost of the infrastructure as such. The criteria are all with regard to the particular elements which go to constitute the cost of production and attempt is made to reduce the same to make the cost of the Indian exports competitive vis-a-vis the international prices. 34. In paragraphs 4.9 to 4.15, the Committee studied the costs and benefits of export promotion and while working out the cost of export promotion, it observed in paragraph 4.13, inter alia, as below :
".... The objective of the export promotion effort is to maximise the net foreign exchange earning and the benefit cost ratio should ideally consider the net foreign exchange earning on the benefit side by deducting from the gross earnings the quantum of their direct and indirect import contents. Similarly, on the cost side also there is tribute to the revenues through increase in direct taxes and also indirect taxes on the inputs induced on account of the additional export production. In fact part of cash assistance 'returns' to the exchequer in the form of tax on income including this cash assistance and taxes on inputs..."
From the portion underlined above, it would be clear that the Committee was regarding cash assistance given to industrial units as a revenue receipt and as such includible in the total income as indeed it was on the basis of the numerous criteria laid down by the Bose Malik Committee and the Alexander Committee referred to above. Imputing to the Committees or to the Govt. Policy, the motive that the Government intended to give cash assistance to the various industrial units to enable them to build up infrastructure for example to construct warehouses to help them export their goods would be in the face of the above facts totally contrary to the material on record. In fact, there is nothing in the recommendations of both the Bose Malik and the P. C. Alexander Committee to suggest that cash assistance was intended to be given to the various industrial units to enable them to develop their fixed capital infrastructure.
35. In 1984, the Government of India again appointed a Committee on trade policies under the Chairmanship of the then Commerce Secretary Sh. Abid Hussain. This Committee presented its report to the Govt. on31st December, 1984. The said Committee emphasised the Macro-Economic Overview approach and pointed out that : "Foreign trade cannot and should not be separated from the national economy, just as trade policies cannot and should not be separated from economic policies. Such a macro-economic perspective is essential because developments in the foreign trade sector and developments in the economy as a whole are inter-dependent. Exports are a means of transforming domestic resources into foreign resources which are necessary to finance the process of development. Imports are essential to sustain desired levels of consumption, investment and production in the economy. At the same time, the level of both exports and imports depends on the performance of the economy." After providing the above basis of their approach, the Committee examined in detail the various policies of the Government not only having a bearing on foreign trade but also other economic policies. In Chapter II, in paragraph 2.12 the Committee observed that :
".... the domestic factors which have constrainedIndia's export performance are the costs of production, the pressure of domestic demand, the supply constraints and the procedural bottlenecks, which, along with the non-price factors such as quality and the product profile, have adversely affected the competitiveness of our exports..."
In Chapter III, the Committee considered export promotion policy and strategy to be adopted for that purpose. It pointed out in paragraph 3.1 that "over the next decade, export earning would have to finalise a larger and larger proportion of imports, if we have to keep external borrowing and the burden of debt servicing within manageable proportions." According to the Committee, "In the Indian context, export promotion policies need to perform two roles, that of providing compensation on the one hand and that of providing assistance to remove disincentives on the other." The Committee noted that the present regime of export promotion policies consisted of the following :
(i) the duty drawback system;
(ii) the market development assistance which is made up of the cash compensatory support and other forms of assistance for market development;
(iii) fiscal concessions for exports;
(iv) the import policy for export; and
(v) the Free Trade Zones and 100 per cent Export-Oriented Units.
While considering duty drawback system, the Committee pointed out : The object of the duty drawback system is to reimburse exporters for tariffs paid on the imported raw materials and intermediates and central excise duties paid on domestically produced inputs which enter into export production. This is a world-wide practice and the rationale is straightforward. Customs duties and excise duties on inputs raise the cost of production in export industries and thereby affect the competitiveness of exports. Therefore, exporters need to be compensated for the escalation in their costs attributable to such customs and excise duties.
36. Referring to market development assistance, the Committee pointed out in paragraph 3.10 as below :
"An overwhelming production of the expenditure on Market Development Assistance is accounted for by the cash compensatory support regime..."
In paragraph 3.11, the Committee traced the history of cash assistance/cash compensatory support by observing, inter alia, as below :
"3.11 Cash assistance for exports, which has subsequently been termed as cash compensatory support, was introduced in 1966. The stated objectives was to enable exporters to meet competition in foreign markets, to develop marketing competence and to neutralise disadvantages inherent in the present stage of development of the economy. Over a period that spans almost two decades, there has been no substantive change in the rationale of this export promotion measure although its scope and operation has evolved from experience over time. The Alexander Committee set out three basic principles underlying the CCS regime : (i) CCS should fully compensate for unrebated indirect taxes paid by exporters on inputs which enter into export production; (ii) CCS should neutralise disadvantages such as those implicit in freight rates which may be discriminatory or higher; (iii) CCS should provide assistance to finance the initial promotion costs in the case of new products and new markets. In the perception of this Committee, CCS is designed to perform two basic roles : first, it is a facility is so far as it seeks to compensate for unrebated indirect taxes which are not reimbursed through the duty drawback system, and second, it is an assistance insofar as it attempts to provide resources for product/market development. In paragraph 3.15, the Committee considered the position of CCS in terms of the various factors on the basis of which its quantum was being determined and observed, inter alia, as below :
"3.15 The Committee was informed that CCS rates are determined after considering the incidence of unrebated indirect taxes, the disadvantages implicit in higher freight rates and interest rates as compared with competitors, and the cost of product/market development. It is exceedingly difficult to quantify each of these components of CCS across the wide range of eligible products. A rough assessment of available evidence suggests that at least two-thirds, in some cases as much as three-fourths, of the CCS disbursed in recent years was simply a compensation for unrebated indirect taxes which are not refundable through the duty drawback system. This production is probably an under-estimate inasmuch as the evidence on the incidence of unrebated indirect taxes relates to inputs at the final stage of the manufacturing process whereas, in practice, the cascaded structure of taxation implies that there is an element of unrebated indirect taxes at earlier stages of the manufacturing process. What is more, the CCS disbursed is added to the taxable income of the exporter so that a significant proportion of it is returned to the Govt. in the form of tax revenue. On balance, therefore, it seems to the Committee that an overwhelming proportion of CCS is a compensation for unrebated indirect taxes, and it does not constitute an incentive. Such a conclusion has two implications. First, CCS only ensures that taxes are not exported in the form of escalated costs, which is in keeping with the practice in most countries of the world. Second, in the absence of CCS, the competitiveness of Indian exports would be adversely affected, and it is plausible to suggest that without CCS our export performance would have been worse."
In paragraph 3.31, the Committee made its recommendation with regard to the cash compensatory support and observed, inter alia, as below :
"3.31 Second, the regime of cash compensatory support must be maintained in its present form as a facility, so that the export sector is not at a disadvantage in world markets on account of either unrebated indirect taxes or the cascaded structure of taxation. The CCS regime would have to continue so long as these disadvantages are implicit in the structure of domestic fiscal levies. The present practice of including CCS as a part of taxable income is not logical inasmuch as it implies taxing the compensation for unrebated indirect taxes. The Committee would, therefore, urge the Govt. to consider exempting CCS from income-tax."
37. From what has been stated above, with regard to the observations of the Abid Hussain Committee Report, the following points would be explicit :
(1) That cash compensatory support or cash assistance has had the same rational all along from 1956 to 1984 over a period of almost two decades and as such it would be wrong to proceed on the presumption as made by my learned Brother Sh. V. P. Elhence that the rationale of the cash assistance scheme has been changing and that what was the nature and character of cash assistance prior to 1-4-1976 was not there after 1-4-1976. The observations of the Jt. Secretary, Ministry of Commerce in his letter to the CIT (A), referred to above notwithstanding, the Secretary of the Ministry of Commerce, Sh. Abid Hussain is on record to emphasise that over a period that stands almost two decades there has been no substantial change in the rationale of this Export Promotion measure (i.e., cash compensatory support.).
(2) That the basic objective of the cash compensatory support has been to enable exporters to meet competition in foreign markets to develop marketing competence and neutralise disadvantages inherent in the present stage of development of the economy. From this point of view, the cash compensatory support was earlier, i.e., prior to 1-4-1976 onwards instead of determining it with reference to the difference in the F. O. B. price realisation and the marginal cost of production and from 1-4-1976 onwards instead of determining it with reference to the totality of the cost of production, it is being related to some of the elements which go to form the cost as spelled out in the Bose Malik Committee Report and the Alexander Committee Report referred to above.
(3) That the nature of the cash compensatory support is purely of revenue nature as it tends to provide compensation and assistance in removing disadvantages faced by the exporters of this country in the international market with a view to persuade them to sell more and more to the foreign markets.
(4) The above nature of the cash compensatory support was recognised both by the Alexander Committee and by the Abid Hussain Committee who pointedly brought out that cash compensatory support/cash assistance was includible in the total income and was subjected to income-tax. In the opinion of the Abid Hussain Committee, the relief given u/s 80HHC on account of export profits was not commensurate with the objective to be aimed at namely to induce the exporters to sell more and more in the foreign countries. It was, therefore, suggested by the Abid Hussain Committee that cash compensatory support should be made tax-free. If these items were already tax-free, there would have obviously been no scope for making such a recommendation.
38. Inasmuch as the essential nature of cash assistance/CCS has not changed since its inception till date, the opinion of the Hon'ble Calcutta High Court as to its character would have as much validity in regard to the period commencing on1-4-1976onwards as it would with regard to the period preceding that. The reasoning that the ratio of the said judgment was not applicable to CCS after1-4-1976is not in my opinion valid. As noted earlier, the Hon'ble High Court had proceeded on the footing that there was no merit in the departmental contention that the cash assistance was being given to the assessee by the Central Govt. to make up their losses of export business. Their Lordships made it clear that they would like to determine the true character of the receipt de hors the aforesaid presumption of loss compensation. The plea of the assessee before their Lordships was that the dominant purpose for grant of amounts by way of cash compensatory support was promotion of exports, that it was irrespective of the profit or loss and that it was not made by the Government in order to meet any trading obligation. (May it be noted at this stage that the theory of dominant purpose as expounded before their Lordships has been expounded before us also and it has found favour with my learned Brother Sh. V. P. Elhence and the Hon'ble President and the Hon'ble J. M. Sh. F. C. Rustagi.) Their Lordships had, however, rejected the above theory by pointing out that the above tests were not decisive at all of the issue as to the character of the receipt and that what was, according to their Lordships decisive in these matter was 'the nature of the business, the nature of the income and the nature of the right to receive and also the relationship inter se...'. According to their Lordships, if on examination of the nature of the receipts and the amounts, it is found that these amounts were supplementary trading receipts or were connected with the business even though they did not arise actually from any positive operation of the traders, then in our opinion, it should legitimately be considered to be 'business receipts'. After laying down the propositions as above, their Lordships referred to the facts of the given case and observed as below :
"... In this case the Govt. announced cash assistance for encouraging exports; but it was the exporter who did, in fact, export, got the assistance. It was by the exportation or making favourable exports that the assessee received those amounts. This, in our opinion, is the true nature of the assistance. If that is the position then it is incidental to and supplemental to the trading receipts and should, therefore, be considered to be revenue receipts."
The above principles have been followed by various Courts in a number of cases and their Lordships have given a detailed list of the cases wherein the above proposition had been laid down and followed.
38.1 A similar question regarding the nature of cash subsidy given by the Textile Committee to the various exporting textile units came up for the consideration of their Lordships of the Hon'ble Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd. There the facts as narrated in the head note, were as below :
"The assessee was a manufacturer of textile goods. In order to acquire foreign exchange the Govt. of India started an export promotion scheme. Under the scheme an exporter of cotton cloth or yarn was eligible for grant of import licences to the extent specified. The amount received by the assessee under this scheme amounted to Rs. 5,85,071. The assessee contended that this amount was a capital receipt; and was not assessable.".
The reasoning of the assessee in that case was more or less the same as advanced by the assessee's learned counsel in the present case. At page 145, the following arguments put forward on behalf of the assessee before the learned AAC have been noted by their Lordships :
"For the assessee, the submission before us in this appeal was that it was a capital receipt. The exemption is no longer rested as a casual receipt as it recurs year after year. The fact that it was granted under a scheme formulated by the Government for bringing in foreign exchange was relied upon as showing that the assessee got it outside his trade. Mr. Balai Pal, the learned counsel for the department, submitted that the assessee earned the amount in the course of its business and as a result of the sale of its manufactured goods, and that the receipt was nothing but business profit."
The above submission of the assessee which was repeated before their Lordships also was rejected by them by observing, inter alia, as follows :
"It appear that the amount was received in the course of carrying on of the business. The amount was received in cash. The fact that in the course of carrying on of the business an amount is received which could be turned into capital, does not, in our opinion, in any way militate against the said amount being considered to be revenue receipt...."
38.2 From the portion underlined above, it will be seen that the nature of an item would not get transformed into capital receipt merely because the amount received by the assessee might have been utilised by the assessee in acquiring a capital asset. Therefore, nothing turns on the fact as made out by the assessee's learned counsel in the present case that much after the accounting period was over, the assessee had constructed a warehouse inU. S. A.There is no knowing that the said warehouse was constructed by the assessee out of the receipts by way of CCS and even if it were so, it would not make any difference to the nature of the receipt as pointed out by their Lordships above. The nature of the receipt has to be adjudged at the threshold itself and not by the subsequent user thereof.
39. I have already noted above that there is no criteria laid down either by Bose Malik Committee or by Alexander committee stating that cash compensation should be given to the assessee for acquiring some capital goods or assets. The receipts in question is purely in the course of the business carried on by the assessee and in fact the amount is being paid by the Govt. to the assessee with a view to induce him and to enable him to sell more and more in the foreign countries. Something given to boost sales has to be in the nature of revenue receipt only and it is incomprehensible to me that it would be in the nature of capital receipt. A plethora of case law has been reviewed in the judgment of the Tribunal in the case of Reliance International Corpn. Ltd., to which extensive reference was made by the learned counsel of the department. Inasmuch as I am in complete agreement with the observations and analysis of the various case law made therein. I would reply on the ratio of that order in support of the present finding given by me.
40. There is in my opinion, no comparison whatsoever between the subsidy granted by the Govt. of India for setting up industries in a backward region and the CCS granted for maximising foreign sales. By its very nature, the amount given by the Govt. under the 10 per cent subsidy scheme for setting up industries in backward area is to reimburse the cost of fixed capital assets, to the industry. The user of that money is inconsequential and would not determine the nature of the receipt. At the threshold the money was given for setting up industries and was thus on capital account. In the present case, cash compensatory support is given for enabling the Indian exporter to sell more and more to the foreign countries and is aimed at neutralising disadvantages faced by him in the present state of the country's economy which go to increase the cost of production in various ways noted above. The nature of this payment can, therefore, never be capital for neither it is in lieu of a capital asset nor is it for the purpose of acquiring a capital asset. It is for the purpose of maximising the sales of an exporter to the foreign countries and is directly connected with the F. O. B. realisation price, i.e., the sales made outside the country.
41. To sum up, therefore, it may be stated :
(1) that cash assistance is given by the Central Government to an exporter of stipulated goods including the engineering goods for the purpose of selling the goods to the foreign powers to the maximum extent possible;
(2) that the amount is given to a businessman for the purpose of enabling him to carry on his business more profitably. According to Bose Malik Committee report, the object of having a fairly wide ranging system of cash assistance was "to improve our competitiveness and to make export activity profitable";
(3) that the above rationale of providing cash assistance has remained unchanged from 1966 to-date as per the finding of Abid Hussain Committee Report, referred to above;
(4) that what has changed from time to time is the measure and the principles to determine that measure; the object of awarding the cash assistance remaining unchanged all along. Thus, whereas prior to 1-4-1976, it was the difference between the marginal cost of production and the F. O. B. value that was taken into account for measuring the cash assistance to be given, after 1-4-1976 and up to 31-3-1979. It was the principles evolved by Bose Malik Committee with reference to the elements of cost of production that was used to ascertain the quantum of cash assistance and from 1-4-1979 onwards, it has been the three principles enunciated by the Alexander Committee Report which are more or less of the same nature as the principles enunciated by the Bose Malik Committee report which are being used to measure the quantum of cash assistance. On account of change in the measure, the nature of the item itself would not get changed. The quality of the payment, namely, cash assistance has remained all along the same. According to the Bose Malik Committee Report, the system of cash assistance, suitably revised as a means of boosting of export effort should continue. This being the essential nature of the payment and this being the rationale for its being granted by the Government to the exporter, it has to be said that it is inseparably interlinked with the export of the export effort of the individual businessman and the purpose of granting it is to encourage him to sell more and more to the foreign countries and thereby to make the export activity more profitable.
41.1 Any payment which is of the above nature would be of revenue nature, according to the principles laid down by the House of Lords in the case of Pontypridd & Rhondda Joint Water Board 45 (HL) 47, where Viscount Simon observed as follows :
"The first proposition is that, subject to the exception hereafter mentioned, payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker's trade or business are trading receipts, that is, are to be brought into account in arriving at the balance of profits or gains....
The second proposition constitutes an exception. If the undertaker is a rating authority and the subsidy is the proceeds of rates imposed by it or comes from a fund belonging to the authority, the identity of the source with the recipient payment (sic) any question of profits arising;...."
The elementary principle which has been laid down by their Lordships for the above proposition is that if a payment is in the nature of a subsidy and if it is from public funds made to a businessman to assist him in carrying on his trade or business, the payments in question are trading receipts and as such they have to be brought to assessment as business income. The payments made as such may be either to compensate for losses or to reimburse the cost or they may be either to compensate for losses or to reimburse the cost or they may be related to nothing in particular but generally to encourage him to produce more or to sell more and thereby maximise the profits and the production in that particular line. It is not the law that a payment would be revenue receipt only if it is towards making up the losses of the businessman. Even when the amount is given just to encourage exports, for example of cotton textiles and other textiles, the amount paid to the businessman would be of revenue nature as it is being given to him in the course of his business and for the purpose of his business and even if the said assessee had converted the amount received into a capital asset, it would not change the character of the receipt. Reference may be made to the ratio of the judgment of the Hon'ble Calcutta High Court in this regard in the case of Kesoram Industries & Cotton Mills Ltd. In the case of H. R. Sugar Factory (P.) Ltd. the assessee was given certain cash assistance with a view to enabling it to start early crushing w.e.f. Nov. 4, 1956 four annas per maund of cane crushed up to Nov. 12, 1956. The said amount was not specifically given to meet any cost or expenditure but only as an inducement to start early crushing of sugarcane in sugarcane industry and yet it was held by their Lordships of the Hon'ble Allahabad High Court that the above sum was taxable as it arose from the assessee's business.
41.2 Apart from which has been stated above, I am of the opinion, that when judgment of one of the Hon'ble high courts set up in this country is available on the interpretation of the nature of a certain item and there is no contrary decision of any other High Court, the income-tax authorities as well as the I. T. A. T. should follow the said decision in the interest of uniformity in the administration of an All India Taxation Statute. No Bench of the I. T. A. T. whether Single Member, or the Division Bench or the Special bench has the competence and authority of sitting in judgment over that of a High Court and in my opinion, it would be a wrong precedence if a Special Bench of the Tribunal including the present one purports to override or disapprove or circumvent the judgment of the Hon'ble Calcutta High Court in the present issue as reported in Jeewanlal (1929) Ltd.'s case. The Benches of the Tribunal inCalcuttahave no option but to follow the aforesaid judgment irrespective of the Special Bench decision to the contrary because the said Benches are within the territorial jurisdiction of the Hon'ble Calcutta High Court. Delhi is, no doubt, not under the Hon'ble Calcutta High Court but the judicial propriety to follow the ratio of the judgment of a High Court when no other High Court decision is in existence to the contrary has been recognised even by the Hon'ble Delhi High court and it would not do to brush aside the observations of the Hon'ble Delhi High Court in the case of All India Lakshmi Commercial Bank Officers' Union by saying that their Lordships were referring to income-tax authorities and that they did not mean to suggest that the I. T. A. T. need not follow the judgment of another High Court when there was no contrary judgment of any other High Court. In fact the Division Bench which dealt with the appeal of Reliance International Corpn. Ltd.'s case dealt with this line of reasoning in their order as follows :
"The reference to the income-tax authorities in the above decision has been made because it were they who had acted against the above principle. But the said principle is equally valid for the appellate authorities including the Tribunal, for it is a wholesome principle of guidance, while interpreting an All India Statute. We are, therefore, bound to follow the above decision of the Hon'ble Calcutta High Court."
I have found no reasons whatsoever to change the aforesaid view.
42. Before I conclude I must place on record the fact that I had made a request to the President of the I. T. A. T. who presided over the Special Bench and the other companion Brothers that the reports of Bose Malik Committee and Alexander Committee to which extensive references had been made both by the CIT (A) and by my learned Brother Shri V. P. Elhence, should be gone into and inasmuch as the two reports, though referred to in the course of arguments, were not placed before the Special Bench despite my request to the counsel of the assessee to show authority for the proposition that prior to 1-4-1976, the rationale governing the grant of cash assistance was different from what it came to be after 1-4-1976, the said reports should be now placed on record. The Abid Hussain Committee Report was also material because it reviewed the entire history of the CCS and threw a considerable light on the nature of the receipt and was necessary in the interest of substantial justice to dispose of the present controversy which is of great import and would have far reaching consequences as is recognised by the President himself when he appointed the Special Bench, I therefore requested that it be also considered. My request was however rejected by the President and other Brothers by observing, inter alia, that the Special Bench could not look at those reports because the said reports had not been placed before the Bench by either of the two sides. I am unable to accept the correctness of the above decision because in my opinion when reference is made to a Committee's report, the Bench has every right, rather obligation and duty to look into the Committee's report suo motu if the reports are not placed on record by either sides because the object of the Bench is to ascertain the facts and truth and not merely to repeat what in the name of the Committees is stated before it by the two sides and out of the two versions of the report given before the Bench to pick up one as the correct one.
42.1 Anyway as I was overruled on the matter by the President and other Brothers, I could not ensure that the benefit of the three reports which are otherwise very relevant and important for the determination of the present appeal is made available to both the sides and they are heard with regard to the same and in the light of the said submissions, the present controversy is resolved. My learned Brother Shri S. Grover has, of course, expressed the opinion that the reports can be referred to while disposing of the present appeals and that for this purpose, it was not necessary to re-fix the hearing of the appeals.
43. It is interesting in this connection to observe that the assessee's learned counsel was relying in support of his submissions on Nabhi's Handbook of Export Promotion 1986-87 and had referred to therein to the following extract appearing at page II. 38 :
"It is for the information of the Member Exporters, when any claim is sanctioned by the Reserve Bank of India whether against quality or otherwise and the waiver given in absence of non-re-protrusion of foreign exchange, exporters are required to surrender proportionate CCS/REP, etc., for the aims of waiver authorised by the R. B. I. It is in the interest of the exporters that all such amounts should be immediately surrendered by depositing the amount in the Central Bank ofIndiaunder challan and inform the Licensing Authority in this respect. Kindly ensure to send this original challan to CLA under proper receipt. It is advised that the adjustment should not be made against the future CCS/REP applications. The proper record of such surrenders should be maintained which can be furnished to the Licensing Authorities on demand at a later date."
Just at the beginning of this Chapter at page II. 1, the learned author takes note of the Circular No. 12/58/86-EAC dated25th July, 1986, which had been issued on the basis of the Abid Hussain Committee Report. The assistance from this book could not have been taken by the assessee's learned counsel without the knowledge of the Abid Hussain Committee Report and its recommendations. It is a published document issued by the Govt. of India, Ministry of Commerce in December, 1984. Therefore, it was all the more reason that both the sides should have been able to address us at length on the history of cash assistance as brought out by the various Committees referred to above, instead of going by the gloss out by the Jt. Secretary of Ministry of Commerce with regard to the Bose Malik Committee Report.
43.1 Apart from the above, the rationale of setting up the Special Bench is defeated by not examining the said reports and by not letting the two sides make their submissions with reference to them. The propertied object of setting up a Special Bench is to create a precedent for other Benches of the Tribunal to follow. But when the Special Bench refuses to examine the most vital reports and yet gives its interpretation on what has been stated in the said reports, the order of the Bench will lose its value as a precedent for other appeals, where the two sides might like to place on record the three reports and develop their arguments on the basis of their texts, instead of what other said about them. In that case, the concerned Bench will be obliged to hear the parties, and may be, there would be need to set up another Special Bench of more than five Members. All these complications could have been avoided by inviting the two sides to make their submissions with reference to the texts sight at this stage. The present Special Bench could then have done all that was necessary to resolve the controversy as satisfactorily as possible. By not doing so, the Special Bench decides only this appeal, but does not create a viable precedent for other Benches to follow.
44. The other items, namely, duty drawback and sale of import entitlements have been held to be assessable even by my learned Brothers. Essentially they are also the products of business and as such their assessability cannot be assailed. Duty drawback is intended to reduce the cost whereas import entitlement is an incident of business and comes to the assessee by way of supplemental trading receipt. I am in entire agreement with my learned Brother with regard to their finding in respect of these two items.
45. In the departmental appeal with regard to ground Nos. 1 to 3, I have no separate opinion to give inasmuch as I agree with the findings of my learned Brothers on these grounds as incorporated in the order written by Shri V. P. Elhence.
46. Regarding ground No. 4, I have already given my opinion above and according to me there was no justification whatsoever with the CIT (A) in holding that 45 per cent of the CCS as received by the assessee was a capital receipt. No. part of it was capital receipt. It was revenue receipt in its totality and was liable to be subjected to tax as indicated above.
47. The fifth ground of appeal in the Revenue's appeal is regarding the refusal of the Commissioner of Income-tax to accept the request of the Inspecting Asstt. Commissioner (Asst.) to make enhancement in respect of a sum of Rs. 27,76,816 in respect of which the ITO had allowed weighted deduction. The relevant discussion in the Commissioner's order is in paragraph 14 at page 19. This is what the observed on the subject :
"14. The IAC had sought an enhancement of the assessment in this year following the decision of the Madras High Court in the case of Southern Sea Foods Ltd. I have heard the assassin this behalf and I am of the view that in the light of the law as explained by the Full Bench of the ITAT, Madras in the case of ITO v. Bharat Skin Corpn. (15 Taxman 57) and the Board's operative instruction on this subject as quoted in the Tribunal's order, there is no justification for enhancement of the income by withdrawing the weighted deduction allowed u/s 35B on the amount of Rs. 12,10,893 paid by the assessee as commission on export sales."
The above discussion would clearly show that the CIT (A) did consider the request of the IAC for enhancement and rejected the request on merits on the ground that the matter stood covered by the judgment of the Special Bench of the ITAT, Madras in the case of ITO v. Bharat Skin Corpn. [1983] 15 Taxman 57 (Trib.).
48. The Revenue's contention in respect of the above finding of the CIT (A) was that it was erroneous and that the decision of the Madras High Court in the case of Southern Sea Foods Pvt. Ltd. clearly covered the present subject-matter particularly with regard to those agents who were situated in India and who had rendered services to the assessee-company in India. On behalf of the assessee, it was submitted that no appeal would lie before the Tribunal in respect of the above issue on behalf of the Revenue for before the CIT (A) it was the assessee who had the right of appeal and not the ITO and it was entirely discretionary for the CIT (A) to make enhancement or not and that if the request of the Department to enhance was turned done by the CIT (A) the Revenue could not make an appealable issue out of it. The learned conceal submitted that the learned CIT (A) could as well refuse to adjudicate upon the request of the enhancement and yet dispose of the appeal which was before him and that in such a case, the Department would not get way right of appeal before the Tribunal, the best that it could do was to go for a writ to the Hon'ble High Court with the prayer to direct the CIT to adjudicate upon the request of enhancement raised by the revenue before the CIT (A). Even this was not certain as to whether such await would at all lie because of there was no duty on the part of the CIT (A) to adjudicate upon the issue of enhancement raised by the AC (Asst.) before him, no amendments could prima facie be issued to him for do in something which was not his duty to do.
49. I have given careful consideration to the facts of the case and the rival submission. So far as the Tribunal is concerned, the power to file appeal before it is given to the CIT by sub-section (2) of sec. 253 and it reads, inter alia, as below :
"The Commissioner may if he objects to any order passed by an AAC/CIT (A) u/s 154 or sec. 250, direct the ITO to appeal to the Appellate Tribunal against the order."
A bare reading would suggest that a valid appeal would lie before the Tribunal by the Commissioner, if the said Commissioner objects to any order passed by the CIT (A). If no order is passed by the CIT (A) disposing of an appeal, apparently filing of an appeal would be premature, but, if an appeal has been dispose of by the CIT (A), and, if his order gives rise to an objection, either on account of an act of commission or omission, a valid appeal may be filed by the CIT before the Tribunal under sub-section (2) of sec. 253. In the present case, as we have noted above, the CIT did adjudicate upon the request of enhancement by the IAC (Asstt.) vide paragraph 14 of his order referred to above. It is to this part of the order of the CIT (A) that the CIT objects. Because of such objection the CIT has a right to come in appeal before the Tribunal. To say, therefore, that the CIT (A) could not have directed the ITO to file an appeal before the Tribunal with regard to the observations made by the CIT (A) in paragraph 14 does not appear to me to be correct. The ground of appeal No. 5 was, thus, according to me, entirely valid and could have been raised by the CIT and the Revenue cannot be thrown out right at the threshold on the ground that an appeal against refusal of IAC's request for enhancement would not lie to the Tribunal.
50. If the CIT had refused to pass an order with regard to this request, what would have happened, would be a totally hypothetical situation, and, in my opinion, it would be wrong on the part of the tribunal to answer a hypothetical question which does not arise from the facts of the given appeal. The issue must be left open for proper canvassing in case where it might arise in future.
51. The learned counsel for the assessee had urged that only the assessee had the right of appeal before the CIT (A) and the ITO was precluded from appealing against his own order, and that as such, it was not open to the ITO to request the CIT (A) to enhance the assessment at his instance. The CIT (A) could of course do it on his own but the ITO had no right to approach the CIT and to tell him that his own order was wrong and that he should enhance the same.
52. It is true that u/s 246, it is only the assessee who gets the right to appeal to the CIT against an order of assessment passed by the ITO u/s 143(3). But once the appeal is filed before the learned CIT (A), the assessee loses the right the withdraw the said appeal and the matter has, thereafter, to be proceeded with in accordance with law by the learned CIT (A). For this purpose, he has to give notice of hearing both to the appellant and to the ITO and both of them have the right to be heard before him. The CIT has been given the right of considering and deciding any matter arising out of the proceedings in which the order appealed against was passed notwithstanding that such matter was not raised before the CIT (A) by the appellant. The issues which have not been raised by the appellant in his appeal but which have been determined by the ITO can thus be gone into by the CIT (A) while deciding the assessee's appeal. He can, of course, do so suo motu. The purpose of vesting this power in the CIT (A) has been explained by the Hon'ble Bombay High Court in the case of Narrondas Manordass v. CIT [1957]31 ITR 909, 917, inter alia, in the following words :
"... The Legislature has conferred very wide powers upon the AAC once an appeal is preferred to him by the assessee. If the assessee chooses to remain content with the order of the ITO there is nothing that the AAC can do, however erroneous the assessment may be. But if the assessment is opened up by the action of the assessee himself, then the powers conferred upon the AAC are much wider than the powers of an ordinary court of appeal. The statute provides that once an assessment comes before the AAC, his competence is not restricted to examining those aspects of the assessment which are complained of by the assessee; his competence ranges over the while assessment and it is open to him to correct the ITO not only with regard to a matter raised by the assessee but also with regard to a matter which has been considered by the ITO and determined in the course of the assessment."
The Hon'ble Supreme Court approved of the above approach of the Hon'ble Bombay High Court in CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443, 449. When this is the position in law and the CIT (A) can go into the question of enhancement with regard to the mistakes committed by the ITO, if any, it is not understood as to what prevents in law, the ITO from bringing to the attention of the CIT (A) that in his order he had committed some error which deserved to be rectified by him and for which enhancement was the remedy. The ITO has a locus stand before the CIT (A) as a respondent and in this capacity, he can brig to his attention, an issue on which enhancement is in his opinion necessary. The CIT, once such an issue is brought to his attention, is duty bound to exercise his discretion in a judicial manner as to whether or not to make the enhancement. The order which he passes on the issue raised by the ITO would be part of a judicial order against which an appeal does lie to the Tribunal as noted above. In view of this, I am unable to go along with may other Brothers on this subject namely that no appeal would lie to this Tribunal against the refusal of the CIT (A) to enhance the total income of the assessee on a point raised by the ITO but rejected by the CIT (A). In the present case, however, it has already been stressed above that the facts are slightly different. The CIT (A) did entertain the objection of the revenue and then held against it on merits. Therefore, the matter has to be examined on merits as to whether or not the enhancement was justified.
53. As regards merits, the learned CIT (A) disposed of the Revenue's submissions on the short ground, namely, that the matter stood covered by the judgment of the Bench of the ITAT in Bharath Skin Corpn.'s case and the circular of the CBDT referred to in the said judgment. I have gone through the said judgment and I notice that there the question was as to whether weighted deduction should be given to the assessee on account of commission paid by it to the State Trading Corpn. for rendering to it, inter alia, the following services :
"It obtains for the expositors (a) information regarding markets outsideIndia; (b) does advertisement and publicity outsideIndia; (c) prepares and submits tenders for supply of the goods to be exported; (d) furnishes samples and other technical information for the promotion of exports; and (e) maintains trances outsideIndiaand sends the executives outsideIndiafor negotiating export contracts".
On the basis of these services it was held by the Special Bench of the Tribunal that the commission paid to state Trading Corpn. was eligible for weighted deduction.
54. In the present appeal, it is not known as to what are the exact facts and who are the persons to whom the commission has been paid and what are specific services rendered by them. Without the information on the above subject, it would not be possible to adjudicate upon the ground of appeal of the Revenue at this stage. I will, therefore, set aside the order of the learned CIT (A) on the ground that it is a non-speaking order and would direct him that he would retirement the issue de novo in accordance with law.
55. In view of the above observations, the appeals of both the sides are allowed in part.
Per Shri S. Grover, Judicial Member - These cross-appeals are directed against the order dated28-5-1984 passed by the CIT (Appeals),New Delhi [herein after referred to as the CIT (A)] in respect of assessment year 1979-80. In respect of certain reliefs, the parties have joined issues and, therefore, it is considered expedient to state, first, briefly, the facts before dealing with them.
2. The assessee is a Private Ltd. Company and the business is that of manufacture and sale of hand-tools inIndiaand export to other countries in almost all the parts of the world. For the previous year, which ended on 30-6-1978, returned declaring income of Rs. 2,25,70,517 was filed on 27-6-1979. Total turnover of various units amounted to Rs. 18,68,94,744 and gross profit Rs. 2,11,10,995 giving a rate of 38 per cent. For the immediately preceding years the corresponding figures were Rs. 15,13,14,194, Rs. 1,78,01,411 and rate of 40 per cent. In addition various benefits under the Income-tax act, 1961 (hereinafter referred to as the Acts) like relief u/s 35 were being availed of.
3. A revised return came to be submitted on 7-1-1980 reducing the taxable income to Rs. 2,16,08,971 because commission payment of 3 per cent to selling Agents came to be proved by the Company Law Board in respect of the period under consideration. The return had to be further revised to Rs. 2,09,67,942 on10th Oct., 1980because, on the assessee's representation, the commission payable was enhanced from 3 per cent to 5 per cent. A fourth return revising income to Rs. 1,99,58,308 was furnished on 29th October, 1980, in which though the assessee reduced its interest claim under sec. 40-A (8) of the act by Rs. 1,10,240 enhancing weighted deduction under sec. 35-B from Rs. 64,04,030 to Rs. 75,34,187. Final revised return was submitted on 30-10-1981 for Rs. 1,95,77,963 as depreciation claim, investment allowance, etc., on the Central Subsidy received in respect of a plant set up in industrially backward area were enhanced. It must be stated as a fact that the receipts of Rs. 1,33,82,158 as Cash Compensation Support (hereinafter referred to as the CCS), Rs. 51,93,926 as Duty draw Back (for short DDB) and Rs. 16,73,519 realized by way of sale of Import Entitlements (IE) along with Rs. 7,35,181 as a result of fluctuation in exchange rate were not claimed as exempt before the assessing officer. It was only at the first appellate stage, i.e., before the CIT on 31-1-1984 that the exemption claim from taxability of these amounts was staked by way of additional grounds, which were admitted and a report obtained from the IAC (A). This aspect is borne out in para 7 which is noted below :
"7. While this order disposes of the original grounds of appeal filed by the assessee, the assessee had raised certain additional grounds, which were admitted through my order dated31-1-1984. These additions grounds highlight the inclusion in the total income of Cash Compensatory Support, Duty Drawback, Income from Sale of Import Entitlement and Difference in Exchange Rates. In the remand report submitted by the IAC in pureness of my order dated31-1-1984, the IAC has, relying on several decided cases, reported that each one of these claims is misconceived and untenable in law. He has reported that the assessment on the basis of assessee's own return were perfectly correct, reasonable and in accordance it the law."
4. The Revenue, however, is not contesting that the CIT (A) was not justified in considering such aspects for the first time, the earlier pattern being different. For the assessment years 1975-76 and 1976-77, it was before the Tribunal for the first time that the equation regarding exemption of CCS, DDB and IE was raised. The Tribunal admitted the on controversy and decided that CCS was not taxable. For the assessment years 1977-78 and 1978-79, however, the CIT (A) refused to admit additional grounds on the question and the Tribunal upheld such decisions.
5. Against to finally declared income of Rs. 1,95,77,963 the assessment came to the framed on 16-2-1982 under sec. 143(3) read with sec. 144-B of the Act on an income of Rs. 2,67,46,348.
6. The abovesaid variation arose mainly on account of :
(a) lesser relief given under sec. 80-J, inasmuch as, as against the claim of Rs. 22,50,390 in respect of Unit No. 4 (Kundli Unit), the ITO's computation amounted to Rs. 14,72,014 and in respect of Unit No. 5-Aurangabad reduction of 80-J was from Rs. 24,28,623 to Rs. 7,59,218, and
(b) deduction under sec. 35-B of the Act claimed at Rs. 75,34,187 was reduced to Rs. 10,68,499. In other words, the difference in relation to sec. 35-B claim itself, was of the order of Rs. 64,65,688. There were other disallowances under sec. 40-A (5) read with section 40(c) of the act with which we are not concerned.
7. The assessee had claimed tax holiday benefits under sec. 80-J of the Act in respect of Unit No. 4 (Kundli Unit) and Unit No. 5-Aurangabad on the ground that it was the gross capital employed without adjustment of liabilities on which 80-J relief was to be worked out. Reliance was placed on the decision of the Hon'ble Calcutta High Court in Century Enka Ltd.'s case. The assessee and also revised its claim taking the value of assets on actual costs instead of WDV. The claim was, however, declined by the ITO by referring to rule 19-A (2)(a) of the Income-tax Rules, 1962. The assessing officer also mentioned that the assessee had filed a write petition before the Hon'ble Supreme Court challenging the validity of the retrospective amendment of sec. 80-J by Finance (No. 2) Act of 1980 which had been admitted. The assessee's assertion that, if, at a later stage, the Hon'ble Supreme Court upheld the retrospective amendment, the assessment could be modified accordingly came to be accepted by the assessing officer and assessment was made in accordance with the interim order issued by the Hon'ble Supreme Court restraining the department from applying the amended provisions of sec. 80-J of the Act.
8. The learned CIT (Appeals) disposed of the assessee's appeal in relation to 80-J dispute vide pars 2 and 2-A of his order, which are reproduced below :
"2. The first ground of appeal is against reduction of the claim of the appellant to relief under sec. 80-J from Rs. 22,50,390 made by the assessee to Rs. 14,72,014 in respect of Unit No. IV of the company (Kundli Unit). An identical claim was considered by my predecessor in his order dated21-3-1983in respect of assessment year 1978-79. In this year too, as in the earlier year, the difference between the claim and the actual allowance arises only because of the application of the provisions of rule 19-A. For the reasons given by my predecessor in pars 29-33 of his order referred to, with which I agree, I direct the IAC to work out the relief under sec. 80-J in respect of this unit in accordance with the interpretation of the provisions by the Calcutta High Court in Century Enka Ltd. (107 ITR 909) case. As observed by my producer in case the retrospective amendment of sec. 80-J is ultimately upheld by the Supreme Court, the assessee's ground which stands rejected, the IAC will then again compute the relief on the basis followed by him in the assessment order.
2-A. The next ground is against similar reduction of the claim of the assessee under section 80-J in respect of its Unit V-Aurangabad from Rs. 24,28,623 to Rs. 7,59,218. In respect of this ground also, for the same reasons as given by my predecessor in his order dated21-3-1983, the IAC is directed to verify the figures furnished by the assessee and allow admissible relief in accordance with theCalcutta,Madras,Punjaband Allahabad High Courts. The IAC will have to revise the allowances and restrict them to the amount actually allowed by him in case the Supreme Court ultimately uphold the retrospective amendment of section 80-J or the validity of rule 19-A."
9. Both the assessee and the Revenue were dissatisfied with the CIT (A)'s order on 80-J issue. The assessee's grievance being that the CIT (A) should have clarified that actual cost of assets and not the depreciated value was to be considered for 80-J deductions and the Revenue contending that valid directions could not be given, that relief be worked out by relying on the principle laid down by the Calcutta High Court in the case of Century Enka Ltd. till the final decision of the Hon'ble Supreme Court.
10. We have given above details because of the vagueness of the grounds taken both by the assessee and the Revenue. However, before us, Shri G. C. Sharma, Senior Advocate, sought the Bench's permission to withdraw 80-J dispute and conceded the Revenue's appeal on the question which was accorded in view of the Hon'ble Supreme Court judgment in the case of Lohia Machines Ltd. In such view of the matter, we reverse the order of the CIT (A) and direct the assessing officer to recompute relief/deduction under section under section 80-J within the parameter laid down by the Hon'ble Supreme Court, particularly thaw tall liabilities are to be deducted for the purpose of computing capital employed.
11. Coming top ground No. 2 in each of the cross-appeals, which are interlinked, the assessee claimed weighted deduction under section 35-B to the tune of Rs. 64,04,030 in respect of expenses totalling Rs. 1,92,12,089 as flows vide its return submitted on 27th June, 1979 :
Rs.
"1. Directors' Foreign Tour expenses for
export purposes 2,76,710
2. Travailing for Exports Promotion (Staff) 64,960
3. Foreign publicity 87,014
4. Commission on export sales 27,76,816
5. Inspection Fee on exports 2,13,583
6. Interest on post-shipment export credit loan 4,50,983
7. Ocean Freight on export 58,60,193
8. Forwarding charges on exports 8,95,760
9. Bank charges on exports 2,31,591
10. Packing materials consumed for exports only 65,08,653
11. Difference in foreign receipts and remittances 10,55,379
12. Salary, etc., for head office staff for
exports only 8,84,451
13. HRA exports department 22,229
14. Conveyance allowance-Export Department 22,186
15. General charges - Regarding Exports 19,612
16. Printing & Stationery - Regarding Exports 31,761
17. Postage, Telegrams & Telephone -
Regarding Exports 1,19,590
18. Insurance Charges - Regarding exports 2,10,618
-----------
Total expenses in respect of exports 1,92,12,089
-----------
12. Such claim, however, came to be enhanced to Rs. 75,34,187 vide return filed on 20th October 1980 by stating that inland freight on export consignment to the true of Rs. 33,90,473 also was eligible for relief. The ITO allowed section 35-B claim in respect of expenses to Serial Nos. 1, 2, 3 & 4 only and thereby computed deduction at Rs. 10,68,499 by observing that the claim in respect of salary paid to staff of export divisions as also packing charges could not be acceded to as the order of the CIT (A) for the earlier year had not been accepted and other deductions were wrongly claimed.
13. The learned CIT (A) in addition to the items considered for relief by the ITO, directed deduction in relation to expenses at Serial Nos. 5, 9, 15, 16, 17, & 18, but upheld the ITO's action in respect of others.
14. Taking first the assessee's appeal, Shri G. C. Sharma, in fairness, accepted that, since for the earlier years, the Tribunal, in the assessee's own case, had not accepted the assessee's plea, it was difficult to argue that the following items of expenses would be entitled to weighted deduction relief (Serial No. as given in the assessment order) :
"S. No. Particulars Amount
6. Interest on post-shipment export
Credit Loan 4,50,983
11. Exchange rate difference 10,55,379
Inland freight on export
consignments (as mentioned in
para. 13 of the order) 33,90,473
7. Ocean Freight on export
consignments 53,60,193
8. Forwarding charges on export
consignments 8,95,760"
15. The learned advocate, however, very strongly contended that in respect of packing material consumed exclusively for exports to the tune of Rs. 65,08,653 the treatment similar to the one given by the Tribunal in the assessee's own case in respect of assessment year 1976-77 be accorded and similar directions issued. As a fact, I have been the author of the orders in ITA Nos. 1143 & 1826/Delhi/79, which were cross-appeals for 1975-76 and ITA No. 696/Delhi/82 which was the assessee's second appeal for 1976-77, both orders dated29-5-1985. It was accepted by the parties that the facts were similar and so were the nature of expenses. No fresh arguments were sought to be addressed, but for short additions submission of Shri G. C. Sharma that the wrappers could be considered either as samples as done for 1976-77 assessment year or in the nature of advertisement expenditure, I, however, like to follow order for 1976-77 because advertisement is a preceding factor vis-a-vis the exports with wrappers and by making para 10 of the order for the year as the basis give the same direction, i.e., as in that year, i.e., wrappers should be considered was export samples and precise related bifurcated expenses should be given 35-B relief :
"10. However, in respect of packing materials, we are inclined to take a different view. In the court before us, the assessee pleaded that it was not entirely the packing material but the goods were exported in attractive plastic wrappers which are more taken as samples of goods. It was explained to us that the tools with wrappers are packed in boxes and if, at all, the box packing material would be disentitled for weighted deduction relief, rather the wrappers, which appealed to us also as attractive samples. The case before us is a peculiar one and own for the Revenue it was not disputed that the assessee was introducing fresh evidence, we are inclined to direct the ITO that, to the extent the assessee spent money for preparing wrappers for putting the tools for the purpose of exporting them, these would be entitled to weighted deduction, because it was entirely for the purpose of development of export markets that the assessee prepared beautiful and expensive plastic and colourful wrappers, which were more or less of durable nature and not wrappers, as the term is generally understood. What was exhibited in the court before us was that set of tools were neatly arranged in plastic containers, which were termed as samples for tools. Considering the type of wrappers, we direct that these should be considered as samples and if the assessee is in a position to separate its cost, the same should be given the benefit of deduction under section 35-B of the Act. The total claim is in respect of Rs. 25,02,836 but it shall be subject to bifurcation, if necessary, after it is subject to the scrutiny of the ITO."
With regard to the above, Mr. Sharma submitted that in respect of assessment year 1976-77, the assessee had been in a position to bifurcate expenses in relation to the cost of wrappers and that the assessing officer has accepted the same. If such is the case, the same pattern is directed to be applied to this year also.
16. Since, for the assessee, it was given in writing that in addition to the relief given by the CIT (A), 35-B deduction was sought only for six more items, out of which claim for five came to be withdrawn as mentioned in para 14 above, there is no question of our dealing with the claim further, In view of directions sin relation to packing material expenses of Rs. 65,08,653 the assessee is treated as partly successful in respect of its ground No. 2. The Revenue is rejected (sic) in related agitations concerning 35-B relief in respect of Rs. 2,13,583, Rs. 2,10,618 and Rs. 2,31,591 which represented expenses on inspection fees on exports, insurance charges regarding exports and bank charges on exports respectively, because, in the earlier years, the Tribunal have upheld the allowability of such relief in the assessee's own case. The CIT (A) noted three items under section 35-B :
Rs.
(a) General charges 1,19,612
(b) Telephone/telegrams 1,19,590
(c) Printing & Stationery 31,761
We do not find much discussion in the CIT (A) order as to how the claims are worked out, though the assessee's assertion was recorded that quantification of the above three expenses were in accordance with the godliness given in the special Bench decision of the ITAT in J. Hem Chand & Cops case. In the figures given in the paper book, it is mentioned that the claims are respected to only exports after making necessary adjustments of domestic expenses. In view of insufficient data, we direct that if necessary adjustments were already made, i.e., the claim put forward was not in relation to all the expenses but only for exports, then there will be no justification as to why the claim should be allowed in part, but if the relief is for the entire expenses on the ground that the assessee was hundred per cent export house, then adjustments shall be necessary because general charges, telephone, telegram and printing & stationery expenses in relation to manufacturing activities certainly cannot be allowed. Since, as per the directions of the Tribunal in relation to wrappers' expenses in respect of assessment year 1976-77 amicable arrangement has been reached, we see no reason or apprehension as to why there should be any difficulty in analysing the above three expenses in view of our observation above.
17. Before parting with section 35B controversy amounting both from the assessee's and revenue's appeals, it must be stated that very strong reliance was placed on the judgment of Hon'ble Madras High Court in the case of southern sea Foods (P.) Ltd. for the contention that it has greatly diluted the concept and principle enunciated by the Special Bench with regard to sates of expenditure (place where the expenditure is made) for allow ability of relief. In view of the vigour with which the revenue sought to by-pass the Special Bench decision we closely looked into the Madras High Court judgment again and fine that the Hon'ble Madras High Court was dealing with a case, where the assessee had engaged the services of another company for the propose of procuring orders from foreign years in respect of export of prawns and shrimps and though the Tribunal allowed 35-B relief in relation to commission paid to the company, whose services were engaged, the Hon'ble High Court reversed the decision by observing that the object of the provision being not fiscal but to advance the policy of the state to promote exports, the conditions laid down under sec. 35-B for weighted deduction must be strictly followed and since, in that case, nothing further was required after the export order had been obtained through the medium of another company, there was no question of sub-clause (viii) coming to the assessee's rescue and as far as sub-clause (iii) was concerned, the location of payment must necessarily be outside India. The judgment, therefore, does not affect a case where there are no intermediaries or agency working inIndiaonly which procure import orders thereby requiring no further action for the exports as was the situation in Southern Sea Foods (P.) Ltd.'s case. Commission payments to agencies like State Trading Corporation ofIndiawhich maintains offices around the world and actively engages in the development of foreign markets would not, therefore, be hit by the saidMadrasjudgment.
18. Ground No. 3, in the revenue's appeal is against the CIT (A)'s decision that the assessee is entitled to deprecation and Investment Allowance on fixed assets without reducing their cost to the extent of Central Subsidy received from the Govt. for moving into or setting up plants in industrially backward areas. We do not propose to go to the figures because it was accepted by the parties that the questions of principle. There are now two judgments, one that of Hon'ble Andhra Pradesh and the other of the Hon'ble Madhya Pradesh High Courts, as noted below, which have taken the view that the Central subsidy for locating industries in backward areas cannot go to reduce the cost of the fixed assets :
(i) Godavari Plywoods Ltd.'s case and
(ii) Bhandari Capacitors (P.) Ltd.'s case
For the revenue, no contrary view, expressed by any High Court, was pointed out. In such view of the matter, we find no occasion to interferes with the CIT (A) order.
19. The last ground in the revenue's appeal reads as follows :
"On the facts and in the circumstances of the case, the learned CIT (A) has erred in holding that there was no justification in the enhancement of income by withdraw in the weighted deduction under section 35B on Rs. 27,76,816 already allowed to the assessee. The CIT had wrongly given the figure at Rs. 12,10,893 in the order."
20. The related order of the CIT (A) reds as follows :
"The IAC had sought an enhancement of the assessment in this year following the decision of the Madras High Court in the case of Southern seafoods Ltd. I have heard the assessee in this behalf and I am of the view that in the light of the law as explained by the Full Bench of the ITAT, Madras, in the case of ITO v. Bharath Skin Corpn. (15 Taxman 57) and the Board's operative instructions subject, as quoted in the Tribunal's order. There is no justification for enhancement of the income by withdrawing the weighted deduction allowed under section 35B on the amount of Rs. 12,10,893 paid by the assessee as commission on export sales."
Before us, it was submitted that, though the total commission paid amounted to Rs. 27,76,816 but for Rs. 12,10,893 the balance commission was paid outsideIndiaand even in respect of Indian payment, the nature was the same.
21. We do not propose to deal with the question of justification of the allowance because of the considered view that the power to make enhancement vests with the first appellate authority and if he does not choose to exercise the same, the saturation cannot be remedied by way of appeal before the Tribunal. In this connection, we like to notice and analyst the provisos of section 251, which spells out the related powers :
"251. (1) In disposing of an appeal, the Appellate Assistant Commissioner, or as the case may be, the Commissioner (Appeals) shall have the following powers :
(a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annual the assessment; or he may set aside the assessment and refer the case back to the ITO for making a rich assessment in accordance with the directions given by the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) and after making such further inquiry as may be necessary, and the ITO shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment;
(b) in any appeal against an order imposing a penalty, he may confirm or cancel such order or vary it, so as either to enhance or to reduce the penalty;
(c) in any other case, he may pass such order in the appeal, as he thinks fit.
(2) The Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.
Explanation : In disposing of an appeal, the Appellate assistant Commission or, as the case may be, the Commissioner (Appeals) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the appellate Assistant Commissioner, or as the case may be, the Commissioner (Appeals) by the appellant."
22. The above provision has various limbs. From clauses (a), (b) and (c) of sub-sec.
(1) pure power is drawn. In the instant case, we are concern with primarily clause (a) because it was the assessment order which was involved. Sub-section. (2) place contents and obligations inasmuch as if assessment or a penalty order is to be modified adverse against a taxpayer, he must be given reasonable opportunity of showing cause that section contemplated is not proper.
Explanation to the section must be closely seen because, though, on a casual look, one may initially form an impression that while disposing of an appeal, the first appellate authority can consider and decide any matter arising out of the proceedings-the assessment order being only a part of such process-but, the catch is in the last lines and the last word 'appellant', reading as :
"Notwithstanding that such matter was not raised before the AAC, or, as the case may be, the Commissioner (Appeals) by the appellant."
The indication is clear and loud that the above provision is means for the benefit of taxpayer only. There is and should be no conflict on this score.
23. Coming to the assessee's appeal, Ground Nos. 1 & 2 concerning 80J and 35B, we have already adjudicated upon, because they were linked up with similar issues in the revenue's appeal.
24. I like to take up Ground No. 6 before dealing with Ground Nos. 3,4 and 5, in which the taxability of Rs. 7,35,191 arising out of difference in exchange rate is contested. To adjudicate upon this, we do not have to exercise much mental faculties because of the following to Supreme Court Judgments :
1. Canara Banks Ltd.'s case.
2. Sutlej Cotton Mills Ltd.'s case.
25. The above judgments ar authorities for the proposition that receipts arising on revenue account are taxable and that its precisely that happened in relation to difference in exchange rate. The order so the lower authorities, therefore, on the question are upheld.
26. This brings us to Ground Nos. 3,4 and 5 dealing with the following receipts in respect of which exemption was claimed from taxation :
Rs.
1. CCS 1,33,82,158
2. Duty Drawback 51,93,926
3. Income from sale of import entitlements 16,73,519
27. Before proceeding further, it must be stated that the present years' case came up for hearing before a Division Bench of the Tribunal, constituted by the Hon'ble President and Shri V. P. Elhence on 26th October, 1987, when Shri G. C. Sharma stated that the point of taxing CCS as covered by orders of the Tribunal in the assessee's own case for the assessment years 1975-76 and 1976-77. However, for the Revenue, it was pointed out that a contrary view was taken by the another Bench in the case of reliance International after considering the decision in the assessee's own case and, therefore, the later decision should be followed. Apparently, the Bench did not find it feasible to hear the case in D. B. and follow the earlier decision in the assessee's own case and that is how Special Bench was constituted of five Members. Since, as stated above, I was the author of the order in respect of assessment years 1975-76 and 1976-77, I have to offer personal explanations to why I am departing from the view taken, that the assessee is not entitled to exemption in respect even CCS.
28. For the assessment year 1975-76, in spite of various opportunities, the Revenue instead of bringing on record related evidence and the relevant judicial authorities, in the first place, submitted that the only direct authority concerning the type of CCS as was involved, was the Calcutta High Court judgment in Jeewanlal (1929) Ltd. v. CIT (1983) 139 ITR 865 and then it was suggested ultimately that the matter be referred back to the assessingofficer of CIT (Appeals) for examination of evidence which was yet to be collected. The all important judgment of the Hon'ble Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd. cited as was simply not pressed into service for the Revenue, in which case also, Hon'ble Justice Sabyasachi Mukharji, as he then was (presently Hon'ble Judge of the Supreme Court of India) spoke for the Court as in the case of Jeewanlal (1929) Ltd. In Keshoram's case, the assessee as a manufacturer of textile goods was eligible for grant of import license to the extent of 66 2/3 per cent of the F. O. B. value of such exports. For the exports after1st April, 1960, additional premium at certain rates was granted. For the premium, which was due to the received for the related performance of exports, the assessee received cash payments of Rs. 5,85,701. The Income-tax authority having assessed the amount as trading receipt, the matter came up before the tribunal and submission made was that the receipt was capital in nature. The Tribunal also having rejected the assessee's contention and having granted reference, the question came up before the Hon'ble High Court who opined that the fact that, in the course of carrying on of the business, an amount is received, which could be turned into capital, did not, in any way, militate against the said amount being consider the be a revenue receipt and that the cash premium received was not in the nature of subsidy or a grant from the Govt. Their Lordships then explained the position in respect of grant or subsidy from the Government by referring to the decision of the House of lords in the case of Pontypridd & Rhondda Joint Water Board where Viscount Simon speaking for the Court had observed that the first proposition is that, subject to the certain exception payments in the nature of a subside from public funds made to an undertaker to assist in carrying on the undertaker's trade or business would be trading receipts, to be brought into account in arriving at the balance of profit or gains. Another important principal laid down by the Calcutta High Court in Kesoram's case was that recurring nature of receipt shall make all the difference, i.e., with regard to one time receipt, the position may be different, but if a trader is expecting and receiving a grant or subsidy year after year, it cannot be termed as casual in character.
29. In view of the above, it is considered expedient to reproduce paras 13.6 to 15 of the Tribunal's order for 1975-76 to project that the case for that year came to be decided more for default of non-production of relevant information and non-noticing of Kesoram's case, rather on merits :
"13.6 The burden of the argument was that it necessarily follows that payment of CCS was made by Government by way of subsidy or grant and the question for consideration is, whether such payment can be held to possess any attributed of income.
13.7 At this stage, we would like to observe and make it clear that if we are not referring to each and every argument and the authorities cited by Shri K. K. Sharma, senior D. R., it is because the related contentions are primarily against he assessee's claim concerning I.E. and D. D. which aspect is being decided in favour of the Revenue. Similar is the case with regard to judicial authorities, though several cases were cited, it was emphasised for the Revenue that the only direct authority concerning the type of CCS, as is involved in the present appeal is that of Calcutta High Court in Jeewanal [1929] Ltd. v. CIT [1983] 139 ITR 865, which we shall be referring to. Therefore, if certain authorities do not find reference its because the same have not been considered necessary for deciding these appeals. Similarly, only those arguments are not dealt with which are considered overlapping or irrelevant and which should be considered as rejected. The same considerations are relevant and will apply with regard to submissions and arguments made by Shri G. C. Sharma and Shri Kanwal Krishan, learned advocate who appeared for the assessee at different dates.
14. Before proceeding further, we like to give some dates because at one stage it was very strongly and vehemently contended for the Revenue that the matter should be restored back to the income-tax authorities preferable at the assessment stage to investigate into the facts regarding the nature and scheme of CCS.
15. Hearing in the assessee's appeal started on31-12-1984. Second hearing took place on12-2-1985when appeals were adjourned and marked as part-heard. On14-2-1985assessee's arguments were concluded for the assessment year 1975-76 but the request of the learned D. R. the hearing was adjourned to25-2-1985to enable him to give a detailed reply. One of us (Judicial Member) being on leave on25-2-1985, the matter was posted for hearing on26-2-1985. On this date, the learned departmental Representative raised the plea for remitting the case back to the ITO/CIT (Appeals) for examination of evidence. After hearing the parties, the Bench decided to announce judgment on Departmental Representative's plea on28-2-1985. On the said day, the Bench decided to proceed with the hearing at the request of the Departmental Representative posted the case for hearing on18-3-1985. On18-3-1985, the hearing was adjourned to25-3-1985at the request of the departmental Representative. On 25th March, one of us (Accountant Member) was on leave and the matter was posted for hearing on 2nd April. 1985. The hearing was finally concluded on16th April, 1985."
30. When the case of Reliance International Corpn. Ltd. was taken up, for both the sides, to certain extent, materials were placed and though some of the judgments on which reliance was placed were common different inferences were dawn by the two Benches. But then non-reference to the judgment in Kesoram Industries & Cotton Mills Ltd.'s case greatly affected my mind.
31. After the hearing was completed on27-11-1987, there was discussion between Members constitution the Bench and though there appeared to be note much difference on the issues other than the taxability of CCS, on such question, there were two clear thinking, one against the taxability of CCS and the other in favour. Because of such situation, the Hon'ble President suggested writing of separate judgments, by Brother Elhence and myself. I was proceeding with my judgment on all aspects when some time in January, a draft was sent by Brother Elhence only in respect of non-taxability of CCS. By that time, my own judgment on all the issues was held way. Since I had already expressed my view that my earlier approach was apparently not correct in view of certain revelation emerging from reliance International I sent the draft back with a note appending my view that there could be no question of offering my comments.
32. Therefore, on5-2-1988. Brother Elhence sent me the order signs by him and Brother F. C. Rustagi on4-2-1988and also the Hon'ble President. In such order, all the issues had been dealt with.
33. At that time, my own order was more or less complete but I had to make certain changes to avoid overlapping and repetitions of certain aspects but as far as the issues other than CCS taxability was concerned, I found no occasion to make any alteration because of the detailed facts given.
34. On 23-2-1988, I handed over the order authorised by Brother Elhence as also my order to Brother Anand Prakash on the thinking that, but for CCS taxability controversy, there were no substantial divergence of views. Brother Anand Prakash, however, chose to express different opinion on certain other issues and wrote his orders on all the issues, copy of which was given to me yesterday. After going through the same, I thought that it would be unnecessary avoidable multiplication of the orders with regard to the taxability of CCS, DDB and IE. Since I had changed my approach and thinking on basis of the Tribunal's order in Reliance International case, the author of which was Brother Anand Prakash, for the sake of expediency and judicial property, I prefer to and hereby rely on paras 9 to 41 of the order of Brother Anand Prakash Dated 23-3-1988 to hold that there is no case for treating the CCS, DDB and IE differently and that related receipts for all the three are taxable.
35. The result would be that the assessee fails in relation to its claim for exemption from taxation of all the above mentioned three receipts, i.e., CCS, DDB and IE since in respect of other points, the parties have succeeded in parts, the appeals are treated as partly allowed.
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