Deduction u/s 10AA not to be allowed on enhanced profits arrived after considering the disallowance u/s 69C, in view of legal position clarified by CBDT.




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Deduction u/s 10AA not to be allowed on enhanced profits arrived after considering the disallowance u/s 69C, in view of legal position clarified by CBDT.

Short Overview: Assessee had only one business undertaking and total turnover of business was equivalent to total turnover of the undertaking as well as export turnover and purchases disallowed by AO related to the same business activity of manufacture and export in respect of which assessee was held eligible for deduction under section 10AA, therefore, deduction under section 10AA had to be allowed on enhanced profits after taking into consideration the disallowance under section 69C in light of accepted legal position by the CBDT. Though Circular No. 37 of 2016, dated 2-11-2016.

Assessee engaged in manufacturing and export of gold, silver and base material jewellery plain and studded with precious and semi precious stones was eligible for deduction under section 10AA. AO treated 25% of purchases as claimed by the assessee as non-genuine and made addition under section 69C. Assessee claimed deduction under section 10AA as regards the amount subjected to addition. Revenue denied this on the ground that section 69C is deeming provision where income is taxed as deemed income without specifying any head of income. Thus, any disallowance made under section 69C could not be considered for benefit under any other section. Further, section 10AA considers benefit for SEZ units only to the extent of profits and gains derived from export. As deemed income under section 69C was not the income derived from export activities, addition made could not be considered for granting benefit under section 10AA.

It is held that Though Circular No. 37 of 2016, dated 2-11-2016 has been issued by the CBDT in the context of Chapter VI-A however deduction under section 10AA being equally profit-link deduction legal position which has been accepted by the CBDT in aforesaid circular would equally apply to deductions claimed section 10AA. In the said circular, CBDT has accepted that if expenditure disallowed is related to business activity against which deduction has been claimed, the deduction needs to be allowed on enhanced profit worked out taking into consideration disallowances so made by AO. In the instant case it was not in dispute that assessee had only one business undertaking and total turnover of business was equivalent to total turnover of the undertaking as well as export turnover and purchases disallowed by AO related to the same business activity of manufacture and export in respect of which assessee was held eligible for deduction under section 10AA, therefore, deduction under section 10AA had to be allowed on enhanced profits after taking into consideration the disallowance under section 69C in light of accepted legal position by the CBDT.

Decision: In favour of assessee

Relied: ITO v. Anthelio Business Technologies (P) Ltd. (2017) 78 Taxmann.com 203 (Mum) : 2017 TaxPub(DT) 84 (Mum-Trib).

IN THE ITAT, JAIPUR BENCH

SANDEEP GOSAIN, J.M. & VIKRAM SINGH YADAV, A.M.

Amrapali Exports v. Dy. CIT

ITA Nos. 190 & 191/JP/2019

4 November, 2019

Assessee by: P.C. Parwal (CA)

Revenue by: Runi Pal (JCommissioner)

ORDER

Vikram Singh Yadav, A.M.

These are two appeals filed by the assessee against the respective orders of learned Commissioner (Appeals)-1, Jaipur, dated 18-12-2018 for assessment years 2009-10 & 2014-15 respectively. Since the common issues are involved, both these appeals were heard together and are being disposed off by this consolidated order.

  1. InITA No. 190/JP/19, the assessee has taken the following grounds of appeal :–

“1. Learned Commissioner (Appeals) has erred on facts and in law in upholding the validity of the order passed under section 147 of Income Tax Act, 1961.

  1. The learned Commissioner (Appeals) has erred on facts and in law in upholding the rejection of books of accounts under section 145(3) of Income Tax Act, 1961.
  2. The learned Commissioner (Appeals) has erred on facts and in law in upholding the action of assessing officer in treating the purchases of Rs. 11,22,000 made from M/s. Karishma Diamonds (P) Ltd. as bogus by not considering the various evidences filed by the assessee. He has further erred in confirming the addition of Rs. 2,80,500 by disallowing 25% of alleged unverifiable purchases of Rs. 11,22,000 under section 69C of Income Tax Act, 1961.
  3. The learned Commissioner (Appeals) has erred on facts and in law in confirming the addition of Rs. 22,440 being 2% of Rs. 11,22,000 on account of alleged commission paid for obtaining the accommodation entry.
  4. The learned Commissioner (Appeals) has erred on facts and in law in not accepting the contention of assessee to recomputed the deduction under section 10AA after considering the trading addition of Rs. 2,80,500 ignoring theCBDT Circular No. 37/2016, dated 2-11-2016.”
  5. Briefly stated, the facts of the case are that the assessee firm is engaged in the business of manufacturing and export of gold, silver and base material jewellery plain & studded with precious & semi precious stones. It has set up its manufacturing and export unit/factory in Special Economic Zone at Sitapura Industrial Area, Jaipur and has started commercial production from 21-4-2008 and has claimed deduction under section 10AA of the Act. The assessee originally filed its return of income on 23-9-2009 at Nil income after claiming deduction under section 10AA at Rs. 2,42,21,021. The assessment was completed under section 143(3) on 7-12-2011 wherein the returned income was accepted by the assessing officer. Subsequently, basis the information obtained from Investigation wing, Mumbai that the assessee has obtained bogus entries in the form of bogus purchases amounting to Rs. 11,22,000 from M/s. Karishma Diamonds (P) Ltd., notice under section 148 was issued on 30-3-2016. In response to such notice, the assessee filed its return of income on 15-4-2016 declaring the income at Nil after claiming deduction under section 10AA at Rs. 2,42,21,021. The reassessment order under section 143(3) read with 147 was passed by the assessing officer on 8-11-2016 wherein the assessee was found eligible for deduction under section 10AA to the extent of Rs. 2,42,21,021 as originally assessed under section 143(3) of the Act.

However, books of accounts were rejected under section 145(3) and a sum of Rs. 2,80,500 was added back to the total income of the assessee, being unexplained expenditure under section 69C of the Act for the reason that the assessee was found indulging in obtaining accommodation entry of purchase of goods from bogus concern which was operated by Shri Gautam Jain without any physical deliveries and such purchases amounting to Rs. 11,22,000 were treated as non genuine and 25% of such purchases were brought to tax as unexplained expenditure under section 69C of the Act. Further, an amount of Rs. 22,440 on account of commission paid for obtaining the accommodation entry was also brought to tax in the hands of the assessee. On appeal, the said findings have been sustained by the learned Commissioner (Appeals) and against the said finding, the assessee is now in appeal before us.

  1. In Ground No. 5, the assessee has contested the findings of the learned Commissioner (Appeals) wherein he has not accepted the contention of the assessee to recompute the deduction under section 10AA after considering the trading addition of Rs. 2,80,500 ignoring theCBDT Circular No. 37/2016, dated 2-11-2016. The relevant findings of the learned Commissioner (Appeals) which are under challenge before us read as under :–

“3.4.2 Determination–(i) The assessing officer disallowed the amount on account of bogus purchase under section 69C of the Act, the appellant contended that the section 69C is not applicable as it has provided all the information explanations details and supported documents to the learned assessing officer. As discussed in the preceding paragraphs, the appellant was found to obtain accommodation entries to inflate the purchase. The action of the assessing officer was based on information collected and follow up actions taken. The details/submissions regarding accounting of purchase etc. did not find support in view of investigation mace in this respect. The appellant relied upon number of cases but they are not directly linked to the case and are distinguishable on facts of the case. Considering this, it is held that the assessing officer was justified in making addition under section 69C of the Act.

(ii) The appellant contended that the disallowance made by the assessing officer should be considered as profit of SEZ unit and be exempted under section 10AA of the Act. As discussed in the Preceding paragraph, the addition made by the assessing officer have been upheld under section 69C of the Act. The section 69C is a deeming provision where income is taxed as deemed income without specifying any head of income.

The proviso to section 69C read as under :–

“Provided that, notwithstanding’ anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.”

(iii) Thus, any disallowance under section 69C of the Act cannot be considered for benefit under any other section. Further, section 10AA of the Act considers the benefit for SEZ units to the extent of profits and gains derived from export. As deemed income under section 69C is not the income derived from export activities and also in view of the provision to section 69C of the Act, the addition made by the assessing officer cannot be considered for granting benefit under section 10AA of the Act. Therefore, no interference is cal led for in the order of the assessing officer.”

  1. In this regard, it was submitted by the learned Authorised Representative that during appellate proceedings, the assessee contended that any disallowance made will increase the deduction under section 10AA and will have no impact on the total income. The learned Commissioner (Appeals) however held that section 69C is deeming provision where income is taxed as deemed income without specifying any head of income. Thus, any disallowance made under section 69C of the Act cannot be considered for benefit under any other section. Further section 10AA of the Act considers the benefit for SEZ units only to the extent of profit & gains derived from export. As deemed income under section 69C is not the income derived from export activities, addition made by the assessing officer cannot be considered for granting benefit under section 10AA of the Act.
  2. It was submitted by the learned Authorised Representative that even if the purchases made from M/s. Karishma Diamonds (P) Ltd. is held to be bogus and disallowed in computing the income from business, the same would increase the profit of the assessee to that extent and such increased profit is eligible for deduction under section 10AA. TheCBDT in Circular No. 37 of 2016, dated 2-11-2016 has clarified that where specific disallowances, related to the business activity against which Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, then deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowances. The ratio of this circular is equally applicable where deduction is claimed under section 10AA. Hence, any disallowance made will increase the deduction under section 10AA and will have no impact on the total income.
  3. It was further submitted that the lower authorities have wrongly held that the addition is made under section 69C on account of unexplained expenditure. This is because the entire payment of Rs. 11,22,000 made by the assessee is recorded in the books of accounts. Hence, the question of unexplained expenditure does not arise. In fact the assessing officer has disallowed 25% of the purchases. This would only increase the business income and is not an addition falling under section 69C. Wherever the legislature intended not to allow deduction under section 10A or 10AA or Chapter VI-A with reference to the addition made to the total income, it has been specifically so provided for and reference can be made to section 92C(4) where it is specifically provided that the arms length adjustment made by the assessing officer which enhances the total income shall not be entitled to deduction under these sections. Therefore, in the absence of any bar in section 10AA, the income increased due to the addition made by the assessing officer is eligible for deduction under section 10AA. In view of above, even if purchases made from M/s. Karishma Diamonds (P) Ltd. is held to be bogus, the assessing officer be directed to recompute the deduction under section 10AA after considering the trading addition of Rs. 2,80,500.
  4. The learned Departmental Representative is heard who has relied on the findings of the learned Commissioner (Appeals). It was further submitted that the circular referred by the learned Authorised Representative is in the context of deduction on enhanced profit under Chapter VI-A of the Act whereas in the present case, the assessee has claimed deduction under section 10AA which falls under Chapter II of the Act.
  5. We have heard the rival contentions and perused the materials available on record. The limited issue under consideration is whether the assessing officer is required to recompute the deduction under section 10AA after considering the addition of Rs. 2,80,500 so made by him and in that sense, the addition so made is revenue neutral. In this regard, we refer to theCBDT No. 37/2016, dated 2-11-2016 which reads as under :–

“Chapter VI-A of the Income Tax Act, 1961 (“the Act”), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the assessing officer may make certain disallowances, such a disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profit linked deduction under Chapter-VI-A.

  1. The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows :–

(i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non deduction of TDS under law, such disallowance would ultimately increase assessee’s profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the Courts in the following cases:–

— ITO-Ward 5(1) v. Keval Construction, Tax Appeal No. 443 of 2012, 10-12-2012, Gujarat High Court : 2013 TaxPub(DT) 1595 (Guj-HC)

— CIT IV, Nagpur v. Sunil Vishwambharnath Tiwari IT Appeal No. 2 of 2011, 11-9-2015, Bombay High Court : 2015 TaxPub(DT) 3661 (Bom-HC)

(ii) If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act. This view was taken by the court in the following case :–

— Pr. CIT, Kanpur v. Surya Merchants Ltd. IT Appeal No. 248 of 2015, 3-5-2016, Allahabad High Court : 2016 TaxPub(DT) 3567 (All-HC) 

The above views have been attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.

  1. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a) (ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.
  2. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned.”
  3. Though the aforesaid circular has been issued by the CBDT in the context of Chapter VI-A of the Act, the deduction under section 10AA is equally profit-link deduction though the fall under Chapter III of the Act and the legal position which has been accepted by the CBDT in the aforesaid circular will equally applies to the deductions claimed section 10AA of the Act. In the said circular, the CBDT has accepted the judgment of the various High Courts wherein it has been held that if the expenditure disallowed is related to business activity against which deduction has been claimed, the deduction needs to be allowed on enhanced profit worked out taking into consideration the disallowances so made by the assessing officer.
  4. The Co-ordinate Bench in case ofITO v. Anthelio Business Technologies (P) Ltd. (2017) 78 taxmann.com 203 (Mumbai) : 2017 TaxPub(DT) 0084 (Mum-Trib) in context of deduction under section 10B relying on the aforesaid CBDT Circular has taken a similar view and it would be relevant to refer to the findings of the Co-ordinate Bench which read as under :–

“7. We have heard the rival contentions and also perused the material available on record including the afore-stated CBDT circular. We have observed that the assessee is registered as a 100% export oriented unit under the Software Technology Park of India Scheme and the assessee is engaged in the business of provision of information technology enabled services and other back office support services. It is also an undisputed and admitted position between both the parties that the assessee is entitled for deduction under section 10B of the Act and the profits of the assessee are exempt from payment of taxes under section 10B of the Act. We have observed that the assessee has undertaken total turnover of Rs. 32,76,00,596 which is also export turnover of the assessee and the assessee has claimed deduction under section 10B of the Act of Rs. 7,60,34,821. Additions have been proposed under section 40(a)(i) of the Act at Rs. 1,49,73,455 by the assessing officer vide draft assessment order, the details of which are as under :–

Sl. No. Name of the party Amount (Rs)
1. Mark R Luciw 22,10,258
2. Garry O Neil 1,04,57,012
3. Bruce Sugaarman 21,70,629
4. John Blyzinkyl 1,35,556
TOTAL 1,49,73,455

The above expenses were incurred by the assessee towards ‘sales and marketing expenses’ from which the assessee has not deducted tax at source. Additions were proposed by the assessing officer of Rs. 1,49,73,455 in his draft assessment order which was restricted by the learned Dispute Resolution, Panel vide Order, dated 29-11-2014 to an amount of Rs. 1,35,556. With respect to the payments of Rs. 1,48,37,899, the Dispute Resolution, Panel directed to delete the same as the assessee has submitted the notarized copies of passports, which as per Dispute Resolution, Panel proved that three individuals at s. no 1 to 3 in above chart did not visit India during the relevant year. Hence, the Dispute Resolution, Panel directed that said payments will not be subject to withholding tax under section 195 of the Act and accordingly these payment cannot be disallowed under section 40(a)(i) of the Act.. The Dispute Resolution, Panel held that these payments to the tune of Rs. 1,48,73,455 are to be allowed, while, with respect to the 4th person Mr. John Blyzinskyj, the payment of Rs. 1,35,556 without deduction of tax at source had remained unsubstantiated and the learned Dispute Resolution, Panel confirmed the addition of Rs. 135,556 by issuing directions under section 144C(5) of the Act, which additions were confirmed by the assessing officer in his assessment Order, dated 17-12-2014 passed under section 143(3) of the Act read with section 144C(13) of the Act in pursuance of directions of Dispute Resolution, Panel.. We have observed that the CBDT has issued Circular No. No. 37/2016, dated 2-11-2016, which is reproduced below :–

“Section 80-IB, READ WITH SECTIONS 32, 40(a)(ia), 40A(3) & 43B, OF THE INCOME-TAX ACT, 1961–DEDUCTIONS–PROFITS AND GAINS FROM INDUSTRIAL UNDERTAKINGS OTHER THAN INFRASTRUCTURE DEVELOPMENT UNDERTAKINGS–CHAPTER VIA DEDUCTIONS ON ENHANCED PROFITS

CIRCULAR No. 37/2016 (F.No. 279/MISC./140/2015/ITJ), DATED 2-11-2016

Chapter VI-A of the Income Tax Act, 1961 (“the Act”), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the assessing officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A.

  1. The issue of the claim of higher deduction on the enhanced profits has been a contentious one.

However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows :–

(i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such

(ii) If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act. This view was taken by the court in the following case: disallowance would ultimately increase assessee’s profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases :–

— ITO–Ward 5(1) v. Keval Construction (2013) 33 taxmann.com 277 (Guj.) : 2013 TaxPub(DT) 1595 (Guj-HC) 

— CIT-IV, Nagpur v. Sunil Vishwambharnath Tiwari (2016) 63 taxmann.com 241 (Bom.) : 2015 TaxPub(DT) 3661 (Bom-HC)

— Pr. CIT, Kanpur v. Surya Merchants Ltd. (2016) 72 taxmann.com 16 (All.) : 2016 TaxPub(DT) 3567 (All-HC).

The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.

  1. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.
  2. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned.”

The sum, substance and spirit of the afore-stated circular is that the Revenue does not want to continue the litigation with respect to disallowance made by the Revenue under section 32,40(a)(ia), 40A(3), 43B etc. of the Act, which ultimately led to increase in profits which are otherwise eligible for profit linked deduction under Chapter VI-A of the Act.

The Board has accepted that the disallowance made under section 32, 40(a)(ia), 40A(3), 43B etc. of the Act and other disallowance out of specific expenditure related to the business activity may be made by Revenue which led to enhancement of profits against which Chapter-VIA profit linked deductions has been claimed and it is accepted that enhanced profit linked deduction under Chapter VI-A is admissible on the profits so enhanced by the said disallowance made by the Revenue. We find that the Revenue’s appeal and the assessee’s cross objection are duly covered by the CBDT circular although section 10B of the Act is not placed under Chapter VI-A of the Act rather the same is placed under Chapter-III of the Act but the deductions under section 10B of the Act are profit linked deductions and hence there is no reason why the same should not be allowed keeping in view the spirit of afore-stated CBDT circular as the deduction under section 10 B of the Act is also profit linked deduction. Similarly, it is stated in the circular about disallowance under section 40(a)(i) of the Act which is succeeded by the word ‘etc’ wherein the circular has stated as under :–

“In computing the profits and gains of a business activity, the assessing officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act.”

The use of the word ‘etc.’ clearly denotes that it will apply to similarly placed disallowances and disallowance under section 40(a)(i) of the Act is also disallowance due to non-deduction of withholding tax as is contemplated by section 40(a)(ia) of the Act.

Hence the CBDT circular will be applicable to deductions under section 10B of the Act as well to disallowance under section 40(a)(ia) of the Act as well. Hence the appeal of the Revenue is not sustainable/maintainable in view of afore-stated CBDT Circular, dated 2-11-2016 and we dismiss the appeal filed by the Revenue, while the C.O. filed by the assessee is allowed as the additions of Rs. 1,35,556 made by the assessing officer are w.r.t. disallowance under section 40(1)(ia) of the Act. In any case this issue is also covered by decision of Hon’ble jurisdictional Bombay High Court in favour of the assessee in Gem Plus Jewellery India Ltd.’s case (supra) as disallowance under section 40(a)(i) of the Act is a statutory disallowance and the hence enhanced profits due to disallowance shall be considered for deduction under section 10B of the Act. We order accordingly.”

  1. In the instant case, it is not in dispute that the assessee is eligible for claim of deduction under section 10AA of the Act. It is also not in dispute that the assessee has only one business undertaking which is engaged in the business of manufacturing and export of gold, silver and base material jewellery plain & studded with precious & semi precious stones situated at Sitapura Industrial Area, Jaipur and the total turnover of the business is equivalent to the total turnover of the undertaking as well as the export turnover. The expenditure to the extent of 25% of purchases where are held as non-genuine and disallowed by the assessing officer relates to the same business activity of manufacture and export in respect of which assessee is held eligible for deduction under section 10AA of the Act. The deduction under section 10AA therefore needs to be allowed on the enhanced profits after taking into consideration the disallowance of Rs. 2,80,500 in light of accepted legal position by the CBDT and following the consistent position taken by the Co-ordinate Benches. The assessing officer is therefore directed to recompute the deduction under section 10AA taking into consideration the addition of Rs. 2,80,500. In the result, the Ground No. 5 of the assessee’s appeal is allowed.
  2. In view of the above, we find that rest all ground taken by the assessee have become academic and the same are thus dismissed as infructuous.
  3. In the result, appeal of the assessee is disposed off in light of above directions.

ITA No. 191/JP/2019

  1. InITA No. 191/JP/2019 for assessment year 2014-15, the assessee has taken the following grounds of appeal :–

“1. The learned Commissioner (Appeals) has erred on facts and in law in confirming the disallowance of employees contribution to PF of Rs. 2,56,714 by invoking provisions of section 2(24)(x) read with section 36(1)(va).

  1. The learned Commissioner (Appeals) has erred on facts and in law in confirming the disallowance of deduction of Rs. 2,87,694 (50% of Rs. 5,75,388) under section 10AA of Income Tax Act by considering the receipt on account of freight, clearing & insurance charges as income from other sources as against business income.
  2. The learned Commissioner (Appeals) has erred on facts and in law in not directing the assessing officer to recompute the deduction under section 10AA on the increased business income assessed by assessing officer on account of disallowance of PF contribution ignoring theCBDT Circular No. 37/2016, dated 02-11-2016.”
  3. Regarding Ground No. 1, it is not disputed that the assessee has deposited the employee’s contributions towards PF before the due date of filing of the return of income. Hence, the matter is squarely covered by the decision of Hon’ble Rajasthan High Court in case of CIT v. State Bank of Bikaner and Jaipur and the ground of appeal no. 1 is thus allowed. Ground No. 3 thus becomes infructious and is dismissed.
  4. In Ground No. 2, the assessee has challenged the disallowance of deduction under section 10AA of the Act by considering the receipt on account of freight, clearing & insurance charges as income from other sources as against business income.
  5. In this regard, the learned Authorised Representative submitted that in the profit & loss account, the assessee has declared export sales of Rs. 30,20,77,213. It includes excess recovery of freight, clearing & insurance expenses of Rs. 5,75,388. This amount is net of the freight recovered from the customers on export of goods Rs. 24,98,290 and the freight expenditure incurred at Rs. 19,22,902.The assessee has claimed deduction under section 10AA at Rs. 4,08,51,049/(in the return Rs. 4,08,51,804) calculated as under :–
Export Sales Rs. 30,20,77,213
Less:-Freight, clearing & insurance Rs. 5,75,387
Less:-Exchange Rate Difference Rs. 69,92,951
Net Export Sales Rs. 29,45,08,874
Local Sales Rs. 2,17,299
Total Turnover Rs. 29,47,26,173
Total Profits derived by the undertaking Rs. 8,17,62,382
Deduction under section 10AA Rs. 4,08,51,049
(8,17,62,382/29,47,26,173*29,45,08,874)*50%
  1. It was submitted that the assessing officer observed that assessee has shown an amount of Rs. 5,75,388 on account of freight, clearing & insurance expenses as part of export sales and claimed deduction under section 10AA of the Act. However, as per the definition of export turnover given in Explanation 1 to section 10AA, freight and insurance charges is specifically excluded from the definition.

Accordingly, he held that freight, clearing & insurance expenses is assessable as income from other sources and disallowed deduction under section 10AA at Rs. 2,87,694 (50% of Rs. 5,75,338). The learned Commissioner (Appeals) confirmed the disallowance by upholding the findings of assessing officer.

  1. It was further submitted that excess of freight, clearing & insurance receipt over the expenses is a business receipt as it is directly linked to the export. Hence, it is assessable as business income and not income from other sources. However, such receipt is not a part of export turnover as per Explanation 1(i) of section 10AA and accordingly, assessee himself has excluded the same in working out the export turnover but such receipt remains a part of the business income. The lower authorities by referring to the above explanation has wrongly inferred that such receipt is not a part of business income whereas the explanation only provides such receipt is not a part of export turnover. It nowhere states that such receipt is not part of business income. The Hon’ble Supreme Court in case ofPCIT v. Vedansh Jewels (P) Ltd. (2018) 258 Taxman 154 (SC) : 2018 TaxPub(DT) 5855 (SC) dismissed the SLP filed by the department against High Court order where High Court upheld the Tribunal’s order that surplus amount in freight export account and in insurance export account was derived from export activities eligible for deduction under section 10AA. Hence, the assessee has correctly claimed the deduction under section 10AA.
  2. The learned Departmental Representative is heard who has relied on the findings of the lower authorities.
  3. We have heard the rival contentions and pursued the material available on record. In the instant case, the assessee has incurred freight, clearing and insurance expenses of Rs. 19,22,902 in respect of export of goods and has recovered an amount of Rs. 24,98,290 from its customers, thus there is an excess recovery of Rs. 5,75,388 towards such expenses and such recovery has been reflected in the profit/loss account. In its computation of income for claiming deduction under section 10AA, the assessee has excluded such recovery of expenses from the export turnover as well as total turnover.

Therefore, the limited issue is regarding whether such excess recovery of freight and other expense in respect of export of goods is derived from business and the eligible for deduction under section 10AA of the Act. We find the issue is squarely covered by the decision of the Hon’ble Rajasthan High Court in case of Pr. CIT, Jaipur v. Vedansh Jewels (P) Ltd. which the question of law admitted for consideration was as follows :–

“(i) whether on the facts and circumstances of the case, the ITAT was justified in law in holding that surplus amount in the freight export account and in the insurance export of Rs. 1830488 is derived from export activities and on those accounts deduction under section 10AA is allowable.”

And in this regard, the Honb’le High Court has affirmed the findings of the Tribunal and the relevant findings are reproduced as under :–

“6.1 Briefly the facts of the case are that the learned assessing officer disallowed the deduction under section 10AA of Rs. 20,17,500 for assessment year 2010-11 in respect of the amount comprising surplus of freight, Insurance charges and Misc. Balances w/off on the allegation that the same constituted indirect income not derived from export of goods.

6.8 The next question that arises for consideration is the definition of export turnover which has been defined in explanation 1 to section 10AA of the Act and whether the same would have any effect in the instant case. The term “export turnover ” has been defined as consideration in respect of export by the undertaking, being article or thing received in or brought into India by the assessee but doesn’t include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India. In our view, the same may not have any effect as where the freight or insurance charges are reduced from the export turnover, the same have to be reduced from the total turnover as well. The same has been the consistent stand of the various Coordinate Benches.

6.9 In light of above discussions and in the entirety of facts and circumstances of the case, we do not find any infirmity in the order of the learned Commissioner (Appeals) and confirm the allowance of exemption under section 10AA in respect of freight and insurance excess receipts. On parity of reason, the same position would hold good for misc. balance written off. In the result, the ground No. 1 of the revenue is dismissed.”

Respectfully following the decision of the Hon’ble Rajasthan High Court, the ground of appeal is allowed.

  1. In the result, appeal of the assessee is disposed off in light of above directions.




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