CIT vs Henna Zebraat

These appeals arise out of the orders passed by the Income Tax Appellate Tribunal Lucknow Bench, Lucknow dated 16-1-2009, in respect of assessment years. The department has raised the following substantial questions of laws to be considered by the High Court:-

Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in coming to the conclusion that the assessee is entitled to exemption u/s. 10A/ 10B of the Act on the basis of the judgment of the Hon''ble Supreme Court in the case of J.B. Boda and Co. Pvt. Ltd. Vs. Central Board of Direct Taxes, New Delhi, despite the fact that the said judgment was rendered in the context of section 80O of the Act as it stood in the A/Ys 1984-85 & 1985-86?

Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in mis-interpreting the provisions of sub-section (3) of section 10A/ 10B of the Act, which makes it mandatory to bring in India all the sale proceeds of articles or things in convertible foreign exchange with the stipulated period?

Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in coming to the conclusion that the provisions of section 80O are parallel or pari materia to the provisions of sections 10A & 10B of the Act, despite the fact that sub-section (3) of section 10A/ 10B deal with sale proceeds of article or thing while section 80O deals with income?

The facts of the leading case (ITA No. 512 of 2009), as disclosed in paras 3 and 4 of the order of the Appellate Tribunal, are as stated below:-

In the year under consideration, the assessee imported 14.1086 kgs. of gold bars on a total of thirteen invoices received from three foreign parties namely (i) Hayatt Jewellers, (ii) Dhakan Jewellers and (iii) Evershine Jewellery of Dubai. The total value of import was shown at 17,02,589 US Dollars and accordingly, after converting into Indian rupees, a sum of Rs. 7,85,71,961/- was debited as purchase. However. in respect of sales, assessee shown export of sale of 151.293 kgs. of gold jewellery through a total ten invoices valuing at 19,99,583 US Dollars resulting into a credit of 9,12,73,602/- under the head sales. After adjusting administrative expenses and crediting other income, a net profit of Rs. 1,02,68,919/- was shown as per audited accounts. After considering depreciation and interest, income of Rs. 96,32,570/- was worked out as reflected on pages 4 & 5 of the order of the Assessing Officer.

The Assessing Officer referred to section 10A and held that provisions of sub-section (3) of section 10A are not complied with by the assessee according to which assessee is required to repatriate and credit entire sale proceeds in a bank account. According to the Assessing Officer, whereas total sale proceeds amounted to Rs. 9,12,73,602/- assessee has shown a credit of only Rs. 1,27,65,693/- as reflected on page 7 of the Assessing Officers order. The case of the assessee was that it credited net proceeds for which exemption u/s. 10A was claimed whereas the case of Assessing Officer is that the assessee ought to have credited in Indian Rupees entire sale proceeds of 9.12 crores. The assessee referred to the decision of Hon''ble Supreme Court in the case of J.B. Boda and Co. Pvt. Ltd. Vs. Central Board of Direct Taxes, New Delhi, , according to which, if net proceeds are received in foreign exchange and credited then assessee would not be disentitled from exemption. The Assessing Officer, however, did not agree with the above decision and held that facts in JB Boda & Co. (P) Ltds case are different therefore, it will not be applicable to the facts of the present case. Accordingly he denied exemption to the assessee u/s. 10A as according to him entire sale proceeds have not been brought into India and have not been credited in the bank account.

In para 8 of the order of the Tribunal, it observed as follows:-

... The undisputed facts are that assessee had imported gold bars without incurring any expenditure in foreign exchange. It was import on credit. It was converted into gold ornaments and exported. The assessee received back net amount and credited it into the bank account and claimed exemption on the income computed on that basis...

The Tribunal relied upon judgment of the Supreme Court in J.B. Boda and Co. Pvt. Ltd. Vs. Central Board of Direct Taxes, New Delhi, , in observing that if assessee receives net proceeds in foreign exchange then the deduction u/s 10A of the income tax Act, 1961, for promotion of exports, should not be denied.

Sri. A.N. Mahajan, learned Counsel for the appellant submits that in J.B. Boda & Co. (P.) Ltds case (supra), the Supreme Court was concerned with provisions of section 80O of the income tax Act 1961, which provides deduction in respect or royalties etc., from certain foreign enterprises. He submits that in the present case, the deductions of the profits and gains derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year, relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may, shall be allowed from the total income of assessment. The deductions, he submits, depend upon the provisions of sub-section (3) of section 10A of the Act.

Sub-section (3) of section 10A of the Act and its explanation provides that:-

(3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous, or within such further period as the competent authority may allow in this behalf.

''Explanation 1 - For the purpose of this sub-section, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorized under any law for the time being in force for regulating payments and dealings in foreign exchange.

''Explanation 2 - the sale proceeds referred to in this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained or the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.

It is not denied and rather admitted that the assessee was importing gold bars, without incurring any expenses on foreign exchange, which was imported on credit. The gold bars brought into the country were got converted into jewellery, and exported thereafter against such credit. It was not a two way transaction. The assessee purchased gold bars from Dubai, on credit and exported it, after they were converted into as jewellery. The amount due and payable in US dollars to the Dubai parties in respect of import of gold bars from them, was deducted from the gross export of sale proceeds, to arrive at the balance amount receivable by the assessee from the Dubai parties.

We may quote here the principle of law, for our benefit, laid down by the Supreme Court in J.B. Boda (P.) Ltds case (supra) u/s 80O of the Act, which in our opinion is equally applicable to section 10A of the Act as follows:-

The facts brought out in this case are clear as to how the remittance to the foreign reinsurance company is made through the Reserve Bank of India in conformity with the agreement between the appellant and the foreign reinsurers, and that the remittance statement filed along with annexure "A" which evidences that the amount due to the foreign reinsurers as also the brokerage due to the appellant and the balance due to the foreign reinsurers is remitted (and expressed so) in dollars. It is common ground that the entire transaction effected through the medium of the Reserve Bank of India is expressed in foreign exchange and in effect the retention of the fee due to the appellant is in dollars for the services rendered. This, according to us, is receipt of income in convertible foreign exchange. It seems to us that a "two-way traffic" is unnecessary. To insist on a formal remittance to the foreign reinsurers first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a meaningless ritual, on the facts of this case. On a perusal of the nature of the transaction and in particular the statement of remittance filed in the Reserve Bank of India regarding the transaction, we are unable to uphold the view of the respondent that the income under the agreement is generated in India or that the amount is one not received in convertible foreign exchange. We are of the view that the income is received in India in convertible foreign exchange, in a lawful and permissible manner through the premier institution concerned with the subject-matter the Reserve Bank of India. In this view, we hold that the proceedings of the Central Board of Direct Taxes dated 11-3-1986, declining to approve the agreements of the appellant with Sedgwick Offshore Resources Ltd., London, for the purposes of section 80O of the income tax Act, are improper and illegal. We declare so. We direct the respondent to process the agreements in the light of the principles laid down by us hereinabove. The appeal is allowed. There shall be no order as to costs

The Tribunal did not commit any error in finding that the principle of laid down in J.B. Boda & Co. (P.) Ltds case (supra) will be applicable, in the deduction of profits and gains from the business u/s 10A of the Act. We further find that the words sale proceeds in section 10A would, in the context also mean, net proceeds, if the goods were purchased from foreign buyers on credit. The Explanations 1 and 2 to sub-section (3) is not attracted in the present case.

The distinction sought to be drawn by Sri. A.N. Mahajan on the basis of perks in the case of section 80O and Section 10A of the Act is not relevant as principle for allowing deductions in both the sections remain the same.

In view of the above discussion, we find that the question of law raised by the appellant-department are covered by decision of the Supreme Court in J.B. Boda & Co. (P.) Ltd. (supra). All the income tax Appeals are dismissed.