COMMISSIONER OF INCOME TAX Vs. PRAVIN M MEHTA

JUDGEMENT

(1.) TWO points arise for determination in this appeal. Firstly, whether the assessee was entitled to claim deduction under S. 80HHC on receipt of labour commission of Rs. 46,952. Secondly, whether the Department was right in taxing the export reserves withdrawn from the business and transferred to partner's capital account.

(2.) ON the first point, it may be mentioned that in view of our judgment in the case of the CIT vs. Kantilal Chhotalal, Mumbai decided on 31st July, 2000 vide ITA No. 533 of 2000 [reported at (2000) 163 CTR (Bom) 476], we hold that the labour commission/indenting commission was not includible in business profits in the formula : business profits X export turnover/total turnover. Accordingly, the issue is answered in favour of the Department and against the assessee.

(3.) ON 4th Oct., 1990, the assessee filed its return of income for the asst. year 1990 91. The assessee was engaged in the business of export of diamonds. The assessee also had local sales. The assessee firm had created reserve during asst. year 1987 88 to Rs. 65,000. Similarly, the assessee created reserve in asst. year 1988 89 of Rs. 1 lakh. However, during asst. year 1990 91, the AO found that the assessee had transferred the said export reserves of Rs. 1,65,000 to partner's capital account. Vide letter dt. 22nd Jan., 1993, the assessee claimed that it had utilised the export reserves for business proposes during the asst. year 1987 88 upto asst. year 1990 91 and transferred the reserves to the partner's capital account only on 31st March, 1990. It was further pointed out that the export during the asst. year 1987 88 upto 1991 were much more than the reserves. It was contended that under the Act, there was no provision for taxing the export reserves if they are withdrawn from business. The AO did not accept the contention. The AO came to the conclusion that under S. 80HHC as it stood at the relevant time, the assessee was required to debit the P&L a/c of the previous year in respect of which deduction is to be allowed and credited to reserve account to be utilised for the purposes of the business of the assessee. According to the AO, on transfer of export reserves to the partner's capital account, the proviso to S. 80HHC stood violated. Accordingly, the above amount of Rs. 1.65 lakhs was taxed as income of the assessee for the asst. year 1990 91. Being aggrieved, the assessee went in appeal to the first appellate authority which came to the conclusion that under S. 80HHC, as it stood at the relevant time, the only requirement was that the funds shall be generally used for the purposes of business; that the funds remained with the assessee during the asst. yrs. 1987 88, 1988 89 and 1989 90; that there was no mandate in S. 80HHC to retain the reserve account permanently. Hence, there was no violation of the proviso. Hence, the appeal was allowed. Being aggrieved the Department carried the matter in appeal to the Tribunal. The Tribunal found that w.e.f. 1st April, 1989, the said section had undergone a complete change. That even the requirement of creating the reserve came to be dispensed with from 1st April, 1989. That up to 1st April, 1989, the export reserves remained with the firm. That unlike S. 80HHD, there was no provision for bringing the said amount to tax. That at best, the allowance made in the earlier years became wrongful allowance but for that also there was no provision in the Act as in the case of other sections like S. 32A(5)(b) r/w S. 155(4A); S. 34 (3) r/w S. 155(5); S. 33A(3) r/w S. 155(5A), etc. Accordingly, the appeal was dismissed.