Income Tax Appellate Tribunal - Jaipur
Vijay Industries vs Income Tax Officer on 29 June, 2007
Equivalent citations: (2007)112TTJ(JP)353
ORDER
B.P. Jain, A.M.
1. Both these appeals are the cross-appeals filed against the order of the learned CIT(A), dt. 31st Jan., 2005 for the asst. yr. 2001-02.
2. In ground Nos. 1.1 and 1.2, the assessee has prayed as under:
1.1 Rs. 14,36,198 : The learned CIT(A) erred in law as well as on the facts of the case in confirming the application of provisions of Section 145. The provisions so applied and confirmed by the learned CIT(A) being contrary to the provisions of law and facts, the same may kindly be quashed. Consequently, the trading addition of Rs. 14,36,198 may also kindly be deleted in full.
Alternatively and without prejudice to above 1.2 The learned CIT(A) further erred in law as well as on the facts of the case in applying the G.P. rate of 22.5 per cent as against 21.65 per cent declared by the appellant and in partly sustaining the additions upto Rs. 14,36,198. The application of G.P. rate so partly confirmed is totally contrary to the provisions of law and facts on the record and hence the addition of Rs. 14,36,198 may kindly be deleted in full.
3. The solitary ground of the Revenue is that the learned CIT(A) has erred in deleting the trading addition of Rs. 80,97,842 by estimating G.P. rate of 22.5 per cent as against G.P. rate applied by the AO at 27.3 per cent.
4. We have heard the parties. The brief facts of the case are that the assessee is a partnership firm engaged in export of large types of PVC wires, which have been manufactured by the assessee. A comparative chart of the total turnover, gross profit and net profit for the year and immediately preceding years is as under:
Asst. year Total turnover Total G.P. G.P. % Total N:P. 1999-2000 12,16,00,549 4,05,14.550.58 33.31% 3,71,80,058 2000-2001 12,37,16,134 3,74,90,793 30.30% 3,35,00,407 2001-2002 16,87,06,712 3,65,22,892 22.00% 3,13,43,379
The AO observed that in its production records, the receipt of raw material i.e. copper, PVC compound and G I Wire is shown in weight whereas the finished goods are accounted for in terms of length. Therefore, the reconciliation between the consumption and production is not possible. The assessee submitted the explanation and the details on the basis of the raw material for different batches. The AO observed that the production was different for different batches and also different for similar batches in the case of sister-concern, M/s. Emkay Exports. The assessee vide para 2.2 at pp. 4 and 5 of AO's order submitted the explanation vide reply dt. 2Sth March, 2004 and produced the relevant records on 30th March, 2004 which is reproduced as under:
(A) Complete quantity tally is available on the basis of stock register, which was duly audited by auditors. Complete details of raw material consumption and production were furnished.
(B) It is wrong to say that reconciliation between production and sale is not possible as assessee has maintained raw material in kilogram while finished goods are in terms of length. The order of the assessee always comes in length as no other denomination is provided. However, assessee has provided details of consumption of raw material per kilometer wire.
(C) There is no specific formula for preparing specific type of finished goods. The assessee has always prepared the goods on the basis of requirement of the buyer and specifications provided by him.
(D) With regard to the difference in consumption of raw material for some specific cables by assessee and its sister-concern, Emkay Exports, it was explained that there were some mistakes in submission of details by them and after rectification of such mistake there is hardly any difference in raw material consumption for two concerns for items mentioned in the show-cause notice. It has submitted a chart after rectification of mistakes showing real consumption of raw material for items mentioned in the above show-cause notice, which is enclosed as Annex. B to this order.
(E) With regard to the variation of raw material consumption for production of some item as per assessee's own' record, it was explained that PVC coating is as per desire of customer, hence it may vary even in the same item. This is a matter of technicalities as well as practice of trade.
(F) With regard to variation in raw material consumption compared to the last previous year, it was explained that process of import of raw material, its consumption and sale is strictly under observation of customs authorities, hence no leakage is possible. No standard has been applied for input and output for taking licenses for consumption of raw material, which is on the basis of self declaration and depends upon order to order as per requirement of buyer.
Accordingly, it was claimed that merely on the basis of some technicalities books of account cannot be rejected.
The AO was not satisfied with the explanation of the assessee for the reason that the production of electric cable is a technical and standard process where the consumption of copper, for one Kilometer of cable even in weight will be the same. The power load for which a particular cable is to be used decides the thickness of the copper wire and accordingly insulation on the cable of a particular typo will be the same. The Exim policy of Government of India provides input; output norms for duty exemption schemes is based on input output norms. The AO relied upon the production of same type, in the sister-concern M/s. Emkay Exports, and accordingly pointed out certain deficiencies in the consumption to production. The AO relied upon the decision of Hon'ble Calcutta High Court in the case of Havara Trading Co. (P) Ltd. v. CIT where it has been held that profits of assessee could not be properly determined from the method of accounting kept by the assessee in relation to the quantity of raw materials received for manufacture and the volume of finished products because by the receipts of raw material were shown by weight, the finished goods were accounted for not in weight but in terms of running feet, so that any reconciliation between production and sales and closing stock was not possible. The AO vide para G of his order observed that assessee's books of account are incomplete and incorrect and true profits oarmot be deduced from them and accordingly they are rejected. Vide para 2.4 of his order, the AO looking to the past history of the assessee, where the assessee had declared 30.3 per cent gross profit as against 22 per cent declared by the assessee; during the year, issued a show-cause for declaring low gross profit during the impugned year. The explanation of the assessee vide pp. 9 and 1.0 of AO's order is as under:
(a) The assessee is mainly manufacturer and exporter of PVC insulated armored/unarmored control purpose copper cable. All the sales and purchases are fully vouched. The industry and technology adopted is old. Hence, involvement of labour as well as consumption of electricity is more. Hence, in comparison to other concern, the profitability is less.
(b) Details of closing stock, opening stock, quantitative figures of raw material consumed, etc. have also been filed and supported with stock register.
(c) The assessee has imported raw material mainly copper more in comparison to other concern. The copper rates have been increased about 15 per cent in comparison to earlier years.
(d) The import expenses have also been increased about 83 per cent from the last year, as almost all the import purchases in this concern.
(e) The rates of PVC compound have also been increased in comparison to earlier year. However, assessee has to sell the goods on old rates about 6 to 7 months on the almost orders took time of about 7 months on materialisation of orders.
(f) The import and export of assessee is on strict supervision and control of customs authorities.
(g) The cost of copper is also controlled by LME (London Metal Exchange). Quotations of rate of copper at London Metal Exchange were also submitted to prove as there was an increasing trend in the value of copper.
The AO was not satisfied with the explanation of the assessee and observed that at the most a fall in gross profit by about 3 per cent may be justified because of the reasons mentioned* by the assessee hereinbefore. Accordingly, the AO estimated the gross profit at 27.3 per cent on a turnover of Rs. 16,87,06,712 at Rs. 4,60,56,932 as against gross profit declared by the assessee at Rs. 3,65,22,892, thus making a trading addition of Rs. 95,34,040. The learned C1T(A) confirmed the rejection of books of account vide para 3.4 of his order and by accepting the explanation of the assessee, directed the AO to apply a G.P. rate of 22.5 per cent on the declared turnover by the assessee, thus giving a relief of Rs. 80,97,842 and sustaining an addition of Rs. 14,36,198.
5. We have considered the facts of the case. The learned Authorised Representative at the outset had challenged the rejection of books of account by the AO and argued that the assessee is a 100 per cent exporter and has been maintaining complete books of account and the other subsidiary records in a comprehensive manner. Complete quantitative record is maintained by the assessee which shows the opening stock of raw material in terms of quantity and value and similarly the purchases, the consumption and the balance for each transaction. The records so maintained clearly show the quantity of consumption vis-a-vis the production (paper book 23-33). Due to the nature of the activities, carried out by the assessee, if the input is described in a different unit than the output, then the comparison has to be made to ascertain the production with reference to certain standards/norms, if any, or on any other acceptable basis. In this regard, the learned Authorised Representative, Shri Mahendra Gargieya, advocate, argued that the AO has referred to the norms fixed under the import and export policy of Govt. of India. Such reference or comparison by the AO was not at all required for the reason that the exporter in the present case has to pass through various tough tests for obtaining the advance license for importing duty-free raw material wherein the aspect of consumption/production is deeply examined. The assessee has to apply for an advance license under duty exemption scheme provided under the Exim Policy, 1997-2002 so that raw material being used could be imported without payment of any duty thereon. A detailed and technical note vide letter dt. 18th March, 2004 was submitted before the AO in which:
(i) The exporter (assessee) has to give an undertaking that the consumption of raw material will be governed by the norms fixed by Special Advance Licensing Committee (SALC) and it shall be consuming the imported raw material in accordance with the Standard Input Output norms fixed by the SALC.
(ii) The requisition of the imported duty-free raw material under the said schemes and policies, has to be got verified by a chartered engineer, notably who is not an employee of the assessee but is on the panel maintained by the JDGFT.
(iii) In the said application, the exporter (assessee) has to give minute details, of its requirement of all the three imported duty-free raw materials on the basis of one kilometre output. A complete set of such an application along with enclosures and certificate by the chartered engineers, is available in "the paper book 9-14.
(iv) The JDGFT on the basis of such an application and after evaluating the same, permits the assessee to import such items, who is bound to consume for its own production and then to finally export.
(v) To ensure that such a duty-free imported raw material is not sold out in the market, a separate duty exemption entitlement certificate (DEEC) is issued by the JDGFT for the purposes of import and export as well.
(vi) Notably, every entry of the imported duty-free raw material is made and all exports made against such an import, are further entered in these books.
(vii) Further notably, these entries are made by a separate and independent Government agency, i.e. customs authorities under the Central Excise and Customs Department of the Ministry of Finance.
The learned Authorised Representative further argued that the norms and standards of the consumption of raw material are fixed in advance by the concerned authorities and the assessee is bound to consume the raw material in the same ratio as permitted and licensed by the concerned authorities. The AO has not pointed out any specific defects in the books of account and the subsidiary records maintained by the assessee which were all produced before the AO and the AO vide para 1 at p. 1 of his order has admitted the same. The AO cannot allege that books of account are incomplete since Section 44AA r/w Rule 6F has not prescribed any such record to be maintained for an exporter of the type of the assessee.
6. We agree with the arguments of learned Authorised Representative that the assessee has to apply for an advance license under Duty Exemption Scheme provided under the Exim policy so that the raw material being used could be imported without payment of any duty thereon. The assessee consumed the raw material according to the norms fixed by special advance licensing committee which is verified by a chartered engineer who is not the employee of the assessee but who is a person of the panel maintained by the JDGFT. To ensure that such a duty-free imported raw material is not sold out in the market, a separate duty exemption entitlement certificate is issued by the JDGFT for the purpose of import and export as well. The assessee is a 100 per cent exporter and does not have any local sales. The AO has not brought on record any possibility of making the local sales by the assessee of the raw material or the finished goods. Therefore, the record maintained by the assessee cannot be doubted merely on the basis that the consumption is made in weight and production is made in length, without pointing out'any specific defects in the books of account of the assessee when the assessee is maintaining complete quantitative as well as qualitative records which are continuously checked by the Central Excise & Customs Department. Therefore, the AO is not justified in rejecting the books of account of the assessee and action of the learned CIT(A) in confirming the rejection of the books of account is reversed.
7. On merits, the learned Authorised Representative argued that there has been a sharp increase in 15 per cent in the prices of copper, which is a major part of the direct cost. It is submitted that whereas last year the prices of copper ranged between 1400-1450 US $ per M.T., this year the same increased to 1800-1850 US $ per M.T. To support this contention, detailed London Metal Exchange (LME) price charts were also submitted (paper book 15-18) before the lower authorities. On the other hand, there has not been a corresponding increase in the selling prices to recoup this extra burden for the reason that purchases made earlier were consumed towards the old orders in hand. Being bound by the predetermined selling price, the assessee was not in a position to make a further increase on this ground, in the absence of any escalation clause. On this issue, the AO has cited certain examples at p. 11(e) to the effect that there has been increase in the prices of copper by roughly about 35 per cent, 25 per cent and 28.3 per cent and therefore, rejected the assessee's contention. However, the AO has not been fair inasmuch as the assessee filed various examples to support but were not considered. It is submitted that three instances cited by the AO were the only examples on which he could lay hands after deeply investigating the complete record for a long period of two years. However, in all rest of the items, the prices of raw material were found to be higher whereas, the sales bills were on a lower side for the reason that old orders already in hand at a predetermined prices were also executed. As against this, in the three cited cases, the higher sales prices from last year were for the reasons that the fresh orders, which were obtained during the year and were executed also during the same very year. The assessee accordingly filed a further detailed comparative chart (paper book 129-130) showing reduced sale price as compared to the preceding year. Also, a detailed submission was made to the AO on this aspect vide letter dt. 21st March, 2004 (paper book 123-124). The AO however, totally ignored the same. Thus, the allegation of the AO is absolutely incorrect and ignoring the submission made before him. The lower authorities must have accepted that 15 per cent increase in copper prices certainly contributed to a substantial reduction of gross profit of the year.
8. The second reason was the increase in the cost of import expenditure by about 0.83 per cent which' was also ignored. The main reason of the decrease in the G.P. rate this year was the duty difference of Rs. 98,78,483 which was not at all considered by the AO although complete details (paper book 129-130) relating thereto, were admittedly available before the AO. The matter relating to duty difference is basically because of the fact that whereas on the purchases of the copper and other raw material from local market, the buyer is required to make payment of heavy import duty, however under the Exim Policy, 1997 to 2000, an assessee exporter was entitled to apply for an advance license for import of duty free raw material outside India, for its own consumption. As submitted earlier, a detailed application has to be made for this purpose which also contains a statement which shows the amount of raw materia] to be imported vis-a-vis the rate of duty and the amount of duty, which the importer assessee has to save thereon. However, while executing the export orders in hand in a given year, the exporter has to necessarily purchase the raw material from the local market by making payment of duty. This is for the reason that the entitlement to import duty-free raw material accrues to the exporter only when it has already manufactured and shipped the goods and on that basis, the entitlement is computed (for the reason that his entitlement to get duty-free raw material accrues only when he has already manufactured end shipped the goods). On the other hand, the duty-free raw material would be available to him only at a later stage, the value of such entitlement (if partly used in the same year or if remains utilized), is carried forward to the next year. In the next year, the opening balance of duty difference indicates the availability of the duty-free raw material. Thus, this process goes on. The difference between the opening balance and the closing balance Rs. 98,78,483 (Rs. 2,99,98,616 and Rs. 2,01,20,133 respectively) is the cost, which the assessee exporter finally suffered [paper book 128, paper book 262 at p. 8 of learned CIT(A)]. Thus, it cannot be disputed that such a difference is a part of the direct cost. Since there is a variation in the rates of import duties, there is always difference and consequential also, there will have to be a difference in the G.P. rate.
9. The Department has agreed in principle with regard to our claim that due to duty difference which was a part of direct cost and because of this reason the gross profit is coming down not only in this year but also in later years and has already assessed and allowed our claim on this ground in later years, even in the scrutiny assessment framed under Section 143(3), for asst. yr. 2004-05, wherein gross profit declared by the assessee at 7.81 per cent (paper book 256).
10. In the case of Emkay Exports also on exactly similar facts, addition made stood deleted. We refer assessment order for asst. yr. 2003-04 wherein gross profit declared by the assessee at 20.74 per cent though enhanced by the AO to 30 per cent but the learned CIT(A) deleted the addition accepting the same plea (paper book 255). There apart, it is also submitted that duty difference does not always result into a loss but it has also resulted into a profit in the past and in the later years. The assessee has rather shown more gross profit on these very facts. A chart (paper book 129) supports this contention. However, because rate of duty is consistently coming down in India, now such duty difference is resulting into a constant decrease of G.P. rate and ultimately shall rather result in a loss. We refer a comparative gross profit chart (paper book 255). The learned CIT(A) however did not fully appreciate these facts and contentions. The entire trading addition, therefore,' must have been deleted by the learned CIT(A). The appeal of the Revenue be dismissed.
11. We are convinced with the arguments made by the learned Authorised Representative that there was increase in the prices of the copper during the impugned year which is a major part of direct cost whereas there has not been corresponding increase in the selling prices. There was an increase in the cost of export expenditure. The main reason for decrease in G.P. rate was duty difference of Rs. 98,78,483 which is the direct cost which has been borne by the asscssee during the impugned year. The AC) has relied upon the addition made in the case of M/s. Emkay Exports, the sister-concern, but the additions so made have been deleted by the learned CIT(A) and by the Tribunal in ITA Nos. 250/Jp/2005 and 275/Jp/2005 of even date. Therefore, in such circumstances and facts of the case, no trading addition is called for by any of the authorities below. Therefore, the addition made by the AO is directed to be" deleted on this account. Thus, ground Nos. 1.1 and 1.2 of the assessee are allowed and solitary ground of the Revenue is dismissed.
12. In ground Nos. 2.1 and 2.2, the assessee has prayed as under:
2.1 Rs. 4,38,342 the learned CIT(A) also erred in law as well as on the facts of the case in confirming the treatment given by the AO to the interest on FDRs as 'Income from other sources' as against 'Income from business or profession' as declared by the appellant. The treatment given by the authorities below and the assessment of such interest income other than as business income, is totally contrary to the provisions of law and facts on the record and hence, interest, income of Rs. 4,38,342 kindly be held assessable as 'Business income and deduction under Section 80HHC be allowed accordingly.
2.2 Alternatively and without prejudice to above The learned CIT(A) also erred in law as well as on the facts of the case in not even allowing the benefit of netting against the payment of interest of Rs. 13,16,634 to the bank hence the same may kindly be directed now.
13. The brief facts of the case are that the assessee has received interest on FDRs amounting to Rs. 4,84,342 and assessee has paid interest amounting to Rs. 13,16,634 on the loans taken from the bank. The assessee has claimed the net interest expenses of Rs. 8,78,292. The AO treated the interest on FDRs amounting to Rs. 4,84,342 as income from other sources as against income from business claimed by the assessee and did not allow the netting of the interest. This action of the AO was confirmed by the learned CIT(A).
14. We have considered the facts of the case. The learned Authorised Representative had strongly argued that the income from interest is a business income since the fixed deposits were kept as a margin money to avail on overdraft facility from the bank and such overdraft facility was utilized directly in the export business which would not have been possible had the assessee not placed the FDRs as a margin money and therefore, such interest should be treated as a part and parcel of business income. The learned Authorised Representative relied upon various case law which have been taken into consideration. The learned Department Representative, on the other side, supported the orders of the authorities below.
15. With the appreciation of facts, we are of the view that Section 56(1). covers income of every kind which is not to be excluded from the total income under this Act, shall be chargeable to income-tax under the head 'Income from other sources', if it is not chargeable to income-tax under any of the heads specified in Section 14, items A to E. As per Section 57(iii), the income chargeable under the head 'Income form other sources' shall be computed after making deduction i.e. any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. Therefore, the expenditure paid on loans raised for the purpose of business cannot be adjusted against the interest income since the interest paid is not for the purpose of earning interest but as a business expenditure on-the loans raised for the purpose of carrying of business and hence it is an expenditure allowable under Section 37(1) or Section 36(l)(iii). This proposition has been fortified by the decision of apex Court in the case of CIT v. Dr. V.P. Gopinathan where the facts of the case are as under:
The assessee had put money in fixed deposit with a bank and had earned interest of Rs. 1,77,444. On the security of the amount so deposited, the assessee took a loan from the bank and paid in respect of the loan interest of Rs. 90,410. The question was whether the assessee could be taxed only on the difference of Rs. 27,034.
Held, that the interest that the assessee received from the bank on the fixed deposit was income in his hands and it could stand diminished only if there was provision in law permitting such diminution. There was no such provision of law and the interest on the loan taken from the bank did not reduce his income by way of interest on the fixed deposit.
16. The said decision has been followed by the Kerala High Court in the case of CIT v. Vaikundam Rubber Co. Ltd. where interest paid by the assessee was not an allowable deduction against the interest income under Section 57(iii) of the Act. Therefore, following the decision of the apex Court in the case of CIT v. Dr. V.P. Gopinathan (supra), the interest paid by the assessee is not an allowable deduction from the interest earned by the assessee. The immediate source of income of interest is from fixed deposits with bank and not from export business and therefore, income from interest amounting to Rs. 4,38,342 cannot be said to be income from export business and also as discussed above, a deduction of Rs. 13,16,634 for interest paid cannot be allowed as a deduction from the gross interest receipts. Therefore, the AO has rightly allowed Rs. 13,16,634 as deduction under Section 37(1) and Section 36(l)(iii) of the Act and has rightly taxed Rs. 4,38,342 as income from other sources.
17. Also, to support the abovesaid view and in the facts of the following cases, the income was held not to form part of profits derived from the export:
(1) Nanji Topanbhai & Co. v. Asst. CIT [Interest from the fixed deposits with the bank] (2) CIT v. Samir Diamonds Exports Ltd. [Interest on refunds and loans, as the.same were assessable under the head 'Income from other sources'] (3) CIT v. K.K. Doshi & Co. [Profits earned by the assessee on account of service charges, as the same have no direct nexus with the export activities] (4) CIT v. S.G. Jhaveri Consultancy Ltd. [Labour charges, assistance and service charges as also interest] (5) CIT v. Kantilal Chhotalal [Reassortment charges] (6) CIT v. Ravi Ratna Exports (P) Ltd. [Interest on fixed deposits] (7) CIT v. Pravin M. Mehta [Labour commission/indenting commission] (8) Abad Enterprises v. CIT [Interest received on refund of tax, on a bank deposit and on a car deposit] (9) CIT v. Jose Thomas [Interest income and dividend on SBI Magnum units] Also see, Southern Cashew Exports v. Dy. CIT (10) CIT v. Abad Fisheries [Interest on deposits] (11) CIT v. A.S. Nizar Ahmed & Co. [Interest on bank deposits] (12) Asstt. CIT v. South India Produce Co. [Interest on fixed deposit with bank as the same was not business income but only income from 'other sources'] (13) K. Ravindranathan Nat v. Dy. CIT , 670-71, 673-74, SLP dismissed by the Supreme Court: (2003) 263 ITR (St) 3 [Interest on fixed deposits for opening letters of credit for purposes of export]. Also see, CIT v. K. Rajendranathan Nair/Smt. T.C. Usha v. CIT , 38; Southern Cashew Exporters v. Dy. CIT and Anr. (2003) 183 CTR (Ker) 175 : (2003) 130 Taxman 203 (Ker); CIT v. Smt. Preetha Section Nair (2004) 180 Taxation 253 (Ker), 254 (14) Urban Stanislaus Co. v. CIT (2003) 183 CTR (Ker) 176 : (2003) 263 ITR 10 (Ker), SLP dismissed by the Supreme Court : (2004) 265 ITR (St) 38 (SC) [Interest on fixed deposits as the same was income from other sources].
18. The deduction in respect of profits retained for export business is provided under Section 80HHC(1) which reads as under:
80HHC(1) : Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise.
19. By reading the said Section 80HHC(l), it is clear that Section 80HHC(1) overrides all other provisions contained in Section 80HHC. Therefore, for claiming deduction under Section 80HHC(1), there should be profits derived by the assessee from the exports of such business. There should be a direct nexus between the profits, on the one hand and the export activity, on the other hand as held in the case of CIT v. K.K. Doshi & Co. . In this respect we also take the support of decision of Hon'ble apex Court in the case of Pandian Chemicals Ltd. v. CIT where the Hon'ble apex Court has held as under:
The assessment year in question is 1984-85. The following question was referred under Section 256(1) of the IT Act, 1961, to the High Court:
Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the interest on deposits with Tamil Nadu Electricity Board should be treated as income derived by the Industrial undertaking for the purpose of Section 80HH?
The Court followed its earlier decision in CIT v. Pandian Chemicals Ltd. and answered the question in favour of the Department and against the assessee.
The appellant preferred two Special Leave Petitions; the first from the decision in CIT v. Pandian Chemicals Ltd. (supra), being SLP (C) No. CC 3017 of 2000 and the second being the present appeal. As far as the first matter was concerned the Special Leave Petition was dismissed on the ground of delay. The question of law was left open. We have therefore to consider whether, on the merits, the decision of the High Court in adopting the reasoning given in Pandian Chemicals Ltd. 's case (supra).
Section 80HH of the IT Act grants deduction in respect of profits and gains 'derived from' an industrial undertaking. The contention of the appellant before us is that interest earned on the deposit made with the Electricity Board for the supply of electricity to the appellant's industrial undertaking should be treated as income derived from the industrial undertaking within the meaning of Section 80HH. It is submitted that without the supply of electricity the industrial undertaking could not run and since electricity was an essential requirement of the industrial undertaking, the industrial undertaking could not survive with it. It is further pointed out that for the purpose of getting this essential input, the statutory requirement was that the deposit must be made as a precondition for the supply of electricity. Consequently, according to the appellant, the interest on the deposit should be treated as income derived from the industrial undertaking within the meaning of Section 80HH.
The High Court rejected the submission of the appellant by relying upon the decision of this Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT , where this Court had clearly stated that the expression 'derived from' had a narrower connotation than the expression 'attributable to' (p. 93):
In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as for instance in Section 80J. In our view, since the expression of wider import, namely, 'attributable to', has been used, the legislature intended to cover receipts form sources other than the actual conduct of the business of generation and distribution of electricity.
The word 'derived' has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC) when it said (p. 328):
The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But, the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition.
This definition was approved and reiterated in 1955 by a Constitution Bench of this Court in the decision of Mrs. Bacha F. Guzdai v. CIT . It is clear, therefore, that the words 'derived from' in Section 80HH of the IT Act, 1961, must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly form the industrial undertaking itself.
The learned Counsel appearing on behalf of the appellant has referred to several decisions of the Madras High Court in order to contend that the words 'derived from' could be construed to include situations, where the income arose from something having a close connection with the industrial undertaking itself. All the decisions cited by the appellant have been considered by the Madras High Court in the case of Pandian Chemical Ltd. (supra). We see no reason to disagree with the reasoning given by the High Court in Pandian Chemicals Ltd.'s case (supra) with respect to those decisions to hold that they do not in any way allow the word 'derived' in Section 80HH to be construed in the manner contended by the appellant.
The learned Counsel, for the appellant then contended that having regard to the object with which Section 80HH was introduced in the statute book, this Court should give a liberal interpretation to the words in a manner so as to allow such object to be fulfilled. The rules of interpretation would come into play only if there is any doubt with regard to the express language used. Where the words are unequivocal, there is no scope for importing any rule of interpretation as submitted by the appellant. In the circumstances of the case, we affirm the decision of the High Court and dismiss the appeal without any order as to costs.
20. As discussed earlier, when Section 80HHC(1) overrides all other provisions of Section 80HHC, then Section 80HHC(3) provides for method of computation of deduction for the purpose of Sub-section (1) of Section 80HHC. As Explanation (baa) speaks of reduction of certain sums etc., provisio to Section 80HHC(3) speaks of inclusion of certain sums referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 and does not speak of inclusion of interest income. Section 80HHC(3) reads as under:
(3) For the purposes of Sub-section (1)--
(a) Where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee;
(b) Where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;
(c) Where the export out of India is of goods or merchandise manufactured or processed by the assessee and of trading goods, the profits derived from such export shall,--
(i) in respect of the goods or merchandise manufactured or processed by the assessee, be the amount which bears to the adjusted profits of the business in the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and
(ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods:
Provided that the profits computed under Clause (a) or Clause (b) or Clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiia) (not being profits on sale of a licence acquired from any other person), and els. (iiib) and (iiic) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.
21. Therefore the interest income in the present case cannot be said to be income derived from the export business.
22. As per our findings in foregoing paras, we concur with the findings of the AO who has rightly taxed Rs. 4,38,342 being gross interest income under the head "Income from other sources" under Section 57 of the Act. The said income is not a business income and not a profit derived from export and therefore, cannot be taxed under the head "Profits and gains of business or profession." The expenditure of interest amounting to Rs. 13,16,634' paid on loans is allowable as expenditure against the profits from business or profession under Section 37(1) or 36(l)(iii) of the Act. Therefore, the net interest receipts cannot be taxed as income from other sources but the gross interest shall be taxed as income from other sources as discussed above. Thus, ground Nos. 2.1 and 2.2 of the assessee are dismissed.
23. In ground No. 3, the assessee has prayed as under:
The learned CIT(A) also erred in law as well as on the facts of the case in confirming the exclusion of Rs. 2,76,10,955 (correct being Rs. 2,01,20,132) being the value of duty difference on the import and consumption of the raw material and FDR interest of Rs. 4,38,342 from the eligible business income and thereby reducing the deduction under Section 80-IB upto claim to Rs. 32,17,780 as against Rs. 78,35,845 claimed by the appellant. The aforesaid exclusion and the consequential reduction in the deduction under Section 80-IB, is totally contrary to the provisions of law and facts on the record and hence the appellant be held entitled to the deduction on the entire amount including Rs. 2,76,10,955 (correct being Rs. 2,01,20,132 ) and deduction be allowed in full.
24. The brief facts of the case are that the assessee claimed a deduction of Rs. 73,35,845. The AO allowed the deduction as per computation of income at pp. 24 and 25 of his order as under:
Income from business as shown by assessee in return of income Rs. 3,13,66,380 Less : Interest taxed under the head "Income from other sources" (para-3) Rs. 4,38,342 _______________ Rs. 3,09,28,038 Add : on account of trading addition as discussed (para 2.4) Rs. 95,34,040 Income from business and profession Rs. 4,04,62,078 Deduction under Section 80-IB Computation of profit derived from industrial undertaking Income from business and profession Rs. 4,04,62,078 Less: Import entitlement accrued [para-5(H)] Rs. 2,76,10,995 Rs. 1,28,51,123 _______________ _______________ Deduction available under Section 80-IB @ 25% of Rs. 1,28,51,123= Rs. 32,12,780
25. The learned CIT(A) confirmed the action of the AO.
26. We have considered the facts of the case. The learned Authorised Representative, Sh. Mahendra Gargieya, advocate, argued that the AO has wrongly mentioned the import entitlement whereas the same is the value of duty difference and the AO reduced the value of duty difference alleging that the same was not derived from industrial undertaking and accordingly restricted the deduction @ 25 per cent on Rs. 1,28,51,123 as mentioned hereinbefore. The AO mainly relied upon the decisions of Hon'ble Supreme Court of India in the cases of Cambay Electric Supply Industrial Co. Ltd v. CIT and CIT v. Sterling Foods . The learned Authorised Representative argued that both the decisions of Hon'ble Supreme Court of India are distinguishable and are on different facts of the case. In the case of Cambay Electric Supply Industrial Co. Ltd. (supra), the profit is arising due to actual conduct of business. Whereas in the case of Sterling Foods (supra), the facts were different and there was a sale of import entitlement which was not includible in the income for computing the special deduction. In the present case, the issue is not the sale of the import entitlements in the open market. The assessee being a 100 per cent exporter is covered by the advanced licensing which is also a case of duty drawback under the quantity base duty exemption entitlement wherein the assessee exporter was bound to consume the imported duty-free raw material for its own captive consumption and such a license was not at all transferable which is clearly mentioned on the license itself (paper book 182). Therefore, the present case stands at the same footing as in duty drawback the amount is refunded whereas in the present case, there is a direct reduction of the cost. The AO admitted at various places that the amount of the duty difference in the shape of availability of the duty-free raw material, was a part of direct cost (p. 22 para H). The assessee reduced the same from the purchases made inasmuch as such a duty was a part of direct cost and because of this benefit, it was not required to have made the payment. The cost of purchases was reduced by this amount in the audited trading account (A 37B) and the details (paper book 262) of such adjustments relating to the duty difference in the raw material, were submitted with the audit report as Annex. D notably which has been enclosed as Annex. D to the assessment order itself. These facts are admitted by the AO at pp. 22 and 23 of the assessment order. The AO has also given the figures of this benefit and computed the same at Rs. 2,76,10,955. The learned CIT(A) has also considered this as a factor affecting the G.P. rate. As a simple matter of accountancy, the moment the cost of the purchases is reduced, the gross profit stands increased resultantly. The increase/reduction in the gross profit is directly related with the increase/decrease in the direct cost i.e. consumption cost in this case. Thus, it is not the case where this entitlement was sold in the open market and something was earned thereon. In such case, the profit does not arise because of the entitlement under a Government Scheme, but the source of the gross profit (and resultantly the eligible net profits) is the reduced cost of material and hence the very eligible undertaking only. A direct decision on this issue is CIT v. India Gelatine & Chemicals Ltd. wherein decision of Cambay Electric & Sterling Food (supra) has been distinguished. The headnotes in the case of C1T v. India Gelatine & Chemicals Ltd. (supra) are reproduced as under:
(ii) That duty drawback is specffically to reduce the cost of manufacturing the goods. The very scheme of duty drawback is framed and embodied in the statutory provisions in order to relieve the goods to be exported of the burden of customs duties and excise duties. As customs duties and excise duties are admittedly an integral part of the cost of production any receipts by way of reimbursement of such duties are inextricably linked with the cost of production which has to be reflected in the P&L a/c of the assessee, therefore, duty drawback was 'derived from' the industrial undertaking and eligible for deduction under Section 80J of the Act.
27. The learned Authorised Representative argued that on a close reading of Sub-section (1) of Section 80-IA, it becomes palpable that the deduction is to be allowed on profits and gains derived from "any business of" an industrial undertaking. It shows that the admissibility is with reference to profits and gains derived form any business of an industrial undertaking. Thus, it becomes vivid that if the condition of industrial undertaking is satisfied, then the assessee becomes entitled to deduction in respect of profits of any business of such industrial undertaking. Any business may be that of manufacturing or processing or otherwise. More or less the same phraseology continues under Section 80-IA and under Section 80-IB in this year also. At this juncture, it is pertinent to note that the legislature has set the scope of deduction under Section 80-IA by using the appropriate phraseology when seen in contrast with that used in Section 80-IA. Whereas the latter provision grants deduction in respect of 'profits and gains derived from an industrial undertaking', the former provides for deduction on 'profits and gains derived from any business of an industrial undertaking'. As long as the income keeps on emanating from 'any business' of an industrial undertaking, it would remain to qualify for deduction under this section. This was also held in Dy. CIT v. Chaman Lal & Sons (2005) 93 TTJ (Asr) 132 and Asstt. CIT v. Max Care Laboratories Ltd. (2005) 92 TTJ (Ctk) 179, Dy. CIT v. Metro Tyres Ltd. (2001) 79 LTD 557 (Del) and A.P. Industrial Components Ltd. v. Dy. CIT (2002) 74 TTJ (Hyd) 272 and LTO v. Five Star Rugs (2006) 100 TTJ (Del) 222.
28. Also, the significant words 'profits and gains derived from any business of an industrial undertaking' are missing in the provisions, with which the Hon'ble Court was concerned. Needless to say year (sic) that a decision of Hon'ble Supreme Court has to be interpreted in the light of the question and context of CIT v. Sun Engineering Works (P) Ltd. . Looking to the matter in the light of various other submissions and decisions, the above two decisions do not apply in this case. The reliance on decision in CIT v. Ritesh Industries by the Revenue is misplaced as that decision was in the context of Section 80-1 which does not use the word business and therefore, the Hon'ble Court held that duty drawback was not profits derived from industrial undertaking, eligible for deduction. The immediate and proximate source should be the eligible undertaking and not the business of the eligible undertaking. The entire concentration of the Court was on the profits derived from the industrial undertaking. Moreover, in that case the assessee was to take back the amount of duty, whereas in the present case, the cost of purchases was directly reduced because of the benefit. The above distinction has been noted in ITO v. Five Star Rugs (supra) vide para 5, with reference to Ritesh Industries (supra). Similarly, Sterling Foods Ltd. (supra), is also fully distinguishable. Thus, that case was totally distinguishable and not applicable in the present case. The AO himself treated and assessed such a receipt to be a business income under the head Business and Profession for the purpose of Section 80HHC, Expln. (baa) and therefore, included business income of Rs. 4.04 crores. Hence, to give a different treatment for Section 80-IB by Rs. 2.76 crores was not treating such receipt as a business income is highly contradictory. Having treated the same receipt as business income for whatever reason under one provision, the AO was bound to give same treatment under the other provision. In the present case also, the benefit of the duty difference was a part of the business of the eligible undertaking directly and hence qualifies for deduction. Further, the amount of such a benefit has been treated to be assessable as a business profit under Section 28(iiid) therefore, the legislative intent is also very clear to treat such benefit to be a businessman (sic). The case relied upon is Asstt. CIT v. Pratibha Syntax Ltd. (1999) 63 TTJ(Ahd) 409 : (1999) 106 Taxman 32 (Mag)(Ahd). In the past, the Revenue did not give a different treatment on these issues. No such disallowance/reduction in the claimed deduction was made. In asst. yr. 2004-05, the submissions of the assessee were accepted. Thereafter also the claim made has been accepted. Also, in the case of sister-concern, namely, M/s Emkay Export, the issue stands decided in favour of the assessee. This is evident from the assessment/appellate order (paper book 23-235, 234-254). Alternatively without prejudice to above submission and case law, still if there are certain decisions against, the issue involved is clearly debatable and it is settled that view favourable to the assessee has to be adopted as held in the case of CIT v. Vegetable Pioducts Ltd. Mowed in CIT v. Multi Metals Ltd. , CIT v. Bhaiat Nidhi Ltd. and CIT v. International Computers Ltd. .
29. After perusal of the facts and hearing of the parties and the decisions of various Courts law relied upon by the parties, we are of the view that the duty difference in the shape of availability of duty-free raw material was a part of direct cost which has rightly been reduced by the assessee from the purchases as such duty is part of the direct cost' These facts have been admitted by the AO at pp. 22 and 23 of his order. The cases relied upon by the AO are distinguishable in view of the arguments made by the learned Authorised Representative and the decision of Hon'ble Gujarat High Court in the case of India Geletine & Chemicals Ltd. (supra). Therefore, the duty difference is a part of the business of the eligible undertaking directly and qualifies for the deduction as mentioned hereinbefore. Therefore, the AO is directed to accept the treatment given by the assessee who has reduced the duty difference from the purchases and the same is directed to be treated as direct cost and allow the deduction under Section 80-IB as claimed by the assessee. The AO has rightly treated the FDRs' interest as income from other sources in view of our decision in this appeal in ground Nos. 2.1 and 2.2 hereinbefore. Thus, ground No. 3 of the assessee is partly allowed.
30. In ground No. 4, the assessee has prayed as under:
Rs. 25,70,224 The learned CIT(A) further erred in law as well as on the facts of the case in confirming the reduction of the deduction claimed under Section 80HHC, by the amount of deduction under Section 80-IB of Rs. 32,12,780 and thus thereby reducing the deduction under Section 80HHC @ 80 per cent by Rs. 25,70,224.
The authorities below seriously erred in not computing the two deductions claimed by the assessee under Sections 80HHC and 80-IB, separately and independently from each other. The reduction of deduction under Section 80HHC and the interpretation of the authorities below is totally contrary to the provisions of law and facts on the record and hence the said reduction be deleted in full and deductions under both the provision be computed separately without reducing each other.
31. The brief facts of the case are that the assessee had first claimed the deduction under Section 80HHC at Rs. 2,50,74,703 @ 80 per cent and also separately made a claim of deduction under Section 80-IB @ 25 per cent of the eligible profits at Rs. 78,35,845 totalling to Rs. 3,29,10,548. However, the same was restricted to the gross total income of Rs. 3,13,66,380 in view of the restriction put by the Section 80A(4). The AO however, first allowed the deduction under Section 80-IB and thereafter reduced the deduction under Section 80HHC by Rs. 32,12,780 from the eligible export profits of business of Rs. 4,04,52,078. The action of the AO was confirmed by the learned CIT(A).
32. The learned Authorised Representative (sic) of the assessee being entitled to deduction under Section 80HHC and also having been a new industrial undertaking was also entitled to deduction under Section 80-IB @ 25 per cent, hence made a separate claim under both the provisions. Accordingly, claim made by the assessee under Section 80HHC was of Rs. 2,50,74,703. The AO while computing the deduction under Section 80HHC however, reduced the amount of deduction under Section 80-IB of Rs. 32,12,780 (as computed by the AO and separately challenged by the assessee) out of the income from business of Rs. 4,04,62,073 and took 80 per cent thereof i.e. Rs. 2,97,99,438. The contention of the assessee was that deduction under Section 80pHC should be computed independently and separately from the deduction under Section 80-IB or in other words, the deduction under Section 80HHC should not be reduced in any way by the deduction allowed/allowable under Section 80-IB. The AO and the learned CIT(A) however, merely relied upon the provisions of Section 80-IA(9) and Section 80HHC(4B).
33. The learned Department Representative, on the other hand, relied upon the order of the authorities below.
34. We have considered the facts of the case. There is no provision in the Act as regards the priority to be laid d6wn for the deduction under Section 80 of the Act wherein it could be inferred that Section 80-IA and Section 80-IB will be allowed first and then only Section 80HHC shall be allowed. The AO has lost the sight of important provisions contained in Section 80AB of the Act which has an overriding effect on all other provisions contained in Chapter VI-A under the heading "Deductions in respect of certain incomes". Sec. 80AB provides the overall manner of computing and allowing deductions in the entire chapter. It provides that by computing the deduction under a particular provision, amount of income to be considered, shall be only that income which is- before making any further deduction under Chapter VI-A which is derived/received by the assessee and included in the gross total income (GTI). Hence, for the purposes of computing a deduction under Section 80HHC, the amount derived/received by the assessee from exports and included in the GTI (before making any deduction under Chapter VI-A) shall alone be the deemed amount of eligible income for this purpose. Thus, in other words, the deduction allowable under Section 80HHC cannot be reduced by the amount of any deduction under Section 80-IA/s. 80-IB. The decision in case of IPC A Laboratory Ltd. v. Dy. CIT supports the contention that Section 80AB is having an overriding effect over all other sections in Chapter VI-A. The reliance is placed in the case of CIT v. R.P.G. Telecoms Ltd. (2007) 208 CTR (Kar) 152 : (2007) 160 Taxman 365 (Kar), wherein it is held that provisions of Section 80AB have overriding effect on the other provisions of Chapter VI-A.
35. It is an admitted fact on record that the total amount of deduction claimed by the assessee @ 80 per cent under Section 80HHC and @ 25 per cent under Section 80-IB, in any case did not exceed the gross total income. Hence, both the provisions operate differently and the deduction under one section need not be curtailed because of the other, yet assuming so, it is submitted that the very underlying object and intention of the legislature, which is manifestly clear from the notes on clauses of Budget 1988-89, reproduced in verbatim by the learned CIT(A) at pp. 18-19 is that in certain cases, the assessee claimed the deduction more than 100 per cent under different provisions and therefore, with a view to provide suitable statutory safeguard and to prevent such taxpayer from taking undue advantage of the existing provision. Hence, the said amendment was brought on statute book. Applying the rule of liberal interpretation of an incentive provision, and intention of the legislature as above and keeping the admitted fact in mind that in the present case the assessee did not claim more than 100 per cent, hence the deduction as claimed has to be allowed in full without any artificial reduction as done by the AO. A bare reading of Section 80-IA(9) also clearly supports the views. The reliance placed by the lower authorities on Section 80HHC is totally misplaced inasmuch as any deduction claimed/allowed under Chapter VI-A, cannot be equated with any income not chargeable to tax under this Act. Our views find support from the decision of Hon'ble Gujarat High Court in the case of CIT v. Sidhpur Isabgul Processing Co: Ltd. (2001) 171 CTR (Guj) 106 : (2001) 119 Taxman 245 (Guj) where it has been held that the deduction claimed by the assessee under Section 80HHC has to be allowed without any reduction by the amount of deduction of any other provision of the Act. The learned Department Representative has not opposed the arguments of learned Authorised Representative that the Revenue has not made any disallowance in the past and in the asst. yr. 2004-05, such claim of the assessee was accepted and also in the sister-concern, M/s Emkay Exports, the issue stands decided in favour of the assessee by the learned CIT(A). In view of the facts and circumstances of the case and the arguments made by the parties and the decisions relied hereinbefore, we direct the AO to allow the deduction under Section 80HHC on the profit of Rs. 4,04,62,078. The total deduction under Section 80-IB and Section 80HHC shall not exceed the profit of the business i.e. Rs. 4,04,62,078. Thus, ground No. 4 of the assessee is allowed.
36. The ground No. 5 of the assessee is regarding charging of interest under Section 234B of the Act is mandatory and consequential in nature.
37. The ground No. 6 of the assessee is general in natural which needs no adjudication by us.
38. In the result, the appeal of the assessee in ITA No. 247/Jp/2005 is partly allowed and the appeal of the Revenue in ITA No. 274/Jp/2005 is dismissed.