Income Tax Appellate Tribunal - Ahmedabad
Kiri Dyes & Chemicals (P) Ltd.,, ... vs Income Tax Officer, Ward-9(1),, ... on 19 January, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "D" BENCH
Before: Shri R. P. Tolani, Judicial Member
And Shri Amarjit Singh, Accountant Member
ITA Nos. 815 & 1036/Ahd/2010
Assessment Year 2006-07
M/s. Kiri Dyes & The ITO,
Chemicals Ltd., W ard 9(1),
53-Manekbaug Society, Vs Ahmedabad
Lane No. 7, Gate No. 3, (Respondent/Appellant)
Nehrunagar,
Ahmedabad
PAN: AAACK9025C
(Appellant/Respondent)
Revenue by: Shri James Kurian, Sr. D.R.
Assessee by: Shri S.N. Soparkar
Shri Parin Shah, A.R.
Date of hearing : 28-11-2016
Date of pronouncement : 19-01-2017
आदेश /ORDER
PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
This cross appeal for A.Y. 2006-07 filed by assessee and revenue, arise from order of the CIT(A)-VIII, Ahmedabad dated 30- 11-2009 in appeal no. CIT(A)-VIII/ITO/4(2)/253/08-09, in proceedings under section 143(3) of the Income Tax Act, 1961; in short "the Act". I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 2 M/s. Kiri Dyes & Chemicals Ltd. vs ITO
2. The assessee has raised following grounds of appeal:-
"1. The Id. CIT(A) has erred in law and on the facts of the case by confirming the action of Id. AO in disallowing annual club membership fees of Rs.60,000/- after holding that the same has not been incurred for the purpose of business.
2. The Id. CIT(A) has erred in law and on the facts of the case in directing the Id. AO to allocate more administrative expenditure towards 100% EOU unit. The appellant has allocated all the expenditure on scientific and rational basis and the same require no variation.
3. The Id. CIT(A) has erred in law and on the facts of the case in directing the Id. AO to reduce export incentives amounting to Rs. 1,15,03,144/- out of export profit of 100% EOU unit while calculating deduction u/s 10B of the Act.
4. The Id. CIT(A) has erred in law and on the facts of the case in directing the Id. AO to reduce bank interest of Rs. 1, 1,34,985/- out of export profit of 100% EOU unit while calculating deduction u/s 10B of the Act.
5. Alternatively and without prejudice, only net income component of export incentives and bank interest can be excluded and not the gross export incentives and bank interest.
6. Both the lower authorities have erred in law and on facts in passing the orders without properly appreciating the fact and that he further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of both the authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
7 The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s 234B/C/D of the Act.
8 The learned CIT(A) has erred in law and on facts of the case in initiating penalty proceedings u/s 271 (1)(c) of the Act."
I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 3 M/s. Kiri Dyes & Chemicals Ltd. vs ITO
3. The revenue has raised following grounds of appeal:-
"1. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 4,11,242/- made on account of late payment of employees contribution of PF to Government account.
1.1 The Ld. CIT(A) has erred in law and on facts in not appreciating the fact that the allowability of employees contribution of PF is governed expressly by section 36(1)(va) and not 43B of the Act. Hence, unless the amount is deposited within the due date specified under the relevant Act, the amount is not allowable as deduction.
2. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 27,750/- made on account of expenditure incurred on LPG Kit treating the same as capital expenditure.
2.1 The Ld. CIT(A) has erred in law and on facts in not appreciating the fact that there is no replacement involved but a new item has been added to the vehicle. Therefore, the Ld. CIT(A) has further erred in relying on the decision of Gujarat High Court's decision in the case of sdesai brothers 108 ITR 14.
3. The Ld. CIT has erred in law and on facts in directing the Assessing Officer to work out the deduction u/s. 10B with respect to the division of profits instead of working of deduction u/s 10B on proportionate basis as adopted by the A.O. in the assessment order.
3.1 The Ld. CIT(A) has erred in law and on facts in not appreciating the fact that since the assessee has multiple units, the profits of the assessee needs to be apportioned in the ratio of turnover of the unit and not the total turnover."
4. In this case, return of income declaring income of Rs. 2,21,190/- was filed on 31/12/2007. The assessee company was engaged in the business of manufacturing of Dyes Intermediates. The assessing officer had assessed the income at Rs.1,66,10,160/ after making additions under various heads.
I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 4 M/s. Kiri Dyes & Chemicals Ltd. vs ITO The grounds of appeal of the assessee and revenue are decided under relevant heads as under:-
5. Grounds of Appeal of the assessee Ground No.1 5.1 The assessing officer stated that the assessee has claimed club fees of Rs. 60,000/- incurred for the business purpose. The assessing officer was of the view that club fees cannot be considered to be incurred for the purpose of business, therefore, he disallowed the same.
5.2 During the course of appellant proceeding the learned counsel stated that the learned CIT appeal was not right in disallowing the annual membership fees of Rs.60,000 paid to the club wholly and exclusively for the business purpose. He placed reliance in the case of 209 ITR 649(Guj). On the other hand the learned DR relied on the order of CIT appeal.
5.3 We have heard both the sides and gone through the material. We have perused the judicial pronouncement in the case of Gujarat State export Corporation limited of the Hon'ble High Court of Gujarat in which it was held that payment of entrance fees to a sports club was allowable revenue expenditure. Therefore we allow the appeal of the assessee on this issue.
I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 5 M/s. Kiri Dyes & Chemicals Ltd. vs ITO Ground No. 3, 4 and 5 of the assessee
6. While deciding the claim of the assessee u/s 10 B of the act , the learned CIT appeal observed that the profit of 100% EOU for the relevant period also consisted of other income of Rs.1, 26,38,129/ namely export incentives at Rs.115,03,144 and bank interest of Rs.11,34,985/- respectively. In this connection the Ld.CIT(A) stated that Hon'ble Supreme Court in the case of Liberty India had held that Duty drawback receipt and DEPB benefits do not form part of the net profit of eligible industrial undertaking for the purpose of deduction u/s 80I,80IA and 80IB of the act and he further stated that it was equally applicable for the deduction u/s 10B of the act. In view of the above legal findings, the Ld. CIT(A) held that the receipts amounting to Rs.1,26,38,129 were required to be excluded from the export profit amounting of Rs.3, 99,54,778 of the 100% EOU for the relevant period. Therefore, the learned CIT appeal directed the AO to work out the deduction accordingly after taking into consideration the above exclusion. The detail decision of the Ld. CIT(A) on this issue is mentioned at page 13 to 17 of the CIT(A) order reproduced as under:-
"8.6 It may be mentioned that the profit of 100% EOU for the relevant period consist of other income amounting to Rs. 1,26,38,129/- namely export incentives at Rs. 1,15,03,144/- and bank interest of Rs. 11,34,985/-. Hon'ble Supreme court in the case of Liberty India has held that:
Duty drawback receipts and DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purpose of the I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 6 M/s. Kiri Dyes & Chemicals Ltd. vs ITO deduction under section 80-I / 80-IA / 80-IB of the Income-tax Act, 1961.
The Income-tax Act,1961, broadly provides for two types of tax incentives, viz., investment-linked incentives and profit-linked incentives. Chapter VI-A of the Act which provides for incentives in the form of deductions essentially belongs to the category of "profit- linked incentives". Therefore, when section 80-IA / 80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives : what attracts the incentives under section 80-IA / 80-IB is the generation of profits ) (operational profits). It is for this reason that Parliament has confined deduction of profits derived from eligible businesses mentioned in sub-sections (3) to (11 A). Each of the businesses mentioned in subsections (3) to (11 A) constitutes a stand-alone item in the matter of computation of profits. Sections 80-IB and 80-IA are a code by themselves as they contain both substantive as well as procedural provisions.
Section 80-IB provides for the allowing of deduction in respect of profits and gains derived from the eligible business. The connotation of the words "derived from" is narrower as compared to that of the words "attributable to". By using the expression "derived from"
Parliament intended to cover sources not beyond the first degree. Sections 80-I, 80-IA and 80-IB are to be read as having a common scheme. Sub-section (5) of section 80-IA (which is required to be read into section 80-IB ) provides for the manner of computation of the profits of an eligible business. Such profits are computed as if such eligible business is the only source of income of the assessee. Therefore, devices adopted to reduce or inflate the profits of the eligible business have to be rejected in view of the overriding provisions of section 80-IA(5). Sections 80-1,80-IA and 80-IB provide for incentives in the form of deductions which are linked to profits and not investment. On analysis of sections 80-IA and 80-IB it becomes clear that any industrial undertaking which becomes eligible on satisfying sub-section (2) would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after the specified date. Apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of the profits. This is the importance of the words "derived from an industrial undertaking" as against "profits attributable to an industrial undertaking".
I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 7 M/s. Kiri Dyes & Chemicals Ltd. vs ITO DEPB/Duty drawback are incentives which flow from the schemes framed by the Central Government or from section 75 of the Customs Act, 1962. Incentive profits are not profits derived from eligible business under section 80-IB : they belong to the category of ancillary profits of such undertaking. Profits derived by way of incentives such as DEPB/Duty drawback cannot be credited against the cost of manufacture of goods debited in the profit and loss account and they do not fall within the expression "profits derived from industrial undertaking" under section 80-IB . Decisions of the Punjab and Haryana High Court in Liberty India v. CIT [2007] 293 ITR 520 and CIT v. Lakhwinder Singh [2009] 317 ITR 209 of the Delhi High Court in CIT v. Ritesh Industries Ltd. [2005] 274 ITR 324 and of the Madras High Court in Shakti Footwear v. CIT (No. 2) [2009] 317 ITR 199 affirmed.
8.7 Though the judgement has been rendered by the apex court in respect of the eligibility of deduction u/s 80I, 80IA and 80IB of the Act on the incomes like DEPB, Duty drawback etc. yet, it is equally applicable for the deduction u/s 10B of the Act. The language of section 10B is parimeteria to the language of sec. 80IA and 80IB. Section 10B of the Act provides that subject to the provisions of this section a deduction of such profit and gains as are derived by a 100% Export Oriented Undertaking from the export of articles or things or computer software for a period of 10 consecutive assessment years....... Further, in order to explain various provisions of the section a parallel has been drawn with the provisions of sec. 80! and 80IA in the section itself. Therefore, it can safely be held that the provisions of sec. 10B even from the procedural point of view are parallel to the provisions of section 80IA of the Act.
8.8 It may be pointed out that all the controversies with regard to eligibility of other incomes namely DEPB, interest, excise duty refund etc for deduction u/s 80IA and 80IB and similarly placed sections of the Act after the decision of Hon'ble Supreme court in the case of Liberty India (supra). The Hon'ble Apex court has held that only profit derived from the eligible business is entitled for such deduction. It has been held that the connotations of the words "derived from" is narrower as compared to that of the words "
attributable to". By using the expression "derived from" Parliament I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 8 M/s. Kiri Dyes & Chemicals Ltd. vs ITO intended to cover sources not beyond the first degree. Hon'ble Apex court in the aforesaid judgment has further observed that,- "Continuing our analysis of section 80-IA/80-IB it may be mentioned that sub-section (13) of section 80-IB provides for applicability of the provisions of sub-section (5) and sub-sections (7) to (12) of section 80-IA, so far as may be, applicable to the eligible business under section 80-IB. Therefore, at the outset, we stated that one needs to read sections 80-1, 80-IA and 80-IB as having a common scheme. On a perusal of sub-section (5) of section 80-IA, it is noticed that it provides for the manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business have got to be rejected in view of the overriding provisions of subsection (5) of section 80-IA, which are also required to be read into section 80-IB.(see section 80-16(13)). We may reiterate that sections 80-I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. On ao analysis of sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible in satisfying sub-section (2), would be entitled to deduction under sub- section (1) only to the extent of profits derived from such industrial undertaking after specified date(s).Hence, apart from eligibility, sub- section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words "
derived from industrial undertaking "as against" profits attributable to industrial undertaking".
DEPB is an incentive. It is given under the Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export f \ product. Under DEPB, an exporter may apply for credit as a percentage of the FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by the DGFT for import of raw materials, components, etc., DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/ I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 9 M/s. Kiri Dyes & Chemicals Ltd. vs ITO Duty drawback are incentives which flow from the schemes framed by Central Government or from section 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under section 80-IB. They belong to the category of ancillary profits of such undertakings.
The next question is what is duty drawback ? Section 75 of the Customs Act, 1962, and section 37 of the Central Excise Act, 1944, empower the Government of India to provide for repayment of customs duty and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or Central excise duty actually paid by an individual importer-cum-manufacturer. Sub-section (2) of section 75 of the Customs Act requires the amount of drawback to be determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported. Basically, the source of the duty drawback receipt lies in section 75 of the Customs Act and section 37 of the Central Excise Act. Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Scheme(s) framed by the Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression " profit derived from industrial undertaking, in section 80-IB.
Since reliance was placed on behalf of the assessee(s) on AS-2 we need to analyse the said Standard. AS-2 deals with valuation of inventories. Inventories are assets held for sale in the course of business ; in the production for such sale or in the form of materials or supplies to be consumed in the production. "Inventory" should be valued at the lower of cost and net realizable value (NRV). The cost of" inventory" should comprise all costs of purchase, costs of conversion and other costs including costs incurred in bringing the inventory" to their present location and condition. The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Hence, trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, duty drawback, rebate, etc., should not be treated as adjustment I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 10 M/s. Kiri Dyes & Chemicals Ltd. vs ITO (credited) to the cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly (see page 44 of the Indian Accounting Standards and GAAP by Dolphy D'souza). Therefore, for the purposes of AS-2, Cenvat credits should not be included in the cost of purchase of inventories. Even the Institute of Chartered Accountants of India (1CAI) has issued guidance note on accounting treatment for Cenvat/Modvat under which the inputs consumed and the inventory of inputs should be valued on the basis of purchase cost net of specified duty on inputs (i.e., duty recoverable from the Department at a later stage) arising on account of rebates, duty drawback, DEPB benefit, etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets, etc. Therefore, we are of the view that the duty drawback, DEPB benefits, rebates, etc., cannot be credited against the cost of manufacture of goods debited in the profit and loss account for purposes of section 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking. We are of the view that the Department has correctly applied AS-2 as could be seen from the following illustration:
Expenditure Amount Income Amount (Rs.)
(Rs.)
Opening stock 100 Sales 1,000
Purchases 500 Duty 100
(including customs drawback
duty paid) received
Manufacturing 300 Closing 200
overheads stock
Administrative, 200
selling and
distribution exp.
Net profit 200
1,300 1,300
I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 11
M/s. Kiri Dyes & Chemicals Ltd. vs ITO
Note: In the above example, the Department is allowing deduction on profit of Rs. 100 under section 80-IB of the 1961 Act.ln the circumstances, we hold that duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of section 80-I/80-IA/80-IB of the 1961 Act. The appeals are, accordingly, dismissed with no order as to costs."
8.9 In view of the above, the receipts amounting to Rs. 1,26,38,129/- are required to be excluded from the export amounting to Rs. 3,99,54,778/- of the 100% EOU for the relevant period. The A.O will work out the deduction accordingly keeping in view the discussion as referred to above."
6.1 During the course of appellant proceeding before us the learned counsel has stated that the learned CIT appeal has erred in directing the assessing officer to exclude export incentives of export profit while calculating deduction under section 10 B of the act. He referred to the pages of paper book and other submission pertaining to the break-up of other income He also referred to the judicial pronouncements in the cases of Nirma Ltd.367ITR 12(Guj.),Empire Pumps P.Ltd.54 taxmann.com 317 (GUj),ITA No.1935/Ahd/2007 in the case of Radha Madhav Industries for the A.Y.2004-05.
6.2 On the other hand the Ld. DR supported the order of lower authorities.
6.3 We have heard both the sides and perused the material on record. We considered that supporting detail submitted by the learned counsel are required to be considered and examination by the assessing officer. Therefore, we restore this matter to the file of I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 12 M/s. Kiri Dyes & Chemicals Ltd. vs ITO the assessing officer to decide the matter afresh after examination of the submission of the assessee and after providing necessity opportunity to the assessee.
Grounds of Appeal of the revenue Ground no. 1
7. During the course of assessment proceedings, on verification of the details furnished, the assessing officer noticed that the assessee had not deposited the employees' contribution to the PF and ESI to the credit of Govt. account timely. The assessing officer had disallowed Rs. 4,11,242/- as per provision of Sec. 36(1)(vi) for not depositing the money before the due date.
7.1 The learned CIT(A) allowed the claim of the assessee by stating that the assessee deposited the amount with the government beyond the specified date but before the due date of filing return under section 139 of the act after keeping reliance on the case of Gujarat Containers Ltd. decided by the ITAT Ahmedabad. The decision of the learned CIT appeal is reproduced as under:-
"5.2 I have considered the facts and submission of the Ld. A.R carefully. It is seen that though the appellant deposited the impugned amount with the government beyond the specified date, yet prior to filing of return u/s 139(1) of the Act. this is evident from the details given by the A.O in the assessment order itself. Hon'ble ITAT 'D' Bench, Ahmedabad in the case of Gujarat Containers Ltd.ITA No.2609/Ahd/2008 held as under:
I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 13 M/s. Kiri Dyes & Chemicals Ltd. vs ITO "6. In view of foregoing and especially when it was not been by the Revenue disputed before us that the aforesaid contributions towards PF & ESI have been paid before the due date of filing of return u/s. 139(1) of the Act. in the light of view taken by the Hon'ble Delhi High Court in the case of CIT vs.P.M. Electronics 220 CTR (Del) 635 and the decision of Hon'ble Apex Court in the case of Vinay Cement Ltd. (supra), we have no hesitation in holding that the employees' contribution towards PF, having been made by the assessee within the due date of filing of the return for the year under consideration there is no ground for disallowing the same. Thus, ground no.2 raises in the appeal is allowed."
5.3 Therefore, respectfully following the decision of Hon'ble ITAT as referred to above in the case of Gujarat Containers Ltd. I hold that there is no justification in disallowing the Employees' Contribution to P.F/E.S.I u/s. 36(1)(va) of the Act. The addition made on this account is therefore deleted."
7.2 During the course of appellant proceedings before us the learned DR stated that the learned CIT appeal was not right in deleting the addition made by the assessing officer. The learned counsel also agreed that the hon'ble High Court of Gujarat had decided the issue against the assessee in the case of GSRTC Ltd. (Guj) 366 ITR170. We have heard both the sides and perused the material on record. We have perused the judicial pronouncement made by the High Court of Gujarat in the case of Commissioner of income tax vs. Gujarat State Board transport Corporation 366 ITR 170(Guj) in which it was held that where assessee did not deposit the employees contribution to employees account in a relevant fund before due date prescribed in explanation to section 36(1)(va), no deduction would be admissible even though he deposit the same before due date under section 43B of the act. Therefore, we sustain the disallowance made by the assessing officer. I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 14 M/s. Kiri Dyes & Chemicals Ltd. vs ITO Ground no. 2
8. The assessing officer noticed that the assessee had incurred expenses of Rs. 27,750/- for purchase of one LPG Kit claimed as revenue expenditure. The assessing officer assessed these expenses of the nature of capital expenditure and disallowed the claim of the assessee after allowing depreciation on these expenses. Aggrieved against the above stated impugned additions made by the assessing officer, the assessee had preferred appeal before the Ld. CIT(A).
8.1 Learned CIT (appeal) stated that the installation of LPG kit is one of the vehicles by the assessee does not bring into existence a new asset. The learned CIT appeal stated that therefore these expenditures cannot be considered as capital in nature. The decision of the learned CIT appeal is reproduced as under:-
"6.2 I have considered the facts and submission of the Ld. A.R carefully. The installation of LPG kit in one of the vehicles by the appellant does not bring into existence a new asset. Therefore, the expenditure thereon cannot be considered as capital in nature. In this regard reliance is placed on the decision of Hon'ble Gujarat High court in the case of Desai Brothers 108 ITR 14 wherein the Hon'ble court held in respect of replacement of Petrol Engine of truck by diesel engine as business expenditure. The relevant extracts of the decision are as under:
"The object of the assessee in incurred the expenses in replacement was with a view to bringing into existence a new asset or was with a view to have a substantial replacement or renovation, but it appers that the assessee was motivated in making the expenses by the object of preserving and I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 15 M/s. Kiri Dyes & Chemicals Ltd. vs ITO maintaining the asset for the purpose of use in the business. The Tribunal was right in holding that the expenditure incurred for replacing the petrol engine by diesel engine was in the nature of revenue expenditure for current repairs to the machinery of the assessee."
6.3 In view of the above, the disallowance made by the A.O is hereby deleted."
8.2 The learned DR supported the order the assessing officer.
8.3 During the course of appellant proceeding before us the learned counsel placed his reliance on 108 ITR 14 (Guj) and he relied on the order of CIT appeal. We have perused the judicial pronouncement made by the Hon. High Court of Gujarat in the case of income tax v Desai brothers 108T 14(Guj) in which it was held that expenditure incurred for replacing patrol engine by the diesel engine in assessee's truck was allowable as business expenditure. After hearing both the sides and perusal of the material on record we find that the case of the assessee is identical to the case mentioned in the above cited judicial pronouncement, therefore, we uphold the order of the Ld.CIT(A) on this issue.
Ground no. 2 of the assessee and Ground no. 3 of the Revenue
9. During the course of appellate proceedings, the assessing officer noticed that the assessee had claimed deduction u/s. 10B of the act to the amount of Rs. 3,47,53,482/-. The assessee had claimed working of profit separately for 100% EOU and Non-EOU during the year under consideration. The assessing officer observed I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 16 M/s. Kiri Dyes & Chemicals Ltd. vs ITO that in the previous years relevant to assessment years 2004-05 and 2005-06, the assessee had claimed deduction u/s. 10B on proportionate basis, however, during the year under consideration the deduction u/s. 10B of the act was claimed on the basis of profit earned by 100% EOU unit and Non-EOU units separately, therefore, the assessing officer had asked the assessee to furnish the followings information:-
"With reference to your assessment proceedings for the A.Y. 2006-07, you are requested to furnish the following details/in formation to this office latest by 23-12-2008 positively.
1. Sources of purchase of fixed assets and investments made by the company in 100% EOU Unit.
2. Please furnish separate profit & loss Account, balance- sheet and annexures pertains to 100% EOU Unit and others from the beginning from where you have started the EOU Unit.
3. Base on which you have allotted the common expenses of the company.
4. Give the details about the products manufactured and sold in 100% EOU Unit and other Units separately along with their gross profit & Net profit ratios".
9.1 In this connection, the assessee had explained as under:-
"we explain that unlike in A.Y, 2006-07, we had segregated out Net ''profit on the basis of turnover for A.Y. 2004-05 and A.Y. 2005-06 for the purposes of deduction u/s. 708.
We had applied the following formula for arriving at claim of deduction u/s. 708 for A.Y. 2004-05 and A.Y. 2005-06. (A) Net profit as per profit and Loss Account was adjusted to give effect to the provisions of section 28 to 44 of the I.T. Act. For example, depreciation as per books, donation expense, provisions for bonus, leave encashment and other statutory liabilities u/s. 43B etc. were added to net profit. Depreciation as per Income-tax Act, payment made on account of statutory liabilities u/s. 43b etc. were deducted out of net profit.
I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 17 M/s. Kiri Dyes & Chemicals Ltd. vs ITO (B) Profit arrived at after giving effect to adjustment as aforesaid was subjected to the following formula."
9.2 The assessing officer stated that the asssessee has not furnished the supporting information as asked relating to details of fixed assets and investment made by the company in 100% EOU unit, separate P & L a/c, balance sheet and annexures pertaining to 100% EOU and others from the beginning, basis of allocation of common expenses, product manufactured and sold in EOU unit and other units separately along with their gross profit and net profit ratios.
9.3 The assessing officer stated that facts in the case of the assessee for this assessment year are similar to the assessment year 2004-05 and 2005-06 and no new facts has been brought on record in support of the working of the deduction claimed u/s. 10B for assessment year 2006-07. He further stated that during this year also for the F.Y. 2005-06 relevant to assessment year 2006-07 the assessee had filed one combined balance sheet profit and loss a/c and grouping along with the tax amount report. He also pointed out that assessee could not prove that any separate balance sheet, profit and loss a/c for 100% EOU units and others were maintained separately. In view of the above facts and circumstances, the assessing officer had restricted the claim of deduction u/s. 10B in the case of the case on proportionate basis as claimed in the earlier years to Rs. 1,89,56,908/- instead of Rs. 3,47,53,482/-. I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 18 M/s. Kiri Dyes & Chemicals Ltd. vs ITO 9.4 The Ld. CIT(A) had directed the assessing officer to work out the deduction u/s 10B with respect to the division of profits instead of working of deduction u/s 10B on proportionate basis as adopted by the assessing officer. The decision of the learned CIT appeal is reproduced as under:-
"8.2 I have considered the facts and submission of the Ld. A.R carefully. It is seen that during the assessment proceedings the A.O asked the appellant to furnish details such as source of purchase of fixed assets and investments made by it in 100% EOU; separate P & L a/c, balance sheet and Annexures pertaining to 100% EOU and other from beginning; base on which it had allotted the common expenses and the products manufactured and sold in 100% EOU and other units separately alongwith their gross profit and net profit ratio. In response to the show cause of the A.O it was explained by the appellant that in the previous years relevant to A.Ys 2004-05 & 2005-06 the deduction u/s 10B was claimed on proportionate basis, however, for the year under reference it was claimed after segregating the net profit of EOU and non EOU separately. The A.O however, did not find the explanation of the appellant satisfactory and observed that it had not prepared separate profit and loss accounts for 100% EOU and other units. He further noted that in the A.Ys 2004-05 & 2005-06 the claim for deduction u/s 10B was claimed on proportionate basis. He accordingly, rejected the appellant's claim for deduction u/s 10B and worked out on proportionate basis by multiplying the export profit of EOU with export turnover / total turnover.
8.3 I have gone through the details submitted by the appellant before the A.O during the assessment proceedings vide letter dated 24.12.2008 which have been placed on page 39, 40 & 41 of Annexure B of the submissions made by the Ld. A.R. In the said letter the appellant has clearly explained the system adopted by it to work out the profit of 100% EOU by segregation of income and expenditure between its different manufacturing units. It has also explained the rationale of segregation of various expenditures between the different manufacturing units. The A.O without pinpointing any discrepancy in such accounting has rejected the same while working out the deduction u/s 10B of the Act. The A.O while working out the deduction u/s 10B of the Act for the 100% EOU has adopted total turnover of the appellant's business as denominator.
I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 19 M/s. Kiri Dyes & Chemicals Ltd. vs ITO 8.4 In terms of the provisions of sub section (4) of section 10B for the purposes of the section, the profits derived from export of article or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the Export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking (emphasis applied). Therefore, as per the provisions of section 10B the turnover of "the undertaking" is required to be taken as the denominator not as the total turnover of entire business of the appellant. Therefore, under these circumstances the formula adopted by the A.O for working out the deduction u/s 10B cannot be held justified. In this regard reliance is placed on the decision of Hon'ble Supreme court in the case of CIT v/s Laxmi Machine Works 290 ITR 667 and the decision of special Bench of ITAT Chennai in the case of ITO v/s SAK Soft Ltd. in ITA No. 691 & 1953/madras/2007. Therefore, the A.O is directed to work out the deduction u/s 10B of the Act in respect of the profit of 100% EOU and its total turnover for the relevant period.
8.5 However, it is seen from the details filed by the appellant that though all the expenses have been segregated in 100% EOU and other unit on proportionate basis yet, the segregation of administrative expenses deserves further scrutiny. As per the details filed by the Ld. A.R out of total administrative expenses debited in the profit and loss account at Rs. 1,50,62,554/- only 46,89,519/- have been debited from the profits of 100% EOU. It is further seen that out of administrative expenses of Rs. 1,50,62,554/- a sum of Rs. 98,52,575/- has been incurred towards rent, rate and taxes. Further, out of 98,52,575/- only 84,715/- has been allocated to 100% EOU. It is seen that the allocation of such expenses is totally lop sided and no plausible explanation is conning forward from the appellant's side. Therefore, the A.O while giving effect to this order will examine the details of such expenses and will work out the proper allocation with a view to arrive at the correct profit of 100% EOU."
9.5 During the course of appellant proceeding before us the learned counsel stated that separate books of accounts were maintained by the assessee during the previous years relevant to the I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 20 M/s. Kiri Dyes & Chemicals Ltd. vs ITO assessment years. He has also referred to the various pages of the paper book submitted by him during the course of appellate proceedings. On the other hand the learned DR contended that the assessee failed to prove that separate books of accounts were maintained in respect of100%EOU and non EOG. Even the assessee had not furnished details such as source of purchased of fixed asset and investment made by it in the present EOU, separate profit and loss account, balance sheet and the basis on which it had allocated the common expenses and the product manufactured and sold in100% EOU and other units separately along with their gross profit and net profit ratio. He further stated that during this year also for the F.Y. 2005-06 relevant to assessment year 2006-07 the assessee had filed one combined balance sheet profit and loss a/c and grouping along with the tax amount report. He also pointed out that assessee could not prove that any separate balance sheet, profit and loss a/c for 100% EOU units and others were maintained separately. We have heard both the sides and perused the material on record carefully. We find that even the learned CIT appeal has mentioned that allocation of expenses by the assessee towards the 100% EOU was totally lopsided and no plausible explanation was coming forward from the assessee side. Looking to the facts as elaborated above in this order, we find that the Ld.CIT(A) had not provided clear finding and reason in his decision. We find that the submission of the assessee is required to be examined and verified by the assessing officer. Therefore, we considered it appropriate to restore this issue I.T.A Nos. 815 & 1036 /Ahd/2010 A.Y. 2006-07 Page No 21 M/s. Kiri Dyes & Chemicals Ltd. vs ITO to the file of the assessing officer to decide it afresh after providing proper opportunities to the assessee.
10. In the result the appeal of the assessee and the appeal of the revenue are partly allowed.
11. Grounds no.6 to 8 of the assessee and grounds no.4 to 5 of the Revenue are of general nature, so, they do not require any adjudication.
Order pronounced in the open court on 19-01-2017 Sd/- Sd/-
(R. P. TOLANI) (AMARJIT SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad : Dated 19/01/2017
आदेश क त ल प अ े षत / Copy of Order Forwarded to:-
1. Assessee
2. Revenue
3. Concerned CIT
4. CIT (A)
5. DR, ITAT, Ahmedabad
6. Guard file.
By order/आदेश से,
उप/सहायक पंजीकार
आयकर अपील य अ धकरण,
अहमदाबाद