Income Tax Appellate Tribunal - Mumbai
Sumaraj Seafoods (P) Ltd. vs Ito on 26 June, 2007
Equivalent citations: [2008]112ITD177(MUM), [2008]300ITR182(MUM), (2008)115TTJ(MUM)649
ORDER
J. Sudhakar Reddy, Accountant Member
1. All these appeals are filed by the assessee directed against separate orders of the Commissioner (Appeals), XXXIII, Mumbai for the assessment years 2001-02, 2002-03 and 2003-04. As the issues arising in all these appeals are common, for the sake of convenience they are heard together and disposed of by way of this common order.
2. The assessee is a private limited company and is in the business of processing of marine products, storing the same in its cold storage plant and then exporting the same. The common issue in all the three appeals is whether the assessee is entitled to deduction under Section 80-IB(3)(ii) of the Income Tax Act, 1961. The assessee filed its return of income claiming deduction under Section 80-IB as well as under Section 80HHC. The assessing officer observed that the deduction under Section 80-IB is allowable to an industrial undertaking which fulfils certain conditions. As a basic condition to be satisfied is that it should be an industrial undertaking and it should also operate a cold storage plant, he relied on the judgment of the Hon'ble Supreme Court in the case of CIT v. Relish Foods and held that processing of fish cannot be held as an industrial undertaking and thus he denied exemption. The first appellate authority, while agreeing with the contentions of the assessee that it is eligible for deduction under Section 80-IB(3)(ii), dismissed the claim of the assessee on the ground that a separate computation of profit from cold storage is not provided by the assessee and also held that no income can be said to have been generated from the cold storage as it is just one stage of the total export business of the assessee. He rejected the claim of the assessee. Aggrieved, the assessee is in appeal before us.
3. Shri Arvind Sonde appearing for the assessee took this Bench through the history of the legislation and submitted that it was the intention of the Legislature to grant exemption from income-tax on all profits of the business of an industrial undertaking which operates a cold storage plant. His contention is that there are two conditions to be satisfied for the assessee to be eligible for a deduction in respect of profits and gains under Section 80-IB(3)(ii) The first being that it should be an industrial undertaking and the second being that the undertaking should operate its cold storage plant. He emphasised on the wording of Section 80-IB(I) the "Profits and gains derived from any business of an industrial undertaking" and the wording used in the erstwhile Section 80-I, i.e., "Profits and gains derived from industrial undertaking" and submitted that the Legislature has consciously altered the language, with an intention that the entire profits arising out of the business of an undertaking, which fulfils the necessary conditions, be exempt from taxation. For the proposition that the entire profits and gains assessable under the head "Business profits" of an industrial undertaking is exempt, he relied on the following case laws:
1. Asstt. CIT v. Maxcare Laboratories Ltd. (2005) 92 ITD 11 (Ctk).
2. Jagdishprasad M. Joshi v. Dy. CIT (2005) 97 TTJ 924.
3. Dy. CIT v. Eltek SGS (P) Ltd. (2006) 10 SOT 178 (Delhi).
4. The thrust of his argument is that the profits from business of an undertaking, from whatever source should be exempt, provided the conditions mentioned for enabling the undertaking to claim exemption are fulfilled. Thus he submits that the first appellate authority while agreeing that the assessee is eligible for deduction under Section 80-IB(3)(ii) was wrong in holding that no separate computation of profit from the operation of the cold storage has been furnished by the assessee and thus no deduction can be given. He further pointed out that the fact of the assessee claiming deduction under Section 80HHC, cannot be a circumstance to deny assessee's claim under Section 80-IB. He further disputed the finding of the first appellate authority that no income has been generated from the operation of cold storage as it is one part of the total business, which in the assessee's case is the export of seafood. He vehemently contended that the section nowhere contemplates any such segregation of profits so as to arrive at a conclusion as to how much of profit is attributable to purely storage of goods. He relied on Circular No. 005 P, dated 9-10-1967 issued in the context of provisions of Section 84 of the Income Tax Act and submitted that the intention of the Legislature, right from that time till date was expressed by this circular which states that "An industrial undertaking operating cold storage plant in India will be eligible for the 'tax holiday' concession in the same manner as an industrial undertaking which manufactures or produces articles in India". Thus he submits that the Legislature has specifically provided that operation of a cold storage plant is at par with the activity of manufacturing of an article or thing. He vehemently contended that it is impossible to visualise export activity of fish and other marine products without processing of storing the same in a cold storage plant. Thus his case is that the entire profits are totally an outcome of the operation of a cold storage plant. He further submits that purchases, preservation and sale of perishable goods is the only business of a cold storage undertaking and this activity is an integrated, inter-linked and inseparable activity and has to be considered as a whole. On the reliance placed by the first appellate authority on the decision in the case of Delhi Cold Storage (P) Ltd. v. CIT he submits that the facts are totally different and not applicable to the facts of this case. On the decision in the case of Relish Foods (supra) relied upon by the assessing officer he submits that was regarding manufacture of goods and not in connection with operating of a cold storage. On the proposition that the assessee should be eligible for grant of deduction, the learned Counsel relied on the decision of the Hon'ble Madras High Court in the case of CIT v. George Marjo Exports (P) Ltd. (2001) 250 ITR 4462 wherein it was held that the assessee operating cold storage plant for use of its sister concern and receiving payment is entitled to deduction under Section 80J. He pointed out that there are similarities in the wordings used in Section 80-IB(3)(ii) and Section 80J. Similarly he brought to the notice of the Bench the decision of the Hon'ble Madras High Court in the case of CIT v. Asian Marine Products (P) Ltd. (sic) wherein it was held that where an assessee company had not done any manufacturing business and had let out the cold storage plant on hire during the relevant period, it was held that the assessee is not entitled to special deduction under Section 80J.
5. Shri Rajesh Kundan, the learned departmental representative, submitted that the assessee herein purchases, process, stores in a cold storage fish and marine products and then exports the same and that this activity cannot be considered as an activity of an industrial undertaking and thus is not eligible for deduction under Section 80-IB. He further submits that the wording of Section 80-IB(3) clearly states that what is deductible is profits derived from the activity of an industrial undertaking which is in the exempted category and not the entire profits of any undertaking which also has an eligible undertaking. Thus he submits that it is the duty of the assessee to provide a computation of the profits that are derived from the eligible industrial undertaking and only such profits could be claimed as a deduction. He pointed out that the first appellate authority has held that he has satisfied that the assessee is entitled to deduction under Section 80-IB(3)(ii) and that the only issue to be answered by this Bench is on the quantum of deduction and whether the revenue authorities were right in refusing deduction, on the ground that the assessee has not furnished any computation of such profits and on the ground that no profits as such can be said to have been derived from the operation of the cold storage plant He relied on the orders of the revenue authorities and prayed that the same be uphelearned
6. Rival contentions are heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record and the case laws cited before us we hold as follows:
6.1 Section 80-IB(l) is extracted for ready reference:
(1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in Sub-sections (3) to (11) [and (11A)] (such business being hereinafter referred to as the eligible business), 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 from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.
[Emphasis supplied] Section 80-IB(2) lays down the conditions to be fulfilled under this section. The conditions are firstly that an industrial undertaking should not be formed by splitting or the reconstruction of the existing business. The second condition, is that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. These conditions are not issues before us. The third condition mentioned at Clause (Hi) of Sub-section (2) of Section 80-IB is relevant on the issue in hand and hence is extracted below:
(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India.
[Emphasis supplied] The fourth condition is on the number of workers that are to be employed etc. and this condition is not in dispute before us and hence we do not deal with the same.
6.2 Section 80-IB(3) reads as under:
(3) The amount of deduction in the case of an industrial undertaking shall be twenty-five per cent (or thirty per cent where the assessee is a company), of the profits and gains derived from such industrial under taking for a period of ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) beginning with the initial assessment year subject to the fulfilment of the following conditions, namely:
(i) **
(ii) where it is an industrial undertaking being a small scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage plant [not specified in Sub-section (4) or Sub-section (5)] at any time during the period beginning on 1-4-1995 and ending on 31-3-2002.
[Emphasis supplied] A conjoined reading of these sections shows that the necessary condition to enable the assessee to claim a deduction under Section 80-IB is it operates its one or more cold storage plant or plants in any part of India. In Section 80-IB(l) deduction is given when the gross total income of the assessee includes any profits and gains derived from the business referred to in Sub-sections (3) to (11), (11a) and (11b). In this case, the gross total income of the assessee includes profits and gains derived from the business referred to in Sub-section (3)(ii) i. operation of its cold storage plant and thus the conditionalities of Section 80-IB(1) are duly fulfilled. The revenue has not filed any cross appeal or cross objection to the finding of the Commissioner (Appeals) that the assessee is entitled to deduction under Section 80-IB(3)(ii) read with Section 80-IB(2)(iii).The condition that the eligible undertaking should operate its cold storage plant is an alternative to an undertaking which, manufactures or produces article or thing. As the revenue has not disputed that the assessee is an industrial undertaking and that it operates its own cold storage plant, we do not disturb the finding of the first appellate authority.
6.3 Even otherwise the erstwhile Section 80J read as follows:
80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, 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 from such profits and gains (reduced by the deduction, if any admissible to the assessee under Section 80HH or Section 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the manner specified in Sub-section (1A) in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section referred to as the relevant amount of capital employed during the previous year):
Provided that in relation to the profits and gains derived by an assessee being a company, from an industrial undertaking which begins to manufacture or produce articles or to operate its cold storage plant orplants after 31-3-1976, or from a ship which is first brought into use afterthat date, or from the business of a hotel which starts functioning afterthat date, the provisions of this sub-section shall have effect as it for thewords "six per cent", the words "seven and a half per cent.
(Emphasissupplied).
Interpreting this section the Hon'ble Madras High Court in the recent judgment in the case of George Marjo Exports (P) Ltd. (supra) held as follows:
Counsel for the revenue submitted before us that in the instant case the assessee is not engaged in the manufacture of articles or production of articles in any part of India, but it had let out the machinery and derived rent and it has thus become ineligible for deduction.
The Tribunal has found that the assessee had only allowed the sister concern to avail of the use of the men and machinery on payment of charges proportionate to the goods processed. It was the assessee which operated the cold storage facility with its men and machines even though the other sister concern paid for the work done. It appears from the records that there was an agreement entered into between the assessee and its sister concern. On the basis of the agreement, the Tribunal has found that the assessee operated the cold storage with its men and machines and it was the other sister concern which paid monies for the work done. This being a question of fact, the Tribunal has considered this aspect and has found that it was the assessee which carried out the action of operating the cold storage: and the production of the sea food and the entire activity was done with the men and machines of the assessee. We, therefore, do not find any error in the order passed by the Tribunal and we answer the first question in favour of the assessee and against the revenue.
As the wording used both under Sections 80J and 80-IB are para materia, as in the case considered by the Hon'ble High Court is a case of sea food business, where cold storage facility is operated we apply the judgment of the Hon'ble Madras High Court in the case of George Marjo Exports (P) Ltd. (supra) and uphold the findings of the appellate authority that the assessee is eligible for deduction under Section 80-IB(3)(ii) of the Act.
6.4 We now consider the issue whether the entire profits and gains derived from the business of a small scale industrial undertaking which operates its cold storage plant is exempt from taxation or not. This argument of Shri Arvind Sonde on the issue cannot be accepted for the reason that the deduction in this case is governed by Section 80-IB(3). This section clearly provides that the amount of deduction shall be a particular percentage of the profits and gains derived from its industrial undertaking which operates its cold storage plant. In our humble opinion, in the case of an industrial undertaking operating its cold storage plant, the profits eligible for deduction would be restricted to the profits generated from activity of operating the cold storage plant which would include (i) the activity of storage of goods belonging to others against charges and (ii) activity of storage of its own goods for sale. In the case of former, it would relate to the profit derived from such job work which in the later case would mean the profit derived by the assessee from the sale of goods which were kept in the cold storage. The other profits, even attributable to such activity, would not be eligible for deduction. For example, such undertaking may have income by way of interest on deposits/loans, etc., rent by letting out a portion of its building or profits on mere purchase and sale of goods which are not stored in its cold storage plant, etc. Such income cannot be said to be income derived from the business of an undertaking. This view has also been taken by the co-ordinate Bench in the case of National Thermal Power Corpn. v. Addl. CIT (2004) 91 ITD 101 (Delhi). So long as the activity of operation of cold storage is distinct and independent small-scale industrial unit, its income either by job work or on account of purchase, storage and sale of goods having direct nexus with cold storage plant would be eligible for deduction under Section 80-IB. Other income which are incidental to such business would not be eligible for deduction since legislation has used the words 'derived from' and not 'attributable to'.
6.5 Coming to the case on hand, the only activity conducted by the assessee is to purchase, process, store in its cold storage plant and then to export fish and other sea foods. Thus the operation of its cold storage plant is a very essential and critical element in this activity of the undertaking. Thus the profits derived from this industrial undertaking have a close and proximate nexus with the operation of its cold storage plant and thus in terms of Section 80-IB(3) the same, in our considered opinion, would be eligible profits for grant of deduction under Section 80-IB(3).
6.6 The finding of the first appellate authority that no profit can be said to have been derived from the cold storage plant, in the chain of activities, in our considered opinion, is erroneous. Even if the contention of the revenue is to be taken into consideration, then also the operation of a cold storage plant would definitely result in certain value addition to a product and such value addition should be considered as profits derived from operation of a cold storage plant. As we have held that the entire profits derived from an industrial undertaking which operates its cold storage plant as one of its critical processes, is eligible for deduction, we do not find it necessary to comment on this issue. This much has to be said that the stand A of the first appellate authority is against the facts of the case and also against the wording and spirit of the section. If the assessee had no cold storage plant of its own, it would have to depend on some other facilities, or otherwise, perishable goods, i.e. sea foods being a product of the assessee would get destroyed and the entire profits would be wiped out.
7. Thus we set aside the issue to the file of the assessing officer with the direction to consider and compute the "profits and gains derived from the industrial undertaking which operates its cold storage plant" and to grant suitable deduction under Section 80-IB(1) read with Section 80-IB(3) of the Act. The assessing officer shall exclude such business profits which cannot be said to have been derived from the industrial undertaking, by keeping in mind the tests laid down by the Hon'ble Supreme Court in the case of Sterling Foods (supra), Pandian Chemicals and other similar cases. The assessing officer shall also keep in mind the provisions of Section 80-IB(13) while granting deduction, for the reason that the assessee had also claimed benefit under Section 80HHC.
8. Thus the sole ground for the assessment year 2001-02 and ground No. 3 for the assessment year 2002-03 and ground No. 1 for the assessment year 2003-04 is allowed for statistical purpose.
9. Out of the remaining grounds in assessment year 2002-03, first ground is not pressed, hence dismissed. The other ground pertains to deduction under Section 80HHC in respect of export incentive earned on sale of DEPB. We find that as per the Third Proviso to the amended provisions of Section 80HHC(3) the assessee is not entitled to the benefit of DEPB as its turnover exceeds Rs. 10 crores. Hence, we uphold the decision of the learned Commissioner (Appeals) on this issue. Thus ground No. 2 is rejected.
10. With regard to the remaining issue in assessment year 2003-04 raised by way of ground No. 4 is not pressed, hence dismissed.
11. In the result, all the three appeals filed by the assessee are treated as partly allowed, for statistical purpose.