Income Tax Appellate Tribunal - Ahmedabad
Dhanlaxmi Pigments Pvt.Ltd., Bharuch vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D" AHMEDABAD
Before Shri Mahavir Singh, Judicial Member, and
Shri D. C. Agrawal, Accountant Member
ITA No.4133/ Ahd/2008
Assessment Year: 2005-06
Date of hearing:3.11.09 Drafted:17.11.09
Dhanlaxmi Pigments V/s. DCIT, Bharuch Circle,
Pvt. Ltd., Plot Bharuch
3020/3021, GIDC
Estate, Panoli
PAN No. AABCD014H
(Appellant) .. (Respondent)
Appellant by :- Shri S.V. Agrawal, AR
Respondent by:- Shri C.K. Mishra, Sr. DR
ORDER
PER Mahavir Singh, Judicial Member:-
This appeal by the assessee is arising out of the order of Commissioner of Income-tax (Appeals)-VI, Baroda in appeal No.CAB/VI-281/07-08 dated 16- 09-2008. The assessment was framed by the DCIT, Bharuch Circle, Bharuch u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 26-09-2007 for the assessment year 2005-06.
2. The only issue in this appeal of the assessee is against the order of CIT(A) in confirming the action of the Assessing Officer in treating the income declared during the course of survey u/s.133A of the Act on account of cash gifts as income from other sources thereby disallowing deduction u/s.80-IB of the Act. For this solitary issue, the assessee has raised the following five grounds:-
ITA No.4113/Ahd/2008 A.Y 2005-06Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 2 "[1] The learned CIT(A)'s order treating cash deposits of Rs.1,44,000/- to be non-business income, is erroneous in as much as the company was incorporated with a main object to carry out manufacturing of chemical pigments and except manufacturing a product, CPC Blue, non other business activity had been carried out since the year of incorporation.
[2] The Revenue Authorities had not observed any other manufacturing Activity incompetent for the claim of deduction u/s.80IB. Thus, the excess cash & cash deposits declared as income, resemble cash generated & derived from the main & normal manufacturing activity of the assessee company, eligible for deduction u/s.80IB. [3] The learned CIT(A) should have appreciated at Point No.16 of the statement recorded during the course of survey, the department itself had proposed the additional income of Rs.12,44,000/- to be part of income of the business of the assessee and the director of the company had agreed with the proposition, the following was the question at Point No.16 and corresponding answer;
Q-16. Looking to your above dealings it cannot be believed that on 30.08.04, the director And the family members have received the gift of Rs.12,44,000/-. You are being asked once again if the gift received by director and his family members is nothing but the income of your business which has been credited to the director and his family members in the form of gift. It is an apprehension that it has, in fact, taken from the incomes in addition to incomes disclosed as per your books. You are being given one more opportunity to disclose the true fact in relation to the aforesaid matter.
A As an answer to your question I, after discussion with other director Mr. Manubhai P Ramolia, who is my brother and with full understanding, inform you that amount of gifts, is, in reality, the income of the company Dhanlaxmi Pigments Pvt. Ltd. for the current year i.e. F.Y 2004-05. I accept the said amount as additional income of this company and I am ready to pay required tax on it. [4] The learned CIT(A) should have appreciated the judgment of H'ble Amritsar Tribunal in Kashmir Steel Rolling Mills v. DCIT (1991) 39 TTJ 126;
Income disclosed under the Amensty scheme - no material brought on Record by the Revenue to prove that the income disclosed was not derived from assessee's industrial undertaking but from some different source. This being the only source of income of the assessee-firm, there is strong circumstantial evidence to conclude that such income was derived from the industrial undertaking.
[5] The appellant craves leave to add/amend/alter/modify all or any of the above grounds during the course of hearing"
ITA No.4113/Ahd/2008 A.Y 2005-06Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 3
3. The brief facts of the case are that the assessee is engaged in the business of manufacturing of chemicals. A survey u/s.133A of the Act was conducted on the business premises of the assessee-company on 27-10-2004 and during the course of survey, the following additional income was declared by the assessee:-
I On account of cash gift Rs.12,44,000
II On account of cash Rs. 2,32,625
III On account of excess stock of Rs. 3,33,500
work-in-progress
Total Rs.18,10,125
During the course of survey from the premises of the assessee eight bank receipts representing various deposits in the name of Directors and their family members were found totaling to Rs.12.44 lakhs. This amount was disclosed as additional income at the time of survey by the Directors of the assessee-company Shri Manubhai P Ramolia. The Assessing Officer during the course of assessment proceedings noticed that the assessee has claimed deduction u/s.80IB of the Act on this income disclosed on account of cash gifts amounting to Rs.12.44 lakhs and after discussing the submission of the assessee, disallowed the deduction u/s.80IB of the Act of this amount of Rs.12.44 lakhs vide para-7 of his assessment order as under:-
"7. On verification, it is seen that the assessee has claimed deduction u/s.80IB of the Act of Rs.6,71,279/- worked out on total income of Rs.22,37,597/- computed by the assessee. As stated above, during the survey action, the assessee admitted Rs.18,10,125/- as additional income. The disclosed income is consist of as under:-
1. On account of cash gifts Rs.12,44,000
2. On account of cash Rs. 2,32,625
3. On account of excess stock in work in progress Rs. 3,33,500 Rs.18,10,125 ========== The deduction u/s.80IB of the Act is admissible for the income of the industrial undertaking as per the provisions of the I.T. Act. The income disclosed by the assessee is not a business income but it is "income from other sources". The assessee has admitted the gift of ITA No.4113/Ahd/2008 A.Y 2005-06 Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 4 Rs.12,44,000/- and cash of Rs.2,3,65/- as additional income. This income is not the business income hence the assessee was asked as to why the deduction u/s.80IB of the Act should not be disallowed on this income shown in the return of income filed. The assessee submitted reply dated 17/09/007 which is as under:-
Eligible of Deduction U/s.80IB On the Value of Excess Stock As mentioned earlier, the above excess stock was a semi finished generated piece by piece over different manufacturing process within the factory premises of the assessee. Here, the activity of manufacturing CPC blue was eligible for deduction U/s.80IB. The assessee company had been, since its incorporation, carrying out a sole manufacturing which was eligible for deduction U/s. 80IB. The assessee company had, since its incorporation, never carried out any other manufacturing activity not eligible for deduction u/s.80IB. Also, during the course of survey, the Income-tax Department had not observed any other manufacturing activity incompetent for the claim of deduction u/s.80IB.
Since, the declared income of Rs.3,33,500/- was directly pertaining & derived from the manufacturing activity of the assessee, the same is eligible for deduction u/s.80IB.
Eligible of Deduction U/s.80IB On the Income being Excess Cash found during survey & on Loans.
The assessee company had declared as income of Rs.18,10,125/- of which Rs.14,76,625/- is for cash and loans, Rs.232625/- for excess cash found at the time of survey & Rs.12,44,000/- addition for unsecured loan. As mentioned at point no.3, the assessee company has been manufacturing CPC blue since, the year of its incorporation & it was a sole manufacturing activity carried out since then to the date of survey, being eligible for deduction u/s.80IB. The following is the Main Object as per Memorandum of Association:-
"To carry of business as manufacturers, formulators, processors, producers, makers, buyers, sellers, re-sellers, importers, exporters, distributors, suppliers, fermentations, distillers, refiners, stockiest, agents, merchants, developers, consultants and dealers, in all types, forms (solid liquid and gaseous) and of all kinds of chemicals and chemicals compounds (organic and inorganic) heavy chemicals, acids, alkalies, tannis, tannis extracts, solvents, dyestuffs, dyes, pigments, colours, resins, chemical, auxiliaries, microc crystalliner, bio and colloidal chemical ITA No.4113/Ahd/2008 A.Y 2005-06 Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 5 sparay dried products, its intermediates, derivatives suspensions, gels, powders, formulations, downstreams, ingredients and byproducts and their related preparations activities and products.":
Also, the Memorandum of Associations, in its main object clause, mentions the object of the company is to manufacture chemicals and the main object clause has not been amended since, the date of incorporation. Thus, the view that the manufacturing activity carried out by the company was a main object for the incorporation of the company, is being supported by the Memorandum of Association. In fact for carrying out any other activity, the company requires to change the main object clause with passing a special resolution.
Also, during the course of survey, the Income-tax Department had not observed any other manufacturing activity incompetent for the claim of deduction u/s.80IB. Thus, the excess cash and loans disclosed as income, resembles the cash generated & derived from main & normal manufacturing activity of the assessee company and hence, the same is eligible for deduction U/s.80IB."
The reply of the assessee is considered. So far as the deduction u/s.80IB of the Act on the additional income shown by way of work in progress of Rs.3,33,500/- is concerned it can be allowed. However, for the remaining amount, the deduction u/s.80IB of the Act cannot be allowed. The additional income admitted at the time of survey action u/s.133A of the Act is of the cash deposited in the various bank accounts, which were disclosed as gift amounting to Rs.12,44,000/- and cash of Rs.2,32,625/-, which was not reconciled with the cash book. These are not the business income of the assessee. The additional income disclosed is the "income from other sources" as the source of this income is not known and therefore this income is charged to tax as "income from other sources". This fact is also supported by Gujarat High Court decision in the case of Fakir Mohmed Haji Hasan V/s. C.I.T. reported in 247 ITR 290. Therefore, the assessee is not entitled to the deduction u/s.80IB of the Act on this income. In view of this the deduction u/s.80IB of the Act is worked out on Rs.12,69,972/- @ 30% which comes to Rs.3,80,991 which is allowed as deduction u/s.80IB of the Act."
ITA No.4113/Ahd/2008 A.Y 2005-06Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 6
4. The Assessing Officer in computation of income has added this income from other sources by stating as under:-
"Add: Income from other sources disclosed at the time of survey u/s.133A of the Act Rs.14,76,625/-"
5. Aggrieved, the assessee preferred appeal before CIT(A) and he confirmed the disallowance after distinguishing the case law in the case of Kashmir Steel Rolling Mills (1991) 39 TTJ 126 (AMR); Lakhmichand Baijnath v. CIT (1959) 35 ITR 416 (SC) and also Daulatram Rawat Mull v. CIT (1967) 64 ITR 593 (Cal) by giving following finding in para-11 and 12 of his appellate order:-
"11. I have carefully considered the submissions of appellant, assessment order and the decisions cited in the context. Deductions out of total income under chapter VIA are provided with specific purpose and intention, i.e. to promote saving, to promote industrialization, promote development of backward area, develop infrastructure, promote export and so on. Deduction under section 80IB is provided inter alia for setting up of new industrial undertaking and for development of backward districts. To secure such deduction it is presumed that the assessee would follow the law of land and also satisfy the conditions stipulated in section 80IB. If the eligible business is not operated according to the established business and accounting principles and correct turn over is not disclosed or correct taxes are not paid, the assessee cannot seek benefit of the concessional provisions. In the instant case, during the course of survey it was revealed that income to the extent of Rs.147665/- had not been disclosed to the department and on being found out the appellant claimed that it was generated out of the business activities. If that be so then there would be undisclosed purchases, undisclosed expenses and undisclosed sales. In other words the book results would have no sanctity. Neither in assessment or appellate proceedings the appellant has disclosed the modu9s operandi as to how such undisclosed income has been earned. In other words in the absence of details, it is not evident that the said income was conclusively from its business activities. The activities of the assessee are within its special knowledge and section 106 of the Evidence Act requires the assessee, not the department, to disclose it and prove it. The appellant cannot be allowed to profit from his mischief.
12. In view of the above and considering the facts and circumstances of the case, in my humble view the appellant is not eligible for benefit u/s.80IB of the Act. The disallowance of Rs.14,76,625/- is therefore confirmed."ITA No.4113/Ahd/2008 A.Y 2005-06
Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 7 Aggrieved, the assessee came in second appeal before us.
6. Before us Ld. Counsel for the assessee stated that the assessee- company was incorporated on 23-10-1998 with an object to manufacture pigments & organic and inorganic chemicals and the company has been manufacturing a sole product, namely, CPC Blue since the year of its incorporation. According to the assessee, it was sole product which has been manufactured & sold by the company since its incorporation and further claimed that the assessee-company was eligible to claim deduction u/s.80IB of the Act. He stated that the assessee-company was subject to income-tax survey on 27-10-2004 and the assessee admitted an additional income of Rs.18,10,125/- as stated below:-
Rs.
"1. On account of cash deposits found to have been 12,44,000 made in banks accounts of directors and family members.
2. Excess cash found 2,32,625
3. Excess Work-in-progress 3,33,500 DECLARED INCOME 18,10,125 ======== He narrated the fact that on date of survey at the premises of the assessee- company bank deposit slips were found aggregating cash deposit of Rs.12,44,000/- in the bank accounts of the Directors and their family members. He stated that the department treated the same as an income of the assessee-company since the bank deposit slips were lying at the premises of the assessee-company and while filing the return of income, the assessee- company treated the declared income of Rs.18,10,125/- to be part of business income and accordingly taken the same into consideration while computation of deduction u/s.80IB of the Act. He narrated that the Assessing Officer, during the assessment proceedings treated only excess work-in-progress Rs.3,33,500/- to be part of business income and treated the balance declared ITA No.4113/Ahd/2008 A.Y 2005-06 Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 8 income of Rs.14,76,625/- pertaining to excess cash and cash deposits to be non-business income and disallowed the assessee's claim of deduction u/s.80IB to that extent. The Ld. counsel for the assessee drawn our attention to the assessee's paper book pages-10 to 13 and particularly question No.14 to 16 and 19 to 20 and stated that vide Question No.16 while the Assessing Officer himself has admitted this income as income from business and now he cannot treat the same as income from other sources. Accordingly, the Ld. counsel for the assessee urged the Bench to deduction u/s.80-IB on this income.
7. On the other hand, Ld. Sr. DR, Shri C.K. Mishra stated that the gift received by the Directors and their family members cannot be the business income or income from industrial undertaking so as to eligible u/s.80-IB of the Act. He stated that even this income is accepted as business income, it cannot be called as derived from industrial undertaking and he relied on the case of law of Hon'ble apex court in the case of Liberty India Ltd. v. CIT (2009) 317 ITR 218 (SC) and he argued that the lower authorities have rightly treated the income disclosed at the time of survey as income from other sources. He further stated that the assessee-company neither before the lower authorities nor before the Tribunal is able to explain how this income is related to or derived from new industrial undertaking or industrial undertaking set up in backward areas. The unexplained gifts credited in the accounts of the Directors or the family members of the assessee-company cannot be treated as income derived from industrial undertaking and there is no nexus with the earning of this income with the new industrial undertaking or industrial undertaking set up in backward area. In view of these arguments, the Ld. Sr. DR urged the Bench to confirm the orders of the lower authorities.
8. We have heard the rival contentions and gone through the case records including the assessment order, the order of CIT(A) and the submissions and paper book filed by the assessee. We have also considered the case law ITA No.4113/Ahd/2008 A.Y 2005-06 Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 9 relied on by both the sides. The brief facts narrated are undisputed that during the course of survey on the premises of the assessee on 27-10-2004 cash gifts were surrendered by the assessee before the Assessing Officer. It was contended by the assessee that it had sole manufacturing unit since incorporation and never carried out any other business activity. According to him, the Department could not find out any other activity and accordingly excess cash or loans found deposited in the bank accounts of the Directors or the relatives and disclosed as business income is derived from manufacturing activity and is eligible for deduction u/s.80IB of the Act. The Assessing Officer found that the additional income in respect of cash deposited in various bank accounts on account of the gifts received from relatives were not treated by the AO as business income but as income from other sources placing reliance on the decision of Hon'ble jurisdictional High Court in the case of Shri Fakir Mohmmed Haji Hassan v. CIT (2007) 247 ITR 290 (Guj). Now, we have to go through the statement of Shri Chaturbhai Phoptbhai Ramolia recorded at the time of survey on 27-10-2004 at the premises of assessee and this statement was referred by the Ld. Counsel for the assessee and he referred particularly question No.14 to 16 and thereafter question No.19. He particularly referred to question No.16 and stated that the AO himself has accepted this as income from business by asking that the gifts received by the Directors and his family members are nothing but income from business, which have been recorded in the names of Directors and his family members in the form of gifts. The following are the questions asked during the course of statement and the relevant questions read as:-
"Q-14 During the survey conducted today we have obtained bank slip book (Ank. Nag. Sah. Bank) and pass book of Oriental Bank of Commerce (OBC) and computerized statement in which information regarding name of person and amount received is shown. Verify the given Annexure B wherein inventory of these three items is shown and explain about it.
A. After verifying the statement, bank pass book and slip in Annexure B I explain that names of the person are that of director an his family members. The amount relates to cash deposited in bank and ITA No.4113/Ahd/2008 A.Y 2005-06 Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 10 received amount relates to that received from relatives of directors. The director has received gifts from relatives for himself as well as for his family members. This amount of gift has been taken by demand draft of Ank. Nag. Sah. Bank on 30-08-2004. The said amount is credited in OBC Bank in the director's and his family member's name.
Q-15 As stated by you that the gift has been received in the name of director and his family member disclose name, address and occupation of the person who have donated the gift. Also state and explain about the cash deposited by them on same date, 30-08-04 with Ank. Nag. Sah. Bank.
A. The persons who have presented the gift are the residents of District-Amreli. They belong to the village of the Director. They are farmers.
Q-16 Looking to your above dealings, it cannot be believed that on 30- 0-2004, the director and the family members have received the gift of Rs.12,44,000. You are being asked once again if the gift received by director and his family members is nothing but the income from business which has been credited to the director and his family members in the form of gift. In fact, it is taken out of the incomes in addition to incomes disclosed as per your books. You are being given one more opportunity to disclose the true fact in relation to the aforesaid matter.
A. As an answer to your question I, after discussion with other director Mr. Manubhai P Romalia, who is my brother and with full understanding, inform you that amount of gifts, is in reality, the income of the company Dhanlaxmi Pigments, Pvt. Ltd. earned in the current year i.e. F.Y. 2004-05. I accept the said amount as additional income of this company and I am ready to pay required tax on it.
Q-19 Today we found cash from your place of Rs.2,32,625 and as you explained cash book is not written and hence cash on hand as per books can not be ascertained. So explain this cash and why the cash of Rs.232625/- should not be treated as additional income of your business.
A. I agree that our company's cash book is not updated. So I agree that the additional amount found in our company's office is our additional income and I promise to pay the tax on the same."
9. We further find that this income declared by the assessee-company during the course of survey was on account of cash deposited in the bank a/c. of the ITA No.4113/Ahd/2008 A.Y 2005-06 Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 11 assessee-company as gifts received from Directors or relatives of Directors. The assessee could not adduce anything that these gifts are generated out of the business income of industrial undertaking eligible for deduction. For this the Ld. Counsel for the assessee relied on the case law in the case of Kashmir Steel Rolling Mills v. DCIT (1991 39 TTJ 126 (AMR), wherein the Tribunal has allowed deduction u/s.80HH and 80-I on the income disclosed under the Amnesty Scheme, where the Revenue could not prove that the income disclosed was not derived from the assessee's industrial undertaking but from some other sources. But in the present case before us, Revenue is able to assess the income as income from other sources by proving that the gifts received by the Directors and his family members of the assessee- company is income from other sources being non-genuine gifts. Further in the case of Lakhmichand Baijnath (supra) was that the income received representing cash credit is business income derived from the business of the eligible unit but in the present case, the facts are entirely different.
10. After going through the provisions of Section 80-IB of the Act, which provides for allowing deduction in respect of profit & gains derived from the eligible business, we find that in the present case the cash gifts disclosed by the Directors and their relatives as deposited in the bank accounts as business income cannot be a profit & gains derived from the eligible business. The Assessing Officer has recorded a categorical finding that the income disclosed on account of gifts received and deposited in the name of Directors and their relatives by the assessee-company is income from other sources as the assessee-company could not prove that this income is derived from eligible business of the assessee-company, i.e. from manufacturing unit of the assessee-company. This view has been fortified by the Hon'ble jurisdictional High Court in the case of Shri Fakir Mohmmed Haji Hassan (supra), wherein it is held ( pages-293-294) as under:-
"The scheme of sections 69, 69A, 69B and 69C of the Income-tax Act, 1961, would show that in cases where the nature and source of ITA No.4113/Ahd/2008 A.Y 2005-06 Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 12 investments made by the assessee or the nature and source of acquisitions of money, bullion, etc., owned by the assessee or the source of expenditure incurred by the assessee are not explained at all, or not satisfactorily explained, then, the value of such investments and money or the value of articles not recorded in the books of account or the unexplained expenditure may be deemed to be the income of such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and the income would be treated under the appropriate head of income for assessment as per the provisions of the Act. However, when these provisions apply because no source is disclosed at all on the basis of which the income can be classified under one of the heads of income under section 14 of the Act, it would not be possible to classify such deemed income under any of these heads including income from "other sources" which have to be sources known or explained. When the income cannot be so classified under any one of the heads of income under section 14, it follows that the question of giving any deductions under the provisions which correspond to such heads of income will not arise. If it is possible to peg the income under any one of those heads by virtue of a satisfactory explanation being given, then these provisions of sections 69, 69A, 60B and 69C will not apply, in which event, the provisions regarding deductions etc., applicable to the relevant head of income under which such income falls will automatically be attracted.
The opening words of section 14 "save as otherwise provided by this Act" clearly leave scope for "deemed income" of the nature covered under the scheme of sections 69, 60A, 60B and 60C being treated separately, because such deemed income is not income from salary, house property, profits and gains of business or profession, or capital gains, nor is it income from "other sources" because the provisions of sections 69, 69A, 69B and 69C treat unexplained investments, unexplained monetary, bullion, etc., and unexplained expenditure as deemed income where the nature and source of investment, acquisition or expenditure, as the case may be, have not been explained or satisfactorily explained. Therefore, in these cases, the source not being known, such deemed income will not fall even under the head "income from other sources". Therefore, the corresponding deductions which are applicable to the incomes under any of these various heads, will not be attracted in the case of deemed incomes which are covered under the provisions of sections 69, 69A, 69B and 69C of the Act in view of the scheme of those provisions.
It is, therefore, clear that, when the investment in or acquisition of gold, which was recovered from the assessee was not recorded in the books of account and the assessee offered no explanation about the nature ITA No.4113/Ahd/2008 A.Y 2005-06 Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 13 and source of such investment or acquisition and the valu9e of such gold was not recorded in the books of account, nor the nature and source of its acquisition explained, there could arise no question of treating the value of such gold, which was deemed to be the income of the assessee, as a deductible trading loss on its confiscation, because, such deemed income did not fall under the head of income "profits and gains of business or profession".
11 Recently Hon'ble apex court in the case of Liberty India Ltd. (supra) has analyzed the provisions of Section 80-IB and 80-IA and stated that Section 80- IB provides for allowing deduction in respect of profit & gains derived from the eligible business. The Hon'ble apex court held that Section 80-IB provides for allowing deduction in respect of profit & gains derived from eligible business and analysis the provisions as under:-
"Before analysing section 80-IB, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment-linked incentives and profit-linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of "profit linked incentives". Therefore, when section 80-IA/80-TB 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). For example, an assessee-company located in Mumbai may have a business of building housing projects or a ship in Nava Sheva. Ownership of a ship per se will not attract section 80-IB(6). It is the profits arising from the business of a ship which attracts sub-section (6). In other words, deduction under sub-section (6) at the specified rate has linkage to the profits derived from the shipping operations. This is what we mean in drawing the distinction between profit-linked tax incentives and investment-linked tax incentives. It is for this reason that Parliament has con fined the deduction to profits derived from eligible businesses mentioned in sub-sections (3) to (11A) (as they stood at the relevant time). One more aspect needs to be highlighted. Each of the eligible business in sub sections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. That is the reason why the concept of "Segment Reporting"ITA No.4113/Ahd/2008 A.Y 2005-06
Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 14 stands introduced in the Indian Accounting Standards (IAS) by the Institute of Chartered Accountants of India (ICAT).
Analysing Chapter VT-A, we find that section 80-113/80-IA are a code by themselves as they contain both substantive as well as procedural provisions. Therefore, we need to examine what these provisions prescribe for "computation of profits of the eligible business". It is evident that section 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words "derived from"
are narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is: whether the DEPB credit/duty drawback receipt comes within the first degree sources? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit/duty drawback receipts do not come within first degree source as the said incentives flow from the incentive schemes enacted by the Government of India or from section 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, the Department places heavy reliance on the judgment of this court in Sterling Foods [1999) 237 ITR 579. Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture. (see CIT v. Kirloskar Oil Engines Ltd. reported in [1986] 157 ITR 762.) Continuing our analysis of section 80-IA/80-IB it may be mentioned that sub-section (13) of section 80-lB 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-lB. Therefore, at the outset, we stated that one needs to read sections 80-I, 80-IA and 80-IB as having a common scheme. On a perusal of sub-section (5) of section 80-lA, it is noticed that it provides for the manner of computation of profits of an ITA No.4113/Ahd/2008 A.Y 2005-06 Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 15 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-TB. (see section 80-IB(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 an 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 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 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/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 80-113. They belong to the category of ancillary profits of such undertakings.
ITA No.4113/Ahd/2008 A.Y 2005-06Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 16 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 "profits derived from industrial undertaking" in section 80-lB.
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 ITA No.4113/Ahd/2008 A.Y 2005-06 Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 17 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 (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 (1CM) 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."
12. As in the present case, the income disclosed during the course of survey is not arising out of undisclosed purchases, undisclosed expenses or undisclosed sales, rather, it is on account of disclosure of additional income on account of cash gifts received by the Directors and their family members and deposited in assessee's bank account. As referred by the Ld. Counsel for the assessee the case law of this Tribunal in the case of Associated Power Structure Pvt Ltd. V ACIT in ITA No.3660/Ahd/2007 dated 8/5/2009 is clearly distinguishable on the facts asin that case the surrender amount of Rs. 11.20 was out of scraps generated out of assessee's eligible business but same is not the case here. We find that the provisions of section 80-IB prescribe for "computation of profits of the eligible business" and allows deduction in respect of profits and gains derived from the eligible business. Accordingly the ITA No.4113/Ahd/2008 A.Y 2005-06 Dhanlaxmi Pigments Pvt. Ltd. v. DCIT Bharuch Page 18 word "derived from" are narrower in connotation as compared to the words "attributable to" and the legislature by using the expression "derived from"
intended to cover sources not beyond the incomes generated out of eligible business, which is out of profits and gains from certain Industrial Undertakings or of Industrially Backward States Specified in the Eighth Schedule. Accordingly, the income declared by the assessee during the course of survey out of the cash gifts deposited in the bank accounts of relatives and directors of the assessee-company is income from other sources and is not derived out of eligible business and deduction u/s. 80-IB is not available to the assessee on this income. Accordingly, we confirm the orders of the lower authorities and this issue of the assessee's appeal is dismissed.
13. In the result, assessee's appeal is dismissed.
Order pronounced in Open Court on 31 /12 /2009
Sd/- Sd/-
(D.C.Agrawal) (Mahavir Singh)
(Accountant Member) (Judicial Member)
Ahmedabad,
Dated : 31/12/2009
*Dkp
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT(Appeals)-VI, Baroda
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT, Ahmedabad