Income Tax Appellate Tribunal - Mumbai
Shah Originals vs Assistant Commissioner Of Income Tax on 25 October, 2007
Equivalent citations: (2007)112CTR(MUM)754
ORDER
G.E. Veerabhadrappa, Vice President
1. These appeals are filed by the assessee for the asst. yrs. 2000-01, 2001-02, 2002-03, 2003-04 and 2004-05. The Department has also filed appeal for the asst. yr. 2001-02. These appeals arise out of the respective orders of the CIT(A) for those years. Since common issues are involved in all these appeals, the same have been consolidated and are being disposed of by this order.
2. The assessee is a partnership firm engaged in the business of manufacture and export of readymade garments. The manufacturing activity of the garments is carried on at the industrial undertaking of the assessee at Malvia Nagar, Jaipur, and the export of the same is done from the head-office at Jogeshwari, Mumbai. The issues under appeal may broadly be divided into two categories viz. those related to allowance of deduction under Section 80HH (sic-Section 80HHC) of the Act and the others in respect of allowance of deduction under Section 80-IB.
3. The disallowance under Section 80HHC of the Act may again be sub-divided into four categories viz.
(i) Non-inclusion of gain on foreign exchange rate fluctuation under EEFC account within profits and gains of business (in this case wholly export business) and, on the other hand, treatment of the same as income from other sources. The years concerned are asst. yrs. 2000-01, 2002-03, 2003-04 and 2004-05. The actions of the AO in this regard have been upheld in the respective first appeals. For the asst. yr. 2001-02, however, the CIT(A) allowed the claim of the assessee for inclusion of gain on foreign exchange rate fluctuation within profits and gains of business and the sole ground of the Department for that year is in respect of this issue and directed against the order of the CIT(A) allowing the claim of the assessee in this regard.
(ii) Non-inclusion of interest on EEFC account and also interest on bank FDRs kept for guarantee purpose in connection with the export business within profits and gains of business and treatment of the same as income from other sources. The issues are common in asst. yrs. 2000-01, 2001-02, 2003-04 and 2004-05.
(iii) Non-inclusion of interest on income-tax refund within profits and gains of business and treatment of the same as income from other sources. The issue is there for the asst. yr. 2002-03 only.
(iv) Treatment of DEPB credit of Rs. 83,86,782 as income from other sources for the asst. yr. 2004-05.
4. With regard to the first issue the disallowance has been on the basis of the finding of the AO that the assessee kept the export proceeds/part thereof in the EEFC account. Therefore, the interest income, according to the AO, cannot be considered to be connected with the export operations and, hence, not eligible for consideration in the computation of deduction under Section 80HHC of the Act.
5. We have heard both the sides and find that the CIT(A) accepted the above contention on behalf of the assessee for the asst. yr. 2001-02 and in all the other years he did not accept the same. Our attention was drawn by the learned Counsel for the assessee to the following decisions:
(i) Smt. Sujata Grovei v. Dy. CIT (2002) 74 TTJ 347 (Del);
(ii) Decision of the Mumbai Bench of the Tribunal in S.S. Industries ITA No. 2732/Mum/1997, decided on 30th Jan., 2000;
(iii) Mohindra Impex ITA No. 1492/Del;
(iv) Decisions of the Mumbai Bench of the Tribunal in M.B. Mehta & Co. ITA No. 4607/Mum/2004, decided on 27th June; 2006 and Fountainhead Exports ITA Nos. 5817/Mum/2000 and 5823/Mum/2000 and CO. No. 78/Mum/2001 for asst. yr. 1998-99.
6. The learned Departmental Representative was also heard who strongly drew support from the line of reasoning adopted by the AO.
7. In the light of the above, the decision of the co-ordinate Benches on the identical issue, we accept the contention of the assessee and allow the appeals filed by the assessee. The Departmental appeal on this issue for the asst. yr. 2001-02 is accordingly dismissed.
8. So far as the second issue is concerned, the Mumbai Benches of the Tribunal held in the case of Fountainhead Exports (supra) that interest income of the assessee of EEFC account should be treated as income derived from business and accordingly, is not to be excluded from calculation of deduction under Section 80HHC. Following this judgment, the appellate grounds of the assessee with regard to interest on EEFC account for the different years under consideration, are being allowed. The same treatment should also be accorded to interest on FDRs maintained by way of guarantee for export operations. Since, furnishing of guarantees is closely linked up with the export business, there is no reason why the interest earned on such FDRs should not be considered as business income of the assessee. Hence, similar decision is being given on this issue also and the grounds taken by the assessee are being allowed for different years. So far as interest earned on ordinary FDRs are concerned, they merely represent placement of surplus money of the business of the assessee in the form of FDRs. Hence, they cannot be considered to be having any direct connection with the business of the assessee.
9. The learned Departmental Representative invited our attention to the decision of the Delhi High Court in the case of CIT v. Shri Ram Honda Power Equip holding that for the purpose of allowance of deduction under Section 80HHC of the Act, 'profit' would relate to only those items of income directly relatable to the business of export. The learned Departmental Representative has also cited a similar decision of Tribunal, Mumbai Bench 'F', in the case of Jayantilal Bhimraj Jain ITA No. 5307/Mum/2003, order dt. 5th March, 2007.
10. We have heard both the sides and have also perused the materials placed on record. We find that the judgments cited by the learned Departmental Representative clearly hold that interest earned on FDRs is totally unconnected with the export business of the assessee and simply by way of utilization for the surplus money of the assessee and has to be considered as income from other sources only. Therefore, the Tribunal held that interest income on ordinary FDRs has rightly been treated as income from other sources. To that extent, we uphold the orders of the lower authorities and the grounds taken by the assessee on this issue are rejected.
11. As regards the third category, i.e., non-inclusion of interest on income-tax refund within the profits and gains of business and treatment of the same as income from other sources is concerned, we do not find any merit in the ground raised by the assessee in this regard. Interest earned on income-tax refund can, in no way, be considered to be earned during the ordinary course of business of the assessee and, hence, there cannot be any question of treating the same as the business income of the assessee. Accordingly, we reject the ground raised by the assessee on this issue for the asst. yr. 2002-03.
12. Lastly, as regards the treatment of DEPB credits amount as income from other sources for the asst. yr. 2004-05 is concerned, after hearing both the sides, we are of the considered opinion that DEPB credit arises directly out of the business operations of the assessee. Hence, the said credit amount has necessarily got to be considered as business of the assessee. We order accordingly.
13. The next dispute relates to allowability of deduction under Section 80-IB of the Act. Though the assessee firm was eligible for deduction under Section 80-IB in the past also, the same was, however, never claimed, perhaps because that the need to avail of deduction under Section 80-IB did not arise in earlier years. The assessee started claiming deduction under Section 80-IB for the first time in the asst. yr. 2001-02. The claim of deduction under this section was denied by the AO. The CIT(A) upheld the order of the AO on this issue for all the years under consideration. In the present appeals, the assessee challenges the sustenance of the said disallowances.
14. We have heard both the parties and deal with their respective contentions in the paras hereinafter. While dealing with the same we will also deal with several aspects of the issue as discussed in the assessment order.
14.1 The contentions of the assessee before the AO were that it is a partnership firm engaged in the business of manufacture of readymade garments in its industrial undertaking at Malvia Nagar Industrial Area, Jaipur, which was set up in asst. yr. 1994-95. It is noted that the following items of machinery were purchased for the purpose of the said industrial undertaking and were installed therein:
(a) Stitching machine 102 (b) Cloth cutting machine 1 (c) Button hole machine 2 (d) Button stitch machine 214.2 The AO has found out that the business of the assessee comprises of the following activities:
(a) Purchase of grey fabric
(b) Getting it dyed and printed
(c) Fabrication of garments
(d) Embroidery work on garments
(e) Export of garments 14.3 The AO also noted that for the purpose of the industrial undertaking, the assessee company used to get the job of dyeing and printing of grey fabric by outside agencies on payment of job charges to them. Part of the fabrication works was also done through M/s Mangalam Garments, 109, Hi-Tech Industrial Centre, Jogeshwari, Mumbai. However, it is an undisputed fact that such fabrication works were being done under the direct control and supervision of and with the materials provided by the assessee firm as per their specifications and orders. Copies of sample purchase bills for materials by the Jaipur office and of papers sent for fabrication labour at Mumbai with instructions have been provided in the paper book to evidence the above. It is also found that the assessee firm duly submitted a report as required in Form 10CCB r/w Rule 18BBB for its claim under Section 80-IA/80-IB of the Act to the effect that the profit of the industrial undertaking being run from G-109, Malvia Nagar Industrial Area, Jaipur, qualifies for deduction under the said section.
14.4 Secion 80-IB, as it stood at the relevant time, required that in order to claim deduction under that section, the industrial undertaking should fulfil the following conditions:
(a) It is not formed by splitting up or reconstruction of a business already in existence.
(b) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
(c) It manufactures or produces any article or thing, not being any article or thing specified in the list in Eleventh Schedule.
(d) The industrial undertaking should begin to operate before 31st March, 1995 and in the case of an industrial undertaking being a small scale undertaking, it begins to manufacture or produce article or thing during the period beginning on the 1st day of April, 1995 and ending on the 31st day of March, 2000.
(e) The industrial undertaking manufacturing article or thing should employ 10 or more workers in a manufacturing process carried on with the aid of power or employ 20 or more workers in case of manufacturing process carried on without aid of power.
14.5 It is the claim of the assessee firm that it satisfied all the above requirements for claiming deduction in respect of the profits of the industrial undertaking established by it in Malvia Nagar, Jaipur. It is pointed out that the factory building at Jaipur belongs to the assessee firm and that the same has been disclosed in the accounts. It is also claimed that the plant and machinery were all newly acquired and were set up in the industrial undertaking. Furthermore, it is pointed out that the undertaking manufactures articles or things, which are not appearing in the list of Eleventh Schedule and that the said undertaking started operation of manufacture and production prior to 31st March, 1995, although it being a small scale industrial undertaking as per Sub-clause (d), even when production begins within 31st March, 2000, the industrial undertaking shall qualify for deduction. It is further, submitted that requirement of employment of 10 or more workers in the undertaking has also duly been met. In this connection, it has been submitted during the course of hearing of the appeals that besides casual and job workers, the undertaking employed a team of 42 regular workers in one of the years under appeal and in any case, not less than 20 regular workers in the other years. Thus, it is contended that all the requirements of Section 80-IB(2) stood fully satisfied and, therefore, the assessee's claim for deduction under Section 80-IB was within the four corners of law and hence, allowable.
14.6 The AO, in his assessment order dt. 10th Feb., 2004, made disallowance of the claim under Section 80-IB on the following grounds:
(a) Assessee's business at Mumbai is a separate industrial undertaking. In this connection, the AO refers to finding of some machinery at Gala 109, Hi-Tech Industrial Estate, Mumbai.
(b) The said separate industrial undertaking is not eligible for deduction under Section 80-IB.
(c) The Jaipur unit of the appellant firm undertook two distinct activities-one starting from procurement of cloth till dyeing and printing of the same and the other starting from printed cloth to the fabrication and packing of readymade garments.
(d) The activity pertaining to dyeing and printing does not pertain to any newly established undertaking and, hence, not eligible for deduction under Section 80-IB.
(e) Fabrication activity at Jaipur is not entitled to the deduction under Section 80-IB as it fails to meet the requirements of Section 80-IB(2)(iv).
14.7 The learned Counsel for the assessee vehemently contested the above findings of the AO by pointing out that the AO started the assessment with a pre-conceived notion that "the assessee undertakes manufacturing activity at two locations, namely, Jogeshwari at Mumbai and Malvia Nagar at Jaipur", whereas the actual fact is that the assessee firm runs only one industrial undertaking, which is located at Malvia Nagar Industrial Area, Jaipur. It has been further argued on behalf of the assessee that as far as machinery found at Gala 109, Hi-Tech Industrial Estate is concerned (one of the allegations of the AO), the assessee clarified vide submission dt. 27th Jan., 2004 quoted at p. 10 of para 4.3.4. of the assessment order, "Regarding machineries found in unit 109 at Hi-tech Industrial Estate please note that the said unit belongs to Om Apparels.... Presently, M/s Om Apparels is not doing any activity. However, their machines and unit No. 109 at Hi-Tech Industrial Estate, (is used) by one M/s Mangalam Garments to whom your assessee is paying labour charges for stitching of readymade garments." Further, as quoted in para 4.3.4 at p. 10 of the assessment order. "In his statement recorded on oath, Shri Anup Shah has stated that persons engaged in manufacturing activity at Gala No. 109 were not employees of the assessee firm. Rather, they were employed by M/s Perfect Creation, who are job workers for the assessee." It is required to be noted that the above factual contentions on behalf of the assessee have not been refuted in any way by the AO.
14.8 It has further, been clarified in this regard that, in fact, the assessee firm had neither taken on lease or on rent the premises at 109, Hi-Tech Industrial Centre, Jogeshwari, Mumbai, nor were they employing the contract labour for the purpose of production of article or thing. They have also not paid any remuneration or lease charges for the old machineries as alleged by the AO. They only got their job work done through M/s Mangalam Garments under the direct supervision of the assessee firm by providing them printed fabrics and stitching materials and have themselves performed the other activities, such as, putting buttons, packing, labelling, etc., and thereafter have sold/exported the said goods as per the export orders. On verification, we find the above contentions on behalf of the assessee to be correct. Hence, the question of allowing/denying deduction under Section 80-IB on the alleged unit at Mumbai does not arise.
14.9 So far as the actual industrial undertaking of the assessee at Jaipur is concerned, it is found that the AO, on the basis of the statement of the partners that "activity of dyeing and printing are undertaken by job workers outside the factory premises of the assessee and that no plant and machinery are required for the dyeing and printing", concluded that the entire gamut of operations of the assessee can be regarded as consisting of two distinct sets of activities as under:
(a) From procurement of cloth to dyeing and printing
(b) Fabrication and packing of readymade garments 14.10 In reaching such a conclusion, the AO has relied upon the following judgments:
(a) CIT v. J.B. Kharwar & Sons ;
(b) Rajeswari Mills Ltd. v. CIT (1963) 50 ITR 29 (Mad);
(c) Textile Machinery Corporation Ltd. v. CIT ;
(d) Tata Iron & Steel Co. Ltd. v. State of Bihar ;
(e) Citation at page 3665 in the 5th Edition of Charturvedi & Pithisaria
15. On this issue, the learned Counsel for the assessee has argued that the judgments relied upon by the AO are not given specifically in relation to Sections 80-I and 80J and that they have been given in altogether different contexts. He refers to the comments made while discussing the scope of the term "manufacture", in the case of CIT v. U.P. State Agro Industrial Corporation Ltd. --"It is difficult to lay down as a proposition that any and every activity of assembling amounts to manufacturing or producing of articles. One has to go further and examine the precise activity. If the question arises under Sections 80-I and 80J, the object underlying the sections and the trend of the decisions of the Courts in the country may also have to be kept in view.... The object of Sections 80-I and 80J is to provide relief and encouragement to newly established industrial undertakings and to certain other specified type of industrial undertakings. The trend of decisions under Section 80J is towards a liberal construction of the section. In the light of the said trend, the activity of the assessee in these cases does amount to manufacture/producing of articles and, therefore, it is entitled to the benefit of the said two provisions though left to the Court, it would have held other wise."
16. The learned Counsel for the assessee argued that he above judgment brings out the following vital fact that when it comes to Sections 80-I or 80J, the provisions need to be interpreted more liberally inasmuch as what is held in reference to other sections may not strictly apply to the case of Section 80-I/80J and that in view of the above, the judgments relied upon by the AO may not strictly apply to the case of the present assessee.
17. It has further been argued by the learned Counsel that the Bombay High Court in the case of CIT v. Tata Locomotive & Engineering Co. Ltd. held that "assembling of the imported parts into a finished chassis" amounted to the manufacture or production of an article within the meaning of Section 15C(2)(ii) of the Indian IT Act, 1922 (corresponding to Section 80J of the present Act). Hence, assembly of parts received in the knocked down condition is also considered to be manufacture. It is submitted that the above judgment has been followed by the Allahabad High Court in the case of U.P. State Agro Industrial Corporation Ltd. (supra), and further, followed by the Mumbai Bench of the Tribunal in the case of Equinox Equipment Systems (P) Ltd. in ITA No. 8498/Mum/2004 for asst. yr. 2001-02. It is further argued that nowhere has it been laid down that in order to claim deduction under Section 80-IB, each and every aspect of the process has to be undertaken by the manufacturer himself. On the contrary, the learned Counsel pointed out that outside job working of different aspects of the manufacturing process perfectly acceptable. In this regard, reliance has been placed on the decision of the Calcutta High Court in the case of Addl. CIT v. A. Mukherjee & Co. (P) Ltd. , wherein it has been held that "publication of books and selling them in market by a process of acquisition of manuscripts, formatting, getting them printed from a partner and getting them bound under own supervision tantamount to manufacturing or processing and the assessee company is an industrial company." The above view was also taken by the Bombay High Court in the case of CIT v. Penwalt India Ltd. , wherein it was held,-"an assessee would be said to be engaged in manufacturing activity if he is doing a part of the manufacturing activity himself and for the rest of it he engages the services of somebody else on a contract other than a contract of purchase. From the facts found by the Tribunal it is found that the assessee's manufacturing activity consisted of (i) canvassing of orders, (ii) preparing of designs and drawings on the basis of orders, (iii) placing orders for the manufacture of machinery with TH, (iv) to see that the manufacturing process is carried on by TH under the direct supervision of the assessee company, (v) to have a check over the quality control guarantee after sale service for a stipulated period. Out of so many activities, except for one activity, namely, getting the machinery manufactured through TH all other activities are admittedly undertaken by the assessee company. In the circumstances, there is no difficulty in agreeing with the Tribunal that the assessee is engaged in the business of manufacture of sugar and tea machinery and is accordingly qualified for relief under Section 80-I."
18. The above view was further followed by the Mumbai Bench of the Tribunal in the case of Sunrise Metal Industries v. ITO (2004) 86 TTJ (Mumbai) 298 wherein it was held-"assessee undisputedly engaged in manufacturing activity, deduction under Section 80-IA could not be denied on the ground that part of manufacturing activity was got done from outside when such activity was under the direct supervision and at the risk of the assessee."
19. Our attention was also drawn to the CBDT Circular No. 347, dt. 7th July, 1982 (1982) 31 CTR (TLT) 5 : (1982) 137 ITR (St) 14, which lays down that the Board has accepted the view in certain decisions to the effect that it was not necessary that the assessee itself should carry on the entire activities of manufacture and that it was enough if such activity was carried on with the aid of other units under the supervision of the assessee.
20. In view of the above, we are of the considered opinion that job work got done under own supervision of the assessee can be considered to be a part of the manufacturing process of the assessee and in this view of the matter, dyeing and printing although got done as job work, can qualify as manufacturing process.
21. Another important aspect that needs to be addressed is that if the said process of manufacture comprises of several activities each capable of being identified as a "separate manufacturing activity" then what should be the treatment? This issue stands answered by the Bombay High Court in the case of Tata Locomotive & Engineering Co. Ltd. (supra), wherein it has been held--"The assembly stage was a part and parcel of the entire industrial undertaking of the assessee whereby they manufactured or produced bus/truck chassis which were wholly indigenous. The assembly stage upon the facts was not a different industrial undertaking but one intimately connected with the subsequent stages whereby the Indian bus/truck chassis were progressively manufactured. The whole was one integrated scheme; one programme and this notional division of that programme into two industrial undertakings is unjustified upon the facts."
22. The above view is buttressed by the finding of the Allahabad High Court in the case of CIT v. U.P. State Agro Industrial Corporation Ltd. (supra), wherein it relied on the decision of the Madras High Court in the case of CIT v. Standard Motor Products of India Ltd. and quoted therefrom--"Assessee who was engaged in the manufacture of motor cars and tractors, it imported parts and components for assembling cars and tractors. Out of these imported parts it used some of them for assembling cars and the remaining parts were sold as spare parts. The assessee claimed relief under Section 15C of the 1922 Act on the entire income, but the AO excluded the profits derived by the company from sale of spare parts. This was questioned by the assessee and the High Court ultimately held that profits from the sale of spare parts did not form part and parcel of the assessee's income from an industrial undertaking and was, therefore, not entitled to exemption under Section 15C".
23. In view of the above legal position, it can be said that act of the AO in splitting the entire manufacturing process into two sets of activities i.e. from procurement of cloth to dyeing and printing and from dyeing and printing to fabrication and dividing the aggregate profit of the undertaking into the two aforesaid segments is unwarranted and not permissible. On the contrary, for the purpose of Section 80-IB, all the steps followed by the undertaking including even the job work of dyeing and printing is one complete and integrated manufacturing activity, the profit out of which qualifies for deduction under Section 80-IB.
24. So far as the different decisions relied upon by the AO are concerned, the learned Counsel for the assessee has tried to distinguish them in the following manner:.
________________________________________________________________________________________ Citation Findings Remarks ________________________________________________________________________________________ CIT v. J.B. Kharwar Dyeing and The judgment merely says that dyeing is & Sons (1986) 57 printing is an an independent manufacturing activity.
CTR (Guj) 9 : 163 independent However, the case law says nothing IIR 394 (Guj); also manufacturing about whether the same is to be 242 ITR 162 [sic-CIT activity considered independently while claiming v. Kashiram Textile deduction Under Section 80-IB. This Mills (P) Ltd. (2001) question is suitably answered by discuss- 170 CTR (Guj) 11 : ion at paras 9.13-9.17, supra
________________________________________________________________________________________ Rajeswari Mills Ltd. Spinning unit set The case is factually different from the v. CIT (1963) 50 ITR up after closure of case of the appellant inasmuch as in the 29 (Mad) weaving unit, is an stated case spinning unit was set up as independent unit a separate unit after closure of the for reckoning the weaving unit. However, the case of the period for purposes appellant is factually different inasmuch of Section 15C as dyeing, printing and fabrication were carried out simultaneously in the same industrial unit.
________________________________________________________________________________________ Textile Machinery New unit Does not apply to the case of the Corporation Ltd. v. established by appellant as it is factually different CIT 1977 CTR (SC) 151 assessee for inasmuch as in the case of the appellant : (1977) 107 ITR 195 manufacturing no new unit was set up and dyeing and (SC) articles used as printing was a process of the same unit intermediate which undertook fabrication.
products in old division, which the assessee was buying from the market earlier, is not reconstruction of business already in existence.
Further the new
units are
independent as the
business of old can
be carried on
without them.
________________________________________________________________________________________ Tata Iron & Steel The judgment was The judgment was given in an Co. Ltd. v. State of in relation to altogether different context and by Bihar (1963) 48 ITR validity of virtue of discussion in paras 8.1-8.2 123 (SC) imposition of a (supra) the same is not applicable to cess, under Sections 5 the case of the appellant.
and 6 of the Bengal Cess Act, 1880.
________________________________________________________________________________________
25. We have heard both the sides and have also perused the materials available on record and we fully agree with the submissions of the learned Counsel for the assessee in this regard and, thus, find no substance in the reliance placed by the AO in the different judgments as mentioned above.
26. The AO has further stated that the assessee failed to meet the conditions specified in Section 80-IB(2)(iv) inasmuch as though the assessee employed more than 20 workers, yet they belonged to the contractor who did job work for the assessee at the factory premises of the assessee using assessee's plant and machinery. In arriving at the abovestated conclusion, the AO relied on the following decisions:
(i) V.B. Narania & Co. v. ITO (1986) 25 TTJ (Ahd) 226 : (1986) 16 ITD 334 (Ahd) approved in CIT v. V.B. Narania & Co. (2001) 171 CTR (Guj) 416 : (2001) 252 ITR 884 (Guj);
(ii) CIT v. Apparel Express Co. (P) Ltd. (2001) 170 CTR (Del) 440 : (2001) 251 ITR 733 (Del);
(iii) Mahendra Kumar Agarwal v. ITO (1987) 27 TTJ (Del) 529.
On the other hand, the learned Counsel for the assessee has replied to the above arguments by distinguishing the above decisions in the following manner:
______________________________________________________________________________________ Citation Findings Remarks ______________________________________________________________________________________ V.V. Narania & Co. Simply because the The case clearly brings out what v. ITO (supra) workers engaged by the the appellant had been Gujarat High Court assessee in its emphasizing inasmuch as it clearly manufacturing process says that if the workers were working in, its factory working within the factory premises were paid on premises of the assessee and the piece rate basis or job assessee controlled their work, work basis it could not they automatically become the be said that they were employees of the assessee. In this not in the employment view of the matter all contract of the assessee. labours working for the assessee were his employees as they worked as per his instructions at his factory premises.
______________________________________________________________________________________ CIT v. Apparel Held, that the payments The judgment does not apply to Express Co. (P) Ltd made on piece rate basis the case of the appellant inasmuch (supra) Delhi High to fabricators, dyers, as in this case the dyers, Court printers, embroiderers,etc. fabricators, etc., were independent had been treated as persons who did such work for payment on piece rate other people as well. However, the basis to workers by the same is not true in the case of the Tribunal. This showed that appellant as evident from pp. 275-
these persons were not on 300 of the paper book which clearly the assessee's pay roll. shows that the said persons worked The Tribunal's conclusion worked exclusively for the appellant.
these persons were inciden- The case being factually different
tally connected with the from that of the appellant, it does
assessee's manufacturing not apply to the present assessee's
process as employees, had case.
no factual foundation. There
was no material in this
regard before the Tribunal.
On the contrary, they were
persons who operated
independently and did
such jobs not only for the
assessee, but also for other
persons. There was no
question of any
employment of these
persons. Therefore, the
assessee was not entitled
to deduction under Section 80J
______________________________________________________________________________________ Mahendra Kumar The AO has stated that the This judgment definitely helps the Agarwal v. ITO case does not apply to the case of the present assessee as (supra) appellant inasmuch as in there is an express finding that "It the given case the is possible to conceive that the assessee was not the employment of 10 or more persons owner of the factory and may not be on wage basis in the moreover the case was assessee's manufactory and that decided in favour of the persons may be employed on Revenue. Moreover, the contract basis to do specified jobs case dealt with non- and to be paid accordingly. In such compliance of Section 80-IB a case, there may not be any Clause (ii) & (iv). employer-employee relationship between the assessee and the said workers. But, such employment must be in the assessee's factory in the course of manufacturing process carried on with the assistance of plant and machinery either owned or hired by the assessee. So far as the present assessee is concerned, he satisfies this condition.
______________________________________________________________________________________
27. The learned Counsel for the assessee has also drawn our attention to the decision of the Ahmedabad Bench of the Tribunal in the case of Prithviraj Bhoorchand v. Asstt. CIT (1993) 47 TTJ (Ahd) 179, wherein it held as under:
Assessee employing 29 workers through the agency of contractor is entitled to relief under Section 80-I.
28. Our attention has also been drawn to the copies of yearly returns filed by the assessee firm with the Commr. Provident Fund and also copies of half-yearly returns filed with ESI Department for the different years under consideration. A perusal of the same clearly convinces one that the number of regular employees working with the assessee did actually exceed 20 during each of the years under consideration. Such persons were over and above the contract labours of the assessee firm and were employed in different capacities as cutting masters, fashion coordinators, production managers, tailors, stitching-machine operators, button operators, thread cutters, merchandises, checkers, etc. Hence, we find that even without going into the controversy of whether job workers should be included within the total roll of workers of the assessee firm. Otherwise also, the assessee met the requirements of Section 80-IB (2)(iv) relating to the number of workers employed by the assessee and would, thus, be duly entitled to the deduction under Section 80-IB of the Act.
29. Finally, in view of the above factual and legal positions, it is being held that so far the grounds taken by the assessee regarding eligibility of deduction under Section 80-IB of the Act in respect of the profits and gains of the Jaipur undertaking of the assessee is concerned, the assessee's appellate grounds have got to be allowed. The AO's action in considering a separate unit of the assessee at Jogeshwari, Mumbai, does not have any factual basis and, further, there is also no basis for the attempt on the part of the AO in trying to bifurcate the composite activities of manufacturing at the Jaipur unit into separate activities relating to dyeing and printing and the rest of the activities differently. Thus, the orders of the lower authorities in this regard are being reversed and it is directed that deduction under Section 80-IB be allowed duly on the entire profits and gains of the Jaipur industrial undertaking of the assessee. This appellate ground is common to all the years from asst. yrs. 2001-02 to 2004-05.
30. Another issue raised by the assessee in its appeals for the different years is whether the action of the lower authorities in holding that receipts in the nature of duty drawback (export incentive), foreign exchange fluctuation, sale of import licence and interest on income-tax refund are not part of income derived from industrial undertaking and thereby not entitled to deduction under Section 80-IB, is correct or not.
31. With regard to the 'duty drawback', the learned Counsel for the assessee has submitted that duty drawback is nothing but a refund of excise duty or customs duty paid on input of raw material. He has argued that the finding of the AO that such duty drawback is not "derived" from business is not correct inasmuch as there is an inextricable link between the business carried on by the assessee and the receipts of these amounts. The learned Counsel for the assessee has referred to the judgment of the Gujarat High Court in the case of CIT v. India Gelatine & Chemicals Ltd. , held that "the object of duty drawback scheme is to reimburse exporters for tariffs paid on the imported raw material and intermediates and Central excise duties paid on domestically produced inputs which enter into export production. Customs duties and excise duties on inputs raise the cost of production in industries and thereby affect the competitiveness of exports. Therefore, exporters need to be assisted for neutralizing the escalation in their costs, attributable to such customs and excise duties. Duty drawback is, therefore, intended to reduce the cost of production. Hence, duty drawback is an integral part of the pricing of the goods and, therefore, duty drawback has to be treated as 'derived from' industrial undertaking...duty drawback is derived from the industrial undertaking and, therefore, eligible for relief under Section 80J".
32. The learned Counsel for the assessee further pointed out that following the aforesaid decision, the Mumbai Bench of the Tribunal in the case of 1977 nothings, Unit No. 1 v. ITO, in ITA No. 3772/Mum/2005 for asst. yr. 2001-02 held that duty drawback received by the assessee forms part of profit derived from industrial undertaking. He also relied upon the decision of the Chandigarh Bench of the Tribunal in the case of FTO v. Paramount Industrial Corporation (2007) 109 TTJ (Chd) 295 holding that income earned on account of duty drawback is income earned from industrial undertaking eligible for deduction under Section 80-IB of the Act. So far as the decisions in the cases of CIT v. Jameel Leathers and Uppers and CIT v. Vishwanathan & Co. (2003) 181 CTR (Mad) 335 : (2003) 261 ITR 737 (Mad), as relied upon by the Revenue are concerned, the learned Counsel for the assessee submitted that the decision of the Hon'ble Gujarat High Court discussed above was arrived at after considering the said two decisions.
33. In view of the above legal position, we hold that 'duty drawback' is to be considered as derived from the industrial undertaking of the assessee and would, thus, have to be considered for the purpose of allowance of deduction under Section 80-IB.
34. As regards receipts from foreign exchange fluctuation is concerned, it has already been discussed above that the same forms an integral part of the export proceeds and would, thus, have to be considered as derived from the industrial undertaking. We order accordingly and direct that foreign exchange fluctuation be taken into consideration for allowing deduction under Section 80-IB.
35. As regards the question of inclusion of income arising from sale of import licence is concerned, the learned Departmental Representative has pointed out that the Hon'ble Supreme Court in the case of CIT v. Sterling Foods held that profits from sale of import entitlement are not profits derived from industrial undertaking. Respectfully, following the aforesaid decision, we dismiss the grounds taken by the assessee in this regard.
36. We are also of the view that ordinary interest income as well as interest earned on income-tax refund can in no way be considered as profits derived from industrial undertaking. Hence, the grounds taken by the assessee on this issue is also dismissed.
37. For the asst. yr. 2004-05, there is another question on whether the profit on transfer of the Duty Entitlement Pass Book (DEPB) Scheme should be considered as income derived from the industrial undertaking and, hence, entitled to being reckoned for the purpose of computation of deduction under Section 80-IB. We are of the view that DEPB Scheme is more akin to the scheme of allowing drawback amount on duty already paid by the assessee on import of raw materials, etc. than conferring import entitlement benefit on exports done by the assessee. In that way, treatment meted in the case of 'duty drawback' should be exercised in this case. Thus, the profits arising under the DEPB Scheme should be considered to be derived from the industrial undertaking and the assessee should be allowed deduction under Section 80-IB on such profits. We order accordingly.
38. In the result, the appeals filed by the assessee for all the asst. yrs. 2000-01, 2001-02, 2002-03, 2003-04 and 2004-05 are partly allowed to the extent as above and the appeal filed by the Department for the asst. yr. 2001-02 is dismissed.