Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income-Tax vs Metro Tyres Ltd. on 3 August, 2001
ORDER
Singhal, Judicial Member
1. The short but interesting question arising out of this appeal is whether the following amounts of income can be said to have been derived from the industrial undertaking for the purpose of claiming deduction under section 80-I:--
Rs.
(i) Sale of import licences 3,93,740
(ii) Sales-tax refund 8,28,010
(iii) Claims from Insurance & Transport 7,79,642
(iv) Duty drawback 1,02,301
(v) Difference in exchange 7,73,407
(vi) CCS 2,88,740
(vii) Amount received against IPRS 6,29,369
2. The aforesaid amounts were included by the assessee in the profits of the industrial undertaking for claiming the deduction under section 80-1 for assessment year 1992-93. However, the Assessing Officer was of the view that the words "derived from" used by the legislature in section 80-1 has restricted meaning as compared to the expression "attributable to". Reliance was placed by him on the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. Applying this legal position he was of the view that the aforesaid amounts of income could not be said to be income derived from the industrial undertaking. Accordingly the claim of the assessee to that extent was disallowed.
3. The matter was carried before the CIT(Appeals), who has allowed the claim of the assessee after following the decisions of Madras High Court in the case of Shardlow India Ltd. v. CIT [1981 ] 128 ITR 571' and in the case of CIT v. India Piston Repco Ltd. [1987] 167 ITR 917. Aggrieved by the same, the revenue is in appeal before the Tribunal.
4. The learned DR on behalf of the revenue has vehemently assailed the order of the CIT(Appeals) by contending that the meaning of the words "derived from" has to be understood in the restricted sense as held by the Supreme Court in the case of Catnbay Electric Supply Industrial Co. Ltd. (supra). According to him, there must be a direct nexus between the income and the industrial undertaking. Proceeding further it was submitted that if the source of the income is something else than the industrial undertaking, then such income cannot be said to have derived from industrial undertaking. In this connection, he relied on the latest decision of the Supreme Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579, wherein it has been held that income from the sale of import entitlements could not be treated as income derived from industrial undertaking since source of such income was the Central Government scheme itself and not the industrial undertaking. Accordingly, it was argued by him that in the present case there was no direct nexus between the income and the industrial undertaking and, therefore. Assessing Officer was justified in excluding such income from the income of industrial undertaking for the purpose of computing deduction under section 80-I.
5. On the other hand the learned counsel for the assessee submitted before us that the word "from" has been used to single out the industrial undertaking from non-industrial undertaking and, therefore, if there is any connection between the income and the industrial undertaking then deduction under section 80-I must be allowed. He also tried to distinguish the decision of Supreme Court in the case of Sterling Foods (supra) by submitting that in that case merely a right had accrued to the assessee under the scheme which had no value in itself. If the said entitlement was not sold then no income would accrue to the assessee. Hence there was no direct connection with the activity of industrial undertaking in that case but in the present case the items disputed have direct connection with the activity of the manufacturing and sale of manufactured goods. Proceeding further it was submitted by him that if any expenditure goes to the trading, manufacturing or profit and loss account of the assessee in any year and deduction is allowed for the same in computing the income of the industrial undertaking then reimbursement of such expenses would have direct connection with industrial undertaking and accordingly such income cannot be excluded while computing the profits derived from industrial undertaking. Consequently, it was argued by him that sales-tax refund, duty drawback as well as claim for insurance and transport must be held to be income derived from industrial undertaking. Proceeding further he drew our attention to the various schemes i.e., cash subsidy scheme and International Price Reimbursement Scheme and argued that these are the trading receipts in view of the decision of the Supreme Court in the case of CIT v. Sahni Steel & Press Work [1997] 226 ITR 253 having originated from the industrial activity of export of the goods manufactured by assessee. According to him, the profits do not accrue on mere manufacturing but accrue on sale thereof. Therefore, if on the basis of such sales any incentive is received then it must be held to have derived from industrial undertaking. Proceeding further, it was submitted that the difference in exchange was also directly related to the activity of the industrial undertaking. At this stage, a query was raised from the Bench as to whether foreign exchange was utilised for operational activity of the assessee or for acquisition of capital asset. The learned counsel for the assessee was not able to answer this factual aspect and, therefore, submitted that if the Bench think fit than the matter may be restored for verification to the Assessing Officer. Regarding the income from sale of import entitlement he had nothing to say in view of the decision of the Supreme Court in the case of Sterling Foods (supra).
6. Rival contentions of the parties as well as the case law referred to by them have been considered carefully. The controversy before us centers around the interpretation of the words 'derived from' used by legislature in section 80-I. This issue came up for consideration for the first time before the Privy Council in the case of CIT v. Raja Bahadtir Kamakhaya Narayan Singh [1948] 16 ITR 325. The question before the Court was whether the interest of arrears of rent payable in respect of land used for agricultural purposes could be treated as agricultural income. The meaning of the words "derived from" was also considered by the Hon'blc Supreme Court in the case of Mrs. Bacha F. Guzdarv. CIT [1955] 27 ITR 1. In that case 'A' was shareholder of various tea companies whose 60 per cent income was exempt from tax as agricultural income. The assessee also claimed 60 per cent of the dividend income as exempt from tax being agricultural income. The court was concerned with the interpre-
tation of the words "revenue derived from land". It was held that the income must have direct association or relation with the land so that it may fall within the scope of the words "revenue derived from land". Dividend income was out of investment of funds in shares and, therefore, the same could not be treated as agricultural income. Again in the case of Cambay Electric Supply Industrial Co. Ltd. (supra), the Hon'ble Supreme Court has held that the expression "attributable to" is wider in import than the expression "derived from". It was further held that whenever the legislature intended to give restricted meaning it has used the expression "derived from". The latest decision of Supreme Court on this issue is in the case of Sterling Foods (supra) wherein it has been held that there must be direct nexus between the income and the activity of the industrial undertaking. The question before the court was whether the income from the sale of import entitlements could be said to have derived from the industrial undertaking. In this connection, following observations were made by their Lordships :
"We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlement can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee's industrial undertaking."
7. In view of the above discussion, it is held that there must be direct nexus between the income and the industrial undertaking meaning thereby, the source of income must be the industrial undertaking. If the source of the income is other than the industrial undertaking than it cannot be said that such income was derived from the industrial undertaking.
8. In view of the above legal position let us examine the items of dispute before us. For the sake of convenience we first take up the item of duty drawback. In order to appreciate the contentions of the parties, we would like to refer the provisions of section 75(1) of Customs Act, 1962 under which duty drawback is allowed. The same is reproduced as below :
" 75. Drawback on imported materials used in the manufacture of goods which are exported.--(1) Where it appears to the Central Government that in respect of goods of any class or description manufactured in India being goods which have been entered for export and in respect of which an order permitting the clearance and loading thereof for exportation has been made under section 51 by the proper officer a drawback should be allowed of duties of customs chargeable under this Act on any imported material of a class or description used in the manufacture of such goods, the Central Government may, by notification in the Official Gazette, direct that drawback shall be allowed in respect of such goods in accordance with, and subject to, the rules made under Sub-section (2)."
We are informed that similar provisions are also made in Central Excise Act. Since in the present case duty drawback was received under the Customs Act, we are referring to the provisions of section 75(1) of Customs Act, 1962 only.
The perusal of section 75(1) clearly shows that the duty drawback is given by way of incentive to boost the export of goods manufactured in India. If any imported goods on which custom duty has been levied, has been used in the manufacture of any goods of any class or description and such manufacture goods have been exported out of India, the custom duty paid on imported goods is given back to the manufacturer by way of rebate. This duty drawback is given only to manufacturers making export as is apparent from sub-section (2) of section 75. In other words, it is nothing but reimbursement of duty already paid. Whenever such duty is paid, it directly affects the profits of industrial undertaking in as much as it is debited to Manufacture & Profit and Loss account. Such payment of custom duty increases the cost of manufacturing but when the same is received back as drawback, it nullifies the affect of aforesaid increase in the cost of manufacturing. Therefore, in our opinion, the duty drawback is inextricably linked with the production cost of the goods manufactured by assessee. Accordingly, it is held that duty drawback is the trading receipt of the industrial undertaking having direct nexus with the activity of such industrial undertaking and accordingly, the same forms part of the income derived from such industrial undertaking. The order of CIT(Appeals) is, therefore, upheld with reference to this item.
9. For the similar reasons we arc of the view that assessee is entitled to succeed in respect of claims received from insurance company and transporters. The reasons is obvious. The payment of freight charges to the transporter as well as the premium to the insurance company is directly connected with the activity of the industrial undertaking affecting the profits of the business and consequently, refund thereof has a direct nexus with such business activity. The details furnished before us clearly shows that amount received from transporters was on account of shortage of rubber and tyres transported. Further the claim from insurance company was on account of the damage of stock due to flood. So, in our view, there is direct nexus between the amount received from the transporter/insurance companies and the activity of the industrial undertaking. Accordingly it is held that such receipts form part of the profits derived from industrial undertaking. The order of CIT(Appeals) is, therefore, upheld on this aspect of the issue.
10. As far as income from sale of import entitlement is concerned, the issue is squarely covered against the assessee by the decision of Supreme Court in the case of Sterling Foods (supra). Respectfully following the same it is held that the amount received on the sale of import entitlement shall not form part of profits derived from industrial undertaking.
11. As far as difference in foreign exchange is concerned, it is not clear from the facts of the case whether such foreign exchange was utilised in the field of capital or revenue. Therefore, order of CIT (Appeals) is set aside on this issue and the matter is restored to the file of Assessing Officer who shall ascertain the facts in this regard, He is directed to allow the claim of the assessee if it is found that foreign exchange was utilized in the revenue field. However, if it is found that it was utilised in the capital field then the Assessing Officer may not include the same in the business profits derived from industrial undertaking.
12. As far as sales-tax refund is concerned, the relevant provisions of Sales-tax Act under which refund was granted and the relevant facts which led to such refund were neither placed before the lower authorities nor before us. The only submission of the learned counsel for the assessee is that like duty drawback it is also reimbursement of the amount of sales-tax paid by the assessee. According to him, the payment of sales-tax is debited to the P&L account like custom duty or excise duty which affects the cost of production and, therefore, any amount refunded against such payment would be trading receipt and thus it would have a direct nexus with the activity of industrial undertaking. However, we do not find such submissions supported by any material or evidence. Normally sales-tax is paid by the dealer/manufacturer after collecting the same from customers. In such cases question of debiting the sales-tax payment to P&L account simply does not arise. However, if sales-tax collected and paid are transferred to P&L account it would not affect either the profit or loss of such undertaking. However, sometimes, the assessee may challenge the levy of sales-tax itself in writ petition before the High Court and subsequently, may get the refund. Such cases have been considered by the courts as cases of unjust enrichment in as much as taxes arc paid after collecting the same from the customers. In such cases, the sale-tax refund may constitute business receipts in view of the decision of Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT[1973] 87 ITR 542, but the same, in our opinion, cannot be considered as profits derived from industrial undertaking because there is no direct link between the activity of such undertaking and receipt of sales-tax. Further, copy of profit and loss account appearing at page 20 of the paper book does not show that any amount of sales-tax was debited to P&L account. It is also not the case of the learned counsel for the assessee that sales-tax paid on raw material is given back against the export/local sales of the goods manufactured out of such raw material as in the case of duty drawback. Therefore, the sales-tax refund cannot be cor idered at par with the duty drawback unless it is established that payment of sales-tax enhance the cost of production and same is received back by way of reimbursement. We are not aware of the circumstances under which the refund was granted to the assessee. The law is well-settled that whenever any deduction/relief is claim, the onus lies On the assessee to prove that the conditions for claiming such relief are fulfilled. Reference can be made to the decision of the apex court in the case of CIT v. Calcutta Agency Ltd [1951] 19 ITR 191. Since such onus has not been discharged, the claim of the assessee regarding sales-tax refund is rejected. However, it is clarified that in some other appropriate case, the Tribunal may decide the issue in the light of sales-tax provisions and relevant material/evidence which may be brought before it. The decision of Madras High Court reported as Shardlow India Ltd. '$ case and India Piston Repco Ltd.'s case (supra) relied upon by the learned CIT (Appeals) are quite distinguishable inasmuch as the Madras High Court decided the issue in view of the wordings "attributable to" which are wider in scope than the words "derived from" as held by the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra). In view of the above discussion, the order of CIT(Appeals) is reversed on this aspect of the issue and the order of Assessing Officer is restored. Consequently, it is held that the sales-tax refund was rightly excluded from the profits of the industrial undertaking for the purpose of deduction under section 80-1.
13. As far as cash compensatory support (CCS) is concerned, we find merit in ihe appeal of the revenue. The perusal of the scheme raised before us shows that CCS is a kind of subsidy given to a person who export goods either purchased or manufactured by him under a scheme formulated by the Central Government. Unlike duty drawback it is not reimbursement of any expenditure on input incurred by the assessee. Further for claiming such subsidy, the person need not carry on any industrial undertaking since it is available to any person making export out of India. It is simply an incentive granted to an exporter under a scheme. Therefore, it cannot be said that there is any nexus between the subsidy received and the activity of the industrial undertaking. The source of the subsidy is the scheme framed by the Government and not the industrial undertaking. Hence the decision of the Hon'ble Supreme Court in the case of Sterling Foods (supra) would apply squarely to the present issue. It has been held in that case that receipts on sale of import entitlements had nexus with the scheme of Government and not the industrial undertaking and, therefore, deduction under section 80HH could not be allowed. Respectfully following the same, it is held that CCS cannot form part of profits derived from industrial undertaking. The order of CIT(Appeals) is, therefore, reversed on this aspect of the issue and order of Assessing Officer is restored.
14. Now coming to International Price Reimbursement Scheme (IPRs), we find that a scheme was formulated by the Central Government under which exporters of engineering goods were allowed reimbursement of part of the price paid in the domestic market in respect of certain kinds of iron steel so that such exporters could compete in the international market. Payment of purchase price in respect of raw material certainly affects the profits of an industrial undertaking and, therefore, reimbursement thereof would directly affect such profits. In these circumstances, one can form the view that there is a direct nexus with the activity of the industrial undertaking. However, it has to be borne in mind that such reimbursement would not have been available to the assessee but for the scheme formulated by the Central Government. Therefore, the immediate source of such receipt has to be traced to such scheme and consequently, the decision of Supreme Court in the case of Sterling Foods (supra) would apply, which is binding on us. Hence, the issue is decided in favour of the revenue. The order of CIT(Appeals) is, therefore, reversed on this aspect of the issue and the order of Assessing Officer is restored.
15. The next issue relates to the addition of Rs. 1,82,29,686 made by Assessing Officer on account of Valuation of stock which has been deleted by CIT(Appeals).
16. The assessee was engaged in the manufacture and sale of cycle tyres and tubes as well as trading of fans, sewing machine etc. The assessee had been valuing the closing stock at market price. However, in the year under consideration the assessee changed the method of valuing the closing stock from market value to cost. The assessee was asked to explain as to why such change should not be disallowed. It was explained by the assessee that the method followed in the current year was a recognised method of valuation and the change was bona fide one since it was going to be followed regularly. Certain case laws were relied on by the assessee. After considering the explanation of the assessee, the Assessing Officer found the change as bona fide one and the same was permitted. Having done so, he went on to observe that it is the duty of the Assessing Officer to determine the true profit of the year. Reliance was placed on the decision of Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44'. He has also referred to the decision of Delhi High Court in the case of K.G. Khosla & Co. (P.) Ltd. v. CIT [1975] 99 ITR 574 for the proposition that opening stock cannot be valued in a manner different from the valuation of closing stock. Accordingly, the Assessing Officer worked out the loss to the revenue due to change in the method of valuation. Considering this fact, he reduced the opening stock by 25 per cent. As a consequence thereof, the net addition of Rs. 1,82,29,686 was made.
17. The matter was carried before the CIT (Appeals) before whom it was contended that in the case of change in the method of valuation, the opening stock cannot be disturbed because the closing stock of the preceding year has to be taken as opening stock of next year as per the settled position of law. In this regard three judgments were relied on, namely, decision of Andhra Pradesh High Court in the case of CIT v. Mopeds India Ltd. [1988] 173 ITR 347', the decision of Karnataka High Court in the case of CIT v. Corporation Bank Ltd, [1988] 174 ITR 6162 and the decision of the Bombay High Court in the case of Melmould Corporation v. CIT [1993] 202 ITR 7893. The CIT(Appeals) agreed with this contention of the assessec and further strengthened the same by referring to the decision of Hon'ble Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 wherein it has been held that valuation of closing stock must be taken as opening stock in the succeeding year. Following this legal position, the CIT(Appeals) deleted the addition made by Assessing Officer. Aggrieved by the same, the revenue is in appeal before the Tribunal.
18. After hearing both the parlies, we do not find any merit in the appeal of the revenue. There is no dispute of the fact that the change in the method of valuation of closing stock was bona fide one and the same has been accepted by the Assessing Officer also, Having accepted the same, the question before the Assessing Officer was whether he could disturb the value of opening stock. In our opinion, the answer to this question is in the negative. It is settled position of law that value of the closing stock has to be taken as value of the opening stock of the succeeding year. Reference can be made to the judgment of the Hon'ble Supreme Court in the case of Chainrup Sampatram (supra). This position has not been disturbed by any decision of Supreme Court till date. The decision of Delhi High Court in the case of K.G. Khosta & Co. (P.) Lid. (supra) and the decision of Supreme Court in the case of British Paints India Ltd. (supra) arc distinguishable in as much as in none of the cases, there was change in the method of valuing the stock. Those were the cases where the method of valuing the stock was itself defective and contrary to the recognized principles of valuation. Accordingly, it was held that Assessing Officer was duty bound to adopt the correct method of valuation and in such process the opening stock as well as closing stock could be correctly valued in the similar manner. But there is no case available where there is a bona fide change in the method of valuation and the courts have allowed to disturb the opening stock which was done according to the recognised principles of valuation. On the contrary, the three decisions relied upon by the learned CIT(Appeals) covers the issue before us. These decisions are in the cases of Mopeds India Ltd. (supra), Corporation Bank Ltd. (supra) and Melmoulds Corporation (supra). Therefore, in our opinion, the CIT(Appeals) was justified in deleting the addition. Consequently, the order of CIT(Appeals) is upheld on this issue.
19. In the result, appeal of the revenue is partly allowed.