Income Tax Appellate Tribunal - Ahmedabad
Polycome Associates, Daman vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D"
Before SHRI T K SHARMA,JM & SHRI A N P AHUJ A, AM
ITA No.3532/Ahd/2007
(Assessment Year:-2004-05)
M/s Polycome Associates, V/s Joint Commissioner of
Plot No.26, GDDIDC, Income-tax, Vapi Range,
Daman Industrial Estate, Vapi
Dabhel, Somnath Road,
Daman
[PAN: AADFP 8097 K]
[Appellant] [Respondent]
ITA No.3586/Ahd/2007
(Assessment Year:-2004-05)
Assistant Commissioner of V/s M/s Polycome Associates,
Income-tax, Vapi Circle, Plot No.26, GDDIDC,
Vapi Daman Industrial Estate,
Dabhel, Somnath Road,
Daman
[Appellant] [Respondent]
Assessee by :- Shri Bandish Soparkar,AR
Revenue by:- Shri Rohit Mehra, DR
O R D E R
A N Pahuja: These cross appeals against an order dated 15-06- 2007 of the ld. CIT(Appeals), Valsad, raise the following grounds:-
ITA No.3532/ Ahd/2007[Assessee]
1. "The order of the learned Commissioner of Income Tax (Appeals) Valsad. in confirming the action of the Assessing Officer in calculating the allowance of depreciation on written down value as calculated by presuming that the claim of depreciation, since the inception of the unit, had been allowed, where as the claim of' depreciation from A.Y. 2002-03 onwards only had been made by your appellant and for A.Y. 1999-00 to 2001-02 the matter has been decided in favour of your appellant by the Hon. 1TAT, when the Assessing Officer had thrust upon your appellant the claim of Depreciation u/s 154 of the Act, is bad in law and on the facts of the case.
ITA nos.3532 & 3586/A/07
2. The order of the learned Commissioner of Income lax (Appeals) Valsad in confirming the action of the Assessing Officer in disallowing the claim of deduction under section 80IB of the Act. on the amount of recovery of bad Debts written off in earlier year of Rs.1.02,369/-, is bad in law and on the facts of the case.
3. The order of the learned Commissioner of Income Tax (Appeals), Valsad in confirming the disallowed to the extent of 1/6th of the expenses under the head Telephone and Vehicle Expenses and Depreciation there on, amounting in total to Rs.1.57.019/-.
4. Your appellant craves the leave to add, alter, amend, modify, delete, and append any of the grounds of appeal."
ITA No.3532/ Ahd/2007[Revenue]
1. "On the facts and circumstances of the case and in law, the Id.
CIT(A) has erred in holding that the income from export incentives in form of DEPB will be eligible for deduction u/s 80IB of the Act even though the sales of DEPB is held to be export incentive and without considering the fact that it has not "derived from" the manufacturing activity of the assessee.
2. On the facts and circumstances of the case and in law, the Id.
CIT(A) has erred in holding that the excise duty and sales will not be included in the total turnover while calculating the deduction u/s 80HHC of the Act without considering the fact that the issue in question is yet to be decided by the Highest Court of the Land.
2.1] On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in relying the decision of M/s. Sudarshan Chemicals while giving relief to assessee without considering the fact that the said decision was delivered before the insertion of provisions of section 145A of the Act as per which valuation of purchase and sale has to be made after adding tax, duty, cess or fee etc. 2.2] On the facts and circumstances of the case and in law, the learned CIT(A) has erred in relying decision of the Hon'ble Apex Court in the case of CIT Vs. Sudarshan Chemicals [2000] 245 ITR 769 and CIT, Coimbatore Vs. Lakshmi Machines Works without considering the fact that such decisions were pertaining to the assessment year prior to A.Y. 1999-00 and with effect from 01.04.99 [A. Y. 1999-00], provisions of section 145A of the Act have been inserted as per which valuation of purchase and sale has to be made after adding tax, duty, cess or fee etc. 2 ITA nos.3532 & 3586/A/07
3. On the facts and circumstances of the case and in law, the Id.
CIT(A) has erred in holding that the deductions u/s 80HHC and 80IB should be granted simultaneously on the gross total income which is in contradiction of the provisions of section 80IA(9) r. w. section 80IB(13) of the Act.
4. It is, therefore, prayed that the decision of the learned CIT(A) may be set aside and the order of the AO may be restored.
The appellant craves leave to add, alter or amend any grounds of appeal.
2 Adverting first to ground no.1 in the appeal of the assessee, facts, in brief, as per relevant orders are that return declaring income of Rs.1,95,47,534/- filed on 23-07-2004 by the assessee, manufacturing polyester films, after being processed u/s 143(1) of the Income-tax Act, 1961 [hereinafter referred to as the "Act"], was selected for scrutiny with the service of a notice u/s 143(2) of the Act on 23.2.2005.During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that the unit of the assessee, located in the Union Territory of Daman, a backward area specified in the VIIIth Schedule to the Act, started manufacturing in the accounting period relevant to the AY 1997-98 and was eligible for deduction u/s 80IB of the Act . This being the 8 t h year of manufacturing activity in the unit, the assessee was eligible for deduction @ 25% of the eligible profits u/s 80IB of the Act. The AO further noticed that the assessee did not claim any depreciation on its assets until the AY 2001-02. However, the AO allowed the depreciation in the AYs 1999-2000 to 2001-02 while finalizing the assessments. On the basis of W DV so determined, the AO worked out the depreciation as under:
A. Y. Opening WDV Addition Total Depreciation Closing WDV During the year [net] 98-99 12583013 12583013 980833 11602180 99-00 11602180 2824873 14427053 2154829 12272224 3 ITA nos.3532 & 3586/A/07 00-01 12272224 1044895 13317119 2066007 11251111 01-02 11251111 1156729 12407840 1898517 10509323 02-03 10509323 736549 11245873 1831262 9414610 03-04 9416610 2837564 12252174 2195885 10056289 04-05 10056289 1129560 11185849 2004122 9181727 Since the allowable depreciation worked out to Rs.20,04,122/- as against Rs.29,70,772/- claimed by the assessee, the AO disallowed the difference of Rs.9,66,650/- [Rs.29,70,772-20,04,122] and consequently, the profits eligible for deduction u/s 80IB were recomputed, rejecting the contentions of the assessee that decision of the AO thrusting depreciation in the AYs 1999-2000 to 2001-02 had been reversed by the ITAT, on the ground that Department had preferred appeal before the Hon'ble High Court. Inter alia, the AO relied upon decision of the Special bench in the case of Vahid Paper Converters vs. ITO (2006) 98 ITD 165.
3. On appeal, the ld. CIT(A) while relying upon the decision of the Special Bench in the case of Vahid Paper Converters vs. ITO (2006) 98 ITD 165 upheld the findings of the AO .
4. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee while relying upon the decision dated 30-06-2010 of the ITAT Ahmedabad Bench in the case of M/s W ell Tuff Safety Glass, following decision in the case of M/s Siddharth Corporation in ITA no. 866/Ahd./2007 and in the case of M/s Gautam Enterprises in ITA no.867/Ahd/2007 for the AY 2003-04, contended that the AO can not work out W DV of the assets in the year under consideration after allowing notional depreciation for the AYs 1999-2000 to 2001-02.The learned DR, on the other hand, while relying upon decision dated 1- 9-2008 of the Hon'ble Delhi High Court in the case of Dabur India 4 ITA nos.3532 & 3586/A/07 Ltd. vs. CIT in ITA no.579/2007 supported the findings of the Id. CIT(A).
5. W e have heard both the parties and gone through the facts of the case. W e find that the issue is squarely covered in favour of the assessee by the aforesaid decision in the case of M/s Siddharth Corporation in ITA no. 866/Ahd./2007 and in the case of M/s Gautam Enterprises in ITA no.867/Ahd/2007 for the AY 2003-04. The said decision has also been followed in the order dated 30-06-2010 in the case of M/s W ell Tuff Safety Glass vs. ACIT in ITA no.3166/Ahd/2007, wherein it has been held as under:-
"5 We have heard both the parties and gone through the facts of the case. The only issue before us relates to depreciation of Rs.5,27,625/- relating to the AY 2001-02, which was neither claimed in the return nor allowed by the AO in his order for said assessment year but considered while working out WDV of the assets for the purpose of depreciation for the year under consideration. Though neither the Id. AR nor the ld. DR informed the status of assessments for the AYs. 2001-02 to 2003-04, we find that the Tribunal vide order dated 12-04-2010 of the ITAT Ahmedabad Bench in the case of M/s Khemani Distilleries P. Ltd. in ITA No.2149/Ahd/2007 for the AY 2004-05 relied on a decision dated 28.11.2008 in ITA no. 1885/Ahd./2005 for the AY 2002-03 in the case of the said assessee, wherein after referring to the definition of written down value in section 43(6) of the Act, it was held as under:-
"10. A perusal of the above provisions shows that the WDV in respect of depreciation is to be calculated is the actual cost of the asset to the assessee as reduced by the amount of the depreciation actually allowed to the assessee. Now in the instant case, it is not in dispute that in the earlier years no depreciation was allowed to the assessee in respect of the fixed assets in question. The Revenue could not bring on record any material before us to show that though the depreciation was not claimed by the assessee but in fact such depreciation was allowed by the Department as deduction to the assessee in the assessment made in respect of the income of the assessee. In our considered opinion, it is not open to the Revenue to deduct any amount from the cost of the asset to determine the WDV on the ground that such amount should have been claimed by the assessee as depreciation in earlier year. In our considered view, WDV can be ascertained only by reducing the actual depreciation allowed to the assessee in an assessment and not the amount which ought to have been allowed to the assessee.5
ITA nos.3532 & 3586/A/07 It is the actual depreciation allowed to the assessee which only can be reduced for ascertaining the WDV and not the amount which is notionally allowed to the assessee. Thus, in the absence of any material Drought before us to show that any remedial measure was taken by the Revenue in the earlier assessment years to actually allow the depreciation to the assessee in the year in which the assessee has himself not claimed such depreciation, in our considered view, the notional amount cannot be reduced to ascertain the WDV as per the provisions of section 43(6) of the Act. We, therefore, set aside the orders of the lower authorities and allow the depreciation of ps.3,25,69,030/- as claimed by the assessee as against the depreciation of Rs.2,53,98,0487- allowed to the assessee. Thus, this ground of appeal is allowed."
5.1 The aforesaid decision dated 28.11.2008 was subsequently followed by another Bench in the case of M/s Siddharth Corporation in ITA No.866/Ahd/2007 and in the case of M/s Gautam Enterprises in ITA No.867/Ahd/2007.
5.2 We find that decision in the case of Dabur India Ltd.(supra) relied upon by the Id. DR is not directly on this issue and therefore, reliance on the said decision is totally misplaced.
6 In the light of the view taken in the aforesaid decisions by the co- ordinate Benches, we are of the opinion that WDV of various assets can be ascertained only by reducing the actual depreciation allowed to the assessee in an assessment and not the amount which ought to have been allowed to the assessee. In view thereof, the AO was not justified in reducing the notional amount of depreciation of Rs.5,27,6251- for the AY 2001-02 in order to ascertain the WDV of the assets for the year under consideration in terms of provisions of section 43(6) of the Act . Therefore, we have no option but to allow ground no.1 of the appeal."
5.1 W e may point out that the issue raise before us in this appeal is at variance with the issue in Vahid Paper Converters(supra) . Thus, reliance by the ld. CIT(A) on the said decision is misplaced.
5.2 In the light of consistent view taken in the aforesaid decisions by the co-ordinate Benches, we allow ground no.1 in the appeal of the assessee.
6. Ground no.2 relates to disallowance of claim of deduction u/s 80IB of the Act on the amount of Rs.1,02,369/- recovered out of bad 6 ITA nos.3532 & 3586/A/07 debts written off in earlier years. W hile working out deduction u/s 80IB of the Act, the AO disallowed the claim of the assessee, inter alia, in relation to the aforesaid amount on the ground that deemed income by virtue of provisions of section 41(1) of the Act cannot be termed as income derived from the business of the industrial undertaking in terms of provisions of section 80IA/IB of the Act, relying ,inter alia, on the decisions in CIT Vs. Hukumchand Mohanlal [1971] 82 ITR 624(SC) and DCIT Vs. Mira Industries [2003] 87 ITD 475.
7. On appeal, the learned CIT(A) upheld the findings of the AO in the following terms:-
"9.4 I have perused the facts of the case and the submission made before me by the learned A.R. I did not find any merit in the contention of the appellant. I am of the considered opinion that as per the provisions of Section 80IB manufacturing profits of the year under consideration only are eligible for exemption The amount received by the appellant pertains to the previous year representing old creditors to whom the- appellant had to pay and accordingly the same was carried forward to the year under appeal. The assessing officer has rightly held that the income shown under the head sundry balance written off is not eligible for deduction U/s. 80IB of the Act. This ground of appeal is dismissed."
8. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The learned AR on behalf of the assessee reiterated their submissions before the ld. CIT(A) while relying upon the decisions in the case of W ipro Limited vs. DCIT (2005) 96 TTJ (Bang) 211 and Amar Raja Batteries Ltd vs. ACIT,85 TTJ (Hyb.)20. The learned DR, on the other hand, supported the orders of the authorities below while distinguishing the decisions relied upon by the ld. AR.
9. W e have heard both the parties and gone through the facts of the case. At the outset, we find that in none of the decisions relied upon by the ld. AR, the ITAT examined the issue as to whether or not deemed income in terms of provisions of sec.41(1) of the Act, is derived from the business of the industrial undertaking as 7 ITA nos.3532 & 3586/A/07 envisaged u/s 80IB of the Act. In this context, Hon'ble Apex Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579 , while interpreting the words 'derived from' held that there must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. As the nexus was only incidental and not direct, the receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Act, Hon'ble Apex Court held..
9.1 Similar views were expressed in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278,wherein Hon'ble Supreme Court interpreted the word 'derived' in the following terms:
"The word "derived" has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 when it said:
"The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition."
This definition was approved and reiterated in 1955 by a Constitution Bench of this court in the decision of Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 at page
7. It is clear, therefore, that the word "derived from" in section 80HH of the Income-tax Act, 1961, must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself."
9.2 Hon'ble Madras High Court in the case of CIT Vs. Menon Impex (P.) Ltd.,259 ITR 403(Mad) in the context of provisions of sec. 10A of the Act held:
"Section 10A of the Act provides that the profits and gains derived by an assessee from an industrial undertaking to which that section applies shall not be included in the total income of the assessee. The Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 has held that the words "derived from" are narrower in scope than the words "attributable to".8
ITA nos.3532 & 3586/A/07 9.3 In the case of Ahmedabad manufacturing and Calico Printing Co. Ltd. Vs. CIT,137 ITR 616(Guj),Hon'ble jurisdictional High Court held "We are in full agreement with the view taken by the Bombay High Court and to some extent with the view taken by the Kerala High Court. Profits and gains can be said to have been " derived " from an activity carried on by a person only if the said activity is an immediate and effective source of the said profit or gain. There must be a direct nexus between the activity and the earning of the profits and gains. In other words, what we have to consider is the proximate source and not the source to which the profit or gain may in a remote indirect way be referable. The view to this effect of the Privy Council in CIT v. Kamakhya Narayan Singh [1948] 16 ITR 325 was approved by the Supreme Court in Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 and followed by the Kerala High Court in Cochin Company v. CIT [1978] 114 ITR 822 and by the Bombay High Court in Hindustan Lever Ltd. v. CIT [1980] 121 ITR 951. In our opinion, the word " derive " to be found in s. 2(5)(a)(i) of the relevant Finance Act will have to be given a meaning consistent with what was decided in the above decisions. The words "derived from exports"
cannot be accepted as equivalent to " referable to exports " or even indirectly or remotely connected with the exports by a nebulous link.
9.4 In the case of Mira Industries(supra), the ITAT while adjudicating a similar issue held in the context of receipts on account of insurance claim in the following terms:
"In general terms the insurance receipts -are not income at all. The receipt is to reimburse the expenditure or to compensate for the loss incurred by an assessee and for which the assessee was insured. See in this connection the decision of Supreme Court in the case of CIT v. Hukumchand Mohanlal [1971] 82 ITR 624 wherein it was pointed out at page 626 that "As observed by the High Court, under the General Law if a trading liability has been allowed as a business expenditure and if this liability is remitted in any subsequent year, the amount remitted cannot be taxed as income of the year of the remittance nor can the amount, for the year in which the liability was allowed, to be reopened or adjusted. "
Therefore, there is no liability of the recipient for the receipt of the aforesaid amount and the two assessees cannot be assessed under the general law for such refund. It is only because of a fiction created by section 41(1) that it deemed as income. By that deeming provision such receipt is treated as income if the assessee has been allowed a deduction thereof in computing its income of an earlier year. That fiction treats such receipts as income from business and does not provide further that it has to be treated as income derived from industrial undertaking as is required for granting deduction under sections 80HH, 80HHA, 80-I and 80-IA as the case may be. It would be akin to balancing charge under section 41(2) in Cambay Electricity with respect to which the court held a profit 9 ITA nos.3532 & 3586/A/07 attributable to and had the term 'derived from' been used for granting the deduction the revenue case would have some force."
9.5 For the purpose of claiming deduction under s. 80-IB of the Act, the assessee is not only required to establish that it was business profit of the industrial undertaking, but also to establish that this was a profit 'derived from' the business activity of an industrial undertaking, which means a direct nexus between the profits and industrial undertaking. The mere fact that such income was a business income would not entitle the assessee for deduction under s. 80- IB of the Act. As held by the Hon'ble Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, the profits or gains eligible for deduction under section 80IB of the Act must be derived from the actual conduct of the business, and unless the profits or gains are derived from the actual conduct of the business, it cannot be stated that the income is derived from the business of the industrial undertaking. In other words, the industrial undertaking must directly yield the profit, and it cannot be the means to yield the income. The fact that the amount was assessed as business income itself would not be sufficient to hold that the income was derived from the actual conduct of the business of the industrial undertaking. In other words, it is not all business receipts that would qualify for the deduction and the Legislature has apparently not intended to give the benefit of deduction to all business income. If the intention of the Legislature was to grant relief to all business income, it could have used the expression, "profits and gains of industrial undertaking". The fact that the Legislature has used the expression "profits and gains derived from the business of industrial undertaking" has some significance and it connotes that the immediate and effective source of income eligible for grant of relief under section 80IB of the Act must be the industrial undertaking itself and not any other source. The mandate of law is that unless the source of the profit is the undertaking, the assessee is not eligible to claim deduction under section 80IB of the Act. Mere commercial connection between the income and the industrial undertaking would not be sufficient. The derivation of the income must be directly connected with the business in the sense that the income is generated by the business. It would not be sufficient if it is generated by the exploitation of a business asset.
10ITA nos.3532 & 3586/A/07 9.6 Even otherwise, the scope of a charging section cannot be enlarged by importing further fiction by deeming the sum received as income derived from the business of the industrial undertaking. In terms of provisions of sec. 41(1) of the Act, the amount has to been deemed to be the profits and gains of the business and not profits and gains derived from the business of the industrial undertaking. If the words of a statute are precise and unambiguous, they must be accepted as declaring the express intention of the Legislature. It was trite proposition in law that a legal fiction has to be strictly construed. As was observed by the Hon'ble Supreme Court in Bengal Immunity Co. Ltd. vs. State of Bihar (1955) 2 SCR 603 legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond that legitimate field. In the present case the fiction is limited to the cases provided in the section 41(1) of the Act and cannot be extended further to hold that income is "profits and gains derived from the business of industrial undertaking" .
9.7. In view of the foregoing, we do not find any merit in the ground raised by the assessee. Consequently, we upheld the conclusion drawn by the ld. CIT(A). Therefore, ground no.2 in the appeal of the assessee is dismissed.
10. Ground no.3 in the appeal of the assessee relates to confirmation of disallowance to the extent of 1/6 t h of the expenses under the head "Telephone and Vehicle Expenses" and depreciation on vehicles. The AO noticed that that the assessee debited an amount of Rs.2,42,274/- towards motor expenses for the four cars owned by it .Since personal use of these vehicles by the partners of the firm and their family members was not denied nor any log book of these cars was produced , the AO disallowed l/6th of these th expenses besides 1/6 of the depreciation thereon, resulting in disallowance of Rs.84,892/-. Likewise, the AO disallowed 1/6 t h of the total expenses on telephones and mobiles, leading to disallowance of Rs.72.127/-.
11ITA nos.3532 & 3586/A/07
11. On appeal, the learned CIT(A) upheld the disallowance.
12. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee reiterated their submissions before the lower authorities while the ld.DR relied upon the impugned order of the ld. CIT(A).
13. After hearing both the parties and considering the facts of the case, we find that the ld. AR have not referred us to any material warranting interference with the findings of the ld. CIT(A). Since personal use of cars and telephones by the partners of the assessee firm and their family members or staff has not been denied nor it was claimed that the partners or their family members had any independent vehicles or telephones for personal use, in our opinion th disallowance of 1/6 of the expenses on telephones/mobiles, running and maintenance of vehicles, including depreciation thereon, in the light of provisions of sec. 38(2) of the Act, is reasonable . Therefore, ground no. 3 in the appeal of the assessee is rejected.
14. Now coming to ground no.1 in the appeal of the Revenue, the AO disallowed the claim for deduction u/s 80IB of the Act on the amount of DEPB credits of Rs. 6,35,796/- on the ground that the said income was not derived from the business of industrial undertaking,relying,inter alia, on the decisions in the case of CIT Vs. Eastern Sea Foods Exports P. Ltd., 215 ITR 62 [Madras] , CIT Vs. Sterling Foods, 237 ITR 579(SC) ,Cambay Electric Supply Vs. CIT 113 ITR 84(SC) and Pandian Chemicals Ltd. ,262 ITR 278 (SC) and a decision of Hon'ble Delhi High Court ,holding that duty drawback is not an income derived from the industrial undertaking ,to be eligible for the deduction U/s.80I of the Act.
15. On appeal, the learned CIT(A) allowed the claim of the assessee on the ground that mere receipt of an export benefit to reimburse the duty elements cannot be treated as one degree away from the activity of the 12 ITA nos.3532 & 3586/A/07 industrial undertaking ,relying, inter alia, on the decision of Hon'ble Gujarat High Court in the case of CIT V/s. India Gelatine and Chemicals Ltd., 275 ITR 284
16. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). At the outset, both the parties agreed that issue is squarely covered in favour of the Revenue by the decision of the Hon'ble Apex Court in the case of Liberty India vs. CIT (2009) 317 ITR 218 (SC) .
17. W e have heard both the parties and gone through the facts of the case as also the aforesaid decision of the Hon'ble Supreme Court in the case of Liberty India (supra). On a similar issue as to whether the profit from Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme are "derived from the business of the Industrial Undertaking"
and consequently eligible for deduction u/s 80-IB of the Act, the Hon'ble Apex Court observed that the Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A essentially belongs to the category of "profit linked incentives" while ss. 80-IA/80- IB refer to profits derived from eligible business, it is not the ownership of that business which attracts the incentives but the generation of profits (operational profits) and each of the eligible business in sub-sections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. It was further held that Ss. 80-IB/80-IA are a Code by themselves as they contain both substantive as well as procedural provisions. S. 80-IB allows deduction of profits and gains derived from the eligible business. The words "derived from" is narrower in connotation as compared to the words "attributable to". By using the expression "derived from", Parliament intended to cover sources not beyond the first degree. Though the object behind DEPB etc is to neutralize the incidence of customs duty payment on the import content of export product DEPB credit/duty drawback receipt do not come within the first degree source as the said incentives flow from Incentive Schemes enacted by the Government or from s. 75 of the Customs Act. Such incentives profits are not profits derived from the eligible business u/s 80-IB.13
ITA nos.3532 & 3586/A/07 They are 'ancillary profits' of such undertakings and even as per AS-2 and the ICAI Guidance Note, duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods but have to be shown as an independent source of income beyond the first degree nexus between profits and the industrial undertaking. The Hon'ble Apex Court concluded that "16. DEPB is an incentive. It is given under 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 tocustoms duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by 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-IB. They belong to the category of ancillaryprofits of such Undertakings.
17. 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 Government of India to provide for repayment of customs 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 duty drawback receipt lies in Section 75 of the Customs Act and Section 37 of theCentral Excise Act.
18. 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- IB.
19. Since reliance was placed on behalf of the assessee(s) on AS-2 we need to analyse the said Standard.14
ITA nos.3532 & 3586/A/07
20. 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 form of materials or supplies to be consumed in the production.
21. "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.
22. The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Hence trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, duty drawback, rebate etc.should not be treated as adjustment (credited) to 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 Indian Accounting Standards & 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 Institute of Chartered Accountants of India (ICAI) 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 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 duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for purposes of Sections 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.
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24. In the circumstances, we hold that Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I/80-IA/80-IB of the 1961 Act."
17.1. In the light of view taken in the aforesaid decision of the Hon'ble Apex Court, we hold that DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80-IB of the Act. Therefore, we have no option but to reverse the conclusion of the ld. CIT(A) and allow ground no.1 in the appeal of the Revenue.
18. Ground nos.2,2.1 & 2.2 in the appeal of the Revenue relate to exclusion of excise duty from the total turnover for the purpose of 15 ITA nos.3532 & 3586/A/07 computing deduction u/s 80HHC of the Act. The AO included excise duty in the total turnover while calculating the profits eligible for deduction u/s 80HHC of the Act, relying, inter alia, on the decisions in the case of Chowringhee Sales Bureau Pvt. Ltd. vs. CIT (1977) 87 ITR 542(SC),Synclaire Murray & Co., 97 ITR 615(SC) and Mc. Dowell & Co. Ltd., 154 ITR 148(SC).
19. On appeal, the ld. CIT(A) allowed the claim of the assessee in the light of decisions in the case of CIT Vs. Sudarshan Chemicals Industries Limited, [2000] 245 ITR 769 (Bombay) and CIT V/s. Lakshmi Machine Works [2007], 290 ITR 667(SC)
20. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the order of the AO in the light of provisions of sec. 145A of the Act while the ld. AR on behalf of the assessee relied upon the order of the AO in view of judgment of the Hon'ble Supreme Court in the case of CIT vs Lakshmi Machine Works 290 ITR 667 (SC).
21. We have heard both the parties and gone through the facts of the case. We are not inclined to accept the plea of the ld. DR that the provisions of sec. 145A were applicable to the concept of total turnover even while determining the deduction u/s 80HHC of the Act, in view of the following observations of the Hon'ble Apex Court in the case of Laxmi Machine Works(supra), wherein it was held as under:
".........We have to read the words "total turnover" in section 80HHC as part of the formula which sought to segregate the "export profits" from the "business profits". Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover + total turnover which constitutes section 80HHC concession (deduction). Income in the nature of "business profits" was, therefore, apportioned. The above formula fixed a ratio in which "business profits" under section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words "total turnover" but also to the words "export turnover", "total export turnover" and "business profits". That is the reason why we have quoted hereinabove extensively the illustration from the Direct Taxes (Income-tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words "total turnover" in the above formula with reference 16 ITA nos.3532 & 3586/A/07 to the definition of the word "turnover" in other laws like Central Sales Tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under section 80HHC. They were not eligible even without the clarification introduced by the Legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the Income- tax Act, profits and gains were required to be computed with reference to the books of account of the assessee. However, as can be seen from the Income- tax Rules and from the above Form No. 10CCAC in the case of deduction under section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing section 80HHC deduction was "business profits" as computed under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the Legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under the Excess Profits Tax Act, it existed in the Business Profits Tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of "turnover", excise duty and sales tax also cannot form part of the "turnover". Similarly, "interest" emanates from exports and yet "interest" does not involve an element of turnover. The object of the Legislature in enacting section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, "turnover" was the requirement. Commission, rent, interest, etc. did not involve any turnover. Therefore, 90 per cent. of such commission, interest etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in section 80HHC(3) for the simple reason that they did not emanate from the" export turnover", much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the" turnover". Just as interest, commission etc. did not emanate from the "turnover", so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake of the character of turnover and" therefore, they were not includible in the "total turnover". The above discussion shows that income from rent, commission, etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No. 4409 of 2005, the above proposition has been accepted by the Assessing Officer, if so, then excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of "turnover" which is the position even in the case of rent, commission, interest etc. It is important to 17 ITA nos.3532 & 3586/A/07 bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. The view which we have taken is in the light of the amendments made to section 80HHC from time to time."
21.1 Section 80HHC of the Income-tax Act, 1961 is a beneficial section and was intended to provide incentive to promote exports. The intention was to exempt profits relatable to exports. As observed by the Hon'ble Apex Court, one cannot interpret the words "total turnover" with reference to the definition of the word "turnover" in other laws like the Central sales tax or as defined in accounting principles. The words "total turnover" in section 80HHC have to be read as part of the formula which sought to segregate the "export profits" from the "business profits . Therefore, we are of the opinion that excise duty cannot form part of the "total turnover" under section 80HHC(3) of the Act.
21.2 In the case of Sony India Pvt. Ltd. Vs. DCIT, in ITA no. 1181/Del/2005 dated 23/9/2008 for the AY 2001-02 ,ITAT Delhi Bench ,following the aforesaid decision of the Hon'ble Supreme Court directed to exclude excise duty while working out total turnover for the purpose of deduction u/s 80HHC of the Act.
21.3. In view of aforesaid decision of the Hon'ble Supreme Court, we are of the opinion that the ld. CIT(A) was justified in directing the AO to exclude excise duty while working out total turnover for the purpose of deduction u/s 80HHC of the Act. Thus, ground no.2 in the appeal of the Revenue is dismissed..
22 Ground no.3 in the appeal of the Revenue relates to deduction u/s 80HHC and 80IB of the Act simultaneously on the gross total income. The AO while referring to the provisions of section 80IA(9) of the Act ,reduced profits of the business for the purpose of deduction u/s 80HHC of the Act by the amount allowed on account of deduction u/s 80IB of the Act, relying ,inter alia, on the decision of the ld. CIT(A) in the case of Cello Pens & Stationery P. Ltd. for the A. Y. 2003-04 .
23. On appeal, the learned CIT(A) allowed the claim of the assessee while relying upon decision dated 18.08.2006 of the 18 ITA nos.3532 & 3586/A/07 Ahmedabad Bench Tribunal in the case of M/s. AtuI Intermediates V/s. ITO (OSD) in ITA No. 347/Afad/2005 for the A.Y. 2001-2002,following the order of ITAT, Bangalore Bench in the case of Irfan Sheriff V/s. ACIT (2006) 7 SOT 57.
24. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). At the outset, both the parties agreed that issue is squarely covered against the assessee by the decision of the ITAT Special Bench, Delhi [5 members] in the case of ACIT Vs. M/s Hindustan Mint & Agro Products Pvt. Ltd.,Chandausi,119 ITD 107.
25. W e have heard both the parties and gone through the facts of the case as also the aforesaid decisions of the ITAT. We find that the issue is squarely covered by the decision of Special Bench of the Tribunal in the case of M/s Hindustan Mint & Agro Products Pvt. Ltd(supra). Earlier in ACIT Vs Rogini Garments 108 ITD 49, the Special Bench at Chennai held that relief allowed u/s 80-IA had to be deducted from profits and gains of the business on which relief u/s 80HHC of the Act is to be computed. Subsequently, Hon'ble Madras High Court in SCM Creations, 304 ITR 319 took a contrary view. The question whether Rogini Garments was impliedly overruled was referred to a five Member Special Bench. The Special Bench upheld the correctness of Rogini Garments, holding that SCM Creations is not an authority on how s. 80-IA (9) is to be applied because the effect and implementation of above provision was neither raised nor examined and nor even decided by the Hon'ble High Court. It was held that a decision is an authority for the proposition that it decides and not what can logically be deduced there from. A point not raised nor argued at the Bar cannot be said to be the ratio of the decision. Accordingly, the Special Bench ruled that SCM Creation did not impinge upon the ratio of Rogini Garments. It was, accordingly, concluded that Rogini Garments was correctly decided and did not require reconsideration. The language of s. 80-IA (9)/80-IB (9A) was clear and unambiguous and was required to be given effect to. Deduction of profit and gains allowed u/s 80-IA/80-IB had to be deducted from profits and gains of the business on which deduction u/s 80HHC had to be computed. The Special Bench , therefore, held in following terms:
19ITA nos.3532 & 3586/A/07 "27. ............. We agree that all the provisions should be read together and given a harmonious construction. All provisions are inter-related and cannot be read de hors one and other. The Special Bench in the case of Rogini Garments has held that the restriction imposed by sub-section (9) on account of 80-IA is to be read in all the provisions of Chapter VI-A and it is not possible to ignore the restriction that profit and gains claimed and allowed as exempt under sub-section (9), (to the extent allowed) can not be allowed under any other provision of chapter 'C'.
Above construction in reading restriction in all relevant provisions under chapter 'C', in our opinion, is leading to no contradiction or absurdity and is reasonable. It is the legislative policy not to allow repeated deduction of same profit under sections of deductions in Chapter VI-A. We, therefore, see no conflict or contradiction in giving effect to the legislative mandate. Doing otherwise would, no doubt, be doing violence to the clear language. The argument is accordingly rejected.
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29. Having done so, we are unable to find any substance in the argument advanced on behalf of the taxpayers. The notes on objects and accompanying reasons are only an aid to construction. Such aid to construction is needed when literal reading of provision leads to ambiguous results or absurdity. Where language is clear and there is no ambiguity or absurdity, notes on clauses need not be referred to. Therefore, on facts, we do not see any support for the assessee from notes on clauses of the Finance Act. As regards Circular No. 772 dated 23.12.1998, we have already held that the said Circular was dealing with restriction (b) which provided that deduction (under other provision with heading "C"), "shall in no case exceed profit and gains of business or hotel as the case may be". The above portion of the Section is separated from the other portion of the sub-Section by word 'and'. It is, therefore, clear that there are two restrictions in the sub-section and circular of the Board is dealing only with the second restriction. It is difficult to accept that circular was issued to do away with first restriction incorporated in the provisions. There is absolutely no justification for allowing repeated deductions on profit and gain on which deduction has been allowed u/s 80-IA or 80-IB of the Act. The Special Bench in the case of Rogini Garments rightly held that repeated deductions of same profit and gains of undertaking was not intended to be disallowed. Above conclusion, in our opinion, was rightly arrived at and is confirmed.
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32. ............. In our considered opinion, the language used in Section 80- IA(9)/80-IB(9A) is clear and unambiguous and is required to be given effect to. Deduction of profit and gains allowed u/s80-IA/80-IB is not to be allowed again under any other provision. There is then further restriction on total deduction not exceeding eligible profit of the undertaking. No useful purpose would be served in repeating what we have observed above.
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35. ...........................In our considered opinion, all statutory provisions are inter-related and are part of one scheme. This cannot be read de hors one and other. Restriction imposed in Section 80-IA(9)/80-IB(9A) are to be read in all sections and given effect to. This would only give harmonious reading. The decision of Supreme Court relied upon by Shri Vohra also support above 20 ITA nos.3532 & 3586/A/07 proposition although they do not deal with Section 80-IA/80-IB of the Act. We are unable to find any substance in above argument of the learned counsel.
36. Shri Vohra, on the applicability of the decision of Hon'ble Madras High Court in the case of SCM Creations (supra), submitted that principle High Court being decision of a superior court has to be given preference over the decision of Rogini Garments (Special Bench). In support of this contention, it was submitted that even decision of non-jurisdictional High Court is to be given preference over the Special Bench decision. In this connection, reliance was placed on the decision of Madhya Pradesh High Court in the case of National Textile Corporation Ltd. vs CIT (2008) 171 Taxman 339 (M.P.) as also on the decision of Hon'ble Delhi High Court in the case of All India Lakshmi Commercial Bank Officers Union vs. Union of India 150 ITR 1. Shri Vohra also submitted that certain observations of the bench of ITAT in the case of Nodi Exports Vs ACIT, Moradabad, clearly exceeded its jurisdiction. After careful consideration of decision of Hon'ble Madras High Court in the case of SCM Creations(supra), we have already held that the said decision cannot be treated as a precedent. The issue has been discussed threadbare and those reasons need not be repeated again. Observations of Hon'ble Madras High Court in the later decision dated 20.12.08 in case of General Optics (Asia ) Ltd. (supra) has put the controversy beyond any shadow of doubt. In the above case, amendment brought w.e.f. 1.4.99 introducing Section 9 and (9A) in 80-IA and 80-IB respectively were clearly noticed. These amendments were not brought to the knowledge of the Hon'ble Court in the case of SCM Creations. Therefore, there is no question of supersession of Special Bench decision in the case of Rogini Garments. The said decision is applicable with full force. We do agree that correct propositions in the case Nodi Exports are overstated. There is no question of Tribunal not following and applying decision of superior court. The question involved here is whether decision of SCM Creations can be treated as a precedent. For the reasons already given, the said decision did not lay down that section 80-IA(9) or 809- IB(13) should be disregarded while computing deduction u/s 80HHC or other deduction under Chapter 'C' of VI-A.
37. We accordingly hold that deduction to be allowed under any other provision of Chapter VI-A with the heading 'C' is to be reduced by amount of deduction allowed u/s 80-IB/80-IA of the I.T. Act . We answer the question referred to the Special Bench in the affirmative i.e. in favour of the revenue."
25.1. In view of the foregoing and in the light of view taken by the Special Bench of the ITAT in their aforesaid decisions, we have no hesitation in reversing the findings of the ld. CIT(A) and restoring the order of the AO. Therefore, ground no. 3 in the appeal is allowed
26. No additional ground having been raised in terms of the residuary ground no.4 in the appeal of the assessee as also in the residuary ground in the appeal of the Revenue while ground no.4 in 21 ITA nos.3532 & 3586/A/07 the appeal of the Revenue, being mere prayer, does not require any separate adjudication, accordingly, all these grounds are dismissed.
27. In the result, both these appeals are partly allowed.
Order pronounced in the court today on 10-12-2010
Sd/- Sd/-
(T K SHARMA) (A N P AHUJ A)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Dated : 10 -12-2010
Copy of the order forwarded to:
1. M/s Polycome Associates, Plot No.26, GDDIDC, Daman Industrial Estate, Dabhel, Somnath Road, Daman
2. Jt. CIT, Vapi Range, Vapi and Assistant Commissioner of Income-tax, Vapi Circle, Vapi
3. CIT concerned
4. CIT(A), Valsad
5. DR, ITAT Bench-D, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD 22