Income Tax Appellate Tribunal - Jaipur
Arvind Gupta vs Income Tax Officer on 31 March, 2008
Equivalent citations: (2008)116TTJ(JP)92
ORDER
B.P. Jain, A.M.
1. This appeal of the assessee is arising from the order of learned C1T(A)-II, Jaipur dt. 25th July, 2007 for the asst. yr. 2003-04. The assessee has raised the following grounds:
Ground No. 1: That on the facts and circumstances of the case, the learned C1T(A)-II, Jaipur is wrong, unjust and has erred in law in confirming disallowance of deduction under Section 80JJA of Rs. 26,16,886 made by AO on account of misconception of the fact and alleged that subsidy granted by the Agricultural Department, Government of Rajasthan against sales of bio-fertilizer manufactured by the assessee is not an income derived from assessee's business of producing bio-fertilizers and not included in business income for the purpose of allowing deduction under Section 80JJA of the IT Act, 1961.
2. We have heard the parties. Briefly stated the facts of the case are that me assessee has claimed deduction under Section 80JJA on the subsidy amount of Rs. 32,15,780 which was received by the assessee from Agriculture Department. Therefore, AO has given a show cause notice to the assessee that, since the receipt of subsidy is not derived from the specified business and manufacturing activity as prescribed under Section 80JJA, therefore, why not the deduction claimed be disallowed. After excluding the said subsidy, the net profit of the assessee comes into negative figure. Thereafter the AO considered the reply furnished by the assessee and gave a categorical finding based on certain judicial decisions that the said subsidy received from Agriculture Department cannot be said as derived from the specified business as mentioned in the Section 80JJA of the IT Act. With this discussion, he disallowed the said deduction claimed at Rs. 26,16,886.
3. The learned CIT(A) vide pp. 3 to 5 of his order, confirmed the action of the AO by observing as under:
I have considered the facts of the case and arguments taken by Sh. Gupta quite carefully. It is undisputed fact that the sale value, as per invoice to the customer, does not include the subsidy received or receivable from the Agriculture Department. It is also factually noticed that neither in the sale invoice to the customer nor in the simultaneous sale invoice, there is any mention of part of the sale price receivable from Agriculture Department. It is true that the Government of Rajasthan, as per its scheme with a view to popularize the use of bio-fertilizer, had floated a scheme to give subsidy to the manufacturer/seller so that, at the subsidized/reduced rate, such bio-fertilizer may be made available to the ultimate growers /agriculturists. However, the language of the Sub-section 80JJA is quite clear according to which such deduction has to be allowed only on such profits and gains, which are derived from the said specified business. Certainly, the receipt of subsidy from Government of Rajasthan cannot be said as derived from the specified business. It may be stated as attributable to such business activities, but no deduction is allowable when any of such receipt is attributable to such business activity. On this issue the decision given by Hon'ble Madras High Court in the case of CIT v. Viswanathan & Co. (2003) 181 CTR (Mad) 335 : (2003) 261 ITR 737 (Mad) is quite relevant, wherein it has been discussed by Hon'ble Madras High Court that if a benefit is given to an assessee who runs an industrial undertaking, does not imply that all the benefits to be given to such an assessee should be based on all the profits received by that undertaking and not merely a part thereof. The Hon'ble Madras High Court had observed that when the Parliament has made a conscious distinction between the computation of profits and gains from business in the normal course and for purpose of extending a special benefit to a limited class, then it is open to Parliament to possible a method on to impose a qualification which is different or is absent from computation of the profits in the normal course for the purpose of levy of income-tax. Certainly, the said subsidy is akin to the export subsidy, duty drawback and cash compensatory support received by exporter on the export made which are given for specific purpose to enable him to export his items at the global competitive price. However, in such case such assistance/subsidy cannot be said as derived from the business of such industrial undertaking. This ratio has been laid down clearly by Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CAT , wherein it has been held by Hon'ble Supreme Court that the expression 'derived from' has a much narrower meaning than the expression 'attributable to' or 'from.
4. With this discussion in my considered view, the AO was fully justified in excluding the said subsidy amount from the business profit of the assessee for the purpose of computing deduction under Section 80JJA of the IT Act and since it was worked out to a negative figure, therefore, his action of denying the deduction claimed under Section 80JJA of IT Act is hereby confirmed."
5. We have perused the facts of the case. The dispute before us prima facie is that subsidy of Rs. 32,50,780 (correct figure as stated to be Rs. 32,15,780) received by the assessee included in its profit was not derived from the business of the bio-fertilizers and therefore was not entitled to deduction under Section 80JJA of the Act to that extent. The learned Counsel for the assessee argued and the explanation of the assessee in this regard was made through letters dt. 9th Nov., 2005 and 14th Nov., 2005 (PB 10-11) and also reproduced at pp. 2-3 of the AO. It was submitted that such a subsidy was, in fact and in law was not a subsidy to the manufacturer/seller but it was subsidy to the cultivator. The Government of India and therefore the Government of Rajasthan were interested in encouraging the use of bio-fertilizers more and more as against the chemical fertilizer and therefore a subsidy was given to the cultivator. Accordingly the realization of the selling price, was partly from the cultivator and partly from the Government subsidy. A procedure was laid down by the State Government under which, the assessee had to receive a part of the sale price from the State Government. Thus, the subsidy was only a part of the selling price and hence was a trading receipt. Copies of the scheme of the Government of Rajasthan together with the certificate of Addl. Director of Agriculture (Extn.), Rajasthan (PB 25) were submitted.
6. The assessee also relied upon a decision in the case of Sahney Steel & Press Works Ltd. v. CIT to derive support to the contention that an operational subsidy is treated to be a part of the trading receipt; similarly the subjected subsidy given by the Government to the cultivator but received by the assessee manufacture/seller, is nothing but a part of trading receipt and derived from the eligible undertaking.
7. We have heard the rival contentions and perused the facts of the case. The arguments made by the learned Counsel for the assessee Mr. Mahendra Gargieya, advocate, appear to be convincing that what the assessee received is nothing but a mere part of the sales price of the product which was sold at particular price and the part realization has come to the assessee directly from the buyer and the balance from the Government.
8. The learned Authorised Representative has invited our attention to the scheme by the Director of Agriculture, Government of Rajasthan referred to hereinbefore (PB 12). Also a certified copy dt. 4th June, 2002 of the proceedings between Director Agriculture and various manufacturer/dealers was also brought to our notice which makes it evident that subsidy scheme has nothing to do with the selling prices. The mode of computation of subsidy was depending upon different products and it was brought to our notice that it was mandatory to print out the maximum retail price (MRP) on all packages of bio-fertilizers for sale. The determination of subsidy is with reference to the sales price or weight of the products sold. As mentioned in the scheme dt. 27th May, 2002 (supra) a part of the sales price is realized directly from the buyer and part from the State Government. The determination of subsidy does not affect from sales price. The said subsidy is not meant directly to the manufacturer/seller is not based on the sales target. The certificate of the Addl. Director of Agriculture makes it evident that subsidy on behalf of the cultivators had been paid to manufacturers and they are providing subsidy to the cultivators and not to the manufacturers. As regards entry in the books of account, the mention of subsidy in the trading account does not change the facts of the case i.e., the misinterpretation made by the AO that the subsidy is received by the assessee cannot disentitle the claim of the assessee. The entries in the books of account are not decisive of the facts of the case and true character of the transaction and rights and obligations of the parties, as decided by the Hon'ble Supreme Court in the cases of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 1TR 363 (SC) and Sutlej Cotton Mills Ltd. v. CIT . The intention of the assessee for getting the accounts audited under Section 44AB when its total turnover including the subsidy was Rs. 58,25,430.
9. The learned Counsel for the assessee, Mr. Mahendra Gargieya advocate has produced the copies of the original bills for our perusal and has demonstrated that the assessee prepares two bills i.e. one in the name of cultivator and other in the name of State Government and both the bills are prepared separately. This is the part of the MRP and no reduction is permitted by the State Government as per the Government procedure and the requirement. On perusal of the bills, we are of the view that entire amount received was nothing but the sales price which the assessee was entitled to realize as sales proceeds i.e. the assessee realized/received the sales price in two parts. The decision of Hon'ble Supreme Court in the case of CIT v. Baby Marine Exports (2007) 209 CTR (SC) 183 : (2007) 160 Taxman 160 (SC) supports our view hereinbefore. In this decision of Hon'ble Supreme Court of India it has been held that the export house premium was treated as a part of the export turnover and includible in the profits of business, while computing deduction under Section 80HHC inasmuch as by virtue of an agreement between the parties, such premium was payable by the export house to the assessee in that case.
10. Also the learned Counsel for the assessee Mr. Gargieya pointed out the decision of Hon'ble Supreme Court of India in the case of Chowringhee Sales Bureau (P) Ltd. v. CIT where sales-tax collected by the assessee shown directly in the balance sheet by not taking to the trading account, the Court has held that the sales-tax was nothing but the part of the turnover even if the same has not been shown in the trading account and held the same to be a trading receipt.
11. We are convinced with the arguments of the learned Authorised Representative that Rs. 32.15 lacs was itself a part of sales price and not a separate subsidy given by the State Government which is evident from the fact that the State Government has deducted Rs. 38,225 from the gross amount of Rs. 32,54,005 payable by the State Government directly to the assessee because, such deduction was made because of the substandard quality of goods sold by the assessee which makes it clear that the State Government was working for and on behalf of the ultimate buyer cultivator. The sales price was reduced, therefore, to this extent. Had it been a subsidy directly meant for assessee manufacturer/dealer, there would not have been any deduction of such type. The State Government keeps a control on the quality and on variation, a deduction is made. The learned Authorised Representative has placed on record the communication No. 5335-500, dt. 27th May, 2002 issued by Director Agriculture Rajasthan State Government. The AO himself admitted that subsidy was not based on the production which supports the case of the assessee. The assessee manufactured the product with a trade name and sold in the market as per prevailing prices. We are convinced with the arguments of learned Authorised Representative that the scheme nowhere says that because of the subsidy, the sale price be reduced by the amount of subsidy and the assessee be restricted to sell the product only upto the permissible sales price.
12. We find substance in the arguments of the learned Authorised Representative that on a close reading of Sub-section (1) of Section 80-IA, it becomes palpable that the deduction is to be allowed on profits and gains derived from "any business of an industrial undertaking; it shows that the admissibility is with reference to profits and gains derived from any business of an industrial undertaking. Thus it becomes vivid that if the conditions of industrial undertaking are satisfied, then the assessee becomes entitled to deduction in respect of profits of any business of such industrial undertaking. Any business may be that of manufacturing or processing or otherwise. More or less the same phraseology continues under Section 80JJA as is under Section 80-IA. At this juncture, it is pertinent to note that the legislature has set the scope of deduction under Section 80JJA by using the appropriate phraseology, when seen in contrast with that used in Section 80HH/80-I. Whereas the latter provision grants deduction in respect of 'profits and gains derived from an industrial undertaking', the former provides for deduction on 'profits and gains derived from any business of an industrial undertaking.
13. As long as the income keeps on emanating from 'any business of an industrial undertaking, it would remain to qualify for deduction under this section. This was so held in Dy. CIT v. Chaman Lal & Sons and Asstt. CIT v. Maxcare Laboratories Ltd. (2005) 92 TTJ (Cuttack) 179, Dy. CIT v. Metro Tyres Ltd. (2001) 79 ITD 557 (Del) and A.P. Industrial Components Ltd. v. Dy. CIT (2002) 74 TTJ (Hyd) 272 and ITO v. Five Star Rugs (2006) 100 TTJ (Del) 222. Applying the same analogy and interpretation in the present case, the misreading and confusions in the mind of the AO shall be clarified inasmuch as under Section 80JJA the subjected profit is not confined merely to the undertaking but profits and gains should be derived from any business of an undertaking, giving a wider meaning. The cases cited by the AO and learned CIT(A) are totally distinguishable being based on peculiar facts. The decision in Sterling Foods (supra) was based on DEPB scheme, where there was a sale of license in the open market and hence the assessee in that case, received profit thereon, whereas here there was no such licence given to the assessee saleable in open market. Moreover in this case, the profits are arising due to actual conduct of the business, as was stressed in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT . Also the significant words 'profits and gains derived from any business of an industrial undertaking' are missing in the provisions, with which the Hon'ble Court was concerned. The above distinction has been noted in ITO us. Five Star Rugs (supra) vide para 5. Incentive provision to be construed liberally. We may also mention that Sections 80HH and 80-IB are incentive provisions, meant for the promotion of industrial growth as per CBDT Circular No. 421 dt. 12th June, 1985. It has been held that an incentive provision has to be construed liberally, kindly refer Bajaj Tempo Ltd. v. CIT . The present case also helps achieving the avowed object of maximizing the consumption of bio-fertilizers as against chemical fertilizers. Once the underlying purpose of an enactment is served, there is no reason why the deduction should be restricted on one pretext or other. In CIT v. Krishna Copper & Steel Rolling Mills , which has held for a liberal and broader interpretation of an incentive provision under Section 80J. Recently in CIT v. Baby Marine Exports (supra), the Court strongly advocated for a liberal interpretation at pp. 168 and 169 vide paras 26 and 27. It was held that Section 80HHC was incorporated with the object of granting incentive to earners of foreign exchange. This Court in Sea Pearl Industries v. CIT (2001) 165 CTR (SC) 395 : (2001) 2 SCC 33 (SC) also observed that the object of Section 80HHC is to grant incentive to earners of foreign exchange, in IPCA Laboratory Ltd. v. Dy. CIT this Court has taken the same view. This Court in the said judgment observed that Section 80HHC has been incorporated with a view to provide incentive to export house and this section must receive liberal interpretation.
14. Hence deductions so claimed may be allowed.
15. On perusal of facts and decisions relied upon by the parties, the realization of the selling price is partly from the cultivator and partly from the Government subsidy as per the schemes of the State Government and therefore subsidy is the part of the selling price and essentially has to be treated as a trading receipt though the same is given to the cultivator but received by the assessee manufacturer/seller and is derived from the eligible undertaking. The learned CIT(A) is not justified in disallowing the claim of the assessee under Section 80JJA of the Act. Therefore the AO is directed to allow the claim under Section 80JJA of the Act. Thus ground No. 1 of the assessee is allowed.
16. Ground No. 2: That on the facts and circumstances of the case, the learned CIT(A)-II, Jaipur is wrong, unjust and has erred in law in confirming disallowance of following expenses on account of alleged personal use of proprietor:
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Out of car repair 8,983
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Out of local conveyance 2,537
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Out of petrol 4,504
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Out of depreciation on car 11,529
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Out of telephone expenses 9,483
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Out of travelling expenses 15,809
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Out of entertainment expenses 6,548
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17. Brief facts of the case are that the AO observed as under:
The following expenses debited to P&L a/c were found to include expenses on account of personal use by the assessee as well as his family members also. Therefore, disallowances are made out of these expenses claimed as under:
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Sl. Head of expenditure Claimed in Rate of Amount No.
P&L a/c disallowance disallowed
(Rs.) (Rs.)
---------------------------------------------------------------------------- 1 Car repair 44,913 20% 8,983
---------------------------------------------------------------------------- 2 Local conveyance 12,683 20% 2,537
---------------------------------------------------------------------------- 3 Petrol 22,521 20% 4,504
---------------------------------------------------------------------------- 4 Depreciation on car 57,645 20% 11,529
---------------------------------------------------------------------------- 5 Telephone expenses 47,417 20% 9,483
---------------------------------------------------------------------------- 6 Travelling expenses 79,043 20% 15,809
---------------------------------------------------------------------------- 7 Entertainment expenses 32,739 20% 6,548
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Hence a sum of Rs. 59,393 out of above expenses of Rs. 2,96,961 claimed in P&L a/c is disallowed as element of personal use in these expenses cannot be ruled out in absence of log book of cars and call registers of telephone. Further vouchers of car repairs, local conveyance, travelling and entertainment are not properly maintained; some vouchers related to ' these expenses are self-made. I therefore add a sum of Rs. 59,393 to the income of the assessee.
18. The learned CIT(A) confirmed the action of the AO.
19. We have perused the facts of the case. The findings of the AO that -'there is a personal element in the expenses claimed in the absence of log book of cars, call registers of telephone and vouchers for car repairs, local conveyance, travelling and entertainment are not properly maintained and some vouchers are self-made. Non-business purpose in the expenses claimed in view of the deficiencies pointed out by the AO, cannot be ruled out. The disallowance appears to be on the higher and therefore the AO is directed to restrict the disallowance at 10 per cent of the expenses claimed. The assessee gets the relief accordingly. Thus ground No. 2 of the assessee is partly allowed.
20. In the result, the appeal of the assessee in ITA No. 799/Jp/2007 is partly allowed.