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2nd Issue

3. In so far as this issue is concerned, its disposal would require delineation of certain undisputed facts. These being:-

ITA 83/2008 2 of 20 3.1 The assessee is engaged in the manufacture of flavoured chewing tobacco and Kiwam. The assessee has manufacturing units located at Barotiwala District Himachal Pradesh and in Agartala. In respect of the assessee‟s unit at Agartala, during the relevant period, the assessee was entitled to exemption from excise duty. The exemption to which the assessee was entitled, enured to the assessee by virtue of three notifications issued by the Government of India, Ministry of Finance being, notification numbers 32/99-CE, 33/99-CE and 48/99-CE (NT). All these three notifications were dated 8.7.99 (hereinafter referred to as the „said notifications‟). These notifications were forwarded to the assessee‟s company by FICCI vide communication bearing reference No.F.680/CE-N-8 dated 22.7.1999. In terms of the said notifications, the assessee was exempted from paying excise duty in respect of the product manufactured at its Agartala unit. The procedure for claiming the exemption was that the assessee would first clear the goods from its bonded warehouse by paying the requisite excise duty and thereafter, the assessee would claim refund of excise duty on the seventh day of the succeeding month in which clearance has been made. The net result was that in the first instance, excise duty was paid by the assessee while clearing the goods from the bonded warehouse which, was subsequently refunded in the succeeding month. 3.2 On 30.11.2000, the assessee filed a return declaring a total income of Rs 2,33,97,130/-. The return was processed under Section 143(1)(a) of the ITA 83/2008 3 of 20 Act. On 30.7.2001, the assessee filed a revised return. The case of the assessee was picked up for scrutiny. A notice under Section 143(2) of the Act was served on the assessee. The Assessing Officer, amongst others, raised an issue with respect to a claim for deduction under Section 80-IB on an income of Rs 2,56,45,785/- from the assessee‟s Agartala Unit which the assessee had arrived at by virtue of inclusion of the amount refunded as excise duty, amounting to Rs 2,61,92,386/- from Agartala Unit.

3.3 The Assessing Officer came to the conclusion that since the refund received on account of excise duty was not „income derived‟ from any business of the industrial undertaking, that is, the Agartala Unit, the assessee was not entitled to include the same in the profit of the Agartala Unit, and consequently, no deduction would be allowed to the assessee in respect of that part of the income. The Assessing Officer, thus, concluded if the refund of excise duty was excluded, then, the Agartala Unit would show a loss and hence, the assessee would not be eligible for any deduction under Section 80- IB of the Act. Accordingly, by an order dated 28.3.2003/31.3.2003 the Assessing Officer disallowed the deduction under Section 80-IB of the Act. 3.4 The assessee being aggrieved by the same, preferred an appeal to the Commissioner of Income Tax (Appeals) [hereinafter referred to in short as „CIT(A)‟]. The CIT(A) returned a finding of fact that the assessee company, at the relevant point in time, had a unit at Agartala, which was exempted from ITA 83/2008 4 of 20 payment of excise duty under the notifications referred to hereinabove, and had debited the profit and loss account and merely on receipt of the refund of excise duty, credited the amount to the profit and loss of the Agartala Unit. The CIT(A), thus, came to the conclusion that the net effect was Nil. In other words, the CIT(A) found that if the assessee had maintained separate excise account then the excise duty would have to be debited on one side and the refund would have to be credited on the other. The net effect in any event would be „Nil‟. He accepted the contention of the assessee that it cannot be denied the benefit of, perhaps, incorrect entries in the accounts. 3.5 The CIT(A) also noted that the procedure prescribed by the excise department was that the appellant company was required to pay excise duty upon clearance of goods from the bonded warehouse and could only thereafter receive refund in the subsequent month. This fact as noted by the CIT(A), was reflected by the assessee in the books by first debiting the excise duty and upon receipt of the fund credited in the profit and loss account. Importantly, the CIT(A) returned a finding that the excise duty was paid during the course of manufacturing activity which was the immediate and effective source of refund of excise duty. There was, thus, according to the CIT(A), a direct nexus between the business activity and the excise duty refund. The CIT(A) concluded by holding that there was no justification in, the Assessing Officer, excluding the excise duty refund from the income of the assessee‟s Agartala ITA 83/2008 5 of 20 Unit. He accordingly directed the Assessing Officer to include the excise duty refund in the total income of the assessee‟s Agartala Unit while allowing deduction under Section 80-IB of the Act.