2001 (8) TMI 1388 - AT - Income Tax

Industrial undertaking profits under s. 80-I: duty drawback and refunds included; import entitlements excluded; forex issue remanded

Deduction under s. 80-I turned on whether various receipts were 'derived from' an industrial undertaking. Duty drawback under s. 75(1) Customs Act and ... Interpretation of the words ‘derived from’ used by legislature in section 80-I - Income derived from the industrial undertaking - duty drawback - activity of the manufacturing and sale of manufactured goods - change in the method of valuation of closing stock - manufacture and sale of cycle tyres and tubes as well as trading of fans, sewing machine etc. - HELD THAT:- 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. 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. 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. 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. 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[1999 (4) TMI 1 - SUPREME COURT]. 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. 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. Sales-tax refund - 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. [1950 (12) TMI 4 - SUPREME COURT]. 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.’s case [1980 (3) TMI 45 - MADRAS HIGH COURT] and India Piston Repco Ltd.’s case [1982 (8) TMI 1 - MADRAS HIGH COURT] 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. [1978 (4) TMI 1 - SUPREME COURT]. Thus, 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-I. Cash compensatory support (CCS) - 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 [1999 (4) TMI 1 - SUPREME COURT] 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. International Price Reimbursement Scheme (IPRs) - 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 [1999 (4) TMI 1 - SUPREME COURT] 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. Valuation of stock - 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 [1953 (10) TMI 2 - SUPREME COURT]. 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. Khosla & Co. (P.) Ltd. [1973 (11) TMI 37 - DELHI HIGH COURT] and the decision of Supreme Court in the case of British Paints India Ltd. [1990 (12) TMI 2 - SUPREME COURT] are 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. [1988 (3) TMI 34 - ANDHRA PRADESH HIGH COURT], Corporation Bank Ltd.[1988 (8) TMI 90 - KARNATAKA HIGH COURT] and Melmoulds Corporation [1993 (2) TMI 82 - BOMBAY HIGH COURT]. Therefore, in our opinion, the CIT(Appeals) was justified in deleting the addition. Consequently, the order of CIT(Appeals) is upheld on this issue. In the result, appeal of the revenue is partly allowed. Issues Involved:1. Whether the amounts of income can be said to have been derived from the industrial undertaking for the purpose of claiming deduction u/s 80-I.2. Addition on account of valuation of stock.Summary:Issue 1: Deduction u/s 80-I1. Duty Drawback: - The Tribunal upheld the CIT(A)'s order, stating that duty drawback is inextricably linked with the production cost of the goods manufactured by the assessee. It is a trading receipt of the industrial undertaking having a direct nexus with the activity of such industrial undertaking.2. Claims from Insurance & Transport: - The Tribunal agreed with the CIT(A) that claims received from insurance companies and transporters have a direct nexus with the activity of the industrial undertaking, affecting the profits of the business. Hence, such receipts form part of the profits derived from the industrial undertaking.3. Sale of Import Licences: - The Tribunal followed the Supreme Court's decision in the case of Sterling Foods, holding that the amount received from the sale of import entitlements does not form part of profits derived from the industrial undertaking.4. Difference in Exchange: - The Tribunal set aside the CIT(A)'s order and restored the matter to the Assessing Officer to ascertain whether the foreign exchange was utilized in the revenue or capital field. The claim should be allowed if it was utilized in the revenue field.5. Sales-Tax Refund: - The Tribunal reversed the CIT(A)'s order, stating that the sales-tax refund cannot be considered as profits derived from the industrial undertaking due to the lack of direct link between the activity of the industrial undertaking and the receipt of sales-tax.6. Cash Compensatory Support (CCS): - The Tribunal found merit in the revenue's appeal, holding that CCS is a subsidy given to exporters under a scheme and not reimbursement of any expenditure on input incurred by the assessee. Therefore, it cannot be said that there is any nexus between the subsidy received and the activity of the industrial undertaking.7. International Price Reimbursement Scheme (IPRS): - The Tribunal reversed the CIT(A)'s order, stating that the immediate source of such receipt is the scheme formulated by the Central Government, and hence, the decision of the Supreme Court in the case of Sterling Foods applies.Issue 2: Addition on Account of Valuation of Stock1. Change in Method of Valuation: - The Tribunal upheld the CIT(A)'s order, agreeing that the change in the method of valuing the closing stock from market value to cost was bona fide. It is settled law that the value of the closing stock has to be taken as the value of the opening stock of the succeeding year. The CIT(A) was justified in deleting the addition made by the Assessing Officer.Conclusion:The appeal of the revenue is partly allowed.