TaxTMI 
TaxTMI 
2016 (4) TMI 389
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.... been booked as revenue. 2. The Ld. CIT(A) has erred in ignoring the fact that the excise is being refunded to the assessee but the same has not been booked as revenue. 3. The Ld. CIT(A) has erred in holding that the excise duty has been credited in profit and loss account and already accounted for in the receipts is factually wrong and since refund of excise duty was not accounted for as income during the year. 4. The Ld. CIT(A) has completely ignored and omitted to consider relevant circular and notification of Central Excise Department which clearly states that it is not the case where the refund is given to the manufacturer on account of excess payment of excise duty by the manufacturer to the Central Excise Department, but is a case of refund of regular excise duty paid by an assessee, by way of an incentive to the assessee. 5. The Ld. CIT(A) has erred in deleting the disallowance made by the AO on the issue of deduction u/s 80-IB of the Act in view of the fact that excise duty refund does not have any direct nexus with the 'operational profit' derived by the assessee and will not qualify for deduction u/s 80IB, 6. The Ld. CIT(A) has not appreciated the facts....
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....see on sales, therefore, the AO estimated the profit of the assessee at 3% of the turnover and deduction under section 80IB of the Act in respect of balance amount of Rs. 3,93,01,635/- was withdrawn. Aggrieved with the above findings of the AO, the assessee filed appeal before the Commissioner of Incometax( Appeals), who allowed the appeal. Aggrieved, the Revenue is in appeal before the Tribunal challenging the findings of the ld. Commissioner of Incometax( Appeals). 4. In ground No. 1 to 3 of the appeal, the Revenue has raised the issue of non-booking of excise duty refund as revenue in its profit and loss account. 5. The ld. Department Representative ( in short 'DR') relied on the order of the AO, whereas on the contrary, the ld. Authorized Representative ( in short AR) of the assessee, relying on the order of the ld. Commissioner of Incometax( Appeals) submitted that the assessee has already credited the excise duty collected from the customers in sales and same was paid to the Central Government but not claimed as expenses , therefore, the assessee was not required to credit the refund of the central excise duty, which was due to the assessee as per the notifications of the C....
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....d of the said duty from the Central Excise Department, after verification of the payments in accordance to the notification issued. Since the assessee was to be refunded the central excise duty collected from the customers, which has already been credited by the assessee in the sales and therefore the assessee was not required to again credit the refund due from the Central Excise Department. In our considered opinion, the accounting entries made by the assessee in respect of excise duty refund are in order and there is no infirmity in the finding of the ld. Commissioner of Income-tax(Appeals) on the issue in dispute. Accordingly, we uphold the finding of the ld. Commissioner of Income-tax(Appeals) and the grounds Nos. 1 to 3 of the Revenue are dismissed. 6. In ground Nos. 4 and 5, the Revenue has challenged allowing deduction under section 80IB of the Act in respect of central excise duty refund. 6.1 The ld. DR relying on the findings of the AO submitted that the central excise duty refund was an incentive granted by the government and not part of the profit derived from the Industrial Undertaking and, therefore, it was not eligible for deduction under section 80-IB of the Act a....
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....e first collected the excise duty on the goods from the customers and paid to the government and subsequently the assessee has been granted refund of the excise duty paid, in accordance with the notifications granting exemption to the assessee. The assessee claimed this excise duty refund as part of profit from the industrial undertaking and claimed deduction under section 80-IB of the Act. The assessee is treating this refund of excise duty as part of the profit of the undertaking, whereas according to the Revenue, refund of excise duty is not derived from the industrial undertaking and therefore the amount of refund of excise duty is not eligible for deduction under section 80-IB of the Act. Thus, the entire controversy is whether the excise duty refund received by the assessee is part of profit derived from the industrial undertaking. The contention of the assessee is that on manufacturing of the goods the assessee was liable for excise duty and it collected the same from the customers and therefore there was a direct nexus of the excise duty refund with the manufacturing activity carried out by the assessee. The assessee relied on the judgment of the Hon'ble jurisdictional High....
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....deduction under s. 80-IB. 13. Before analyzing s. 80-IB, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of "profit linked incentives". Therefore, when s. 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under s. 80-IA/80-IB is the generation of profits (operational profits). For example, an assessee company located in Mumbai may have a business of building housing projects or a ship in Nava Sheva. Ownership of a ship per se will not attract s. 80-IB(6). It is the profits arising from the business of a ship which attracts sub-s. (6). In other words, deduction under sub-s. (6) at the specified rate has linkage to the profits derived from the shipping operations. This is what we mean in drawing the distinction between profit linked tax incentives and investment linked tax incentives. It is for this reason that Parliament has confined....
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....to (12) of s. 80-IA, so far as may be, applicable to the eligible business under s. 80-IB. Therefore, at the outset, we stated that one needs to read ss. 80-I, 80-IA and 80-IB as having a common Scheme. On perusal of sub-s. (5) of s. 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub-s. (5) of s. 80-IA, which are also required to be read into s. 80-IB. [see s. 80-IB(13)]. We may reiterate that ss. 80-I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. On analysis of ss. 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-s. (2), would be entitled to deduction under sub-s. (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence....
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....t 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 s. 80-IB. 19. Since reliance was placed on behalf of the assessee(s) on AS-2 we need to analyse the said standard. 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....
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.... Hon'ble Apex Court and, therefore, the ratio of the judgment in the case of Dharmpal Premchand Ltd. is applicable over the facts of the case of the assessee. 6.8 In a recent judgment in the case of Commissioner of Income Tax versus Meghalya Steels Ltd. reported in 132 DTR 273 the Hon'ble Apex Court has discussed the judgments on the issue including the cases of Cambay Electric Supply Industrial Company Ltd versus CIT 1978 CTR (SC) 50, CIT versus Sterling Foods (1999) 153 CTR (SC) 439, Pandian Chemicals Ltd. versus CIT (2003) 183 CTR (SC) 99 and Liberty India versus CIT (2009) 225 CTR (SC) 233. 6.9 In the case of Meghalya Steels Ltd ( supra), the assessee claimed deduction under section 80-IB of the Act on the subsidies received which consisted of transport subsidy, interest subsidy and power subsidy. The Hon'ble Supreme Court held that all the subsidies are reimbursed to the assessee towards element of cost relating to manufacturing or sale of their products and thus there existed a direct nexus between the profit and gains of the industrial undertaking and reimbursement of the subsidies. The Hon'ble Apex Court distinguished the subsidies in the form of drawback or DEPB which ar....
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....s of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that, therefore, the immediate source not being from the business of the assessee, the element of directness is missing. We are afraid we cannot agree. What is to be seen for the applicability of Sections 80-IB and 80-IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the assessee in the manufacturing and selling of its products. The "profits and gains" spoken of by Sections 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Thus understood, it is clear that profits and gains are derived from the business of the assesse....
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....assessee has its unit in a backward area and is entitled to the benefit of the scheme. Further is the fact that transport expenditure is an incidental expenditure of the assessee's business and it is that expenditure which the subsidy recoups and that the purpose of the recoupment is to make up possible profit deficit for operating in a backward area. Therefore, it is beyond all manner of doubt that the subsidies were inseparably connected with the profitable conduct of the business and in arriving at such a decision on the facts the Tribunal committed no error." 22. However, in CIT v. Andaman Timber Industries Ltd., 242 ITR 204 [2000], the same High Court arrived at an opposite conclusion in considering whether a deduction was allowable under Section 80HH of the Act in respect of transport subsidy without noticing the aforesaid earlier judgment of a Division Bench of that very court. A Division Bench of the Calcutta High Court in C.I.T. v. Cement Manufacturing Company Limited, by a judgment dated 15.1.2015, distinguished the judgment in CIT v. Andaman Timber Industries Ltd. and followed the impugned judgment of the Gauhati High Court in the present case. In a pithy discussio....
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....sidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable." 23. We are of the view that the judgment in Merino Ply & Chemicals Ltd. and the recent judgment of the Calcutta High Court have correctly appreciated the legal position. 24. We do not find it necessary to refer in detail to any of the other judgments that have been placed before us. The judgment in Jai Bhagwan case (supra) is helpful on the nature of a transport subsidy scheme, which is described as under: "The object of the Transport Subsidy Scheme is not augmentation of revenue, by levy and collection of tax or duty. The object of the Scheme is to improve trade and commerce between the remote parts of the country with other parts, so as to bring about economic development of remote backward regions. This was sought to be achieved by the Scheme, by making it feasible and attractive to industrial entrepreneurs to start and run industries in remote parts, by giving them a level playing field so that they could compete with their counterparts in central (nonremote) areas. The huge transportation cost for....
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....sed on the incurring of costs relatable to a business, are under the head "income from other sources", which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. Section 28(iii)(b) specifically states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the Government of India, will be income chargeable to income tax under the head "profits and gains of business or profession". If cash assistance received or receivable against exports schemes are included as being income under the head "profits and gains of business or profession", it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head "profits and gains of business or profession", and not under the head "income from other sources". 29. For the reasons given by us, we are of the view that the Gauhati, Calcutta and Delhi High Courts have correctly construed Sections 80-IB and 80-IC. The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods and Li....
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....uld be evidenced from the table below:- Month Sale by appellant to MAPL Sale by other supplier to MAPL Commodity Rate Per KGs(Rs.) Name of Party Rate Per KGs(Rs.) May,2007 DMO 295 N armada Industries 299 August,2007 M Solution 640 SR Industries 660 November,2007 M Solution 590 Maa Durga Industries 605 December,2007 M Solution 575 Alfa Menthol 581.5 January,2008 M Solution 570 Jay Ambey Corporation 585 I also agree with the appellant that the net profit realization is not a proper indication of the trading result and that a safer and more reliable estimate would be the gross profit realization. The appellant has shown the profits of the preceding years where from it is evident that the results of the subject year are not as attractive as those of the preceding years. From the assessment order of Mentha & Allied Products Ltd., it is clear that if facts as narrated by the Assessing Officer in the subject case are taken to be correct, then there was good reason for not allowing that loss. That, however, is not the case here. Further in terms of the mandate u/s 80IA(10) the onus to show that there is an arrangement between the two connected ent....