TaxTMI 
TaxTMI 
2012 (8) TMI 1156
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....615/- and Rs. 28,75,20,135/- respectively. While reducing the profit, the AO has observed at pages 3 to 7 in his order as under:- ''The assessee company has claimed Rs. 2,04,07,539/- as R&D expenditure on capital assets in the computation of income. This expenditure since claimed in the computation of income has not been apportioned between the three units. Similarly although the assessee has apportioned corporate (common) expenses, but no allocation has been made in respect of depreciation claimed on corporate/common assets. Therefore, the assessee was asked to explain as to why the above R&D expenses and depreciation on head office assets should not be apportioned between the three units in the proportion of turnover. In response to which the assessee submitted explanation as under ''Regarding apportionment of depreciation on assets of head office and capital expenditure on R&D be apportioned between three units as the services are shared between them. In this regard, we submit that the other units of the company cannot use the fixed assets of the head office. For example plant and machinery of Udaipur unit ar used wholly and exclusively for manufacturing the pr....
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....rotiwala 2 6.37% 50,74,746/- 3. Bated 28.91% 55,63,556/- Total 1,92,44,394/- The AO has considered the above submission and stated that the Barotiwala and Bated are units/industrial undertakings under the aegis of M/s.SML. These units utilize the corporate and administrative set up of SML for various services and amenities which are imperative had it been separate industrial undertaking on his own. The assessee has not apportioned the common expenses while arriving at the profit of these two units. The AO further observed as under:- ''At this stage, it will be pertinent to illustrate the relevant provisions of the income tax Act. The contents of section 80IA sub section 5,7,8, 10 (applicable for section 80IB and 80IC by virtue of sub section 13 of section 80IB and sub section 7 of section 80IC) which are relevant here are reproduced by the AO on page 4 & 5 of the order. Under sub section (5) the legislature has laid down the most important principle for determining the quantum of profits of eligible business. It read that 'profits will be computed as if such eligible business were the only source of the....
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....ard against the possible misuse. These sub section makes sure that the benefit of deduction is fair and reasonable and the quantum of deduction is such that it actually accrues from the purpose for which deduction is granted. The AO also placed reliance of jurisdictional High Court in the case of Rajasthan State Warehousing Corporation Vs. CIT reported in 209 ITR 271 wherein it has been held that if the assessee is deriving income from different sources from taxable and some non taxable the allocation of expenditure on proportionate basis is justified. The AO further stated that as regards, the common assets, again the assessee's contentions do not hold goods. As the assessee has claimed depreciation in respect of the assets which are exclusively liked to the Barotiwala and Bated units in their P&L account. But no allocation has been made between the three units in respect of Head Office assets. The assessee has not denied the use of head office assets for other units although it stated that such use is negligible. Obviously the head office set up is being utilized for the various services rendered for and on behalf of the units of Barotiwala and Bated. The assessee claims....
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....cted the claim for this deduction as under :- Units Claim made Claim allowed by AO (i) Bated unit (80IB) Rs. 7,98,80,615 Rs. 6,69,68,594 (ii) Barotiwala Unit (80IC) Rs. 28,75,20,135 Rs. 18,70,22,005 Thus, the claim for deduction is reduced by Rs. 1,29,12,021/- in Bated Unit and by Rs. 10,04,98,130/- in Barotiwala Unit. 1.2 The said AO has restricted the above claim by deducting the following amount from income eligible for deduction u/s 80 IB/80IC in respect of the above units. S. N. Particulars Bated unit (u/s 80IB) Barotiwala Unit (u/s 80IC) (i) Capital expenditure for R.D, and depreciation of assets at Udaipur unit allocated to these units on turnover ratio 84,46,778 77,04,653 (ii) Other income not considered as derived for industrial undertaking 40,92,664 6,70,15,169 (iii) Income treated as from trading activity not allowed for deduction u/s 80IB/80IC 3,72,579 2,57,78,308 Total Rs. 1,29,12,021 10,04,98,130 1.3 The said AO has discussed the above issues in para 3 to 5 of the assessment orde3r at page 2 to 14 of the assessment order.....
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....activity is a continuous activity and does not result in any tangible achievement in one year. The results may or may not be achieved over a period of years. Therefore, it cannot be said that Udaipur is rendering any tangible service to other units which can have any market value. R & D activity is for internal consumption only and its results are not for sale. In fact, no company would like to share its achievements through R & D with any third party. Therefore, it is submitted that sharing of revenue expenses between the three units is the correct method of determining the profits of each unit. (ii) The Ld.AO has taken the view that the cost of capital assets, purchased by Udaipur Unit should have been shared by the three units on the basis of turnover. He has accordingly bifurcated the earlier cost of Rs. 2,04,07,539/- between the three units as under :- Udaipur 44.72% 91,26,273 Bated 28.91% 58,99,808 Barotiwala 26.37% 53,81,458 100.00 2,04,07,539 On the above basis he has deducted Rs. 58,99,808/- from the income of Bated Unit and Rs. 53,81,458/- from the income of Barotiwala Unit for the purpose of computing exe....
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....iness in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Income tax Act, 1961, will depend on : (a) fulfillment of requirements of that provision, namely, that (i) the expenditure should not be in the nature of capital expenditure or personal expenses of the assessee; (ii) it should have been laid out or expended wholly and exclusively for the purposes of the business or profession; and (iii) it should have been expended in the previous year; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business 's or not; if they do the entire expenditure will be a permissible deduction, but if they do not, the principle of apportionment of the expenditure will apply, because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee................................ Held, reversing the decision of the High Court, that in view of the fact that a perusal of the question itself disclosed tha....
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.... 39.86% Net profit -32687283 291325347 82936883 341574947 Net profit % -2.91% 49.31% 12.80% 14.47% The appellant has claimed deduction in this year u/s 80IC at 100% at Rs.,28,75,20,135/- in respect of Barotiwala unit and u/s 80IB at 100% at Rs. 7,98,80,615/- in respect of Bated unit. There is a significant difference in GP and NP ratio of the three units. The net profit ratio of Barotiwala unit is significantly higher than the Bated unit. There is net loss in Udaipur Unit. On analysis of facts submitted by the appellant, the AO found that although the appellant had allocated corporate expenses including revenue expenditure on R&D but not apportioned depreciation on the common assets and depreciation on the assets used for R&D facilities. Further, reason behind the high N.P. ratio of Barotiwala unit of inter unit transfer of interest entry. The total expenditure on R&D facilities is Rs. 2,04,07,539/-. The appellant was asked to explain as to why R&D expenses and depreciation on HO assets should not be apportioned between the three units in the proportion of turnover. The appellant submitted during the assessment proceedings that the o....
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....pellant being the same, the benefit shall accrue to the other units also which undisputable. In the light of the fact that Udaipur unit is not a separate centre in the books of the appellant and the appellant is not charging any sum from the other two units for the various R & D activities carried out at Udaipur, the benefits of which are transferred tangible/intangible for the other units as well. Further, the assessee itself has allocated the R & D expenditure which is revenue in nature and claimed in P & L account between the three units. So there is no justification for not apportioning the capital expenditure on R & D. The two of them (capital and revenue) being inter linked with each other. In case of common assets also the appellant has claimed depreciation in respect of assets which are exclusively linked to Barotiwala unit and Bated Unit in their P & L account. But no allocation has been made between three units in respect of 13 HO assets. The appellant has not denied the use of HO assets for other units although it is stated that such use is negligible. Obviously the HO set up is being utilized for the various services rendered for and on behalf of the Barotiwala and Bate....
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....ubmissions. 2.7 We have heard the rival contentions and considered them carefully. After considering the submissions and perusing the materials available on record, we found that the ld. CIT(A) was justified in allowing the claim of the assessee. The ld. CIT(A) has considered the order of the AO and written submissions of the assessee and then he came to the conclusion that the order of the AO was not correct on this point. The ld. CIT(A) has given his finding in para 2.3 at pages 16 to 23 of his order which are reproduced as under:- ''2.3. Decision: I have considered the facts of the case and submissions of the Ld.A/R and found that the appellant company has manufactured units of solid state electronic energy meter at EClass Pratap NHagar Industrial Area, udaipur, Bated and Barotiwala, Solan, Himachal Pradesh. The trading of all the three units is as under :- Particulars Udaipr Barotiwala Bated Total Sales 1122672395 590818983 647729445 2361220823 Gross profit 372957496 354806360 213437957 941201813 Gross profit ratio 33.22% 60.05% 32.95% 39.86% Net profit -32687283 291325347 82936883 3....
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....0IA, sub section 10 of section 80IA and impressed upon the fact that section 5,8,10 and 11 of section 80IA make it very clear that the benefit provided under this section is bound by certain limitations. The spirit of sub section is to safe guard against the possible misuse. The legislature has directed explicit mechanism through the misuse of the provisions would be effectively checked. The intention of legislature is two fold, firstly it is to provide 100% tax deduction on certain eligible business activities but at the same time it aspires to limit the real eligible beneficiaries and to a quantum of profit that was reasonably derived from such eligible business. The AO has also placed reliance on the decision of Hon'ble High Court of Rajasthan in the case of Rajasthan State Warehousing Corporation Vs. CIT 209 ITYR 271 wherein it has been held that if the assessee is deriving income from different sources from taxable and some non taxable, the cost of expenditure on proportionate basis is justified. The AO has at last analysed the case of the appellant in this background. Udaipur being the HO, naturally R&D unit has to be installed at Udaipur. However, the assessee being shall ac....
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.... Particulars Bated unit (u/s 80IB) Barotiwala Unit (u/s 80IC) 1. Capital expenditure of R&D and Depreciation of assets at Udiapur unit allocated to these units on turnover ratio 8446774 7704653 2. Other income not considered as derived from industrial undertaking 4092664 67015169 3. Income treated as from trading activity not allowed for deduction u/s 80IB/80IC 372579 25778308 Total 12912021 100498130 The Co.'s R&D unit is situated at Udaipur factory. The total capital expenditure of Rs. 2,04,07,540/- has been incurred during the year. The appellant has claimed deduction for the above expenditure u/s 35(1)(iv) read with section 35(2)(ia) of the Act. The R&D plant and equipments are situated at Udaipur factory, the deduction is, therefore, claimed against the profit of Udaipur unit. Since the results of the R & D activity are shared with other units, proportionate revenue expenses are recovered by Udaipur Unit from other two units of Barotiwala and Bated and the capital assets such as R & D building, plant and equipments are not shared with other units and, therefore, the capital cost are not recovered from these....
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.... fulfillment of requirements of that provision, namely, that (i) the expenditure should not be in the nature of capital expenditure or personal expenses of the assessee; (ii) it should have been laid out or expended wholly and exclusively for the purposes of the business or profession; and (iii) it should have been expended in the previous year; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do the entire expenditure will be a permissible deduction, but if they do not, the principle of apportionment of the expenditure will apply, because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee........................... Held, reversing the decision of the High Court, that in view of the fact that a perusal of the question itself disclosed that income from various ventures was earned in the course of one indivisible business, the impugned order upholding the apportionment of the expenditure and allowing deduction of only that proportion of it which wa....
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....t income from business of the eligible unit shall be considered as if the business of the said unit was only source of income. The effect of this section is that if there is any loss in the eligible unit in any year the loss will be set off against the income of that unit in the subsequent year for the purpose of deduction under the above section, even if the loss has been adjusted against other income of the earlier years for the computation of total income. In other words the above section is not applicable in the case of the appellant. Because all the three units at Udaipur, Bated and Barotiwala are having only source of income i.e. income from business of electronic energy meter. As far as Decision of Hon'ble High Court of Rajasthan is concerned it has been reversed by the Hon'ble Supreme Court in the same case vide 242 ITR 450/ it has been held that where all the venture carried on by the appellant constituted one indivisible business or not. If they do, the entire expenditure will be a permissible deduction. But if they do not, the principles of apportionment of the expenditure will apply. Because there will be no nexus between the expenditure attributable to the venture not ....
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.... of the ld. CIT(A) on this issue. 3.1 The second ground of the Department is as under:- ''the ld. CIT(A) has erred in allowing of netting of interest income for the purpose of exclusion as 'other income' for calculating deduction u/s 80IB/80IC in respect of Bated and Barotiwala units and allowing deduction u/s 80IB/80IC on exchange rate fluctuation, scrap sales, liquidated damages, sundry credit balance written off, excise duty provision, packaging & forwarding charges. 3.2 The brief facts of the case are that the AO while allowing deduction u/s 80IB and 80IC has not considered the other income of Rs. 7,11,07,833/- as profit derived by the new industrial undertaking unit and not allowing deduction u/s 80IB/80IC of the Act. The AO while not considering the income for the purpose of deduction u/s 80IB/80IC has observed that from the perusal of the profit and loss account of Barotiwala Unit and Bated Unit, it was seen that there was an amount of Rs. 6,70,15,169/- in Barotiwala Unit and Rs. 40,69,662/- in Bated Unit shown as other income respectively. The assessee furnished the break up of the same as under:- Other income Barotiwala Bated Interest received ....
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.... (i) The assessee has shown the following receipts under the head 'Other income' in the two units. Nature of receipts Bated Unit u/s 80IB Barotiwala Unit u/s 80IB (a) Interest received 24,32,623 6,13,04,598 (b) Exchange rate difference received 2,46,050 6,44,129 (c) Misc. receipts 14,31,991 50,66,442 40,92,664 6,70,15,169 Grand Total Rs. 7,11,07,831 (ii) The said AO has taken the view that the above receipts are not derived from the two units and therefore, deduction u/s 80IB and 80IC is not allowable for the same. He has discussed the issue in para 4 of the assessment order at pages 9-11. He has accordingly reduced the claim for deduction u/s 80IB/80IC by Rs. 7,11,07,831/- (iii) The assessee has submitted the details of the above receipts during the course of the assessment proceedings. Thee details relating to the two units are enclosed as under:- Pages from To (a) interest received 58 - 58 (b) Interest paid 59 - 59 (c) Misc. receipts 60 - 60 (iv) Interest Received ....
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....baa), but the claim is that the quantum of such interest income to be excluded must be determined in accordance with the computation provisions relating to business by allowing expenditure by way of interest which bears a nexus with the interest receipt. The computation provisions includes Section 37(1) under which any expenditure incurred or laid wholly and exclusively for the purpose of the business is to be allowed as deduction. Therefore, any expenditure incurred which has a connection or nexus with the interest receipt has to be allowed as a deduction and only the balance can be excluded from the business profits. There may be other provisions in the computation Sections permitting other allowances or deductions provided a nexus is established between the expenditure and the interest receipt. Thus, there are statutory provisions which authorize the claim of the assessee in the instant case when they contend that the net income by way of interest be computed and excluded from business profits.. For the purpose of applying Explanation (baa) below subsection (4B) of Section 80HHC and while reducing 90% of the receipt by way of interest from the profits of the business, it is only....
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....was 100% exempted unit u/s 80IA. Therefore, the interest received on fixed deposits with the banks was a part of assessee's business income of Section 80IA unit and deduction for the same was allowable u/s 80IA. The Tribunal has relied upon the principle laid down in the decision of the Bombay High Court in CIT vs. Punit Commercial Ltd., 225 ITR 550. Copy of this decision is at pages 129 to 132. (c) On page 11 of the assessment order, the said AO has stated that in the assessee's case for the assessment year 1994-95 to 1998- 99, the ITAT Jodhpur Bench has decided that income interest should be excluded from business income for deduction u/s 80I. Copies of these orders dated 2-12-2005 (A.Y. 1996-97) and 22-09- 2006 (A.Y. 1994-95, 1995-06, 1997-98 and 1998-99) are at pages 133 to 136. It is submitted that this decision is not applicable to deduction claimed u/s 80IB/80IC as the working of the Sections are different as stated below. Section 80I (1) '' where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking....' Section 80 IB (1) '' where the gross total income of an assessee includes any profi....
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....undertaking and would themselves constitute the source for the income claimed as deduction. Thus, there is a crucial difference between the phraseology employed in Section 80IB and phraseology employed in Section 80HH and 80I and the decisions rendered in respect of Section 80HH and 80I, wherein the expression considered was 'income derived from an industrial undertaking' and the decisions based on that phraseology are distinguishable for determining the amount deductible u/s 80IB.'' This view is taken in the case of Bharat Rasayan Ltd. vs. JCIT (ITA no. 463/4630 (Delhi), DLF Power Ltd. vs. ITO , ITA No. 195 (Delhi), ITO vs. Kiran Enterprises 92 TTJ, 104 (Chand), ACIT vs. Mexcare Laboratories Ltd. , 92 ITD 11 (Cuttack) and CIT vs. India Golantine & Chemicals Ltd. , 194 CTR 492 (Guj.) Copy of the above decision in 10 SOT 178 is at pages 137 to 144. (f) From the above judicial pronouncements, it is evident that receipts which are intrinsically related to activities of the industrial unit have to be treated as income derived from the business of industrial undertaking. Moreover, the principle of netting of the receipts under one head against payments under the same h....
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....necraft Enterprises vs. CIT, 153 CTR 86 (SC). Copy of the above decision is enclosed at pages 145 to 156 (2) D Kishore & Co.vs DCIT, 2 SOT 769 (Mum) In this case, the Tribunal has held that credit shown in the profit and loss account as 'profit on cancellation of forward contracts' was an integral part of the export business and therefore, it has to be considered as part of the export business profit. Copy of this decision is enclosed at pages 157 to 161. (3) Priyanka Gems vs. ACIT 3 SOT 817 (Ahd.) In this case the assessee was engaged in export business and it accounted for exchange rate difference on account of export made during the year as well as earlier year. The AO treated the amount realized on account of exchange rate difference as income from other sources and declined assessee's claim u/s 80HHC for including the same in export turnover. The Ahmedabad Tribunal in a detailed order has held as under:- "Thus it cannot be said that exchange rate difference, i.e., amount received by assessee, in respect of exports, on account of exchange rate fluctuations, partakes the character of income enumerated in Explanation (baa), 90 per cent....
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....) In this case the assessee engaged in business of export of goods credited certain amount in the profit and loss account representing income on account of exchange rate difference which included certain amounts received after the end of the financial year. The assessee claimed that this receipt was from the export business. The Tribunal has held that the receipt of money on account of exchange rate fluctuation was only consequential to the sale of goods exported. What the assessee had received was the sale consideration in terms of foreign exchange. Though the amount was received after the end of the financial year, the assessee, while finalizing the account, correctly included the amount as business income and claimed deduction u/s 80HHC. Therefore the amount had to be treated as amount receivable on export made by the Company and form part of the income from business of exports. Copy of this decision is enclosed at pages 193 to 193. 7. Sharp Credit Limited Vs. DCIT-83 TTJ 1058 (Del) In this case also it is held that export sales realization on account of exchange rate difference constitutes part of total turn overt for the purpose of Section 80HHC. Cop....
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.... goes to reduce the cost of raw materials/stores etc. consumed in manufacturing process. This view is supported by the following cases. 1. DCIT vs. Harjivandas Juthabhai Zaveri 258 ITR 785 (Guj) and CIT vs. Rane (Madras) Ltd. 238 ITR 377 (Mad) In this case it is held that amounts received for job works, empty soda ash bardan, empty barreis and plastic waste, quality for deduction u/s 80 I. Copy of this decision is at pages 199 to 202. 2. ACIT vs. Maxcare Laboratories Ltd. 92 ITD 11 (Cuttack) In this case it is held that income having close and direct nexus with profits and gains of the business of the undertaking should also be considered for deduction for the purpose of section 80 IA. Therefore, interest received by the assessee from deposits placed with a company due to business compulsion and income from sale of empty drums, useless materials etc. have direct and proximate connection with business of industrial undertaking and should be considered for the purpose of deduction under section 80 IA. Copy of this decision is at pages 203 to 209. It is, therefore, submitted that the said A.O. was not justified in deducting ....
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....excise duty on closing stock made last year. This excess provision of excise duty is reversed this year and amount was credited to the other income. This entry is also of the same nature as stated in (d) above. Therefore, this credit to Profit & Loss Account is directly connected with the business of Barotiwala Unit and, therefore, the said A.O. is not justified in deducting this amount from profit of this unit for deduction u/s 80 IC. (g) Packing and Forwarding - Rs. 2,37,600/- (Bated) & Rs. 1,07896/- (Barotiwala). The appellant company has to incur expenditure for packing and forwarding of goods to customers. The appellant recovers these expenses from customers. There is surplus in this account because only direct expenses are debited to packing and forwarding account. The indirect expenses such as manpower cost, supervision charges etc. are not debited to this account. Therefore, this surplus is part of business income of these two units and, for the reasons stated earlier, the said A.O. was not justified in deducting this amount from profit of two units for allowing deduction u/s 80 IB/80IC. (h) Other Receipts Rs. 44,682/- (Bated) & Rs. 20,819/- (Baro....
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....ng figures:- Unit Total Turnover Purchases of finished goods Percentage Bated 6477.29 lacs 89.91 lacs 1.31% Barotiwala 5908.19 lacs 263.97 lacs 4.47% (iv) The appellant sells goods mainly to State Electricity Boards and large electricity companies in the private and public sector. These customers float tenders for supply of electronic meters. These tenders include supply of certain components which are not manufactured by the appellant. List of major components included in the tenders is as under: The meter reading instruments are hand held equipment used to read the meters. For every 100 or 200 meters, one meter reading instrument is procured by the customer. Without these meter reading instruments the customer will have to read the meter manually, which will make it a difficult job, until and unless additional manpower is deployed for this purpose. The boxes are normally used to house the meter in the field to protect it from rain, shine and dust. Computers are used for analyzing data down loaded from the meters. Printers are used for printing the reports using the meter read....
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....BDT in its Circular No.103, dated 17th February, 1973 has defined an industrial company as under: 2. The question as to the exact meaning of the Explanation to subsection 7(b) of Section 2 of the Finance Act, 1996 came up for consideration and the Board are advised that an "industrial company" would mean- (i) a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, even if its income from such activities is less than 51 per cent of its total income, and (ii) a company which, even though not mainly so engaged, derives in any year , 51 percent or more of its total income from such activities." This circular was issued in the context of industrial company within the meaning of Explanation to sub-section 7 (b) of Section 2 of the Finance Act, 1966. The definition of an industrial company as contained in that Explanation is similar to that as contained in the Explanation to Section 33 B. The sum and substance of the whole position is that the condition of mainly engaged would be satisfied if the vo....
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.... (vii) In view of the above facts and judicial pronouncements the appellant submits that the said A.O. was not justified in deducting the profit of Rs. 3,72,579/- (Bated Unit) and Rs. 2,57,78,308 (Barotiwala Unit) while computing deduction u/s 80 IB/80 IC. It may please be noted that profit from supply of finished components in Bated Unit is only 0.06% of Total Turnover of that unit and in Barotiwala Unit it is only 4.36% of Total Turnover of that unit. (viii) Without prejudice to the above, the profit from trading activities as detailed above direct nexus to the business of the units and deduction U/s 80 IB/80 IC be considered and allowed.'' 3.4 The ld. CIT(A) after considering the submissions and perusing the materials available on record found that the assessee deserves to succeed in part. He has considered the itemwise receipt and expenditure and then he has given his findings recorded in para 3.3 starting from pages 43 to 48 of his order which are as under:- ''3.3 I have considered the facts of the case and submissions of the ld. AR. The appellant has shown other income of Rs. 6,70,15,169/- in Barotiwala unit and Rs. 40,92,662/- in Bated unit. The break ....
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....f expenses against receipt under the same head has been accepted in several judicial pronouncements. It has been submitted that the foreign exchange fluctuation receipts/ payments are mainly on account of difference in the exchange rate at the time of booking transfer of export/ import and exchange rate at the time of receipt receipt/payment. Under the Accounting Standard AS- 11, which was applicable to the appellant , the exchange rate prevailing on the date of transaction should be applied for recording the transaction. During the year under appeal, the difference between these two rates resulted in surplus which has been shown as foreign exchange difference receipt, The exchange rate difference is part of the purchase activity and is in the nature of savings in the purchase cost and therefore, the entire amount should be considered as saving in purchase cost and part of profits derived from the business of two industrial undertaking. This principle has been accepted in various judicial pronouncements. The broad details of the misc. receipts are as under:- Particulars Bated Barotiwala Scrap Sales 1,17,890 13,46,285 Lease rent of building ....
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....provision of Excise Duty is reversed this year and the amount credited to other income. Therefore, the credit to profit and loss account is directly connected with the business of Barotiwala Unit. Packing and Forwarding The appellant has to incur expenditure for packing and forwarding of goods to customers. The appellant recovers these expenses from customers. There is surplus in this account because only direct expenses are debited to packing and forwarding account. Indirect expenses such as manpower cost, supervision charges are not debited to this account. Therefore, this surplus is part of business activity of these two units. I have considered the facts of the case and found that as far as income from interest is concerned the decision of Hon'ble ITAT is against the appellant decided in its own case for assessment year 1994-95, 1995- 96, 1997-98 and 1998-99. Therefore, the interest is treated as Income from other sources. But there is a receipt and payment of interest both simultaneously. Therefore, netting off of the interest is allowed. The AO is directed to work out the actual disallowance. As far as exchange rate fluctuation is conce....
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....wed by the ld. CIT(A) is not justified. Secondly, it was submitted that at best interest income can be termed as income attributable to the industrial undertaking but it cannot be said to be directly derived from the industrial undertaking. The reliance has been placed in the case of Pandian Chemials vs. CIT, 262 ITR 278 (SC) and also the decision of the Tribunal for the assessment years 1994-95 to 1998-99 in the case of assessee itself where interest income is held as income from other sources. Therefore, the ld. CIT(A) was not justified in directing to allow netting of the interest and then working out the actual disallowance. 3.6 Regarding other disallowances made by the AO, the ld. DR placed reliance on the order of the AO. 3.7 On the other hand, the ld. Counsel for the assessee placed reliance on the order of the ld. CIT(A) and also placed written submission containing 28 pages. 3.8 We have heard the rival contentions and considered them carefully. After considering the submissions and perusing the materials available on record, we found that the ld. CIT(A) has given the finding of facts. The ld. CIT(A) has considered each items separately where he found that income i....
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....ng profit from the profit eligible for deduction u/s 80IB/80IC of the Act. The AO has however discussed the provisions of Section 80IB/80IC speaking of 'any business' and further argued that it is qualified by the sentence 'any business' referred to in sub-section (3) to (11). These sub-sections define 'any business'. The sub-section (3) is unambiguously restricts the deduction to the units engaged in the manufacturing or production provided other conditions are fulfilled 4.3 It was submitted before the ld. CIT(A) by the ld. AR as under:- ''That u/s 80IB deduction is allowable on profit and gains of the business of any industrial undertaking. Further u/s 80IC, deduction is allowable on profits and gains of the business of an undertaking. The sections do not define the term industrial undertaking. This term is only defined in Section 33A which was earlier adopted for the purpose of Section 80IA. Explanation u/s 33B reads as under: ''In this Section industrial undertaking means any undertaking which is mainly engaged in the business of ...... manufacturing or processing of goods or mining.'' The deduction u/s 80IB/80IC is not restricted to only the incom....
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....A/R and found that the facts of the two appeals for assessment years 1994-95 to 1998-99 decided by the Hon'ble ITAT, Jodhpur and current year pending before the undersigned are totally different. In 1994- 95 to 1998-99 the appellant used to purchase meter reading instrument and sold it as it is to the customers. There was no relation to the manufacturing activity of the industrial undertaking and no direct nexus of this income with the income of the industrial undertaking. In the current year's appeal, the appellant received combined order for supply of manufactured goods and bought out components which is necessary to fulfill the order of the customer. In case of failure to fulfill the conditions, the customer is not willing to accept the manufactured goods and the appellant will be barred from filing the tender to supply the manufactured goods. It is because of the compulsion also by the customer that the appellant receives a combined order for the manufactured goods and traded goods. In assessment year 1994-95 the value of the manufactured electronic meter was Rs. 4,81,43,716/- and trading turnover for sale of meter reading instrument was to the tune of Rs. 68,987/-. Th....
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.... circular No.103 dated 17-2-73 stated as under:- "the question as to the exact meaning of the Explanation to sub section (7)(d) of section 2 came up for the consideration and the Board are advised that an "industrial company" would mean- (a) A company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, even if its income from such activities is less than 51% of its total income and (b) A company which, even though not mainly so engaged, derives in any year 51% or more of its total income from such activities." "The CBDT has recognized that for being given the benefit of a lower tax rate as an industrial company, it is not necessary for a company to have its income from manufacturing activities to be actually 51% or more of its total income in any particular year provided the company be found to be mainly engaged in manufacturing business..." The decision by the Hon'ble ITAT, Amritsar in case of DCIT Vs. Chamanlal & sons 93 TTJ 132 (ASR) is also in favour of the appellant as under:- ....
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....he part of the assessee to supply the energy meter alongwith other components to the customers otherwise they will not be acceptable to the parties and this fact has been considered by the ld. CIT(A) in detail in his order and only then has allowed the claim of the assessee. The ld. CIT(A) has followed the decision of the Tribunal in the case of DCIT vs. Chamanlal & Sons 93 TTJ 132 (Amristsar) and thereafter has allowed the claim of the assessee. The findings of the ld. CIT(A) in our considered view are reasonable findings which remained uncontroverted also. Therefore, we confirm the findings of the ld. CIT(A) on this issue also. 5.1 The Ground No. 4 of the Revenue is as under:- ''The ld. CIT(A) has erred in allowing of netting of interest income for the purchase of exclusion as ''other income'' for calculating deduction u/s 80HHC in respect of Bated and Barotiwala units more so in the light of the fact that no such disallowance was made in the assessment order and allowing deduction u/s 80HHC on Scrap Sales, Liquidated Damages, Sundry Credit Balance W/back, Packing and forwarding surplus.'' 5.2 In this case, the assessee has not claimed any deduction u/s 80HHC but h....
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.... 2 Interest received 9839588 3 Profit on sale of fixed assets 309603 4 Misc. income 8144027 Total 18306193 Regarding dividend income amounting to Rs. 12,975/- on perusal of the computation of total income, your goodself would observe that we have already treated dividend income as income from othe sources and reduced the same from income from business and profession hence the question of reducing 90% of dividend income from the profit of the business does not arise. 1. Regarding income amounting to Rs. 98,39,588/- on perusal of the working of deduction u/s 80HHC, your goodself would find that we have already reduced 90% of interest income amounting to Rs. 88,55,629/- from profit of the business for computing deduction u/s 80HHC as provided in Explanation (baa) of section 80HHC (4C) of the Act. 2. Regarding profit on sale of fixed assets amounting to Rs. 3,09,603/- we submit that the same has already been added back in the computation of total income for the year under assessment. 3. Regarding misc. income amounting to Rs. 81,44,027/- we have already f....
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.... ii Profit of Bated Unit 7,14,33,837 iii Profit Barotiwala Unit 27,98,15,482 He has discussed the above issue in para 6 at pages 14-16 2.2 Deduction of 90% of interest income of Rs. 98,39,588/- (i) The said AO has taken the view that 90% of the gross interest received is required to be deduction under Explanation (baa) of Section 80HHC. It is submitted that details of interest received are given on page 58. The appellant submits that the appellant has paid interest of Rs. 4,56,16,779/- as per details given on page 59. The appellant submits that in the following decisions, which are discussed in para 1.6(iv) (b) above, it has been held for the purpose of deduction @ 90% of the income under explanation (baa) of Section 80HHC, the interest received which has nexus to interest paid should be netted off and only the net interest should be considered for this deduction (a) Lalsons Enterprises vs. DCIT 89 ITD 25 (Del) (SB) (b) Pinkstar vs. DCIT 72 ITD 137 (Mumbai) (c) CIT vs. Bokaro Steel Ltd. 236 ITR 314 (SC) (d) ACIT vs. Maxcare Laboratories Ltd. 92 ITD 11 (Cuttack) (ii) In the case of the appellant, ....
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....ii) Without prejudice to the above, the appellant submits that 90% of the other income of Bated Unit and Barotiwala Unit should not have been deducted from export profit u/s 80HHC for the reasons stated in para 1.6 (vi). As regards similar income in Udipaur Unit, the submissions are as under:- (iv) Lease Rent on fixed assets Rs. 10,98,500/- This lease rent is received in respect of certain fixed assets such as leasing and calibration equipments etc. given on lease to Yadav Measurements (P) Ltd.. It is submitted these assets being part of the business assets, income from lease rent is business income of Udaipur Unit. Without prejudice to the above, on the basis of netting of income principle as submitted in para 1.6 (iv) above, the following expenditure relating to the fixed assets given on lease should be deducted from Rs. 10,98,500/- if the 90% of the same is held to be deductible from the profit of Udaipur Unit. - Repairs Local Taxes etc. Rs. Nil - Depreciation on fixed assets Rs. 9,73,109/- Rs. 9,73,109/- (v) Scrap Sales Rs. 12,28,644/- If the manufacturing process in the Udaipur Unit certain scrap is....
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.... from the profit of Udaipur Unit for the purpose of deduction u/s 80HHC. (vii) Discount received on Air Ticket Rs. 3,17,141/- This receipt is relating to Air Ticket purchased and debited to profit and loss account . On this basis of principle of netting of expense against income stated in para 1.6 (iv) above, the appellant submits that this amount should be deducted from traveling expenses of Rs. 3,75,85,465/- debited to profit and loss account . The appellant therefore, submits that the said AO was not justified in deducting 90% of the above amount of Rs. 3,17,141/- from the business income of Udaipur Unit. (viii) Duty draw back Rs. 2,43,273/- The said AO has deducted 90% of the duty draw back of Rs. 2,43,273/- (i.e. 2,18,946/-) under explanation (baa) of Section 80HHC. However, he has not considered this amount as Export Incentive under the first proviso to Section 80HHC (3) while computing amount allowable as deduction u/s 80HHC. The appellant submits that Rs. 2,18,946/- (in proportion of export turnover to total turnover) should have been deducted u/s 80HHC . (ix) Sundry Credit Balances Written Off Rs. 7,82,849/- The credit balance i....
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....d gave the following findings recorded in para 5.3 at pages 62 to 65 of his order. '' 5.3 I have considered the facts of the case and submissions of the ld. AR. The AO excluded 90% of the total interest in view of the provision of Section 80HHC(4C)(baa) of the Act. The ld. AR submitted that the appellant has paid interest of Rs. 4,56,16,770/- and submitted that the interest received which has nexus to interest paid should be netted off and only the net interest should be considered for this deduction in view of the decision (i) Lalsons Enterprises vs. DCIT 89 ITD 25 (Del.), (ii) Pinkstar vs. DCIT, 72 ITD 137 (Mum.), (iii) CIT vs. Bokaro Steel Ltd. , 236 ITR 314 (SC) and ACIT vs. Maxcare Laboratories Ltd. , 92 ITD 11 (Cuttack). In the case of the appellant, the interest paid is more than interest received, therefore, the AO was not justified in deducting 90% of Rs. 98,39,598/-. Netting of interest received and interest payment has already been discussed while deciding Ground No. 1 above. The AO has accordingly directed to compute the net interest and then excludes 90%, if in surplus and compute the deduction u/s 80HHC accordingly. Lease Rent: As far as rent is conc....
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....osition in its case also. The sundry balances arising because of non-claim by the purchasing parties at the time of settlement of the account and it has thus become surplus in the sale account but it has been credited as sundry credit balance in profit and loss account . Therefore, it is allowed as income from business. The AO is directed not to exclude 90% of the same for deduction u/s 80HHC purpose. Excise Duty on closing stock: This point has already been discussed and decided while deciding Ground No. 1 as under:- ''this amount represents provision of Excise Duty on closing stock made during last year. The excess provision of Excise Duty is reversed this year and the amount credited to other income. Therefore, the credit to profit and loss account is directly connected with the business of Barotiwala Unit''. Therefore, the AO was not justified in excluding 90% of the same for allowing deduction u/s 80HHC. Thus the disallowance made by the AO is deleted. The appeal is allowed on this point too. Packing & Forwarding Surplus: This point has already been discussed and decided while deciding Ground No. 1. As regards the packing and forwarding in view of th....
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....pur in turnover ratio to Bated and Barotiwala Unit (Rs.57,20,110/- for Barotiwala Unit and Rs. 1,04,15,695/- in the Bated Unit) VI Directing the AO to treat the trading income as business profit not as income from other sources and allowed deduction u/s 80IB/IC. 2. Directing the AO to allow deduction on account of dividend distribution tax of Rs. 43,53,541/- while calculating the book profit u/s 115JB of the Income Tax Act, 1961.'' 6.1 Regarding the ground relating to interest income, scrap sale, surplus on packing and forwarding, rental income, deleting the addition made on account of apportionment of capital expenditure on R&D and depreciation on assets of two units and directing the AO to treat the trading income as business profit not as tax income from other sources, we find that similar issues were involved in earlier years. We have already confirmed the order of the ld. CIT(A) for earlier year as the facts are similar. Therefore, on the same reasoning, we confirm the order of the ld. CIT(A) for the year under consideration. Accordingly, these grounds of the Department are rejected. 7.1 The Ground No. 2 of the Department which is against allowing deduc....