2009 (12) TMI 666 - AT - Income Tax

Computation of deduction u/s 80-IB - estimate made by AO in bifurcating the income attributable to manufacturing and trading activities of the assessee-company - HELD THAT - The assessee is carrying on manufacturing as well as trading activities and therefore, it is necessary to segregate the profit/loss for computing the deduction available under section 80-IB. The lower authorities have adopted a blanket view that exact bifurcation of income/loss is not possible in this case for the reason that separate books of account are not maintained by the assessee-company. But the important point overlooked by the lower authorities is that if the details and nature of transactions entered in the common books of account and supporting subsidiary registers are identifiable with reference to the manufacturing activities and trading activities, it is not impossible to work out almost the exact amount attributable to the above two different activities. Therefore, in cases where separate books of account are not technically maintained, the division of income/expenditure on an estimate basis is not a fait accompli . Therefore, it is only fair that the AO is directed to re-examine the issue after giving assessee an opportunity for furnishing the details so that appropriate amounts can be worked out which are attributable to the manufacturing vis-a-vis trading activities. This issue is accordingly remitted back to the AO for fresh computation. Computation of deduction u/s 80-IB - AO treating the entire amount of other income as not derived from the business of the eligible industrial undertaking - HELD THAT - Interest earned on bank deposits - This interest is in the nature of unearned income and cannot be treated as income derived from the unit eligible for deduction u/s 80-IB. Derived of income connotes an intimate nexus which is genetic as well as functional. we uphold the decision of lower authorities on this point and hold that the bank interest of Rs. 1,55,000 is not eligible to be considered for the purpose of section 80-IB. Duty Drawback - This amount also cannot be considered for quantifying the deduction u/s 80-IB in view of the judgment in the case of Liberty India v. CIT 2009 (8) TMI 63 - SUPREME COURT . The lower authorities have rightly excluded the said amount from the ambit of section 80-IB. Income earned on sale of scrap - Scrap is essentially a remainder portion of the raw-materials/finished goods. Scrap generates out of the inventories processed or out of the sales rejects or quality rejects etc. It is therefore clear that the scrap integrally forms part of the manufacturing activity of an industrial unit. As decided in HARJIVANDAS JUTHABHAI ZAVERI AND ANOTHER 1999 (12) TMI 5 - GUJARAT HIGH COURT held amount received by the assessee for job work, empty soda ash, bardana, empty barrels, plastic wastes etc.are eligible to be considered for deduction available u/s 80-IA - Accordingly, we accept the contention of the assessee and direct the assessing authority accordingly. Sale of export quota - This amount cannot be considered eligible for deduction u/s 80-IB in view of the judgment of Liberty India s 2009 (8) TMI 63 - SUPREME COURT . Stock adjustment - The stock adjustment amount represents the various personal accounts of parties dealing with the assessee who are liable to pay to the assessee for shortage of goods and materials. In fact it is in the nature of earned income . But for the manufacturing activities carried on by the assessee scrap would not have generated and in a way, this is additional sales proceeds received by the assessee from various parties. Therefore, there is no reason to exclude this amount from the computation of eligible profits for the purpose of section 80-IB. We direct the AO to treat this as part of the eligible profits. Penal charges by way of interest on delayed deposits of sale proceeds by franchisees/dealers and on deposits - The very same issue was considered in the case of Nirma Industries Ltd. v. Dy. CIT 2006 (2) TMI 92 - GUJARAT HIGH COURT wherein as examining the nature of the said interest, the Court held that the amount was in fact derived from the business carried on by the assessee and accordingly held that these amounts are includible for the purpose of section 80-I. The above ratio squarely applies to the present case as well. Accordingly, we direct the AO to treat the as part of 80-IB profits. Other income - No details are available regarding the nature of the composition of the amount. Therefore, it is not possible for us to hold that the said amount must be treated as part of section 80-IB profits. The lower authorities are justified in excluding the said amount while computing the profits eligible for deduction u/s 80-IB. Deduction claimed u/s 80HHC - Bank interest cannot be considered as part of export income and therefore not eligible for the benefit of section 80HHC. Duty Drawback has to be considered as part of business profits while computing the deduction u/s 80HHC in the light of the Taxation Laws Amendment Act, 2005, but subject to the conditions prescribed in the amended law. Therefore, this issue is remitted back to the assessing authority to decide the matter in accordance with law. Income against the sale of scrap - It is in the nature of business income. Accordingly, the said amount needs to be treated as part of business profits for the purpose of section 80HHC. This issue is decided in favour of the assessee. Sale of Export Quota - This issue is also remitted back to the AO at par with our decision on the item of Duty Drawback discussed above. Stock adjustment income - This income is essentially in the nature of operational income of the industrial unit. This is the business income of the assessee. Therefore, it is to be treated as part of business profit for the purpose of section 80HHC. Penal charges - These amounts have already been held to be business income while discussing the issues of section 80-IB. Accordingly, we direct the AO to treat these two amounts as part of business income for computation u/s 80HHC. Other income - In the absence of details, the arguments of the assessee on this amount are rejected. The assessing authority is directed to revise the computation of deductions available to the assessee under sections 80-IB and 80HHC in the light of our directions contained in the above paragraphs It is to be further seen that while granting the deductions both u/s 80HHC and 80-IB, no simultaneous and independent deductions would be allowed. The deductions shall first be allowed u/s 80-IB and deduction u/s 80HHC shall be allowed on the remainder profits. This direction is in the light of the Special Bench decision in the case of Asstt. CIT v. Hindustan Mint Agro Products (P.) Ltd. 2009 (6) TMI 124 - ITAT DELHI-C . The above appeal filed by the assessee is partly successful. Nature of expenses - Royalty expenses as revenue expenditure - HELD THAT - A salient feature of the technical agreement was that the royalty payment was to be worked out as percentage of sales turnover of the assessee-company. The period of agreement was four years; all the technical details and materials have to be returned to the foreign collaborators after expiry of four years; the assessee surrenders all rights of every sort arising out of the technical agreement on expiry of the agreement period and assessee does not have any right either in the manufacturing technology or process techniques or other technical aspects or any marketing facilities like trademark, patent etc. When the nature of the payment was examined in the light of the above parameters of the technical agreement, it is clear that the assessee has not acquired any exploitable asset in the nature of technical know or manufacturing procedure or by way of patent or trademark. After the expiry of the period of the agreement, the assessee has no right to rely on the technical resources available with the foreign collaborators. The facility obtained by the assessee from the technical agreement was in fact to help the assessee to run its business in a more competent manner. Therefore, it is to be seen that the royalty paid by the assessee was in the nature of expenditure incurred for running an existing business in a better way. it is not possible to agree with the view of the Revenue that by virtue of utilizing the facility as per the technical agreement for a period of four years, the assessee-company has acquired a benefit of enduring nature. The assessee has not built up any technical base or acquired any intangible asset of perpetual use. Therefore, we agree with the CIT(A) that there was no justification for treating 1/4th of the royalty payment as capital expenditure. The CIT(A) is justified in deleting the said partial disallowance. Rule of res judicata in tax matters - As per assessee AO has not taken seriously the arguments of the assessee that the nature of royalty payment made by the assessee was examined by the assessing authority for the earlier assessment year 1995-96 in a detailed manner and accepted the contention of the assessee that the payment was in the nature of revenue expenditure - When we are in between the Rule of res judicata and Rule of Consistency, it is necessary to examine whether the Rule of Consistency is followed fairly and at the same time the Rule of Consistency is blindly applied in blatant violation of Rule of res judicata . A mere review is not possible. The re-reading of technical agreement and understanding the terms of agreement in the manner of opinion are not provocative reasons to deviate from the earlier finding and to cut off the chord of consistency running through the assessment for so many years. The chord of consistency can be cut off only if the facts are substantially different from the earlier assessment years, capable of leading to a different finding. It is our considered view that the assessing authority has erred in overlooking the finding arrived at on the same subject for the earlier assessment years as there are no demanding circumstances for a deviation. On this ground itself, the disallowance made by the assessing authority has to be held unlawful. Appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Computation of deduction under section 80-IB.
2. Computation of deduction under section 80HHC.
3. Treatment of royalty expenses as revenue expenditure.

Detailed Analysis:

1. Computation of Deduction under Section 80-IB:
- Segregation of Income: The assessee, engaged in both manufacturing and trading activities, contested the CIT(A)'s confirmation of the Assessing Officer's (AO) estimate in bifurcating income attributable to these activities. The Tribunal found that the lower authorities erred by adopting a blanket view without considering the identifiable details in the common books of account. It was held that a proper division of income/expenditure is possible even without separate books, and the issue was remitted back to the AO for fresh computation after giving the assessee an opportunity to furnish details.
- Other Income of Rs. 69,42,058: The Tribunal discussed the eligibility of various components of "other income" for deduction under section 80-IB:
- Interest on Bank Deposits (Rs. 1,55,000): Deemed as "unearned income" and not derived from the eligible industrial unit, thus not eligible for section 80-IB deduction.
- Duty Drawback (Rs. 26,43,000): Excluded from section 80-IB deduction based on the Supreme Court's ruling in Liberty India v. CIT.
- Sale of Scrap (Rs. 1,17,849): Considered part of the manufacturing activity and eligible for section 80-IB deduction.
- Sale of Export Quota (Rs. 1,26,581): Not eligible for section 80-IB deduction as per Liberty India's case.
- Stock Adjustment (Rs. 31,52,697): Treated as direct income from operational activities and eligible for section 80-IB deduction.
- Penal Charges on Delayed Deposits (Rs. 5,11,688 and Rs. 10,970): Considered business income and eligible for section 80-IB deduction.
- Other Income (Rs. 2,24,273): Excluded due to lack of details.

2. Computation of Deduction under Section 80HHC:
- Bank Interest (Rs. 1,55,000): Not considered part of export income, thus not eligible for section 80HHC deduction.
- Duty Drawback (Rs. 26,43,000): To be considered as part of business profits for section 80HHC deduction, subject to conditions in the amended law. The issue was remitted back to the AO.
- Sale of Scrap (Rs. 1,17,849): Treated as business income and eligible for section 80HHC deduction.
- Sale of Export Quota (Rs. 1,26,581): Remitted back to the AO for reconsideration.
- Stock Adjustment (Rs. 31,52,697): Treated as business income and eligible for section 80HHC deduction.
- Penal Charges on Delayed Deposits (Rs. 5,11,688 and Rs. 10,970): Treated as business income and eligible for section 80HHC deduction.
- Other Income (Rs. 2,24,273): Excluded due to lack of details.

3. Treatment of Royalty Expenses as Revenue Expenditure:
- Royalty Payment: The assessee's payment of Rs. 1,99,11,576 as royalty was partially disallowed (25%) by the AO, treating it as capital expenditure. The CIT(A) allowed the entire amount as revenue expenditure.
- Tribunal's View: The Tribunal upheld the CIT(A)'s decision, emphasizing that the royalty payment, calculated as a percentage of sales turnover and related to a four-year technical agreement, did not result in acquiring any enduring benefit or intangible asset. The payment was necessary for running the business and thus constituted revenue expenditure.
- Rule of Consistency: The Tribunal noted that the AO's partial disallowance contradicted the consistent treatment of similar payments as revenue expenditure in previous assessment years without any compelling new circumstances to justify the deviation.

Conclusion:
The appeal by the assessee was partly allowed, and the appeal by the revenue was dismissed. The AO was directed to recompute the deductions under sections 80-IB and 80HHC in accordance with the Tribunal's findings, ensuring no simultaneous and independent deductions are allowed.