2022 (7) TMI 1134 - AT - Income Tax

Deduction u/s 80-IC - assessee received consideration from sale of Focus Scrip/ License received under Focus Products Scheme under the Foreign Trade Policy - AO denied deduction of income received from sale of FPS on the ground that such income is not related to manufacture or sale of the products of the undertaking and is only related to a post manufacturing event, which is not eligible for deduction - HELD THAT - As applying the purpose test laid down by the Hon ble Supreme Court in various decisions, particularly Sahney Steel 1997 (9) TMI 3 - SUPREME COURT and Ponni Sugars 2008 (9) TMI 14 - SUPREME COURT and also the direct judicial precedents referred supra, we hold that Focus Products Incentive in the nature of capital receipt not liable to tax under the provisions of the Income Tax Act, 1961. Duty Draw Back - AO held that the profits of the industrial undertaking included the amount of duty drawback, which is not eligible for deduction under section 80-IC - HELD THAT - In the instant case by reason of an export promotion scheme, an assessee was entitled to import entitlements which it could thereafter sell. Hence, the same could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post-manufacture namely, export. The judgment of Hon ble Supreme Court in the case of Liberty India 2009 (8) TMI 63 - SUPREME COURT wherein it was held that subsidy by way of customs duty draw back could not be treated as a profit derived from the industrial undertaking is very specific to the issue of duty draw back. The judgment of the Apex Court in the case of Liberty India (supra) was in relation to the subsidy arising out of customs draw back and duty Entitlement Pass-book Scheme (DEPB) similar to the facts of the instant case. Hence, keeping in view the judgment of the Hon ble Apex Court, we hereby affirm the order of the ld. CIT(A). Interest on KDR - HELD THAT - We hold that interest earned out of the fixed deposit made from the surplus funds being not connected to the manufacturing activity and do not form an integral part of the profits derived from industrial unit is not eligible for deduction. Interest is an unearned passive income derived out of non manufacturing activity. Judgment in the case of Pandian Chemicals Ltd. 2003 (4) TMI 3 - SUPREME COURT held that although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with the Electricity Board could not be said to flow directly from the industrial undertaking itself. Captivating the same analogy of the Hon ble Apex Court in the case of the assessee, the interest on the fixed deposits kept with the bank though may be required for the purpose of obtaining over draft facility, it can be said that it is a step removed from the business of the industrial undertaking. Hence, we hereby affirm the action of the ld. CIT(A).

Summary

Issues Involved:
1. Admission of additional grounds of appeal.
2. Deduction under section 80-IC on consideration received from the sale of Focus Scrip/License.
3. Deduction under section 80-IC on duty drawback.
4. Admission and consideration of additional evidence.
5. Deduction under section 80-IC on interest on KDR.
6. Imposition of interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Admission of Additional Grounds of Appeal:
The Assessee requested the admission of additional grounds of appeal under Section 253 of the Income Tax Act, 1961, read with Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963. The additional ground pertained to the exclusion of consideration received from the sale of Focus License under the Focus Product Scheme (FPS) from taxable income, claiming it to be a capital receipt not liable to tax. The Tribunal, citing the Supreme Court's decision in the case of National Thermal Power Co. Ltd. vs. CIT, accepted the additional grounds, emphasizing the Tribunal's wide powers under Section 254 to correctly assess the tax liability of an assessee.

2. Deduction under Section 80-IC on Consideration Received from Sale of Focus Scrip/License:
The Assessee claimed a deduction under section 80-IC for the consideration received from the sale of Focus Scrip/License. The Assessing Officer denied this deduction, arguing that the income was not derived from the industrial undertaking but related to a post-manufacturing event. The CIT(A) upheld this view, relying on the Supreme Court's judgment in Liberty India Ltd., which stated that such income does not qualify as profits and gains derived from an industrial undertaking. The Tribunal, however, considered various precedents and the purpose of the FPS, ultimately holding that the Focus Products Incentive is a capital receipt not liable to tax under the Income Tax Act, 1961.

3. Deduction under Section 80-IC on Duty Drawback:
The Assessee received duty drawback, which was also claimed as a deduction under section 80-IC. The Assessing Officer and CIT(A) denied this claim, citing the Supreme Court's decision in Liberty India Ltd., which held that duty drawback is not derived from an industrial undertaking. The Tribunal upheld this view, emphasizing that there must be a direct nexus between the profits and the industrial undertaking, which was not the case for duty drawback as it related to a post-manufacturing event.

4. Admission and Consideration of Additional Evidence:
The Assessee argued that the CIT(A) erred in not admitting and considering additional evidence that substantiated their claims. The Tribunal did not provide a separate detailed analysis on this issue, suggesting that the primary focus was on the substantive issues of deductions under section 80-IC.

5. Deduction under Section 80-IC on Interest on KDR:
The Assessee argued that interest on fixed deposits (KDR) pledged to avail overdraft facilities should not be excluded from profits eligible for deduction under section 80-IC. The Tribunal, however, held that interest earned from fixed deposits, being unrelated to manufacturing activities, does not qualify as profits derived from an industrial undertaking. This view was supported by the Supreme Court's decision in Pandian Chemicals Ltd. vs. CIT, which clarified that such interest is a step removed from the business of the industrial undertaking.

6. Imposition of Interest under Sections 234B and 234C:
The Assessee contested the imposition of interest under sections 234B and 234C. The Tribunal did not provide a separate detailed analysis on this issue, suggesting that the primary focus was on the substantive issues of deductions under section 80-IC.

Conclusion:
The Tribunal partly allowed the appeal, admitting the additional grounds but upholding the CIT(A)'s decisions on the denial of deductions under section 80-IC for the sale of Focus Scrip/License, duty drawback, and interest on KDR. The judgment emphasized the importance of a direct nexus between profits and the industrial undertaking for eligibility under section 80-IC.