1988 (11) TMI 122 - AT - Income Tax

Summary

Issues Involved:

1. Jurisdiction of the CIT under Section 263 of the IT Act.
2. Merits of the case regarding relief under Section 80J of the IT Act.
3. Inclusion of cash assistance and duty drawback as profits derived from the industrial undertaking.

Detailed Analysis:

1. Jurisdiction of the CIT under Section 263 of the IT Act:

The assessee challenged the jurisdiction of the CIT to initiate action under Section 263, arguing that the CIT(A) had already applied his mind to the issue of computation of relief under Section 80J and issued necessary directions. The assessee contended that the order of the ITO had merged with the order of the CIT(A), thereby negating the CIT's jurisdiction to revise the order under Section 263. This argument was supported by various judicial pronouncements, including the Supreme Court's decision in the case of M/s Gojer Bros. vs. Ratanlal Singh and the Gujarat High Court's judgment in Karsandas Bhagwandas Patel vs. C.V. Shah.

The CIT, however, rejected the assessee's contention, stating that the issue involved in the proceedings under Section 263 was not the subject matter of appeal before the CIT(A). The CIT emphasized that the relief granted under Section 80J on profit from Unit II, which included cash assistance and duty drawback, was not considered by the CIT(A). Therefore, the CIT held that the ITO's order on this point was not displaced by a finding or direction given by higher authorities, thus maintaining jurisdiction under Section 263.

The appellate tribunal upheld the CIT's assumption of jurisdiction under Section 263, agreeing with the arguments advanced by the DR and supported by two decisions of the Tribunal, which indicated that the issue before the CIT(A) was different from the issue before the CIT.

2. Merits of the Case Regarding Relief Under Section 80J of the IT Act:

The assessee argued that cash compensatory allowance and duty drawback were integral parts of the profits earned by Unit No. II and had a direct indivisible nexus to the manufacturing activity. The assessee provided a detailed explanation of how these receipts were integral to the export process and constituted profits from the new industrial undertaking.

The CIT, however, disagreed, stating that income from export incentives, including cash assistance and duty drawback, could not be considered as profits derived from the industrial undertaking. The CIT referred to various judicial precedents, including the Privy Council's decision in CIT vs. Raja Bahadur Kamakhaya Narayan Singh and the Supreme Court's decision in Cambay Electric Supply Industries Company Ltd. vs. CIT, to support the view that the expression "derived from" had a narrow meaning and required a direct source of profit from the industrial undertaking.

The appellate tribunal, however, found considerable force in the assessee's submissions and held that cash compensatory support (CCS) and duty drawback received by the assessee would qualify for deduction under Section 80J. The tribunal relied on the Gujarat High Court's decision in Ahmedabad Manufacturing and Calico Ptg. Pvt. Ltd., which established a direct nexus between the export of goods and the receipt of cash subsidy or allowance. The tribunal also referred to the Madhya Pradesh High Court's decision in Gwalior Rayon Silk Mfg. Wvg. Co. Ltd., which held that the items received due to export business constituted income derived from the industrial undertaking.

3. Inclusion of Cash Assistance and Duty Drawback as Profits Derived from the Industrial Undertaking:

The CIT argued that cash assistance and duty drawback could not be considered as profits derived from the industrial undertaking, as the immediate source of these incentives was the scheme of the Central Government. The CIT emphasized that the expression "derived from" required a direct source of profit from the industrial undertaking, and in the absence of such direct source, the relief under Section 80J was not allowable.

The appellate tribunal, however, held that the CCS and duty drawback received by the assessee constituted income derived from an industrial undertaking and were eligible for relief under Section 80J. The tribunal noted that the decisions relied upon by the revenue had no bearing on the facts and circumstances of the instant case. The tribunal emphasized that the Gujarat High Court's decision in Ahmedabad Manufacturing and Calico Ptg. Pvt. Ltd. clearly supported the assessee's stand, establishing a direct nexus between the export of goods and the receipt of cash subsidy or allowance.

Conclusion:

The appellate tribunal set aside the orders of the CIT in so far as they pertained to relief under Section 80J and restored the orders of the ITO. The tribunal upheld the assumption of jurisdiction under Section 263 by the CIT but ruled in favor of the assessee on the merits of the case, allowing the relief under Section 80J for both assessment years. The appeals were partly allowed.