1992 (11) TMI 138 - AT - Income Tax

Summary

Issues Involved:

1. Eligibility of cash compensatory support and income from the sale of import licenses for relief under sections 80HHA and 80-I of the IT Act.
2. Inclusion of duty drawback receipts in the profits of the industrial undertaking for deductions under sections 80HHA and 80-I.
3. Treatment of unabsorbed deductions for carrying over for adjustment in succeeding assessment years under section 80VVA.
4. Classification of cash compensatory support as a capital receipt and its taxability.
5. Disallowance of testing charges of the boiler.
6. Disallowance of 1/4th of expenditure on rent and taxes for personal use by directors.
7. Disallowance of damages for breach of contract.
8. Disallowance of foreign traveling expenses of directors.
9. Computation of relief under sections 80HHA and 80-I.
10. Simultaneous deductions under sections 80J and 80-I.
11. Restriction of total deduction to 70% of total income under section 80VVA.
12. Chargeability of interest under sections 217 and 139(8).

Detailed Analysis:

1. Eligibility of Cash Compensatory Support and Income from Sale of Import Licenses for Relief under Sections 80HHA and 80-I:
The Tribunal examined whether receipts from cash compensatory support (Rs. 3,34,739) and income from the sale of import licenses (Rs. 3,66,063) qualify as income derived from an industrial undertaking for deductions under sections 80HHA and 80-I. The Tribunal followed the Special Bench order in Gedore Tools India (P) Ltd. vs. IAC, which held that cash compensatory support is not trading receipts and thus not taxable under the IT Act. Similarly, profit from the sale of import licenses was deemed not to be derived directly from the industrial undertaking, following the Karnataka High Court's decision in Sterling Foods vs. CIT. Therefore, the Tribunal upheld the CIT(A)'s order denying relief under sections 80HHA and 80-I for these receipts.

2. Inclusion of Duty Drawback Receipts in Profits for Deductions under Sections 80HHA and 80-I:
The Tribunal upheld the CIT(A)'s order, which directed the AO to include duty drawback receipts in the profits of the industrial undertaking for deductions under sections 80HHA and 80-I. This decision was based on an earlier Tribunal order in the assessee's case for the assessment year 1982-83.

3. Treatment of Unabsorbed Deductions for Carrying Over for Adjustment under Section 80VVA:
The Tribunal noted that no argument was raised by the assessee on this point, and there was no evidence of unabsorbed deductions in the orders of the authorities below. Therefore, this ground was rejected.

4. Classification of Cash Compensatory Support as a Capital Receipt and its Taxability:
The Tribunal rejected the assessee's application to treat cash compensatory support as a capital receipt, noting the retrospective amendment of the IT Act by the Finance Act, 1990, which included such amounts in the definition of income under section 2(24). Consequently, the application for admission of the additional ground was also rejected on merits.

5. Disallowance of Testing Charges of Boiler:
The Tribunal agreed with the CIT(A) that the expenditure on testing the boiler was of a revenue nature and upheld the deletion of the disallowance made by the AO.

6. Disallowance of 1/4th Expenditure on Rent and Taxes for Personal Use by Directors:
The Tribunal upheld the CIT(A)'s order deleting the disallowance of Rs. 8,148, as there was no evidence of personal use of the premises by the directors, and the Revenue did not challenge the CIT(A)'s order for the earlier years.

7. Disallowance of Damages for Breach of Contract:
The Tribunal found that the liability for damages payable to M/s M.W. Hardy & Co. was contingent upon the approval of the Reserve Bank of India and the execution of orders by Hardy. Therefore, the Tribunal upheld the AO's disallowance of the entire amount of Rs. 7,93,793 and set aside the CIT(A)'s order on this point.

8. Disallowance of Foreign Traveling Expenses of Directors:
The Tribunal upheld the CIT(A)'s order deleting the disallowance of Rs. 12,944, as the AO did not provide any specific material to justify the disallowance, and the expenses were within the limits prescribed by the IT Rules and the Reserve Bank of India.

9. Computation of Relief under Sections 80HHA and 80-I:
The Tribunal reversed the CIT(A)'s order and upheld the AO's method of computing relief under sections 80HHA and 80-I by adjusting the loss in the head office set from the profit in the branch set and adjusting the unabsorbed loss of the preceding year.

10. Simultaneous Deductions under Sections 80J and 80-I:
The Tribunal agreed with the Revenue that both reliefs under sections 80J and 80-I are not simultaneously available. Since the assessee started production after 1st April 1981, relief under section 80-I was admissible. Therefore, the CIT(A)'s direction to grant relief under section 80J was set aside.

11. Restriction of Total Deduction to 70% of Total Income under Section 80VVA:
The Tribunal noted that the CIT(A) did not quantify the reliefs, and since relief under section 80J was denied, the restriction under section 80VVA would not arise. However, the AO was directed to restrict the relief within the limits prescribed by section 80VVA if applicable.

12. Chargeability of Interest under Sections 217 and 139(8):
The Tribunal upheld the CIT(A)'s order canceling the levy of interest under sections 217 and 139(8), as the ITNS-150 form used for calculating tax payable could not be equated with an order charging interest, and the ITO did not apply his mind to the facts and circumstances as required by the Act.

Separate Judgment by P.J. Goradia, A.M.:
P.J. Goradia, A.M., disagreed with the view that cash compensatory support and income from the sale of import entitlements should be excluded from eligible profits for deductions under sections 80HHA and 80-I. He argued that these receipts are part of the profits derived from the industrial undertaking, considering the legislative intent and the retrospective amendments made by the Finance Act, 1990. He emphasized that the business economics and principles of costing support the inclusion of such receipts in the eligible profits.

Reference to Third Member:
Due to the difference of opinion, the matter was referred to the Hon'ble President for a Third Member's opinion on whether the amounts received by the assessee as cash compensatory support and income from the sale of import entitlements could form part of eligible profits for deduction under sections 80HHA and 80-I.

Third Member's Opinion:
The Third Member, Ch. G. Krishnamurthy, President, concluded that the receipts from cash compensatory support and the sale of import entitlements should be included in the eligible profits for deductions under sections 80HHA and 80-I. He favored the view expressed by P.J. Goradia, A.M., and emphasized the legislative intent and the need to prefer the interpretation in favor of the assessee when there are divergent judicial opinions.