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TMI Blog1992 (11) TMI 137X X X X Extracts X X X X X X X X Extracts X X X X ..... sessees are entitled to certain deductions from the profits and gains of an industrial undertaking and the question is whether the three receipts are of the nature of profits and gains derived from an industrial undertaking. 4. Regarding the amount received by the assessee on account of duty draw back the matter is covered by an earlier order of the Tribunal dated 20-1-1989 passed in ITA No. 720(Delhi)/1986 in the assessee's own case for assessment year 1982-83. The Tribunal in that case upheld the order of the CIT (Appeals) holding the receipt of amounts on account of duty draw back as profit from the industrial undertaking. Following the aforesaid order of the Tribunal we uphold the CIT (Appeals)'s order on this point and reject the plea raised by the revenue. 5. As regards cash compensatory support the issue stands covered by a Special Bench order of this Tribunal in Gedore Tools India (P.) Ltd. v. IAC [1988] 25 ITD 193, in which the Tribunal had held that amounts received by an assessee on account of cash compensatory support were not trading receipts and were, therefore, not taxable under the Income-tax Act. The Tribunal observed that cash compensatory support is received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose exports that the assessee gets import licences and, therefore, the profit arising from the sale of such licences should be treated as profit arising from the industrial undertaking. This contention is not correct. The profit is arising not from the sale of goods produced by the assessee but from the sale of import licences, which is a different commodity. The sale of import licence is an entirely different and independent activity and the profit derived from the sale of such import licence cannot be deemed to be the income derived from the industrial undertaking. The source of profit must be directly the industrial undertaking itself and a remote nexus would not be sufficient. In Sterling Foods v. CIT [1984] 150 ITR 292 the Hon'ble Karnataka High Court has held that profit arising from the sale of Import entitlements is not profit derived from the industrial undertaking. 7. On behalf of the assessee reliance was placed on the aforesaid judgment of the Hon'ble Madras High Court in the case of Wheel Rim Co. of India Lid. In that case it was held that profit arising from the sale of import entitlements was profit and gains derived by the assessee by export of goods. Here the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1961. We, therefore, reject the application for admission of additional ground and in the alternative also reject the additional ground on merits because of the retrospective amendment of law. 10. No other point arises in the assessee's appeal and the same is hereby dismissed. 11. In the revenue's appeal, the first ground relates to the disallowance of testing charges of boiler. The assessee had spent Rs. 38,040 in connection with the testing of its boiler by the Inspector of Boilers. The Assessing Officer disallowed a sum of Rs. 27,546 observing as below:- 'The assessee company has debited in the P L A/c a sum of Rs. 27,546 in the Head Office set and Rs. 10,494 in Pharmaceutical Division totalling to Rs. 38,040 under the head Testing charges of Boiler'. In this connection, it was submitted during the course of assessment proceedings that the boiler is older than 75 years and after a long time re-patching work in the assessee's boiler was got done by M/s Gomti Engineers, Kanpur and the photocopy of their bill has been enclosed. It was further submitted that testing of boiler is got done after a lapse of several years. Thus, it is clear that the nature of these expenses i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are registered with the Basic Chemicals Pharmaceuticals Cosmetic Export Promotion Council,Bombaywithin 15 days from the date of issue of the said notification. The assessee failed to get the said contract dated1-6-1983registered with the aforesaid counsel, as a result of which it could not perform its part of the contract by supply of the goods. A dispute arose between the assessee and Hardy, who claimed damages for breach of contract. Later, another contract dated23-2-1984was reached between the assessee and Hardy which provided as below:- "TERMS OF AGREEMENT. Both parties agreed to the following solution: 1. Mentha has confirmed and acknowledged that there was a breach of contract on his part for the supply of 1,50,000 ozs. Brucine Sulphate at US Dollars 1.08 per oz. cif airNew York. In order to compensate Hardy for the non-fulfilment of the Contract 3153, Mentha agreed to a payment to Hardy of U.S. Dollars 75,000.00 as full compensation for non-compliance of said contract 3153 dated1-6-1983. This compensation of U.S. dollars 75,000.00 for 1,50,000 ozs. is equivalent to U.S. 50 cents per ounce. 2. The total amount of compensation money of US Dollars 75,000.00 will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious terms of the aforesaid agreement, particularly clause (5) thereof, held that the liability arises only when Hardy's order for purchase of Brucine Sulphate for a particular amount stands executed. He, therefore, allowed a proportionate amount of Rs. 13,092.58 as deduction in proportion to the goods actually supplied to Hardy within the accounting period. On appeal the learned CIT (Appeals) obserted that the issue is whether the liability was a determined liability in the relevant previous year or not and he held that the order having been placed by Hardy within the accounting period itself, the liability had arisen and the assessee was entitled to deduction for the whole amount. The CIT (Appeals), therefore, deleted the disallowance of Rs. 7,93,793 made by the Assessing Officer. 15. The Revenue challenges the aforesaid order of the CIT (Appeals). During the course of the appeal on27-2-1990the Revenue moved an application for admission of the following as additional ground:- "That on the facts and in the circumstances of the case the learned Commissioner of Income-tax (Appeals) erred in law in deleting the disallowance of Rs. 7,93,793 being the compensation payable to forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reach of contract were allowable as business expenditure. In the case before us the allowability of the expenditure is not in dispute. What is in dispute is whether the expenditure in question has actually been incurred according to law in the year under consideration. As is apparent from the terms of the agreement dated23-2-1984the agreement was subject to the approval of the Reserve Bank ofIndia. Unless such approval was received the assessee could not pay damages to Hardy even by adjustment from the bills raised on Hardy. Further, the new contract was not a simple contract for payment of damages. It was virtually a novation of the earlier contract and Hardy, who had earlier to pay 1.08 U.S. Dollars per ounce was now to pay 2.00 U.S. Dollars per ounce and get an adjustment of 5 U.S. Dollars per ounce. In the result Hardy actually paid only 1.5 U.S. Dollars per ounce and the assessee got 42 cents per ounce more than the original price even after adjustment of the damages. The damages were to be adjusted from the price of each shipment and if Hardy did not purchase the goods it would not be entitled to any compensation. Mere placing of an order does not amount to purchase of the go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le in the branch set there was a profit and the ITO quantified the admissible relief by adjusting the loss in the Head Office set from the profit in the branch set. He also adjusted the unabsorbed loss of the preceding year before quantifying the relief under the said sections. The assessee objected to these adjustments and on appeal the CIT (Appeals), following his order for assessment year 1982-83 directed that these adjustments should not be made for quantifying the reliefs. In the present appeal the Revenue challenges this direction of the CIT (Appeals). 20. The CIT (Appeals)'s decision for assessment year 1982-83 was the subject matter of appeals before this Tribunal in ITA Nos. 5002 5003/1986 decided vide order dated 17-9-1990 and a Bench of this Tribunal reversed the CIT (Appeals)'s order and restored the action of the Assessing Officer, holding that the reliefs under sections 80HHA and 80-I were admissible only on the net income computed in accordance with the provisions of the Act. Thus, the issue is squarely covered against the assessee by this Tribunal's order in the assessee's own case for the preceding year. In Century Iron Steel Ltd. v. ITO [1989] 31 ITD 117, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed. According to him, all such details were on record and he, therefore, directed the Assessing Officer to allow the relief. 23. In the ground of appeal it is stated by the Revenue that relief under both the sections is not allowable because of the provisions of section 80J(4)(iii) and section 80-I(2)(iii). Under section 80-I relief is admissible in respect of an industrial undertaking which fulfils certain conditions. One of the conditions, which is contained in sub-clause (iii) of sub-section (2), is that the industrial undertaking begins to manufacture or produce certain types of goods at any time within the period of 9 years next following31-3-1981. This means that relief under section 80-I would be admissible in respect of an industrial undertaking which commences production of goods from1-4-1981or thereafter within a period of 9 years. On the other hand, under section 80J(4)(iii) the relief is admissible in respect of an industrial undertaking which has begun or begins to manufacture or produce articles at any time within a period of 33 years next following 1-4-1948. Thus, only industrial undertakings commencing production up to31-3-1981would be entitled to relief und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to a Judgment of the Jurisdictional High Court of Allahabad in CIT v. Himalaya Drug Co. [1982] 135 ITR 368, in which it has been held that form ITNS-150 was meant only for calculation of tax payable and could not be equated with an order charging interest. In that case the Hon'ble High Court held that charging of interest under section 139(8) is not automatic and the ITO is expected to apply his mind to the facts and circumstances of the case. So far as section 217 is concerned, the section itself states that the levy of interest can be ordered where on making the regular assessment the ITO finds certain facts as mentioned in clauses (a) and (b) thereof. Therefore, the Act specifically requires the ITO to apply his mind and to find certain facts, which in the case before us, as the assessment order would show, the ITO failed to find. In our view, therefore, the CIT (Appeals) was right in cancelling the levy of interest under sections 217 and 139(8). 26. No other ground arises for decision in the Revenue's appeal. 27. In the result, the Revenue's appeal is partly allowed. Per Goradia - I have gone through the order passed by my learned Brother. I hold a different view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f products; profit as understood by businessmen. For example, if the cost of sale is Rs. 100 and the international market price in respect of the product is only Rs. 60, the assessee obviously would not sell the products by way of export. But if he finds other benefits by way of some incentives, may be from any direction, then the value of the same shall also be considered. In this case if value of those incentives is say Rs. 50, then as against the cost of sale of Rs. 100 the businessman would get Rs. 110 and, therefore, the transaction would be found to be profitable and then only he will enter into the contract of export sale. Remember this would not be done if the assessee is able to sell at still higher price locally, say Rs. 120. Hence only motivating factor is benefits accruing from sale, in my opinion, it would be difficult to say that the profits received by way of incentives given by Govt. on account of exports do not form part of the profits from industrial undertaking. The scheme framed by Govt. for granting benefits in export trade is only a mode to suit Government needs, the businessman is not concerned with it except its effect on costing he has in mind. Again, fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0-I of the Act?" THIRD MEMBER ORDER Per Shri Ch. G. Krishnamurthy, President - This appeal has come before me for my opinion as a Third Member, under section 255(4) of the Income-tax Act as there was a difference of opinion on the following point between the Members of the Tribunal who heard the appeal: "Whether, on the facts and circumstances of the case, the amount received by the assessee by way of cash compensatory support and income from sale of import entitlements could form part of eligible profits for deduction under sections 80HHA and 80-I of the Income-tax Act?" The learned Judicial Member Shri M.C. Agarwal (as he then was) wrote the leading order mentioning all the relevant facts and since they are not in dispute, I briefly narrate them supplemented by the facts found by the ITO and his observations. 2. The assessee company derives income from purchase and sale of natural Mentha oil in its Head Office and also from the manufacture and sale of basic drugs in its branch. The assessee among others claimed relief under sections 80HHA and 80-I in respect of cash compensatory support of Rs. 3,74,739 and sale of import licences of Rs. 3,66,063. The Income-tax Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot profits and gains derived from an Industrial undertaking. 4. In so far as sale of import entitlements was concerned, the learned Judicial Member held that under the scheme of the Government of India, an exporter is allowed to import goods of certain value if he had exported certain goods. The exporter was entitled to utilise such licences either for importing goods for his use or sell them in the market for a price and the amount so received of Rs. 3,66,063 was by way of sale of these licences and the sale of those licences could not be said to be receipts or profits arising out of the working of the industrial undertaking. The learned Judicial Member made a distinction between the profit arising from the sale of the goods produced by the assessee and the realisation by the sale of import licences. The sale of import licences was entirely a different and an independent activity and the profit derived therefrom could not be deemed to be the income derived from the industrial undertaking. The source for the profit must be directly the industrial undertaking itself and a remote nexus would not be sufficient. For this view, he placed reliance on the case of Sterling Foods a case d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that the language used in sections 80HHA and 80-I would not make much difference and that controversy would not arise in a case of this nature when the underlying object and scheme for enacting the sections was borne in mind. For these reasons, he disagreed with the view expressed by the learned Judicial Member and preferred to decide the matter in favour of the assessee. 6. Now the controversy has come before me and I have heard the learned counsel for the assessee and also the learned Departmental Representative. It is necessary to reproduce the provisions of sections 80HHA and 80-I to understand what the Legislature has intended and whether the assessee had complied with the conditions if any imposed by those sections for the grant of relief contemplated therein: "80HHA. (1) Where the gross total income of an assessee Includes any profits and gains derived from a small-scale industrial undertaking to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof. The other provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee a deduction from such profits and gains of an amount equal to twenty per cent thereof." Except for the words "or the business of a hotel" section 80HHA(1) and section 80HH(1) are exactly similar. The difference between these two sections is while 80HH covered an Industrial undertaking or business of a hotel, 80HHA applied only to small scale Industrial undertakings located in certain areas specified by the Government but the condition for the eligibility of the deduction is the same namely that the gross total income of the assessee must include profits and gains "derived from" such industrial undertaking. Thus the words "derived from an industrial undertaking" came for interpretation before the Karnataka High Court. 8. The word "derived" has already been interpreted as far back as in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325. It was held that interest on rent of agricultural land was not an agricultural income as it was not revenue "derived" fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the course of its business. 9. The Karnataka High Court then proceeded to observe that when a relief was announced by the fiscal statute, the requirements of it must be strictly satisfied before the relief is allowed and it is not sufficient to establish a commercial connection between the profits earned and the industrial undertaking. When the law required that such profits must have been derived from the industrial undertaking, that requirement has to be satisfied and the industrial undertaking must itself be the source of that profit and it must directly yield that profit, but not a means to earn any other profit. The learned Judges placed reliance upon a decision of the Kerala High Court in Cochin Co. v. CIT [1978] 114 ITR 822 where also the expression "derived" received a similar narrow interpretation and where also the Kerala High Court held that an activity carried on by a person must be the immediate and effective source of the profit and not somehow connected with it. There must be a direct nexus between the activity and the earning of the profit. If profit is earned in an indirect or remote manner, such profit cannot be said to be the profit derived from the immedia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a direct conflict of judicial opinion. In the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192, the Supreme Court has pointed out that while interpreting the fiscal statutes, if there are two views possible, the view in favour of the assessee must be preferred. If this rule of interpretation is applied to the facts of the case before me and indeed. I should and also having regard to the historical background that prompted the amendment by declaring that the CCS and the profit derived on the sale of import licence would be treated as business income as against the contrary view expressed by the Special Bench of the Tribunal in the case of Gedore Tools (India) (P.) Ltd., I must hold that the CCS and the sale of import licence are entitled to the relief under sections 80HHA and 80-I. I have not quoted section 80-I because there also the words used are "profits and gains derived from an industrial undertaking or a ship or the business of a Hotel......". Therefore the meaning to be ascribed to the words "derived from" has to be in view of the judicial controversy to be decided in favour of the assessee. 12. What is more fascinating and filling are the facts before the Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the following words, quoted from page 172 of the report: "In our opinion, this argument is without substance. In the first place, as we pointed out already, the receipt by way of subsidy and the receipt by way of the profits due to the sale of import entitlement are directly referable to the export of the cycle rims made by the assessee and consequently they can be said to be profits and gains derived from the export of cycle rims even on the basis of any theory of proximity. Secondly, by virtue of the fact that the amount of profits and gains derived from the export have to be ascertained only in accordance with the provisions of the Income-tax Act, 1961, and not independent of it, in view of the provisions contained in section 2(5)(d) of the Finance Act, 1966, and rule 2(2) made by the Central Board of Direct Taxes pursuant to section 2(5)(d), these two receipts have to be treated as profits referable to or derived from the said export." Thus even though the attention of the Madras High Court was drawn to the restrictive scope of the words "derived from" to press the department's view, that was not accepted by the Madras High Court. I have quoted in detail the observati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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