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TMI Blog2009 (12) TMI 666X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 . Even in such cases, it is possible to decipher a proper division on the basis of the details reflected in the books of account. Therefore, we find that the lower authorities have erred to the above extent while appreciating the merit of the submissions made by the assessee-company. 4. The ITAT, Ahmedabad A Bench has considered the very same issue in the case of an associate concern of the assessee, Arvind Cloth Ltd. v. Asstt. CIT in their order dated 6-11-2009 in IT Appeal Nos. 1471 and 1677/Ahd./2005 relating to the assessment year 2001-02. The Tribunal has held that it may be possible for the assessee, if an opportunity is given, to work out approximately the correct amount of income/expenditure attributab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 has discussed the law on the subject and has held that similar interest income cannot be considered as income derived from the eligible industrial unit. In view of the above, 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. ( ii )Next item is Duty Drawback amounting to Rs. 26,43,000. This amount also cannot be considered for quantifying the deduction under section 80-IB in view of the recent judgment of the Hon ble Supreme Court in the case of Liberty India v. CIT [2009] 317 ITR 218 . The lower authorities have rightly excluded the said amount from the ambit of section 80-IB. ( iii )The next item in the list is the income earned by the assessee 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. It is essentially an incid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly 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 Assessing Officer to treat the amount of Rs. 5,11,688 as part of 80-IB profits. ( vii )The seventh ground is penal charges on deposits. For the reasons stated above, this amount of Rs. 10,970 is entitled to be considered as part of 80-IB profits. ( viii )The last item in the list is other income amounting to Rs. 2,24,273. No details are available regarding the nature of the composition of the above 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 of Rs. 2,24,273 while computing the profits eligible for deduction under section 80-I. 9. After considering the issue raised by the assessee in respect of computation of deduction under section 80-IB, we may proceed to the disputes raised in the context of deduction claimed under section 80HHC. Again we have to refer to the extract of various items of income considered for deciding the matters relating to section 80-IB. ( i ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 under sections 80HHC and 80-IB, no simultaneous and independent deductions would be allowed. The deductions shall first be allowed under section 80-IB and deduction under section 80HHC shall be allowed on the remainder profits. This direction is in the light of the Special Bench decision of Appellate Tribunal in the case of Asstt. CIT v. Hindustan Mint Agro Products (P.) Ltd. [2009] 119 ITD 107 (Delhi). 11. The above appeal filed by the assessee is partly successful. 12. Next we will consider the appeal filed by the revenue. 13. The only ground raised by the revenue in its appeal is that the CIT(A) has erred in directing the Assessing Officer to allow royalty expenses of Rs. 49,77,894 as revenue expenditure. 14. The assessee-company has paid a royalty amount of Rs. 1,99,11,576 to M/s. Wrangler Apparel Corporation and H.D. Lee Co. Inc. This payment was made for availing the technical know-how on the basis of relevant agreement entered into between the parties. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of utilizing these technical materials are in the nature of an intangible asset having value of endurance and in such circumstances, a partial disallowance made by the assessing authority was only legitimate. 18. The learned counsel for the assessee, on the other hand, relied on the judgment of the Gujarat High Court in the case of Jyoti Electric Motors Ltd. v. CIT [1999] 237 ITR 280. The learned counsel pointed out that in the said case, the payment was made as a percentage of the sales turnover of the assessee-company and in such circumstances, the Court held that the payment was in the nature of revenue expenditure and therefore entitled to be deducted in computing the taxable income. The learned counsel explained that in the present case also the assessee was paying royalty as a percentage of the sales turnover. The learned counsel further explained that the technical agreement executed in the present case was only for a short period of four years out of which the assessee had no occasion to procure any technical expertise to be treated as a benefit, of enduring nature. He explained that the assessee-company was bound to return all the technical materials to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenditure incurred for running an existing business in a better way. 21. In the above facts and circumstances, 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. 22. Another aspect to be considered in this context is that the Assessing Officer 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. This finding arrived at by the assessing authority for the earlier assessment year 1995-96 has since then been followed in all the subsequent assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule of res judicata . We have to read down the rule in such a manner that the findings are not disturbed unless there are demanding circumstances and earlier decisions are not thrust upon without examining the factual matrix of subsequent assessment years. In the present case, the issue of payment of royalty has been scrutinized and examined by the assessing authority for the earlier assessment year 1995-96 in a detailed manner and had come to a finding that the payment was in the nature of Revenue expenditure. This finding arrived at after sufficient examination of the facts of the case including the terms of technical agreement has been followed by the Revenue consistently for the succeeding assessment years as well. The position being so, if the assessing authority has to take a different view on the subject for the impugned assessment year 2001-02, it is always necessary that the Assessing Officer should demonstrate the compelling circumstances of facts; which would justify the deviation from the earlier finding. The Assessing Officer .should have pointed out that certain pertinent clauses in the agreement were overlooked by the earlier authorities or subsequent developments ..... X X X X Extracts X X X X X X X X Extracts X X X X
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