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TMI Blog2017 (5) TMI 1492X X X X Extracts X X X X X X X X Extracts X X X X ..... ty refund of Rs. 2,90,51,228/- particularly in view of the provisions of this section and the fact that refund of excise duty is not an income derived from industrial undertaking? (ii) Whether in the facts and circumstances of the Case, the Tribunal was justified in allowing deduction under Section 80IC(2)(a)(iii) of Rs. 3,32,89,399/- as against Rs. 2,70,546/- made by the Assessing Officer? (iii) Whether in the facts and circumstances of the he Tribunal was justified in not upholding the rejection of books of accounts under Section 145(3) of the Act and gross profit of Rs. 67,73,006/- made by the Assessing Officer made in view of the fact that 99% of the sales were made to its sister concern M/s. Kaizen Organics Private Limited at exorbitant higher rates?" D.B. Income Tax Appeal No. 368 / 2008 "(i) Whether in the facts and circumstances of the case, the Tribunal was justified in not upholding the rejection of the books of account under Section 145(3) of the Act despite of the proven facts that assessee has indulged in over-billings and suppression of expenses, merely to show higher profits.? (ii) Whether in the facts and circumstances of the case, the Tribunal was justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits and gains to which provisions of section 80IC(2)(A)(iii) are applicable is 'derived from'. It has been held by the Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd vs. CIT (113 ITR 84) that the expression 'derived from' has a much narrower meaning than the expression "attributable to" or "from" d) Further while explaining the meaning of 'profits and gains' derived from industrial undertaking, it has been held by the Hon'ble Supreme Court in the case of CIT vs. Sterling Foods (237 ITR 579) that income earned on sale of import entitlement could not be included in the income of the assessee for the purpose of relief u/s 80HH, where also the amount of deduction available was a fixed percentage of profits and gains derived from industrial undertaking. The Supreme Court held that the source of import entitlements cannot be said to be industrial undertaking of the assessee. The source of import entitlements can, in the circumstances, only be said to be the export promotions scheme of the Central Government where under the export entitlements became available. On the similar analogy Excise Duty refund can not be the motive of installation of undertakin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electric Supply Ind. Co. Ltd vs. CIT 113 ITR 84 (SC). * CIT vs. Raja Bahadur Kamakhya Narain Singh 16 ITR 325 (Privy Counsel). g) The amount of Excise Duty Refund has been given to the assessee by the Govt. as part of the scheme to develop industrial set up in backward states. It was not the industrial undertaking which yield the income by way of Excise Duty Refund, but it was the scheme of the Govt. which entitled the assessee to receive Excise Duty Refund and the existence of such a scheme was not the essential part of setting up an undertaking. The Excise Duty Refund or any other cash assistance and other import entitlements are undoubtedly attributable to the business carried on by the assessee as the assessee would not have been in a position to receive such benefits, as it not been carrying on the business. However, it can not be said the amount received on account of Excise Duty Refund is derived from such business. h) Further the crux of all the arguments of the assessee mentioned in reply is that Excise Duty Refund allowed to him is reimbursement of Excise Duty included in the cost for manufacturing. Thus the Excise Duty Refund increases the profit from manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits "Derived" from industrial activity. It has been observed by the Hon'ble Court that on raw materials utilized as inputs the assessee pays duty and on the total component or costs the assessee adds his profit component to arrive at the sale price. It is this profit which is included in the expression "profits and gains derived from an industrial undertaking". Merely because under the scheme to encourage the exports the duty is refunded subsequently by way of Duty Draw Back. It cannot be regarded as the profit and gain derived from the industrial undertaking. It may constitute profit or gains of the business by virtue of section 28, but it cannot be construed as profits or gains derived from the industrial undertaking because its immediate and proximate surce is not the industrial undertaking but the scheme for Duty Draw Back. Whether Excise Duty Refund is not allowed, the profit derived from the industrial undertaking remains to be the profit. On account of the Duty Draw Back, business profit may be increased, but so far as profits and gains derived from an industrial undertaking is concerned, it will not increase and it will remain the same. Thus the facts of the decision are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 80IC is much wider than the concept of profit envisaged in section 80HH. However, the above judicial pronouncement in the case of Five Star Rugs, had allowed the deduction u/s 80IB on duty draw back. In this connection, it is surprising to note that at one place the appellant says that its case is not of duty draw back and on the other hand trying to get the support from various judicial pronouncements which are dealing with the issue of allowability of deduction of duty draw back. With utmost respect to all the judicial pronouncements relied upon by the appellant, I feel that for claiming deduction u/s 80IC, the appellant has to first establish that the said profit and gains is 'derived by an undertaking' i.e. there has to be a direct nexus between the profit and gains and the industrial undertaking. And also 'any business' mandates that any business as enterprises this section applies to. The present industrial undertaking i.e. the appellant is entitled for the exemption, by virtue of the notification No.33/99/CE dated 8.7.99 hence, its case is entirely distinguishable from the case laws relied upon by it. The assessee's industrial undertaking manufactures and sells Menthol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quite different and distinguishable from the cases relied upon by the AO. The ld. AR has reghtly relied upon the decision of Delhi Bench in the case of ACIT Vs. Dharampal Premchand in ITA No. 4031/Del/2003 dated 31.1.2006 where the facts are similar to the facts in assessee's case and the issue has been decided in that case in favour of the assessee that by credit of the Excise Duty refund with P & L A/c, the net effect is Nil. The assessee was refunded the same amount which he paid under the modalities for giving effect to notification and mere book entries cannot give rise to the income to the assessee. Therefore, following the decision in the case of ACIT Vs. Dharampal Premchand, supra, the assessee is allowed the Excise Duty refund for the deduction u/s 80IC of the Act as claimed by the assessee and deduction of Rs. 3,32,89,399/- u/s 80IC is directed to be allowed. As mentioned hereinbefore, the AO has not brought any material on record with regard to the suppression of the expenses and the assessee has also not made the over billing and all the purchases made are genuine and the assessee is allowed the exemption of Excise Duty and therefore, the AO in the absence of any materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss". It is evident that Section 80IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words "derived from" is narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is: whether the DEPB credit/Duty drawback receipt comes within the first degree sources? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit/duty drawback receipt do not come within first degree source as the said incentives flow from Incentive Schemes enacted by the Government of India or from Section 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, Department places heavy reliance on the judgment of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included for purposes of computing relief under S. SOHH. Income Tax Act, 1961: S. 80HH. "We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words "derived from ", a direct nexus between the profits and gains and the industrial undertaking. In the instant case the nexus is not direct but only incidental. The industrial undertaking exports processed seafood. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessees' industrial undertaking. ...........In the result, the appeals are allowed The judgment under appeal is set aside. The question is answered in the affirmative and in favour of the Revenue." 4.5 He contended that both the judgments of the Supreme Court have been conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve to be dismissed and are, accordingly, dismissed." 4.6 The same was confirmed by another Bench of Gujarat High Court in CIT-II vs. Metrochem Industries Ltd. (2016) 0 Supreme (Guj.) 1285 in which one of us (Mr. K.S. Jhaveri) was a party wherein it has been held as under:- 14. On a perusal of the judgment of the High Court in Commissioner of Income-Tax v. Asian Star Co. Ltd. (supra), we find that the reason which weighed with the High Court for taking a different view, is that rent, commission, interest and brokerage do not possess any nexus with export turnover and, therefore, the inclusion of such items in the profits of the business would result in a distortion of the figure of export profits. The High Court has relied on a decision of this Court in Commissioner of Income-Tax v. K. Ravindranathan Nair MANU/SC/4281/2007 : [(2007) 295 ITR 228 (SC)] in which the issue raised before this Court was entirely different from the issue raised in this case. In that case, the assessee owned a factory in which he processed cashew nuts grown in his farm and he exported the cashew nuts as an exporter. At the same time, the assessee processed cashew nuts which were supplied to him by exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Central Excise Act. 4.7 Therefore considering that the refund of the excise is not derived from the business the view taken by CIT and A.O. is required to be upheld the fundamental argument of duty drawback including repayment of excise duty is duty drawback. 5. Counsel for the respondent Mr. Pathak has contended that while considering the case of the assessee the tribunal has considered the judgment of the Delhi High Court in CIT vs. Dharampal Prem Chand Ltd. reported in (2009) 317 ITR 353 wherein it has been held as under:- "The notifications issued by the excise duty department and government clearly mandate that the exemption from excise duty is available only if the industrial activity carried out by the assessee either in a new industrial undertaking or in an industrial undertaking in which installed capacity is increased at least by 25 per cent. It is thus clear that in the first notification, i.e., 32 of 1999 the exemption is area specific, while in the second notification, i.e., 33 of 1999 the exemption is specific to goods as referred to in the Schedule appended to the said notification. It is thus clear that the exemption is directly relatable to an industrial und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction Under Section 80-IB of the Act. 28. It only remains to consider one further argument by Shri Radhakrishnan. He has argued that as the subsidies that are received by the Respondent, would be income from other sources referable to Section 56 of the Income Tax Act, any deduction that is to be made, can only be made from income from other sources and not from profits and gains of business, which is a separate and distinct head as recognised by Section 14 of the Income Tax Act. Shri Radhakrishnan is not correct in his submission that assistance by way of subsidies which are reimbursed on the incurring of costs relatable to a business, are under the head "income from other sources", which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. Section 28(iii) (b) specifically states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the Government of India, will be income chargeable to income tax under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished and records produced that the income generated through business establishments in north east states is eligible for deduction u/s 80IC of the Act and therefore, the assessee has declared unreasonably excessive profits by way of raising sales invoices at exorbitant higher rates than the prevailing market rates as well as suppressing actual expenses incurred. The assessee has raised the invoices to the sister concern at exorbitant rates to claim more deduction profit u/s 80IC of the Act and on the other hand, to reduce the profits of the sister concern. The AO observed that the assessee has charged the rates from the sister concern at higher rates than published in the Newspaper i.e. The Economic Time as per Table A at page 4 of his order. As per Table B at page 4 of AO's order, the sister concern M/s. Kaizen Organics (P) Ltd. has been purchasing DMO from other concerns at a lower rates. The AO has observed in his order that the decision of the AO in the case of the sister concern where the sister concern has declared gross profit rate 6.75% and the AO has estimated the sale at 10% in the assessment year 2003-04. The AO further observed that assessee has suppressed various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed herein before, the AO has not brought any material on record with regard to the suppression of the expenses and the assessee has also not made the over billing and all the purchases made are genuine and the assessee is allowed the exemption of Excise Duty and therefore, the AO in the absence of any material cannot estimate the gross profit other than declared by the assessee. No addition on account of suppression of expenses u/s 69C can be made by the AO. Also the addition made on account of estimation of gross profit is directed to be deleted. Thus Ground No.1,2,3 and 4 of the assessee are allowed and the solitary ground of the Revenue is dismissed. " 6. We have heard both the sides on merits. 7. Before proceeding it will not be out of place to mention that the basic object of establishing factory in north-east part of the country is a Hercules task and is established only with a public motive of taking benefits of taxation, therefore the establishment of a factory in north- east parts with all hurdles is required to be viewed in right prospective and the object of the government is to promote industries in the backward area of north-east area. When with all difficulties, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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