9911796707
TMI Blog2012 (8) TMI 1156X X X X Extracts X X X X X X X X Extracts X X X X ..... ,135/- respectively. While reducing the profit, the AO has observed at pages 3 to 7 in his order as under:- ''The assessee company has claimed ₹ 2,04,07,539/- as R&D expenditure on capital assets in the computation of income. This expenditure since claimed in the computation of income has not been apportioned between the three units. Similarly although the assessee has apportioned corporate (common) expenses, but no allocation has been made in respect of depreciation claimed on corporate/common assets. Therefore, the assessee was asked to explain as to why the above R&D expenses and depreciation on head office assets should not be apportioned between the three units in the proportion of turnover. In response to which the assessee submitted explanation as under ''Regarding apportionment of depreciation on assets of head office and capital expenditure on R&D be apportioned between three units as the services are shared between them. In this regard, we submit that the other units of the company cannot use the fixed assets of the head office. For example plant and machinery of Udaipur unit ar used wholly and exclusively for manufacturing the products of Udaipur Unit itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O has considered the above submission and stated that the Barotiwala and Bated are units/industrial undertakings under the aegis of M/s.SML. These units utilize the corporate and administrative set up of SML for various services and amenities which are imperative had it been separate industrial undertaking on his own. The assessee has not apportioned the common expenses while arriving at the profit of these two units. The AO further observed as under:- ''At this stage, it will be pertinent to illustrate the relevant provisions of the income tax Act. The contents of section 80IA sub section 5,7,8, 10 (applicable for section 80IB and 80IC by virtue of sub section 13 of section 80IB and sub section 7 of section 80IC) which are relevant here are reproduced by the AO on page 4 & 5 of the order. Under sub section (5) the legislature has laid down the most important principle for determining the quantum of profits of eligible business. It read that 'profits will be computed as if such eligible business were the only source of the income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year upto and including the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly accrues from the purpose for which deduction is granted. The AO also placed reliance of jurisdictional High Court in the case of Rajasthan State Warehousing Corporation Vs. CIT reported in 209 ITR 271 wherein it has been held that if the assessee is deriving income from different sources from taxable and some non taxable the allocation of expenditure on proportionate basis is justified. The AO further stated that as regards, the common assets, again the assessee's contentions do not hold goods. As the assessee has claimed depreciation in respect of the assets which are exclusively liked to the Barotiwala and Bated units in their P&L account. But no allocation has been made between the three units in respect of Head Office assets. The assessee has not denied the use of head office assets for other units although it stated that such use is negligible. Obviously the head office set up is being utilized for the various services rendered for and on behalf of the units of Barotiwala and Bated. The assessee claims depreciation on the assets which pertain to Udaipur unit, HO which is also in Udaipur and Branch offices spread all over India, in the books of Udaipur. However, all asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim for deduction is reduced by ₹ 1,29,12,021/- in Bated Unit and by ₹ 10,04,98,130/- in Barotiwala Unit. 1.2 The said AO has restricted the above claim by deducting the following amount from income eligible for deduction u/s 80 IB/80IC in respect of the above units. S. N. Particulars Bated unit (u/s 80IB) Barotiwala Unit (u/s 80IC) (i) Capital expenditure for R.D, and depreciation of assets at Udaipur unit allocated to these units on turnover ratio 84,46,778 77,04,653 (ii) Other income not considered as derived for industrial undertaking 40,92,664 6,70,15,169 (iii) Income treated as from trading activity not allowed for deduction u/s 80IB/80IC 3,72,579 2,57,78,308 Total Rs. 1,29,12,021 10,04,98,130 1.3 The said AO has discussed the above issues in para 3 to 5 of the assessment orde3r at page 2 to 14 of the assessment order. The appellant submits that the above adjustments made in the computation of income eligible for deduction u/s 80 IB/80 IC are not at all justified. The appellant has explained the reasons for the same in the submissions made before the said A.O. in the various letters and statements submitted during the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld like to share its achievements through R & D with any third party. Therefore, it is submitted that sharing of revenue expenses between the three units is the correct method of determining the profits of each unit. (ii) The Ld.AO has taken the view that the cost of capital assets, purchased by Udaipur Unit should have been shared by the three units on the basis of turnover. He has accordingly bifurcated the earlier cost of ₹ 2,04,07,539/- between the three units as under :- Udaipur 44.72% 91,26,273 Bated 28.91% 58,99,808 Barotiwala 26.37% 53,81,458 100.00 2,04,07,539 On the above basis he has deducted ₹ 58,99,808/- from the income of Bated Unit and ₹ 53,81,458/- from the income of Barotiwala Unit for the purpose of computing exempt income u/s 80 IB/80 IC. It is submitted such allocation is not permitted u/s 80 IB/80 IC as there is no provision for sharing cost of capital assets. (iii) The said AO has referred to the provisions of section 80 IA (5) on page 4 of the assessment order. This section only states that for the purposes of deduction u/s 80 IB/ 80 IC, the income from business of the eligible unit shall be considered as if the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purposes of the business or profession; and (iii) it should have been expended in the previous year; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business 's or not; if they do the entire expenditure will be a permissible deduction, but if they do not, the principle of apportionment of the expenditure will apply, because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee................................ Held, reversing the decision of the High Court, that in view of the fact that a perusal of the question itself disclosed that income from various ventures was earned in the course of one indivisible business, the impugned order upholding the apportionment of the expenditure and allowing deduction of only that proportion of it which was referable to the taxable income, was unsustainable.'' 1.5 Apportionment of Depreciation on Capital Assets at Udaipur Head Office. (i) The said AO has apportioned depreciation of ₹ 88,09,956/- relating to certain capital assets a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te expenses including revenue expenditure on R&D but not apportioned depreciation on the common assets and depreciation on the assets used for R&D facilities. Further, reason behind the high N.P. ratio of Barotiwala unit of inter unit transfer of interest entry. The total expenditure on R&D facilities is ₹ 2,04,07,539/-. The appellant was asked to explain as to why R&D expenses and depreciation on HO assets should not be apportioned between the three units in the proportion of turnover. The appellant submitted during the assessment proceedings that the other units of the company cannot use the fixed assets of the HO. For example the plant and machinery of Udaipur i.e. (HO) are used wholly and exclusively for manufacturing the product of Udaipur Unititself and not for manufacturing products of other units. Moreover the office equipments, furniture and fixture etc. of Udaipur unit is also exclusively used for day to day working of Udaipur unit (HO) and are not used for the other unit of the appellant. The break up of the capital expenditure on R&D is as under:- R & D building Rs.11,63,149/- R & D equipments Rs.1,92,44,391/- Total Rs.2,04,07,540/- The R & D unit is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being inter linked with each other. In case of common assets also the appellant has claimed depreciation in respect of assets which are exclusively linked to Barotiwala unit and Bated Unit in their P & L account. But no allocation has been made between three units in respect of 13 HO assets. The appellant has not denied the use of HO assets for other units although it is stated that such use is negligible. Obviously the HO set up is being utilized for the various services rendered for and on behalf of the Barotiwala and Bated units. The appellant claimed depreciation on the assets which pertain to Udaipur Unit, HO and Branch office spread all over India in the books of Udiapur. However, all the assets which relates to the HO and branches are shared by all the three units. Ideally the assessee should have identified the assets pertaining to Udaipur unit exclusively and should have charged the Udiapur Unit and remaining assets used as HO and branch office should have been apportioned between the three units in the ratio of turnover. The appellant has not done so. The AO has, therefore, worked out the basis of allocation first apportioning the above depreciation in the ratio of corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y has manufactured units of solid state electronic energy meter at EClass Pratap NHagar Industrial Area, udaipur, Bated and Barotiwala, Solan, Himachal Pradesh. The trading of all the three units is as under :- Particulars Udaipr Barotiwala Bated Total Sales 1122672395 590818983 647729445 2361220823 Gross profit 372957496 354806360 213437957 941201813 Gross profit ratio 33.22% 60.05% 32.95% 39.86% Net profit -32687283 291325347 82936883 341574947 Net profit % -2.91 49.31% 12.80% 14.47% The appellant has claimed deduction for this yhear u/s 80IC at 100% at ₹ 28,75,20,135/- in respect of Barotiwala Unit and u/s 80IB at 100% at ₹ 7,98,80,615/- in respect of Bated Unit. There is a significant difference in G.P. and N.P. ratio of the three units. The Net profit ratio of Barotiwala Unit is significantly higher than the Batged unit. There is net loss in Udaipur Unit. On analysis of facts submitted by the appellant, the AO found that although the appellant had allocated corporate expenses including revenue expenditure on R & d but not apportioned depreciation on the common assets used for the R & D facilities. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Corporation Vs. CIT 209 ITYR 271 wherein it has been held that if the assessee is deriving income from different sources from taxable and some non taxable, the cost of expenditure on proportionate basis is justified. The AO has at last analysed the case of the appellant in this background. Udaipur being the HO, naturally R&D unit has to be installed at Udaipur. However, the assessee being shall accrue to the other units also which undisputable. In the light of the fact that Udaipur unit is not a separate segment in the books of the appellant and the assessee is not charging any sum from other two units for the various R&D activities carried out at Udaipur. The benefits of which are transferred tangible/intangible in the other units as well. Further, the assessee itself has allocated the R&D expenditure which is revenue in nature and claimed in P&L Account between the three units. Therefore, there is no justification for not apportioning the capital expenditure on R&D. The two of them (capital and revenue ) being inter linked with each other. In case of commo9n assets also9 the assessee has claimed depreciation in respect of the assets which are exclusively linked to Barotiwala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the profit of Udaipur unit. Since the results of the R & D activity are shared with other units, proportionate revenue expenses are recovered by Udaipur Unit from other two units of Barotiwala and Bated and the capital assets such as R & D building, plant and equipments are not shared with other units and, therefore, the capital cost are not recovered from these units u/s 80IB(13) and 80IC (7) read with section 80IA(8), there is no provision for sharing cost of assets incurred by one unit for rendering such services to the other units. The R & D activity is a continuous activity and does not result into any tangible achievement in any year. The result may or may not be achieved for a period of years. Therefore, it cannot be said that the Udaipur unit is rendering any tangible service to the other units which can have any market value. Therefore, sharing the revenue expenses between three units is the correct method of determining the profits of each unit. As the AO ha taken the view that cost of capital assets purchased by the Udaipur unit should have been shared by three units on the basis of turnover, he has accordingly bifurcated the cost between three units as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the High Court, that in view of the fact that a perusal of the question itself disclosed that income from various ventures was earned in the course of one indivisible business, the impugned order upholding the apportionment of the expenditure and allowing deduction of only that proportion of it which was referable to the taxable income, was unsustainable. The AO has apportioned Depreciation of ₹ 88,09,956/- relating to certain capital assets at HO in Udipur on the ground that these assets may have been used at HO for administrative purposes of Udaipur, Bated and Barotiwala unit on turnover basis as under :- Units Turnover Allocation Udaipur 44.72% 3939791/- Bated 28.91% 2546970/- Barotiwala 26.37% 2323195/- 100% 8809956/- The various assets at HO are used for day to day working at HO. These assets are not used for the activities at the two units at Bated and Barotiwala. At HO at Udaipur, the company has to perform certain corporate functions and these assets are used for that purpose. As held by the Hon'ble Supreme Court in the decision 242 ITR 450 no such apportionment can be made. Therefore, the apportionment made by the AO is not justified. During discussio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the appellant constituted one indivisible business or not. If they do, the entire expenditure will be a permissible deduction. But if they do not, the principles of apportionment of the expenditure will apply. Because there will be no nexus between the expenditure attributable to the venture not forming of an integral part of the business and not sought to be deducted as business expenditure of the assessee. Further that income from various ventures was earned during the course of one indivisible business. The impugned order upholding the apportionment of the expenditure and allowing deduction of only that portion of which it was reasonable to the taxable income was unsustainable. Considering the above facts and legal position, there is no question of apportionment of R & D capital expenditure and similarly depreciation on fixed assets also among three units. Therefore, the action of the AO is unjustified and the addition made is deleted. The appeal is allowed on this ground.'' 2.8 The above findings of the ld. CIT(A) in our considered view are in consonance with the decision of Hon'ble Apex Court in the case of Rajasthan State Warehousing Corporation vs. CIT (supra). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Unit and Bated Unit, it was seen that there was an amount of ₹ 6,70,15,169/- in Barotiwala Unit and ₹ 40,69,662/- in Bated Unit shown as other income respectively. The assessee furnished the break up of the same as under:- Other income Barotiwala Bated Interest received 61304598 2432623 Exchange rate difference 644129 246050 Misc. income 5066442 1413991 Total 67015169 4092662 Grand total of other income 71107831 It was further seen that the interest income in the above two units relates to the interest entry credited for inter unit transfer of fund. The assessee has claimed deduction u/s 80IB/80IC in respect of other income also. However, the deduction u/s 80IB/80IC is available only in respect of the profits derived from the industrial undertaking. Therefore, the assessee was asked to explain why not the other income should be excluded for arriving at the figure of eligible deduction u/s 80IB/80IC. In reply, the assessee submitted that - ''Regarding excluding other income from the profit of new industrial undertaking, as submitted earlier, profit of Barotiwala and Bated Unit includes other income amounting to ₹ 6,70,15,169/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To (a) interest received 58 - 58 (b) Interest paid 59 - 59 © Misc. receipts 60 - 60 (iv) Interest Received (a) It is submitted that interest received is mainly from inter unit balances. There is a current A/c with the Head office as well as with the other units and interest is either received or paid on these balances. From the details of the interest received at page 58 and the details of the interest paid at page 59, it will be seen that these are receipts/payments on inter unit transactions which form intrinsic part of the business of the undertaking. It cannot be said that monies have been advanced to any third party for the purpose of earning interest. Whatever money is available with the various units are used for the purpose of business of that unit and therefore, it is submitted that the receipts are derived from the activities of the business of the industrial undertakings. What Section 80IB/80IC provides is that the profits and gains should be derived from the business of the eligible units. Therefore, when the source of the receipt is the business activity of the undertaking, it cannot be said that the receipt is not derived from the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HHC and while reducing 90% of the receipt by way of interest from the profits of the business, it is only the 90% of the net interest remaining after allowing a set off of interest paid, which has a nexus with the interest received that can be reduced and not 90 percent of the gross interest.' A copy of this decision is enclosed at pages 61 to 100 2. Pinkstar vs. DCIT 72 ITD 137 (Mumbai) In this case, interest was paid to the Bank which was debited to the profit and loss account. Interest was received which was credited to the profit and loss account .The assessee sought to adjust interest paid against the interest received for calculating profit from the export business u/s 80HHC. It was held by Mumbai Bench of ITAT Tribunal that credits and debits of the same nature should be netted out against each other in order to avoid any distortion in the profits. It could not be denied that despite earning interest of ₹ 1,97,500/- the said earning of interest has merely gone to reduce the net interest burden of the assessee from ₹ 36,21,595/- to ₹ 34,24,095/-. Thus in effect, there was no income on account of interest in the profits of business and hence no reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '' where the gross total income of an assessee includes any profits and gains derived from business referred to in sub-section (3) to (11)….'' Section 80IC (1) '' Where the gross total income of an assessee includes any profits and gain derived by an undertaking or an enterprise from any business referred to in sub-section (2)……..'' From the above working it is evident that in Section 80I, the emphasis is on the profits and gains derived from an industrial undertaking whereas in Section 80IB/80IC the emphasis is on the profits and gains derived from the business of the undertaking. In the cases cited in para (b) above, it has been held that an receipt from the business activity of the undertaking is eligible for deduction u/s 80HHC, 80IA etc. It is therefore, submitted that the decision of ITAT in the assessee's case for earlier years, where the interpretation of Section 80I was involved, will not apply in the year under appeal. Further the question of netting of interest receipt against interest paid has not been considered by the ITAT in the assessee's case for earlier years. (d) The assessee submits that similar question had arisen in assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst payments under the same head is also recognized in the above decision. It is therefore, submitted that the interest receipts should be first netted off and whatever is the resultant figure should be considered as expense or income relating to the business of industrial undertaking. On this basis, the above deduction of interest received from profits of the eligible business of the two units is not at all justified. (v) Exchange Rate Difference Received (a) The said AO has reduced ₹ 2,46,050/- (Bated Unit) and ₹ 6,44,129/- (Barotiwala Unit) from the profits of the business of the two units on the ground that exchange rate difference received was not part of the profit derived from the industrial undertaking. It is submitted that foreign exchange fluctuation receipt/payments are mainly on account of difference in the exchange rate at the time of booking transactions of exports/imports and exchange rate at the time of receipt/payment. It is submitted that under Accounting Standard (AS-11), which was applicable to the assessee, the exchange rate prevailing on the date of the transaction should be applied for recording the transactions. During the year under app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired to be excluded from the "prfits of the business", while computing deduction u/s 80 HHC. Hence, the receipts in question by the assessee on account of exchange rate difference were derived from the export sales and were part and parcel of export proceeds only, and by no stretch of imagination it could be given colour of income from other sources to be excluded from profits, to the business in terms of Explanation (baa) below section 80HHC(4A). Therefore, the assessee was entitled to deduction under section 80 HHC with reference to the amount received by it on account of exchange rate of fluctuation." Copy of this order is enclosed at pages 162 to 177. 4. Hindustan Trading Corporation Vs. CIT 160 ITR 15 (Guj) In this case as a result of devaluation the assessee became entitled to receive a large amount for price difference in terms of rupee for goods sold. Gujarat High Court has held that the income which the assessee derived as a result thereby directly arose in the course of the business and constituted a business profit. In this case also the assessee had received sale proceeds in US D and due to devaluation the assessee received more than the amount in the form o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the appellant's case and in view of the above judicial pronouncements, it is submitted that the said A.O. was not justified in deducting the above amount from the amount eligible for deduction u/s 80 IB/ 80 IC of the IT Act 1961. (vi) Miscellaneous Receipts The said A.O. has reduced ₹ 14,13,991/- (Bated Unit) and ₹ 50,66,442/- (Barotiwala Unit) from the profits of the business of the two units on the ground that these receipts do not form part of the profit derived from the industrial undertaking. It is submitted that, as stated earlier, what is required to be considered u/s 80 IB/80 IC is the profit derived from the "Business" of the undertaking. The appellant submits that the following facts will establish that the various receipts were derived from the business of Bated Unit/Barotiwala Units and were eligible for deduction u/s 80 IB / 80 IC. (a) The broad details of the miscellaneous receipts are as under: Particulars Bated Barotiwala -Scrap Sales 117890 1346285 -Lease Rent of Building 175000 - -Liquidated Damages 837174 - -Sundry Credit Balances written off 1645 19075 -Excise Duty Provision - 3572367 -Packing & For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease. For the reasons stated in (b) above, it is submitted that this income should be treated as income of the business of bated Unit and allowed as deduction u/s 80 IB. Without prejudice to the above, on the basis of netting of income principle as submitted in para 1.6 (iv) above, the following expenditure relating to the portion of the factory given on lease should be deducted from ₹ 1,75,000/- if the same is held to be deductible from the profit of Bated Unit for the purpose of deduction u/s 80 IB. Repairs, Local Taxes etc. Rs. Nil Proportionate depreciation on WDV Rs.3,72,616/- of part of the factory building Rs.3,72,616/- (d) Liquidated Damages - Rs.8,37,174 (Bated) This amount represents levy of penalty on the supplier for the late delivery of the material and therefore termed as liquidated damages Time is the essence of the supplies and in case of delays a penalty is deducted from the payment to be made to the suppliers. To the extent of this penalty the cost of purchases have gone down and therefore it directly relates to the business of the unit. It is, submitted that, as explained earlier, this amount is directly connected with profit of the Bate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from trading activity not eligible for deduction u/s 80 IB/80 IC (i) The said A.O. has treated the following income as income from trading activity and not allowed deduction u/s 80 IB/80 IC while computing profits and gains of the two units. Bated Unit u/s 80 IB ₹ 3,72,579/- Barotiwala Unit U/s 80 IC Rs.2,57,78,308/- He has discussed this issue in para 5 at page 11-14 of the assessment order. (ii) It is submitted that, as submitted earlier, u/s 80 IB deduction is allowable on profits and gains of the "business of an "industrial undertaking". Further, u/s 80 IC deduction is allowable on profits and gains of the "business" of an "undertaking". The sections do not define the term "Industrial Undertaking". This term is only defined in section 33 B which was earlier adopted for the purposes of section 80 IA. Explanation u/s 33 B reads as under. "In this section "industrial undertaking" means any under taking which is mainly engaged in the business of ……………. Manufacture or processing of goods or in mining." From the above, it is evident that deduction u/s 80 IB/ 80 IC is not restricted to only income from manufacturing activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd the rival submissions in the light of material placed before us and precedents relied upon. The assessment year under consideration is 1994-95. The relevant portion of Section 80-IA provides that where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking, there shall be allowed a deduction from such profits in accordance with and subject to the provisions of the section. Clause (b) of sub-section (12) defines industrial undertaking to have the same meaning as is assigned to it in the Explanation to Section 33 B. Relevant portion of the latter explanation, in turn, states that the industrial undertaking means any undertaking which is mainly engaged in the manufacture or processing of goods. On a close reading of sub-section (1) of Section 80-IA, it becomes palpable that the deduction is to be allowed on profits and gains derived from any business of an industrial undertaking. Thus, it becomes vivid that, if the conditions of industrial undertaking are satisfied, then the assessee becomes entitled to deduction in respect of profits of any business of such industrial undertaking. Any business may by that of manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cent and the balanced represents: the sale of the goods manufactured by the assessee. This makes clear that it was mainly engaged in the manufacturing of rice though around 17 per cent of the total volume of sale represented the trading operations. In such circumstances, we find that the case of the assessee gets covered within the Explanation to Section 33 B and it qualities as an industrial 39 undertaking. At this stage it will not be out of context to mention that it is not the case of Revenue that the assessee is not an industrial undertaking and hence, ineligible for deduction under section 80-IA. Rather, by treating it as such, the deduction was granted, though on a lower scale. When section 80-IA(1) is perused, it becomes explicitly clear that the deduction is eligible in respect of profits and gains which are derived from any business of an industrial undertaking. As the conditions of the industrial undertaking are satisfied and the transactions of sale and purchase of rice are part and parcel of the business of industrial undertaking, We, therefore, hold that the profits in respect of such trading operations would also qualify for deduction." (vi) On page 11 of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for arriving to the eligible deduction u/s 80IB/80IC. The appellant has submitted that profit Barotiwala and Bated unit include other income of ₹ 6,70,15,169/- and ₹ 40,92,664/- which relates to interest, foreign exchange rate difference and misc. income etc. which are part and parcel of the profits of the new industrial undertaking. The AO has taken the different view that the word used derived means income should directly arise from the industrial undertaking so form as per provision of section 80IB/80IC. The aforesaid other income can at best be termed as income attributable to the industrial undertaking. It cannot be said to be directly derived from the industrial undertaking. Further in appellant's own case the Hon'ble ITAT Jodhpur Bench in ITA No. 405/JDPR/1999 for the assessment year 1996-97 has upheld the exclusion of interest from the profit eligible for deduction u/s 80IB. the ITAT has upheld the similar disallowance for assessment years 1994-95, 1995-96, 1997-98 and 1998- 99 also The ld. AR has submitted that the interest received is mainly from industrial balances. There is a current account with the HO as well as with other units. The interest has e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income from the business transaction and activities closely connected to the business of the industrial undertaking. The scrap sales realized goes to reduce the cost of raw material / stores consumed in manufacturing process. In such case, there is no question of treating the same as Income from other sources. Lease rent of building It has been submitted that only part of the factory building is given on lease. This income should be considered as income of the business of Bated unit and allowed as deduction u/s 80IB. It has further been stated that on the bas of netting of income principle the following expenditure relating to the portion of the factory given on lease should be deducted from ₹ 1,75,000/-. Proportionate depreciation on WDV of part of the factory building is ₹ 3,72,616/-, which is more than the income. In such case there is no question of treating the same as Income from other sources. Liquidated damages This amount represent levy of penalty on the supplier for the late delivery of the material and therefore, termed as liquidated damages. To the extent of this penalty, the cost of purchase has gone down and therefore, directly relating to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of building is definitely not derived form business activity but of the sale factor building given on lease. But the expenditure incurred for leasing purpose is definitely allowable. As there is expenditure of ₹ 3,72,616/- which is more than the income, there is no question of surplus income but loss of ₹ 1,97,616/-. Liquidated damages directly derived from the business activity as it has arisen on account of purchase of material for not supplying the material within the time prescribed. It has thus reduced the cost of purchase. Therefore, it is treated as income from business and not from income from other sources. As regards sundry credit balance written off, there is similar position in this case also. The sundry balances arising because of nonclaim by the purchasing parties at the time of settlement of the account and it has thus become surplus in the sale account but it has been credited as sundry credit balance in profit and loss account. Therefore, it is allowed as income from business. Regarding Excise Duty provision, it has already been reversed in the subsequent year. Therefore, no decision is required. As regards the packing and forwarding, in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the other items i.e. scrap sales, liquidated damages, sundry creditors and packing and forwarding, the ld. CIT(A) has given reasonable reasoning that they are part of the same business. Therefore, receipt on this accounts cannot be treated as income from other sources. The findings of the ld. CIT(A) is reproduced somewhere above in this order. In respect of lease rent, the ld. CIT(A) has treated it as income from other sources. However, the expenditure on account of lease rent was to be set off i.e. in our considered view is correct. As stated above, the ld. CIT(A) has given reasonable findings which has been reproduced also and therefore, we do not want to go in detail further and accordingly the findings of the ld. CIT(A) on this issue is also confirmed. 4.1 The third ground of the Revenue is that the ld. CIT(A) has erred in deleting the disallowance of deduction u/s 80IB/80IC in respect of Bated and Barotiwala unit on 'Trading Profit'. 4.2 The brief facts of the case are that the AO disallowed the deduction claimed by the assessee on the ground that the trading activity constituted by the purchase and sale of finished goods is not eligible notwithstanding the quantum of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods was ₹ 89.91 lacs and ₹ 2.63 corer and percentage is 1.31% and 4.47% respectively. The A/R has further differentiated the facts of the appellant involved in 1994-95 to 1998-99 before the Hon'ble ITAT Jodhpur on the decision given on this issue and in case of the current appeal before me. The assessment years 1994-95 to 1998-99 the assessee had purchased and sold the goods as it is. There was no relation to the manufacturing activities of the industrial undertaking. There was no direct nexus of this income with the income of the industrial undertaking. Now in the current year and onwards the appellant has received combined order for supply of manufactured goods and brought out components which are necessary to be supplied with the manufactured goods to fulfill the order. Failure to agree to brought out/traded gods the customer's orde3r was unacceptable and was not accepting the manufactured goods and the appellant will get disqualified from the tendering process. The A/R has also submitted a copy of the purchase order from BSES Rajasdhani Power Ltd., New Delhi for sample purpose. This purchase order contains the Order No. , date , scope, applicable standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions set out here under and such directions issued by the buyer from time to time. The meters shall confirm to the technical specifications including but not limited to designing, engineering, manufacturing and assembling specifications provided by the buyer. The supplier shall deliver the goods at the identified sites/stores and store them at supplier's cost as per customers direction. The goods will include common meter reading instrument and meter box (collectively refused to as goods) as provided in Bid and revised technical specification for BCES Rajdhani Power Ltd on following terms and conditions:- Right of purchaser: "Supplier, shall stock sufficient spares and ensure its availability to the Buyer for a minimum time period of 10 years from date of commissioning of the goods. Any change in the design, technical specification in any manner whatsoever, shall not relieve the supplier from its responsibility under this purchase order for the supply of above spares." Acceptance of goods: "Goods delivered in accordance with the purchase order shall become acceptable upon inspection of such delivered goods at identified sites/stores and the goods being in conformity wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowable. The AO is directed accordingly to work out the deductible amount under section 80IB and 80IC of the Act by considering the trading profit as business profit. The appeal is allowed on this ground also.'' 4.5 After considering the orders of the AO and the ld. CIT(A) on which reliance has been placed by the respective parties, we found no infirmity in the order of the ld. CIT(A). It is seen that in earlier year, the facts were different for the reason that from the assessment year 1994-95 to 1998-99, the assessee used to purchase the meter reading instrument and sold it as it is to the customers. There was no relation to the manufacturing activity of the industrial undertaking and no direct nexus of this income with the income of the industrial undertaking. However, in the year under consideration, it is seen that that the assessee received the combined order for supply of manufactured goods and bought out components which is necessary to fulfill the order of the customer. The assessee is manufacturing the meter and the same is packed in the boxes and thus the sale of boxes cannot be treated a separate trading receipt though the boxes were purchased from the market. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits of the business means the profits of the business as computed under the head profits and gains of business or profession as reduced by- (1) Ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits (2) The profits of any branch office, warehouse or any other establishment of the assessee situate outside India. Accordingly we have deducted the following from the profits of the business for computing deduction u/s 80HHC. The computation of the deduction has been worked out as under: Business profit as per computation of income 69417375/- Less: 90% of interest income ₹ 9839588 8855629/- 360561745/- Less a) 100% of profit(loss) of Barotiwala unit Distt. Solan exempt u/s 80IC(3)(iii) of the Act. 287520135/- (b) 100% of profit(loss) of Bated unit Distt. Solan exempt u/s 80IB(3)(ii) of the Act 79880615/- 367400750/- Profit of the business for deduction u/s 80HHC (6839005)/- Since, profit of the business comes to negative hence deduction u/s 80HHC has not been claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 243273 Income from mobile lab 34500 Lease rent on fixed assets 1098500 Misc. Income 3687903 Sundry credit balances written back 803569 Misc. receipt 427502 Packing and forwarding surplus 356628 Rental income 1175000 Total 8144027 After considering the submissions of the AO, the AO held as under:- I have considered the facts of the case and submissions of the assessee but I find no merit in them. The explanation (baa) of Section 80HHC specifies that 90% of receipt by way of brokerage, commission, interest rent charges or other receipt of similar nature have to be excluded from the profit of the business. Therefore, the 90% of interest and misc. income of ₹ 179,83,615/- (9839588 + 8144027) amounting to ₹ 16185254/- is reduced from the profit of the business for calculation of deduction u/s 80HHC.'' 5.4 Detailed submissions were filed before the ld. CIT(A) which has been incorporated in the order of the ld. CIT(A) at pages 56 to 62 of his order and the same is reproduced as under:- ''II. Deduction u/s 80HHC The said AO has computed deduction u/s 80HHC as per Annexure 'B' of the assessment order at ₹ 1,57,757. In this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44,682 619,923 Total 5,235,961 5,066,442 1,413,991 11,716,394 Less: Excise Duty on closing stock netted off with dr.balance 3,572,367 - 3,572,367 Amount as per profit and loss account 8,144,027 (ii) It is submitted that other income of ₹ 14,13,991/- (Bated Unit) and ₹ 50,66,442/- (Barotiwala Unit) have been deducted from profits of these two units while calculating 100% deduction u/s 80IB/80IC (Para 1.6 (vi) above. The said AO has denied deduction for the entire amounts u/s 80IB/80IC in para 4 of the assessment order. He has again deducted 90% of the same amount from export profits u/s 80HHC in para 6 of th assessment order. The appellant further submits that 100% of income from these two units has been reduced from the total profits while working out profit u/s 80HHC. It is therefore, submitted that there is double deduction of the same amount once from the income eligible for deduction u/s 80IB/80IC and again 90% from the income eligible for deduction u/s 80HHC. It is therefore, submitted that the said AO should have considered only ₹ 52,35,961/- (Udaipur Unit) for the purpose of computing amount eligible for deduction u/s 80HHC. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 80IA. Therefore, interest received by the assessee from deposits placed with a company due to business computation and income from sale of empty drums, useless materials etc. have direct and proximate connection with business of industrial undertaking and should be considered for the purpose of deduction u/s 80IA. Copy of this decision is at pages 210 to 221. It is therefore, submitted that the said AO was not justified in deducting the above amount from profits of the Udaipur Unit eligible for deduction u/s 80HHC (vi) Lease Rent of Building (Rs. 10,00,000/-) It is submitted that only part of the factory building is given on lease. For the reasons stated above, it is submitted that this income should be treated as income of the business of Udaipur Unit and allowed as deduction u/s 80HHC. Without prejudice to the above, on the basis of netting of income principle as submitted in para 1.6 (iv) above, the expenditure namely repairs, local taxes, depreciation etc. relating to the portion of the factory given on lease should be deducted from ₹ 10,00,000/- if the same is held to be deductible from the profit of Udaipur Unit for the purpose of deduction u/s 80HHC. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustified in excluding 90% of receipts from the profits of the business for deduction u/s 80HHC. 2.4 Deduction of 100% Profit of Bated Unit and Barotiwala Unit (i) The said AO has deducted 100% of following profit of Bated Unit and Barotiwala Unit from total profits of the business for calculating the amount deductible u/s 80HHC. Bated unit ₹ 7,14,33,837/- Barotiwala Unit ₹ 27,98,15,482/- (ii) The appellant submits that while computing deduction allowable u/s 80IB/80IC for the above two units, the said AO has worked out the eligible profit as under:- Bated unit ₹ 6,69,68,594- Barotiwala Unit Rs.18,70,22,005/- (iii) The appellant submits that the said AO ought to have deducted ₹ 6,69,68,594/- (Bated) and ₹ 18,,70,22,005/- (Barotiwala) being 100% of profit sof the two units as computed by the said AO or such amount as may be computed after decision of Ground No. 1 in this appeal from the total business profit for deduction u/s 80HHC.'' 5.5 The ld. CIT(A) after considering the submissions and perusing the material on record gave the following findings recorded in para 5.3 at pages 62 to 65 of his order. '' 5.3 I have considered t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of penalty on the suppler for the late delivery of the material, and therefore, termed as liquidated damages. To the extent of this penalty the cost of purchase has gone down and therefore,, directly relating to the business of the unit.'' In view of the above, the AO is directed not to exclude 90% of the liquidated damages. The disallowance made by the AO is delete4d. This point is also allowed. Discount received on Air Ticket : This cannot be treated as business income but in the nature of other receipts of similar nature covered by Explanation (baa) to Section 80HHC. Therefore, the AO's action is confirmed. Duty draw back : This cannot be treated as business income but in the nature of other receipt of similar nature covered by Explanation (baa) to Section 80HHC. Therefore, the AO's action is confirmed. Sundry Credit Balance Written Back: This point has already discussed and decided while deciding the Ground No. 1 as under:- '' As regards sundry credit balance written off, there is similar position in its case also. The sundry balances arising because of non-claim by the purchasing parties at the time of settlement of the account and it has thus become surplus in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A). Itemwise finding has been given by the ld. CIT(A). Therefore, we do not want to go into detail further as similar findings has been confirmed by us while disposing off the Ground No. 2 of the Department. Thus this ground of the Department also fails. 6.0 Now we take up the appeal of the Revenue in ITA No.349/JU/2009 for the assessment year 2005-06 where following grounds have been taken by the Department. ''On the facts and in the present circumstances of the case, the ld. CIT(A) has erred in:- 1) I. allowing deduction u/s 80IB/IC on receipt income of ₹ 7,37,28,235/-. II. allowing deduction u/s 80Ib/IC on scrap sale of ₹ 6,33,265/-. III. allowing deduction u/s 80IB/IC on surplus on packing and forwarding of ₹ 8,994/- IV Allowing deduction u/s 80IB/IC on rental income of ₹ 3.00lac of Bated Unit. V Deleting the addition made on account of apportionment of capital expenditure on R&D and Depreciation on assets of Udaipur in turnover ratio to Bated and Barotiwala Unit (Rs.57,20,110/- for Barotiwala Unit and ₹ 1,04,15,695/- in the Bated Unit) VI Directing the AO to treat the trading income as business profit not as income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith retrospective effect from 1-04- 2001. Hence, there shall be no adjustment in the book profit of the assessee.
7.3 Detailed submissions were filed before the ld. CIT(A) who after considering the submissions found that the assessee deserves to succeed on this issue also. Accordingly, he allowed the issue in favour of the assessee.
7.4 The ld. DR stated that in view of the amended provision, the issue was rightly decided by the AO against the assessee.
7.5 The ld. AR fairly stated that in view of the amended provisions, this issue can be decided against the assessee.
7.6 After hearing both the parties and perusing the materials available on record, we hold that the AO was justified in holding that there will be no adjustment in the book profit of the assessee as the amendment was not allowable w.r.e.f. 01-04-2001. Since the amendment is prospective, therefore, we confirm the order of the AO while reversing the order of the ld. CIT(A) on this issue
8.0 In the result, appeal of the Department for the assessment year 2004-05 is dismissed and the appeal for the assessment year 2005-06 is allowed in part.
The order is pronounced on 28-08-2012 . X X X X Extracts X X X X X X X X Extracts X X X X
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