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TMI Blog1988 (11) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... T was of he view that these receipts could not be termed as profits derived from the Industrial Undertaking. The CIT accordingly issued show cause notices to the assessee for both the years under consideration on the ground that Unit No. II in respect of which the ITO had allowed relief under s. 80J reflected a figure of loss after the exclusion of the amounts received on account of cash assistance and duty draw back. According to the CIT the said relief under s. 80J was accordingly not allowable and proposed to be withdrawn by taking action under s. 263. 4. In response to the show cause notices for both the years the assessee raised identical objections; one on the question of jurisdiction of the CIT to initiate action under s. 263 and the other on the merits of the case. It would suffice if we reproduce herewith the assessee's reply to the show cause notice for one of the year via, asst. yr. 1980-81: "1. That the initiation of the proceedings under s. 263 and assumption of jurisdiction by your Honour under the said section, is bad in law and not warranted on the facts and circumstances of the case. 2. That in any case it is held that there exists jurisdiction, the issue sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as delivered prior to 1st May, 1960 and in the said judgment on similar facts, their Lordships held that there is a merger of the ITO order with the order of the Appellate Authority and, therefore, no proceedings could lie under s. 263. In view of the consideration of various judicial pronouncements it is apparent that for the purpose of jurisdiction under s. 263, the order of the ITO merges in that of the AAC not only to the extent to which the AAC has dealt with matter, but also to the extent to which he had power to look into with a view to enhance within the limits prescribed by the Supreme Court in the case of CIT vs. Raybahadur HardutrayMotilal Chamariya (1967) 66 ITR 443 (SC). These views have been expressed by the Special Bench of Tribunal Ahmedabad in the case of Arbuda Mills Ltd. vs. ITO (3 SOT 311) On Merits: Without prejudice tot he legal submissions made as above, we submit on merits that case compensatory allowance and duty draw back are integral part of the profits earned by the Unit No.2 in its new industrial undertaking and has a direct indivisible nexus to the manufacturing activity of the said Unit and profits derived therefrom. For the purpose, we submit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital employed for the purpose of relief under s. 80J of the Act. The assessee's submission before the CIT(A) were as under: While computing the capital employed for the purpose of relief under s. 80J: (a) The ITO ought to have considered the preliminary expenses as an asset. (b) The ITO was wrong in not including the cost of plant and machinery of the value of Rs. 1,42,690 which was not installed. The 1st plea of the assessee was not accepted by the CIT(A). However, the 2nd plea of the assessee was accepted and the ITO was directed to exclude the value of machinery in the total assets of the assessee for the purpose of calculation of relief under s. 80J. 8. The issue involved in the proceeding under s. 263 is relief granted under s. 80J on profit from Unit II which includes cash assistance and duty draw back and whether they can be termed profit from the new undertaking. If cash assistance and duty draw back are not profits derived from the industrial undertaking, then in fact Unit II had incurred a loss. In the case of a loss no relief can be granted. The above facts indicate that the issue raised in proceedings under s. 263 was never the subject matter of apparel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of cash assistance and duty draw back cannot be considered as profit from the industrial undertaking as the immediate source for this incentive was the scheme of the Central Government. The assessee's industrial undertaking Unit-II has incurred a loss. There life granted by the ITO was irregular. The assessee's contentions in this regard are therefore not acceptable. 12. The order passed by the ITO is, therefore, erroneous and prejudicial to the interest of Revenue. I, therefore, direct the IAC(A)-I, Ahmedabad who is now having jurisdiction over the assessee's case to exclude the export benefits received from the Central Government while calculating the relief under s. 80J of the Act, but in case any profits remain, the computation of capital should be made in accordance with the decisions of the appellate authorities." 6. The learned counsel for the assessee in the course of his arguments reiterated submissions on lines identical to those as before the CIT in proceedings under s. 263. it was thereafter submitted that the assessee in this case was exporting 90 per cent of its production to countries outside India. According to him the export incentives received in the form of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the cash compensatory support had been held to be a non-taxable receipt. It was his further argument in view of this decision that the amounts received by the assessee as C.C.S. should atleast be excluded for purposes of working out the profit of Unit No. II. He however has tended to add that this was only an alternative submission without prejudice to his main argument that both the items viz. C.S.S. and duty draw back be excluded as directed by the CIT in the orders under s. 263. He also invited out attention to the fact that the Gujarat ji and the other of the Calcutta High Court, supra, had been duly considered by the Tribunal in the aforesaid Special Bench decision. 9. As regards the jurisdiction of the CIT vis-a-vis the merger of the ITO's order with that of the CIT(A) it was submitted that the issue pertaining to s. 80J being dealt with by the CIT(A) was different to the question with which the learned CIT was ceased in the proceedings under s. 263. In this connection the quoted from the order of the CIT while rejecting the assessee's argument on this aspect of the matter. 10. The learned DR also referred to two decisions of the Tribunal wherein it had been specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cash subsidy allowance has to be taken in consideration in ascertaining profits from exports made by the assessee-company." In the case of Gwalior Rayon Silk Mfg. Wvg. Co. Ltd. their Lordships of the Hon'ble Madhya Pradesh High Court have observed as under: "It is not in dispute before us that the amount received by the assessee company as draw back of the customs duty and as refund of excise duty have been included, in the computation of profits and gains of business of the assessee. It is also not in dispute that these items were received by the company only because of the export business carried on by it. The items are not referable to any other business carried on by the assessee. Once it is held that these items constitute income, they must have their source and as these items could not have been received by the assessee but for the export business carried on by it, a direct relationship between the receipt of these items and the export business is established." 13. Even in the case of Jewanlal (1929) Ltd. their Lordships of Calcutta High Court have held that the cash assistance received by an exporter from the Government is for the purpose of encouraging exports and it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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