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TMI Blog2008 (11) TMI 278X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 1995-96 1996-97 1997-98 ----------------------------------------------------------- 1. 1139/ s. 80-IA s. 80-IA s. 80-IA s. 80-IA Mum/ Trading Trading Trading Trading 2003 turnover turnover turnover turnover ----------------------------------------------------------- 2. 1140/ Provision Provision - - Mum/ for for 2003 warranty warranty ----------------------------------------------------------- 3. 483/ Allowed Allowed Retention Retention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; premium premium ----------------------------------------------------------- 6. 2271/ Reopening Reopening N.A. N.A. Mum/ u/s 148 u/s 148 2002 ----------------------------------------------------------- Table Continues... -------------------------------------------------- Asst. yr. Asst. yr. Asst. yr. Asst. yr. 1998-99 1999-2000 2000-01 2001-02 s. 80-IA s. 80-IA s. 80-IA s. 80-IA Trading Trading Trading Trading turnover turnover turnover turnover -------------------------------------------------- - & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the decision of Special Bench of the Tribunal in the case of Jt. CIT vs. Mukund Ltd. (2007) 109 TTJ (Mumbai)(SB) 172 : (2007) 291 ITR 249 (Mumbai)(SB)(AT), hence, we dismiss the relevant ground in each year. 8. The learned counsel for the assessee, thereafter, proceeded with the issue relating to treatment of retention money as raised at serial No. 3. He submitted that in asst. yr. 1996-97, this issue first arose, hence, he proceeds to deal with the matter firstly in that year. He also submitted that the same issue was raised in asst. yr. 1997-98 by way of additional ground and, since all the facts were on record and it required no investigation into facts, hence, this additional ground should be admitted. 9. The learned Departmental Representative objected to the admission of the additional ground in asst. yr. 1997-98, however, on due consideration of facts and circumstances, we admit the same for adjudication. 10. The facts, in brief, are that assessee is a company engaged in manufacture and trading of UPS systems. In the original return. the assessee did not make any claim for exclusion of retention money while computing the total income. However, it had mentioned a fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also noted by the assessee that there was no mention of liability in the financial statements nor any provision had been made by the assessee on this count in the books of account, hence, the AO held that it was nothing more than a contingent liability. The AO also held that income chargeable under the head profits and gains of business or profession was to be computed either on the basis of cash system of accounting and mercantile system of accounting regularly followed by the assessee and the assessee could not follow a different method for working out its profit for tax purposes which was not even recognized by the assessee itself or its auditors. Accordingly, he rejected the claim of the assessee both on technical grounds as well as on merits. Aggrieved by this, the assessee carried the matter in appeal before the learned CIT(A) wherein, besides reiterating the submissions made before the AO, reliance was placed on the decision of Hon'ble Supreme Court in the case of CIT vs. C. Parakh & Co. (India) Ltd. (1956) 29 ITR 661 (SC) to contend that assessee was entitled to a particular deduction on the basis of legal position and not on a view which it could take about its rights. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd. vs. CIT (2006) 204 CTR (SC) 182 : (2006) 284 ITR 323 (SC) had held that the AO was obliged to give due relief to the assessee or entertain its claims if admissible as per law even though the assessee had not filed revised return, hence, the assessee's claim could not be rejected on technical grounds. In this regard, he also placed reliance on the following judicial decisions: (i) Chokshi Metal Refinery vs. CIT (1977) 107 ITR 63 (Guj); (ii) Bhartiya Engineering Corpn. (P) Ltd. vs. R.G. Deshpande, Addl. CIT (1979) 11 CTR (Bom) 293 : (1981) 130 ITR 442 (Bom). A query was also raised by the Bench with regard to the nature of performance guarantee given by the assessee as per the copy of the bank guarantee submitted by the assessee; such bank guarantee had been given for compliance of terms and conditions of the tender also. The assessee submitted that the same would be submitted subsequently. The learned counsel also contended that such retention money was accounted for as income in the relevant financial year wherein such bank guarantee(s) expired. As far as the quantum of retention money was concerned, it was w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erformance security bond provides some insights into the various eventualities which could arise between the assessee and its customer in future, hence, we consider it proper to reproduce the same as under: "The bank hereby irrevocably and unconditionally guarantees to ITI Ltd. that the bidder shall render all necessary and efficient services which may be required to be rendered by the bidder in connection with and/or for the performances of the said contractor and further guarantees that the goods which shall be supplied by the bidder under the said contract shall be actually performing the work required of it to the satisfaction of ITI Ltd. and shall be free from any defects arising from faulty materials, designs and workmanship, such as corrosion of the equipment, inadequate quantity of materials, inadequate contact protection, deficiencies in circuit design and/or otherwise whatsoever and in the event of the bidder failing or neglecting to render necessary services as aforesaid and/or in the event of goods failing to give satisfactory performance or proving and particularly warranty clause mentioned therein, the bank shall indemnify and keep ITI Ltd. indemnified to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commissioning activity is concerned, the income thereon shall normally accrue to the assessee at the moment when such services are rendered by the assessee and, therefore, the total amount received by the assessee i.e., sale value of the product as well as installation and commissioning charges are to be accounted for as income at two stages i.e., income from sale at the time of delivery of the product and income from installation and commissioning at the time of rendering of the specified services. It is important to reiterate here that the assessee has received the total amount payable by the customer at the time of delivery only, hence, there can be a case where the assessee might have delivered the goods and those goods have not been installed till the end of accounting year and only in those cases, the amount received on account of installation and commissioning charges can be treated as advance. Having stated so, when we analyse the nature of obligations cast upon the assessee as evident from the cl. (1) of the performance security bond reproduced herein above. we find that the assessee's obligation till the delivery of the goods has already been performed and other obligati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case, we have already held that when the goods have been delivered to the buyer by the assessee, the property in goods has been transferred to the buyer in terms of provisions of Sales of Goods Act, 1930, hence, the revenue has to be recognized in the period when such delivery has been made. In the Accounting Standard, it has also been provided that the recognition of revenue can be postponed if there exists uncertainties regarding the ultimate collection, however, in the present case the assessee has already received the amount of sale consideration though it has provided the bank guarantee for satisfactory performance and compliance with the terms and conditions of the contract and which cannot be said to have resulted into any uncertainty as regards the timing of recognition of revenue, hence, the total revenue from the sale transaction has to be recognized at the time of delivery of goods. As regards the case law relied on by the assessee are concerned, we find that the decision of the Tribunal in the case of Associated Cables (P) Ltd. which has been approved by the Hon'ble jurisdictional High Court, the assessee was billing only for 90 per cent of the value of the goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n one year, the same stands covered in favour of the assessee by the decision of the Tribunal in the case of Chicago Pneumatic India Ltd., hence, we hold that the order of the learned CIT(A) is not correct to that extent. 14. Before parting with this issue, we consider it pertinent to deal with the other aspect of the issue involved i.e., once the assessee is postponing the revenue recognition in such situations, in spite of following the mercantile system of accounting, the assessee is not following the principle of matching which requires the assessee to match cost with revenue and vice versa. Further, there is accounting concept of periodicity which requires the financial statement to be prepared for a definite accounting period and which is also recognized under the provisions of the IT Act as the assessees are required to file return of income for a previous year. There is a concept of accrual which is the basis of mercantile system of accounting wherein the effect of transaction and other events are recognized when those occur and those are recorded in the account records, and reported in the financial statements of the period to which those relate and not when the money rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. The only issue which remains to be adjudicated in these appeals is regarding eligibility of the assessee' s claim for deduction under s. 80-IA of the Act on the profits of turnover of trading goods. 16. The facts, in brief, are that assessee claimed deduction under s. 80-IA of the Act in asst. yr. 1996-97 at Rs. 69,45,300, being 30 per cent of the profits and gains of new industrial undertaking. The AO as per Annex. 9A of the notes of account found that assessee had sold 6,529 UPS and 17 PEC systems which had been purchased from outside. Besides these, it also sold 7,404 UPS and 30 PEC systems manufactured by it during the year under consideration. The AO required the assessee to explain its claim under s. 80-IA of the Act. The assessee submitted that trading activity carried on by the assessee company was in respect of Hi-tech UPS model series AP 410 and AP 420 and Model No. 248 FA of Precision Environmental Control Systems to the Indian market and the absorption of technology for manufacturing these models subsequently. It was also submitted that this technology was absorbed and the company started manufacture of these items from the next financial year, hence, assessee's tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequently, these products were manufactured by the industrial undertaking owned by the assessee company, hence, in these years particularly, the assessee was entitled for deduction under s. 80-IA of the Act on such trading turnover. The learned counsel also contended that the language in s. 80-IA was wider in scope as compared to the language employed in other similar incentive sections because in this section, it were the profits of the business of the undertaking which were eligible for deduction. The learned counsel placed reliance on the decision of the Tribunal in the case of Asstt. CIT vs. Maxcare Laboratories Ltd. (2005) 92 TTJ (Cuttack) 179 : (2005) 273 ITR 1 (Ctk)(AT), wherein the Tribunal held that industrial undertaking was the only source of income of the assessee and, therefore, deposits had been made by the assessee out of business compulsion, hence, interest received thereon was to be treated as having direct and proximate connection with the business of the undertaking even though the same could not be treated as derived from the industrial undertaking and the same was eligible for deduction under s. 80-IA of the Act. The learned counsel contended that the tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have considered the submissions made by both sides, material on record and orders of authorities below. The nature of activities undertaken by the assessee have been narrated in detail in this appeal hereinbefore, hence, not repeated. The only question which requires our adjudication is whether the profit of trading activities can be considered as eligible for deduction under s. 80-IA of the Act or not. The learned counsel for the assessee has relied on the decision of the Tribunal in the case of Maxcare Laboratories Ltd. and the decision of the Tribunal in the case of Chaman Lal & Sons. The assessee has also placed reliance on the decision of Hon'ble Delhi High Court in the case of Eltek SGS (P) Ltd. wherein the deduction under s. 80-IB of the Act on the customs duty drawback was involved and the customs duty drawback, being a part and parcel of operations of the industrial undertaking, is in the nature of reimbursement of expenses charged to the P&L a/c of such industrial undertaking and in these circumstances, the Hon'ble Delhi High Court held that assessee was entitled for deduction under s. 80-IB of the Act thereon after noticing the difference in the language of ss. 80-IB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hence, trading activities relating to such products carried on in the year under consideration should be considered as part of industrial undertaking does not stand to our reason because both these aspects are independent of each other as the assessee company may be trading in various products of the same line to offer wide range of products to its clients and in those years, such trading activities would only be of the assessee company and in the year of manufacture of such products by the industrial undertaking owned by the assessee company, the industrial undertaking would be entitled for deduction under s. 80-IA of the Act in respect of products so manufactured subject to satisfaction of other conditions mentioned therein, and if, in that year, the assessee company sells the same products by procuring from outside parties, then also, the industrial undertaking would not be entitled for deduction on such items. In this regard, we also consider it proper to reproduce the relevant findings of the decision of the Tribunal in the case of Gujarat Ambuja Cements vs. Dy. CIT in ITA No. 6474/Mum/l997 for asst. yr. 1992-93, order dt. 15th Sept., 2008 (TM) [reported at (2009) 120 TTJ (Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l unit set up by it is kept in mind, the confusion of treating the income of the assessee company from all its sources as the income of the industrial unit will not survive. Therefore, once it is accepted that the company has its own existence as an assessee and industrial unit is one of its profit earning apparatus, the view that the income of an assessee, who owns only one industrial unit, from all the sources has got to be treated as income of the industrial undertaking is bound to fail. If the contention on behalf of the assessee that the income of a company who owns only one industrial undertaking, say unit No. 1, has got to be treated as the income of the industrial unit were to be accepted, then the income of any other unit, say unit. No. II, set up by the company at any point of time is bound to be treated as the income of the unit No. 1. This is not even the case of the assessee. The illusion of treating the income from all sources of the assessee company of one industrial unit is considered distinct from the income of another industrial unit. If the assessee has income from various industrial units, the income of each unit is different and separate and the entire income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also support our view in this regard as stated in the preceding lines. Hence, in our opinion, the provisions of s. 80-IA are not wider in scope as compared to the s. 80HH. (ii) Similarly, as per s. 80-IA(2)(iii) and/or (iv), an industrial undertaking should be engaged in the manufacturing or produce articles or things or to operate its cold storage plant or plants or in the generation and distribution of power that means the words "any business of an industrial undertaking" used in sub-s. (1) has to be read in conjunction with the activities of such undertaking as defined in sub-s. (2) and profits and gains of only those activities could be considered as profits and gains derived of any business of an industrial undertaking, hence, the trading activities carried on by the assessee cannot be considered as eligible for deduction under s. 80-IA of the Act. (iii) This view can further be explained by the provisions of ss. 80-IA and 80-IB of the Act brought on statute subsequently in the place of the then existing s. 80-IA wherein it has been stated that "where the gross total income of an assessee includes any profits and gains derived by the undertaking or enterprise from any busin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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