CIT v. Sumathi Process Industries (P) Ltd. ()

INCOME TAX

--Deduction under section 80J----PROFITS AND GAINS DERIVED FROM INDUSTRIAL UNDERTAKINGCash compensatory support--Held: Cash compensatory support (CCS) is 'attributable to', but not 'derived from' the industrial undertaking and, therefore, could not be included in profits and gains of the business for the purposes of deduction under section 80J.

Income Tax Act, 1961 s.80J

INCOME TAX

--Deduction under section 80J----PROFITS AND GAINS DERIVED FROM INDUSTRIAL UNDERTAKINGDuty draw back--Held: Duty drawback is intended to reduce the cost of production, hence the duty drawback is an integral part of the pricing of the goods and, therefore, part of the cost of production of the industrial undertaking and, therefore, duty drawback has to be treated as 'derived from' the industrial undertaking.

Income Tax Act, 1961 s.80J

INCOME TAX

--Loss----Carry forward and set-offReturn of income filed under section 139(4)--The assessee filed loss return under section 139(4) as it was not filed return under section 139(1). The AO rejected assessee's claim of carry forward of such loss. The both the lower authorities allowed assessee's claim. Held: Sub-sections (1) and (4) of section 139 are to be read together, and hence the assessee would be entitled to carry forward a loss, if he has filed the return after the period prescribed by sub-section (1), but within the time allowed under sub-section (4).

Income Tax Act, 1961 s.79

Income Tax Act, 1961 s.139

CIT v. India Gelatine & Chemicals Ltd.

In the Gujarat High Court M.S. Shah & A.M Kapadia, JJ.

IT Ref. Nos. 167 & 189 of 1989 7th/8th April, 2004

Income Tax Act, 1961, section SOJ In favour of: revenue; Assessment years 1980-81 to 1982-83

Counsel : Manish R. Bhatt & Tanvish U. Bhatt, for the Revenue J. P. Shah, for the Assessee

JUDGMENT

Ms. Shah J

7th April 2004

Both these references pertain to the same assessee. IT Reference No. 167 of 1989 is for the assessment year 1982-83. While IT Reference No. 189 of 1989 is for the assessment years 1980-81 and 1981-82. In both these references, the following common question of law has been referred for our opinion :

'Whether, in law and on facts, the Tribunal is right in holding that CCS (cash compensatory support) and duty drawback received by the assessee would constitute income derived from an industrial undertaking and eligible for relief under section80J of the Income Tax Act, 1961 ?'

2. The assessee in this case is a company engaged in the manufacture of Ossein and D.C. Phosphate. The Income Tax Officer completed the assessments under section 143(3) and in doing so, allowed relief under section 80J of the Income Tax Act, 1961 (hereinafter referred to as 'the Act). The CIT on perusal of the record opined that the orders of the Income Tax Officer for the years under consideration were erroneous and prejudicial to the interests of revenue. According to the CIT, the relief under section 80J was allowed in respect of Unit No. II where the receipts on account of cash assistance and duty drawback aggregate more than the amount of profit earned by the said unit. The CIT was of the 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 Income Tax Officer had allowed relief, under section 80J reflected a figure of loss after the exclusion of the amounts received on account of cash compensatory support (hereinafter referred to as the CCS) and duty drawback. According to the CIT, the said relief under section 80J was accordingly not allowable and proposed to be withdrawn by taking action under section 263.

In response to the show-cause notices for both the years, the assessee raised objections on the question of jurisdiction of the CIT as,also on the merits of the case. It also furnished detailed replies to the show-cause notices issued. The CIT after considering the replies rejected the various contentions put forth.

The assessee, therefore, challenged the order of the CIT under section 263 of the Act both on merits and on the question of jurisdiction of the CIT to set aside the order in revision. (In the present references, we are not concerned with the challenge to the order of the CIT. on the ground of jurisdiction under section 263). On the question of assumption of jurisdiction under section 263 by the CIT, the Tribunal held that the action of the CIT was wholly justified. On merits, the Tribunal took the view that the CCS and the duty drawback received by the assessee for the years under consideration constitute income derived from an industrial undertaking and eligible for relief under section 80J. The Tribunal, accordingly, set aside the orders of the CIT under section 263 insofar as they pertained to relief under section 80J and restored the orders of the Income Tax Officer in this behalf. Hence, these references at the instance of the revenue.

3. We have heard Mr. Tanvish U. Bhatt, learned standing counsel for the revenue and Mr. J.P. Shah, learned counsel for the respondent- assessee.

4. At the hearing of these references, Mr. Bhatt for the revenue has assailed the view of the Tribunal by taking support of the following decisions :

which is the leading decision on similar controversy under section 80HH,

(ii) CIT v. Jameel Leathers & Uppers (2000) 246 ITR 97 (Mad), which was concerned with both CCS and duty drawback under sections 80J and 80HH;

(iii) CIT v. Vishwanathan & Co. (2003) 261 ITR 737 (Mad), which followed Jameel Leathers.

5. Mr. J.P. Shah for the respondent-assessee has supported the view taken by the Tribunal but submitted that in any case CCS and duty drawback are required to be treated separately.

6. In CIT v. Jameel Leathers & Uppers (supra), the Madras High Court was concerned with this very question and the court on an analysis of the relevant provisions and the decisions of the Hontle Supreme Court interpreting the expression 'derived from' laid down the following principles which are embodied in the headnote which correctly reflects the principles laid down in the judgment :

'Sections. 80J and 80HH of the Income Tax Act, 1961, use the expression 'derived from'. The word 'derived' is usually followed by the word 'from', and it means : get or trace from a source; arise from, originate in : show the origin or formation of. The expression 'derived from' is narrower than the expression 'attributable to'. Had it been the intention of the Parliament that all business income qualified for the benefit under sections 80J and 80HH of the Act, the statutory language would have been different. The fact that an expression which had the narrower meaning has been used, warrants the inference that the legislature intended to limit the extent of profit and gain that should be properly considered as being relevant for the purpose of those provisions. While cash assistance, duty drawback and import entitlements are undoubtedly attributable to business carried on by the assessee and the assessee would not have been 'in a position to receive any of these benefits had the assessee not been carrying on business it cannot be said that such income is 'derived from' business so as to qualify for deduction under sections 80J and 80HH of the Act.'

7. In CIT v. Sterling Foods (supra), the Apex Court was concerned with the interpretation of the expression 'derived from' in section 80HH of the Income Tax Act and laid down the following principles :

'The word 'derive' is usually followed by the word 'from', and it means : 'get, to trace from a source; arise from, originate in : show the origin or formation of', The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements became 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 was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applied. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income Tax Act, 1961.'

In the said decision, the Apex Court reiterated the principles laid down by itself in Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC) wherein it was held as under :

'the expression 'attributable to' was wider in import than the expression 'derived from'. The expression of wider import, namely, 'attributable to', was used when the legislature intended to cover receipts from sources other than the actual conduct of the business. The Division Bench of the High Court observed that to obtain the benefit of section 80HH the assessee had to establish that the profits and gains were derived from its industrial undertaking and it was just not sufficient that a commercial connection was established between the profits earned and the industrial undertaking. The industrial undertaking itself had to be the source of the profit. The business of the industrial undertaking had directly to yield that profit. The industrial undertaking had the direct source of that profit and not a means to earn any other profit. Reference was also made to the meaning of the word 'source' and it was held that the import entitlements that the assessee had earned were awarded by the Central Government under the Scheme to encourage exports. The source referable to the profits and gains arising out of the sale proceeds of the import entitlement was, therefore,'the scheme of the Central Government and not the industrial undertaking of the assessee.'

Cash compensatory support

8. In the instant case, the Tribunal had relied on the decision of this court in Ahmedabad Manufacturing & Calico Printing Co. Ltd. v. CIT (1982) 137 ITR 616 (Guj), and particularly on the finding given in the said decision that the cash subsidy is directly concerned with the export of the goods and eligible for rebate under section 2(5) of the Finance Act, 1964. This court laid down the following principle in the Calico case (supra) :

'The words 'derived from exports' cannot be interpreted as meaning 'referable to exports'. Profits and gains can be said to have been 'derived' from an activity carried on by a person only if the activity is the immediate or effective source, of the profits or gains. There must, be a direct nexus between the activity and the earning of profits or gains.'

In our view, while the above quoted principle laid down by this court in the Calico case (supra) has remained unshaken, the application of the said principle is to be examined in the light of the decision of the Apex Court in Sterling Foods' case (supra). In Sterling Foods' case (supra), the Apex Court has taken the view that the source of the import entitlements (in the facts of the present case CCS) is the benefit made available to the assessee under the government scheme for giving incentives to a newly established undertaking, but for the application of the words, 'derived from' a direct nexus between the profits and gains and the industrial undertaking has to be established. As far as CCS is concerned, the nexus is not direct, but only incidental. The assessee's industrial undertaking manufactures goods and sells them and makes profits and gains. By reason of such industrial undertaking, the government scheme for incentives applies under which the assessee is entitled to certain incentives and, therefore, it is the government scheme which is the direct source for such incentive of CCS and not the assessee's running newly established undertaking. To this extent, the finding given by the Division Bench of this court in the Calico case (supra) that cash subsidy or allowance given on export of goods is directly connected with and derived from industrial undertaking has to be treated as impliedly overruled by the Apex Court in Sterling Foods' case (supra).

9. The aforesaid discussion dealing with the CCS or cash assistance leads to only one conclusion that CCS is 'attributable to', but not 'derived from' the industrial undertaking and, therefore, it could not have been included in profits and gains of the business for the purposes of deduction under section 80J.

8-4-2004

Duty drawback

10. Mr Shah, learned counsel for the assessee, has submitted that duty drawback is reimbursement of the customs duty which the assessee has paid on import of raw materials and reimbursement of excise duty, if any, paid on manufacture of the goods with those imported raw materials which reimbursement is made by the government on account of the export of the finished goods out of India and that benefit is given by statutory provisions embodied in the Customs Act and the Excise Act. Hence, duty drawback is derived from the industrial undertaking and, therefore, to be included in the profits and gains of the industrial undertaking for the purposes of section 80J.

Mr. Shah has, of course, submitted that though there is no direct High Court judgment taking the above view regarding duty drawback, but there are two decisions of the Tribunal-one of the Delhi Bench of the Tribunal in Dy. CIT v. Metro Tyres Ltd. (2001) 79 ITD 557 (Del) and another of the Hyderabad Bench in A.P. Industrial Components Ltd. v. Dy. CIT (2002) 74 TTJ (Hyd) 272.

11. On the other hand, Mr. Tanvish U. Bhatt, learned standing counsel for the revenue has submitted that duty drawback is as much an incentive as cash assistance in the nature of CCS being given by the government for the development of foreign market for Indian products and commodities. The learned counsel has referred to the decisions of the Tribunal, Delhi in Indo Asian Switchgears Ltd. v. IAC (1985) 21 TTJ (Del) 166 : (1985) 12 ITD 65 (Del) and in Reliance International Corpn, v. ITO (1986) 16 ITD 43 (Del) for the purpose of referring to the report of the Estimates Committee (1981-82) as contained in its 23rd Report (7th Lok Sabha).

12. Having' heard the learned counsel for the parties, we are of the view that the question under consideration is an interesting one. While duty drawback scheme may certainly be a part of the larger fiscal scheme of exports assistance and export incentives formulated by the government for the development of foreign market for Indian products and commodities, the duty drawback scheme which is embodied in the relevant provisions of the Customs Act and the Excise Act stands on a different footing from the other cash incentives under executive instructions. Section 75(1) of the Customs Act, 1962 contains the following scheme of duty drawback:

'75. Drawback on imported materials used in the manufacture of goods which are exported.(1) Where it appears to the Central Government that in respect of goods of any class or description manufactured in India being goods which have been entered for export and in respect of which an order permitting the clearance and loading thereof for exportation has been made under section 51 by the proper officer a drawback should be allowed of duties of customs chargeable under this Act on any imported material of a class or description used in the manufacture of such goods, the Central Government may, by notification in the Official Gazette, direct that drawback shall be allowed in respect of such goods in accordance with, and subject to, the rules made under sub-section (2).'

Similar provisions are there in section 36 of the Central Excise Act, 1944.

The object of the duty drawback scheme is to reimburse exporters for tariffs paid on the imported raw materials and intermediates and Central Excise Duties paid on domestically produced inputs which enter into export production. Customs duties and excise duties on inputs raise the cost of production in industries and thereby affect the competitiveness of exports. Therefore, exporters need to be assisted for neutralizing the escalation in their costs, attributable to such customs and excise duties. Duty drawback is, therefore, intended to reduce the cost of production. Hence, duty drawback is an integral part of the pricing of the goods and, therefore, part of the cost of production of the industrial undertaking and, therefore, duty drawback has to be treated as 'derived from' the industrial undertaking.

13. Mr. Bhatt for the revenue would, of course, argue that the assessee could have carried on its business even without the duty drawback and, therefore, the duty drawback is merely attributable to the industrial undertaking but not derived from the industrial undertaking and, therefore, it has to be treated similarly as CCS or import entitlements because the latter incentives are also given to industries exporting their goods and such incentives are also given on the basis of the value of the goods exported.

Mr Bhatt has further submitted that 'derived from' means originates from and the source of duty drawback is export of goods and not manufacturing activity of the industrial undertaking.

14. In this regard, we would like to refer to the distinction that the courts have made in the context of the question whether the subsidy granted by the government is to be taken into account for determining the actual cost of assets under section 43(1) of the Act for the purpose of depreciation and development rebate.

In CIT v. Grace Paper Industries (P) Ltd. (1990) 183 ITR 591 (Guj), the revenue had contended that the amount of subsidy paid by the government to the assessee had a direct nexus and is based on the actual cost of the fixed assets. Therefore, to the extent of the subsidy, actual cost of the fixed assets would stand reduced. On the other hand, the contention of the assessee was that the subsidy was granted by the government for development of industries in backward areas and it was not given to reduce the cost of plant and machinery although the costs of the assets including the building and plant and machinery was a measure for determining the quantum of subsidy.

This court held that the cost of the fixed assets was only a measure of quantifying the subsidy payable to the assessee but the subsidy was provided for dealing with the problems created by reluctance of entrepreneurs to set up industries in undeveloped and underdeveloped areas and the industries were concentrating only in urban areas. Urbanization created several problems such as pollution, growth of slums, etc. and it was also necessary to have balanced growth of industry in different regions. Hence, the government decided to give financial incentives to encourage and induce entrepreneurs to move to backward areas and establish industries there so that the region may develop and promote the welfare of the people living in that region. One of the incentives which the government decided to grant was cash subsidy so that entrepreneurs could utilise such cash subsidy for any purpose connected with the establishment of industries in the backward areas and once the decision to give cash subsidy was taken, the government had to work out some method to determine the quantum of such subsidy, One of the recognised rnethods of working out such cash subsidy is on the basis of the amount invested by an entrepreneur in acquiring capital assets and the government specified a certain percentage of the amount so invested in the capital assets as cash subsidy. The scheme does not say as to in what manner the subsidy granted was to be utilised and, therefore, the industry to which the subsidy was granted was free to utilise it in any manner it liked. The court, therefore, concluded that if the subsidy could be utilised by the entrepreneur in any manner it liked, it could not be said that it was granted for meeting the cost of the capital assets. It was on this basis that the court held that the subsidy was not given to meet cost of the fixed assets and it was merely granted as an incentive to establish industry in a backward area for balanced growth of industries. Since the subsidy was not granted to meet the fixed assets or a portion thereof, it did not take the colour of the part of the cost of the fixed assets. It was not to meet the cost of the fixed assets but was given as an incentive the cost being only a measure to quantify it. This court, therefore, recognised that if the subsidy was given to meet the cost of the fixed assets or a portion thereof, different considerations would prevail and it would be taken into account for reducing the actual cost of acquisition of the assets.

The above view came to be approved by the Apex Court in CIT v. PJ Chemicals (1994) 210 ITR 830 (SC).

15. We are of the view that the same distinction would apply while considering the various incentives being given to an industrial undertaking. If the incentives are like CCS and import entitlement, they are in the nature of general incentives though for determining the quantum of such incentives, the government may take into consideration the export turnover of the industry. Hence, they are not derived from the industrial undertaking, but merely attributable to it. But when it comes to duty drawback, it is specifically to reduce the cost of manufacturing the goods. The very scheme of duty drawback is framed and embodied in the aforesaid statutory provisions in order to relieve the goods to be exported of the burden of customs duties and excise duties, as indicated above. The object of the duty drawback is to reimburse customs duties and excise duties paid by the assessee. As customs duties and excise duties are admittedly an integral part of the cost of production and, therefore, any receipts by way of reimbursement of such duties is inextricably linked with the cost of production which has to be reflected in the P&L a/c of the assessee and, therefore, the revenue's argument cannot be accepted.

16. Since the above distinction between general incentives like cash assistance and import entitlements on the one hand and the specific incentive like duty drawback was not brought to the notice of the Madras High Court and, therefore, not considered while deciding Jameel Leather's case (supra) or Vishwanathan's case (supra). We would like to record our respectful disagreement with the view taken therein that duty drawback is not derived from the industrial undertaking.

17. In view of the above discussion, we are of the view that while CCS (cash assistance) received by the assessee would not constitute income 'derived from' an industrial undertaking and, therefore, the same is not eligible for relief under section 80J of the Income Tax Act, 1961, but in case of duty drawback, the same is 'derived from' the industrial undertaking and, therefore, eligible for relief under section 80J of the Income Tax Act, 1961.

Accordingly, our answer to the common question referred in both these references is in two parts.

In respect of CCS, the answer is in the negative, i.e., in favour of the revenue and against the assessee.

In respect of duty drawback our answer is in the affirmative, i.e., in favour of the assessee and against the revenue.

18. Both the references accordingly stand disposed of.

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