TMI Blog2003 (1) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the new industrial undertaking could not be bifurcated since the appellant produces the same product in the new industrial undertaking also, and accordingly erred in law in not allowing deduction under s. 80-I as claimed by the appellant. 4. The learned CIT(A) has not appreciated that having allowed 80-I deduction in asst. yr. 1994-95, the assessing authority was not entitled to change its opinion, particularly when no new facts had emerged. The facts of the case are that in the return of income, the assessee had claimed deduction under s. 80-I to the tune of Rs. 3,64,65,000. It was submitted before the AO that the assessee had undertaken substantial expansion programme for raising the production of tractors from 12,000 units to 25,000 units in the financial year 1989-90. Such expansion programme involved the creation of a new industrial unit with substantial investment in plant and machinery totalling Rs. 40.90 crores up to financial year 1994-95. Since the product of both the old and new units was tractor and sold at uniform market price, profits of the new industrial unit could be computed on proportionate basis, as the assessee had not maintained separate books of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it and the new unit and year-wise details of investment in buildings and plant and machinery in the new unit were submitted as under: Tractors Production (In Nos.) 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Old Unit 12,015 12,025 12,030 12,050 12,075 12,100 New Unit 2,314 2,784 2,560 4,395 6,120 11,049 Total Prod. 14,329 14,809 14,590 16,445 18,195 23,149 The investment in plant and machinery and buildings in the new industrial unit was as under: Rs. in lacs 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Bldgs. 43.12 111.17 142.17 76.47 28.75 11.42 Plant Mach. 627.09 499.43 913.10 676.69 588.86 372.34 Total Inv. 670.21 610.60 1055.17 753.16 617.61 383.76 It was submitted that deduction under s. 80-I was claimed on proportionate basis as the tractors were being sold at the same price both in respect of the old unit and new unit. It was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in common premises on the common floor. Even the expansion of the existing shed was sanctioned on 4th May, 1992. (c) The assessee itself admitted that the existing assembly line was dismantled and a new common assembly line within the same premises was set up. In the absence of separate books of accounts, there was no distinction in the production area so far as manufacturing process was concerned. The old and new machines were operating from common premises on the same floor with the same workers with no distinction whatsoever between the old and the new units. Due to these reasons, it was not possible at any point of time to determine as to which part of the tractor was manufactured/assembled in the old or the new unit. (d) The assessee continued to maintain common stock register and manufacturing record. The situation was such that the manufactured tractors might have parts, which had been either assembled/manufactured on the old machines or the new machines. Thus, it was not possible to demarcate whether the tractors were manufactured in the old unit or the new unit. (e) The manufacturing process consisting of various operations were co-existing in the common industr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make counter-submissions, if any, the subsequent submissions filed by the assessee and written submissions filed by the learned Departmental Representative on 7th Oct., 2002, were taken on record for deciding the appeal. Respective submissions of both the parties are discussed in the succeeding paragraphs. 5. The learned counsel for the assessee, Shri P.C. Jain, submitted that the assessee is a Punjab Government undertaking. Earlier, the capacity of production of tractors was increased from 5,000 to 12,000 units in the asst. yr. 1980-81. The assessee had claimed deduction under s. 80-I in respect of the new unit for increased capacity and Punjab and Haryana High Court allowed the claim of the assessee in IT Case No. 106 of 1995. A copy of the order of Punjab and Haryana High Court was placed on our file at pp. 1 and 2 of the paper book. He submitted that likewise capacity of production was enhanced from 12,000 units to 25,000 units and necessary sanction for the same was accorded by the Government of India, Ministry of Industry, vide their order dt. 6th Nov., 1989, copy whereof is placed at pp. 9, 9A and 9B of the paper book. He submitted that the facts of the case for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 36.78 crores. In respect of the old unit, the cost of old building and plant and machinery was to the tune of Rs. 2.74 crores and Rs. 14.70 crores, respectively. As regards the assembly line, which is automatic and mechanically operated, the total cost of the old assembly line was not more than 4 per cent to 5 per cent of the new assembly line. He further submitted that whole of the new unit was independently earmarked and was not dependent on the working of the old unit. He submitted that the authorities below have disallowed the claim merely on the basis of surmises and conjectures. The assessee was entitled to deduction under s. 80-I. He also relied on the following judgments to support his view point that for the purpose of claiming deduction under s. 80-I it was not necessary that separate books of accounts should be maintained and that the new unit must be installed at a different place than the already existing unit: (i) Textile Machinery Corporation Ltd. vs. CIT 1977 CTR (SC) 151 : (1977) 107 ITR 195 (SC); (ii) CIT vs. Indian Aluminium Co. Ltd. (1977) 108 ITR 367 (SC); (iii) CIT vs. Batala Engineering Co. Ltd. (1979) 12 CTR (P H) 120 : (1979) 120 ITR 683 (P H) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim of the assessee for deduction under s. 80-I was disallowed. She further submitted that in the asst. yr. 1989-90 the assessee had only undertaken substantial expansion programme for raising the production capacity from 12,000 to 25,000 tractors per annum. This fact is conceded by the directors in the note on deduction under s. 80-I filed along with the return. Thus, she submitted that the assessee had undertaken only an expansion programme of the existing unit and not setting up a new unit. She further submitted that the assessee was entitled to deduction under s. 80-I only in respect of profits 'derived from' an industrial undertaking. Drawing our attention to the reasons given by the AO in the assessment order, she submitted that the working of the profit was faulty any it was not possible to arrive at the correct profit derived from the new industrial unit/undertaking. She relied on the following judgments: (i) CIT vs. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 237 ITR 579 (SC); (ii) Hindustan Lever Ltd. vs. CIT (1999) 156 CTR (SC) 506 : (1999) 239 ITR 297 (SC); (iii) Nanji Topanbhai Co. vs. Asstt. CIT (1999) 157 CTR (Ker) 225 : (2000) 243 ITR 192 (Ker). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Factory; Here also, the Tribunal held that assessee was entitled to deduction under s. 80-J in respect of spinning unit and maintenance of separate books of accounts in respect of new unit was not necessary so long as the profits for the new units could reasonably be ascertained. This is not possible in the present case. (vi) CIT vs. Premier Cotton Mills Ltd.; In this case, the Tribunal had recorded a specific finding that the entire expansion undertaken by the assessee was an independent unit and was capable of functioning as such. But, this is not so in the present case. (vii) ITA Nos. 1458 and 1609 of 1995 of Tribunal, Chandigarh Bench, in the case of Smithkline Beecham Consumer Healthcare Ltd., Nabha vs. Dy. CIT for the asst. yr. 1989-90; In this case, new production lines were established which could be identified separately and the layout plan was such that it clearly showed the location of new units. She further relied on the decision of the Tribunal, Chandigarh Bench, in the case of H.P. Cotton Textile Mills Ltd., Hissar vs. CIT, Patiala in ITA No. 1762/Del/1997, wherein deduction under s. 80-I was not allowed on the ground that the assessee was not able to place any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as entitled to deduction under s. 80-I in view of the fact that new undertaking was not formed out of the existing business. The articles produced by the new unit may be consumed by the old unit or it might be sold to outside parties. This fact would not come in the way of allowing deduction under s. 80-I. (ii) CIT vs. Indian Aluminium Co. Ltd.: Earlier, the assessee had four manufacturing centers at different places. Subsequently, the assessee established one more unit at a new place and also made substantial expansion to the existing two units and installed a new plant and machinery. The assessee claimed deduction under s. 80-I in respect of new unit and also in respect of two existing units where substantial expansion had been carried out. In the light of these facts, Hon'ble Supreme Court held that the assessee was entitled to deduction under s. 80-I in respect of a new unit and also in respect of expanded capacity of the already two existing units. (iii) CIT vs. Gopi Chand Textile Mills Ltd.: In this case, the issue before the Punjab and Haryana High Court was whether the value of plant and machinery under installation should also be included for computing the special de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded the existing capacity of the two units by installing a new plant and machinery worth Rs. 50 lakhs. The Hon'ble Supreme Court held that assessee was entitled to deduction under s. 80-I, both in respect of a new unit and also in respect of the expanded capacity of the already two existing units. As regards the merits of the reasons given by the AO for disallowing the claim, it is obvious from a perusal of the order of the AO that he has disallowed the claim purely on the ground that no separate books of accounts have been maintained, and the working of profit derived from new industrial unit was not possible as the assessee had included many items of income which could not strictly fall in the category of profit 'derived from' an industrial undertaking. The fact that assessee had not maintained books of accounts separately could not be a ground by itself for disallowing the claim of the assessee. In fact, proviso to s. 80-I empowers the AO to compute the profits and gains of an industrial undertaking on a reasonable basis in case the computation made by the AO presents exceptional difficulties. Thus, if the working made by the assessee was faulty, the AO should have computed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation on the new plant and machinery and building would only show that the Revenue has accepted the position that these were new additions to the plant and machinery. Coupled with this is the fact of substantial increase in the production capacity from 12,000 units to 25,000 units. The very fact that part of the old machinery was discarded or sold does not mean that the new unit had not come into being. Moreover, the assessee had furnished separate details of the tractors manufactured in the old unit and the new unit. The number of tractors manufactured in the old unit were higher than the number of tractors manufactured in the new unit. The Revenue has not found any fault with the working of figures of production shown in the old and new units. On the other hands, if separate details were not possible, the assessee could have shown higher production in the new unit as compared to old unit in order to claim deduction under s. 80-I at a higher amount. This fact further shows that the new unit was a separate and independent unit for which it was possible to find out the exact number of tractors manufactured therein. Therefore, the assessee is entitled to deduction under s. 80-I in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaking and hence do not qualify for deduction under s. 80-I of the IT Act, 1961." The facts of the case are that the assessee had computed deduction under s. 80-I by including the following items of income: (i) Interest received on bank deposits : Rs. 90,32,947 (ii) Interest on income-tax refund : Rs. 11,50,377 (iii) Interest on loans to employees : Rs. 11,90,113 Total Rs. 1,13,73,436 The assessee had explained before the AO that interest income from deposits in the bank was earned by utilizing the surplus funds. However, the AO was of the view that the said income did not relate to industrial activity and was, therefore, not includible for the purpose of computing deduction under s. 80-I. Similarly, the AO held that interest on income-tax refund and loans to employees was not eligible for deduction under s. 80-I. In addition to the above, the assessee had also received following income, which was included for the purpose of computing deduction under s. 80-I: (i) (i) Interest on HDFC bonds : Rs. 1,56,000 (ii) Recovery of insurance claims : Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on amounts set apart in the form of bank deposit for expansion of undertaking and to discharge liabilities of undertaking was held to be eligible for deduction under s. 80-I. He also relied on the following decisions: (i) Tribunal, Jaipur Bench, in the case of Wolkem India LTD. vs. Dy. CIT (1999) 65 TTJ (Jp) 68: Where interest received from IT Department was held to be includible for deduction under s. 80-I. (ii) Tribunal, Delhi Bench, in the case of Rollatainers Ltd. vs. Dy. CIT (2000) 69 TTJ (Del) 8: Where interest on fixed deposits from bank was held to be not includible for computing deduction under s. 80-I but exclusion can only be made in respect of net interest income. It was also held that insurance claim received on goods damaged in transit and profit on sale of fixed assets would be includible for the purpose of claiming deduction under s. 80-I. 12. The learned Departmental Representative, on the other hand, heavily relied on the orders of authorities below. She submitted that deduction under s. 80-I is admissible only in respect of profit "derived from" an industrial undertaking. Relying on the judgment of the Supreme Court in the case of CIT vs. Sterling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re should be direct nexus between the profits on the one hand and the export activity on the other hand. Reliance in this regard is placed on the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. vs. CIT 1978 CTR (SC) 50 : (1978) 113 ITR 84 (SC), where the Hon'ble Supreme Court has held that the expression "derived from" used by the legislature intends to cover only the receipt from the actual conduct of the business specified of the specified nature, whereas the expression "attributable to" having a wider import than the expression "derived from" thereby intending to cover receipts from sources other than the actual conduct of the business of the specified nature. This view also finds support from the judgment of the Supreme Court in the case of CIT vs. Sterling Foods, cited supra, where the apex Court has held that the source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of import entitlements could only be said to the export promotion scheme of the Central Government whereunder the export entitlements became available. There must be a direct nexus between the profits and gains and the indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and (ba) of the Explanation to s. 80HHC has held that receipts like labour charges, service charges and interest cannot be included in the business profits as the said items do not have any linkage with the export activities. The same High Court has again considered this issue in the case of CIT vs. Ravi Ratna Exports (P) Ltd. (2000) 246 ITR 443 (Bom), where the High Court has held that interests on fixed deposits do not form part of business profits for the purpose of computing special deduction under s. 80HHC. Similar issue came up for consideration before Madras High Court in the case of CIT vs. Pandian Chemicals Ltd., where by referring to the meaning of the expression "derived from" the Hon'ble High Court has held that interest on deposits with the electricity department made out of a statutory compulsion was not a profit derived from industrial undertaking and, therefore, not to be taken into account in computing deduction under s. 80HHC. In the case of Salgaonkar Mining Industries vs. Dy. CIT (1997) 58 TTJ (Pune) 468 : (1997) 61 ITD 105 (Pune), the Tribunal, Pune Bench, has held that interest earned on loans was liable to be assessed under the head "income from other source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal, Amritsar Bench had no occasion to consider the judgment of the Supreme Court in the case of Sterling Foods cited supra, where the Supreme Court has clearly that there should be a direct nexus between the profits and gains and the industrial undertaking and in case where the nexus is not direct but only incidental, the same would not constitute a profit and gain derived from the industrial undertaking and, therefore, would not qualify for deduction under s. 80HHC. The other judgments of Bombay High Court reported in (2000) 163 CTR (Bom) 472 : (2000) 245 ITR 849 (Bom), (2000) 163 CTR (Bom) 593 : (2000) 245 ITR 854 (Bom) and (2000) 246 ITR 443 (Bom) being of later dates, when the Tribunal, Amritsar Bench, decided the matter in May, 1999, the Tribunal did not have the benefit of the ratio of these decisions. Besides, the Tribunal, Chandigarh Benches, have consistently been taking the view that interest income would not constitute business profit eligible for computing deduction under s. 80HHC. The judicial propriety demands that we must follow the orders of Chandigarh Benches in order to maintain consistency in our decisions. Having regard to the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not a profit derived from export of goods and, therefore, not entitled to deduction under s. 80HHC. Now in this case also, the assessee has earned interest on FDRs by depositing the surplus funds in the bank deposits. Thus, it does not have any direct nexus between the interest income and the industrial undertaking. Therefore, this cannot be considered as profit derived from an industrial undertaking. Same position would prevail in regard to interest received on income-tax refund and interest from HDFC bonds. Even the interest earned on loans given to employees does not have direct nexus with the industrial undertaking. It is only incidental to the business. Therefore, our findings recorded in the abovementioned case would equally apply to the facts of the present case. 14. As regards the judgment of Hon'ble Supreme Court relied upon by the learned counsel in the cases of Karnal Co-operative Sugar Mills Ltd., the same is on different set of facts and, therefore, is not applicable to the facts of the present case. Even the two judgments of the Bombay High Court relied on by the learned counsel are prior to the judgment of Hon'ble Supreme Court in the case of CIT vs. Sterling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t management expenses apportioned by the AO are on the higher side. However, he did not furnish any details of the dividends income received from various sources. 19. The learned Departmental Representative submitted that proportionate management expenses were required to be deducted from the gross dividend income. She relied on the judgment of the Supreme Court in the case of CIT vs. United General Trust Ltd. (1994) 116 CTR (SC) 194 : (1993) 200 ITR 488 (SC). 20. We have heard both the parties and carefully considered their rival submissions. The learned counsel was fair enough to concede that proportionate management expenses are required to be deducted from the gross dividend income. However, he submitted that estimate of expenses at Rs. 1 lakh is little on the higher side. But, the learned counsel has not furnished the details of dividend income received by the assessee. Therefore, we are unable to appreciate as to how the management expenses apportioned at Rs. 1 lakh could be considered excessive keeping in view the volume of such investments resulting in substantial dividend income. Moreover, learned CIT(A) has based his decision on the appellate orders for the asst. yr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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