2007 (10) TMI 313 - AT - Income Tax

Disallowance u/s 80HHC - Profits Derived From Exports - Deduction u/s 80-IB - Dyeing and Printing - Manufacturing Process Or Not - Partnership firm engaged in the business of manufacture of readymade garments in its industrial undertaking - Separate industrial undertaking - Other unit of the appellant firm undertook two distinct activities - not newly established undertaking - F ailed to meet the conditions specified in section 80-IB(2)(iv). Disallowance u/s 80HHC - Profits Derived From Exports - interest earned on FDRs - HELD THAT - We find that the judgments cited by the ld DR clearly hold that interest earned on FDRs is totally unconnected with the export business of the assessee and simply by way of utilization for the surplus money of the assessee and has to be considered as income from other sources only. Therefore the Tribunal in the case of Jayantila Bhimraj Jain held that interest income on ordinary FDRs has rightly been treated as income from other sources. To that extent we uphold the orders of the lower authorities and the grounds taken by the assessee on this issue are rejected. As regards the third category i.e. non-inclusion of interest on income-tax refund within the profits and gains of business and treatment of the same as income from other sources is concerned we do not find any merit in the ground raised by the assessee in this regard. Interest earned on income-tax refund can in no way be considered to be earned during the ordinary course of business of the assessee and hence there cannot be any question of treating the same as the business income of the assessee. Accordingly we reject the ground raised by the assessee on this issue for the AY 2002-03. Lastly as regards the treatment of DEPB credits amount as income from other sources for the AY 2004-05 is concerned after hearing both the sides we are of the considered opinion that DEPB credit arises directly out of the business operations of the assessee. Hence the said credit amount has necessarily got to be considered as business of the assessee. We order accordingly. Deduction u/s 80-IB - Dyeing and Printing - Manufacturing Process Or Not - Partnership firm engaged in the business of manufacture of readymade garments in its industrial undertaking - Separate industrial undertaking - Other unit of the appellant firm undertook two distinct activities - not newly established undertaking - Assessee failed to meet the conditions specified in section 80-IB(2)(iv) - HELD THAT - We are of the considered opinion that job work got done under own supervision of the assessee can be considered to be a part of the manufacturing process of the assessee and in this view of the matter dyeing and printing although got done as job work can qualify as manufacturing process. In view of the legal position it can be said that act of the AO in splitting the entire manufacturing process into two sets of activities i.e. from procurement of cloth to dyeing and printing and from dyeing and printing to fabrication and dividing the aggregate profit of the undertaking into the two aforesaid segments is unwarranted and not permissible. On the contrary for the purpose of s. 80-IB all the steps followed by the undertaking including even the job work of dyeing and printing is one complete and integrated manufacturing activity the profit out of which qualifies for deduction u/s 80-IB. Our attention has also been drawn to the copies of yearly returns filed by the assessee firm with the Commr. Provident Fund and also copies of half-yearly returns filed with ESI Department for the different years under consideration. A perusal of the same clearly convinces one that the number of regular employees working with the assessee did actually exceed 20 during each of the years under consideration. Such persons were over and above the contract labours of the assessee firm and were employed in different capacities as cutting masters fashion co-ordinators production managers tailors stitching-machine operators button operators thread cutters merchandises checkers etc. Hence we find that even without going into the controversy of whether job workers should be included within the total roll of workers of the assessee firm . Otherwise also the assessee met the requirements of s. 80-IB(2)(iv) relating to the number of workers employed by the assessee and would thus be duly entitled to the deduction u/s 80-IB of the Act. Thus in view of the factual and legal positions it is being held that so far the grounds taken by the assessee regarding eligibility of deduction u/s 80-IB of the Act in respect of the profits and gains of the Jaipur undertaking of the assessee is concerned the assessee s appellate grounds have got to be allowed. The AO s action in considering a separate unit of the assessee at Jogeshwari Mumbai does not have any factual basis and further there is also no basis for the attempt on the part of the AO in trying to bifurcate the composite activities of manufacturing at the Jaipur unit into separate activities relating to dyeing and printing and the rest of the activities differently. Thus the orders of the lower authorities in this regard are being reversed and it is directed that deduction u/s 80-IB be allowed duly on the entire profits and gains of the Jaipur industrial undertaking of the assessee. This appellate ground is common to all the years from asst. yrs. 2001-02 to 2004-05. We hold that duty drawback is to be considered as derived from the industrial undertaking of the assessee and would thus have to be considered for the purpose of allowance of deduction u/s 80-IB. Receipts from foreign exchange fluctuation is concerned it has already been discussed above that the same forms an integral part of the export proceeds and would thus have to be considered as derived from the industrial undertaking. We order accordingly and direct that foreign exchange fluctuation be taken into consideration for allowing deduction u/s 80-IB. Profit on transfer of the Duty Entitlement Pass Book (DEPB) Scheme - HELD THAT - We are of the view that DEPB Scheme is more akin to the scheme of allowing drawback amount on duty already paid by the assessee on import of raw materials etc. than conferring import entitlement benefit on exports done by the assessee. In that way treatment meted in the case of duty drawback should be exercised in this case. Thus the profits arising under the DEPB Scheme should be considered to be derived from the industrial undertaking and the assessee should be allowed deduction under s. 80-IB on such profits. We order accordingly. In the result the appeals filed by the assessee for all the AY 2000-01 2001-02 2002-03 2003-04 and 2004-05 are partly allowed and the appeal filed by the Department for the AY 2001-02 is dismissed.

Summary

Issues Involved:
1. Allowance of deduction under Section 80HHC of the Income Tax Act.
2. Allowance of deduction under Section 80-IB of the Income Tax Act.

Detailed Analysis:

1. Allowance of Deduction under Section 80HHC:
(i) Non-inclusion of Gain on Foreign Exchange Rate Fluctuation:
The assessee's claim for inclusion of gain on foreign exchange rate fluctuation within profits and gains of business was upheld by the CIT(A) for the assessment year 2001-02 but denied for other years. The Tribunal accepted the contention of the assessee based on decisions from various coordinate Benches, allowing the appeals for the relevant years and dismissing the Department's appeal for 2001-02.

(ii) Non-inclusion of Interest on EEFC Account and Bank FDRs:
The Tribunal followed the Mumbai Bench's decision in M/s Fountainhead Exports, treating interest income from EEFC accounts as derived from business. The same treatment was extended to interest on FDRs kept for guarantee purposes, considering them closely linked to the export business. However, interest on ordinary FDRs was treated as income from other sources, as they represented surplus business money placement.

(iii) Non-inclusion of Interest on Income-tax Refund:
The Tribunal found no merit in treating interest on income-tax refunds as business income, affirming its treatment as income from other sources.

(iv) Treatment of DEPB Credit:
The Tribunal considered DEPB credit as directly arising from business operations, qualifying it as business income.

2. Allowance of Deduction under Section 80-IB:
Eligibility and Conditions:
The assessee's claim for deduction under Section 80-IB was initially denied by the AO and upheld by the CIT(A). The Tribunal found that the assessee's industrial undertaking at Malvia Nagar, Jaipur, met all conditions under Section 80-IB, including being set up before the specified date, employing the required number of workers, and not being formed by splitting or reconstructing an existing business.

Manufacturing Process and Job Work:
The Tribunal rejected the AO's bifurcation of the manufacturing process into dyeing/printing and fabrication, considering it an integrated activity. Job work done under the assessee's supervision was accepted as part of the manufacturing process, aligning with liberal interpretations favoring industrial undertakings under Sections 80-I and 80-J.

Employment of Workers:
The Tribunal accepted that workers employed through contractors, working within the factory premises under the assessee's control, should be considered as the assessee's employees. This satisfied the condition of employing the requisite number of workers.

Receipts and Income Consideration:
- Duty Drawback: The Tribunal followed the Gujarat High Court's decision, treating duty drawback as derived from the industrial undertaking, eligible for deduction under Section 80-IB.
- Foreign Exchange Fluctuation: It was considered an integral part of export proceeds, qualifying for deduction under Section 80-IB.
- Sale of Import Licence: Following the Supreme Court's decision in Sterling Foods, profits from the sale of import entitlement were not considered derived from the industrial undertaking.
- Interest Income: Ordinary interest income and interest on income-tax refunds were treated as income from other sources, not qualifying for deduction under Section 80-IB.
- DEPB Scheme: The Tribunal treated profits from the DEPB Scheme akin to duty drawback, allowing deduction under Section 80-IB.

Conclusion:
The appeals filed by the assessee for the assessment years 2000-01, 2001-02, 2002-03, 2003-04, and 2004-05 were partly allowed, while the Department's appeal for 2001-02 was dismissed. The Tribunal's decision provided a comprehensive analysis, aligning with judicial precedents and liberal interpretations favoring industrial undertakings.