TMI Blog2006 (2) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... urce' of such extra profit is surely the particular scheme of the Government, under which the export incentive/benefit flows to the assessee in one form or the other. In one case, the assessee received 'cash' straightaway and in another case, the assessee received 'import entitlement' which could be converted into cash and in yet another case, the customs duty paid by the assessee was reimbursed. But in all such cases, in whatever form the export incentive/benefit flowed to the assessee resulting in some extra profit, the 'source' was surely that particular scheme of the Government. This humble opinion of ours is based on the principles laid down by the Supreme Court in the cases of Sterling Foods [ 1999 (4) TMI 1 - SUPREME COURT] , and Pandian Chemicals Ltd. [ 2003 (4) TMI 3 - SUPREME COURT] and by the Madras High Court in the cases of Jameel Leathers and Uppers[ 1998 (10) TMI 12 - MADRAS HIGH COURT] and Viswanathan Co. [ 2002 (10) TMI 43 - MADRAS HIGH COURT] . The ground No.1 is accordingly rejected. Disallowance out of staff welfare expenses, telephone. expenses, and miscellaneous expenses - We find that the AO and also the CIT(A) did not give cogent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived 5,66,312 5,66,312 (d) Scrap sale 31,61,927 (e) Export Incentive (DEPB Scheme) 80,66,246 (f) Liabilities no longer required-written back 4,84,293 (g) Miscellaneous receipts 63,231 2,73,15,293 1,56,64,596 30 per cent thereof 81,94,588 46,99,378 Ground No.1 4. This ground relates to the export incentive of Rs. 80,66,246 excluded by the AO while computing the deduction allowable under s. 80-IA. 5. Shri S.N. Inamdar, the learned Authorised Representative reiterated the arguments put forward on behalf of the assessee, before the AO and before the CIT(A). The submissions made by him are summarized below: that the export incentive received by the assessee under the Duty Entitlement Pass Book Scheme (DEPBS) entitled the assessee to import raw material free of import duty against the exports made; that the DEPB Scheme, in effect, gave the assessee-company a reimbursement/credit against cost of raw material consumed for manufacture of finished goods which were exported; that DEPB Scheme had the effect of reducing the customs duty which was an integral part of the cost of raw material for manufacture of goods; that the impugned export incentive was in the nature of cost compensatory supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pril, 2002 read as under: (1) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or an enterprise referred to in sub-s. (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to hundred per cent of profits and gains derived from such business for the first five assessment years commencing at any time during the periods as specified in sub-s. (2) and thereafter, twenty-five per cent of the profits and gains for further five assessment years; Provided that where the assessee is a company, the provisions of this subsection shall have effect as if for the words twenty five per cent , the words thirty per cent had been substituted. 7.2 Shri Inamdar the learned Authorised Representative heavily relied on the decision of the Gujarat High Court in the case at India Gelatine Chemicals Ltd. In this case one of the issues was whether the 'duty drawback' received by the assessee constituted inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chemicals Ltd. 7.5 The Madras High Court, on the other hand, held in the case of Jameel Leathers Uppers, that it was not the industrial undertaking which yielded the income by way of 'cash compensatory support', 'duty drawback' and 'import entitlements', but it was the scheme of the Government which made it possible for the assessee to receive these amounts and the existence of such a scheme was not an essential part of the industrial undertaking. 7.6 In the case of Sterling Foods, the Supreme Court observed as under: We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become 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 is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extra profit; which manifestly flowed from the DEPB Scheme of the Government and not from the business of the industrial undertaking of the assessee-company. 7.11 The Government has been giving incentives to the exporters in different forms namely 'import entitlement', 'cash assistance', 'duty drawback', 'DEPB Scheme', etc. and the incentive received in each of these forms results in some extra profit in the hands of the assessee. The question is as to what can be said to be the 'source' of that extra profit that arises from the incentive/benefit given by the Government to the exporter-assessee under its various schemes. 7.12 The extra profit, resulting from the various export incentives benefits of the Government, cannot be said to flow directly from the business of the industrial undertaking itself. The 'source' of such extra profit is surely the particular scheme of the Government, under which the export incentive/benefit flows to the assessee in one form or the other. In one case, the assessee received 'cash' straightaway and in another case, the assessee received 'import entitlement' which could be converted into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant facts/material on record and should pass a fresh speaking order with regard to this issue, after giving adequate opportunity of being heard to the assessee. The ground No.2 is decided accordingly. Ground No.3 9. In this ground, it has been contended that the CIT(A) erred in confirming the disallowance out of staff welfare expenses, telephone. expenses, and miscellaneous expenses of Rs. 10,000, Rs. 25,000 and Rs. 25,000 respectively on account of non-business use and for want of verification. 9.1 It was submitted by Shri Inamdar, the learned Authorised Representative that this issue was covered in favour of the assessee by the decisions of the Gujarat High Court in the cases of Sayaji Iron Engg. Co. vs. CIT (2002) 172 CTR (Guj) 339 : (2002) 253 ITR 749 (Guj) and Dinesh Mills Ltd. vs. CIT (2002) 173 CTR (Guj) 478 : (2002) 254 ITR 673 (Guj). 9.2 We have considered the rival submissions in the light of material on record and the precedents cited. The assessee had debited Rs. 22,02,292 on account of telephone expenses out of which the AO disallowed Rs. 50,000 on the ground that personal use of the telephone could not be ruled out. The CIT(A) restricted this disallowance to ..... 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