TMI Blog2011 (1) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... im under section 80-IC of the income-tax Act made by the appellant; 2. That the ld. CIT ( Appeals ) has grossly erred in misunderstanding and wrongly applying the provisions of law for the purposes of section 80-IC of the Income-tax Act made by the appellant; 3. That the ld. CIT ( Appeals ) ought to have appreciated that the maximum amount of disallowance of claim under section 80-IC could not exceed the amount of claim made by the appellant under that section amounting to Rs. 10,79,096; 4. That the confirmation of the order of the assessing officer by the CIT ( Appeals ) in disallowing a sum of Rs. 1,05,09,877 as against the actual claim of Rs. 10,79,096 is based on misapplication of mind by the CIT ( Appeals ) and grossly wrong in law and on facts; 5. That the CIT ( Appeals ) ought to have held that the sum of Rs. 1,05,09,877 has been derived from the business of manufacturing activities and therefore was eligible for computing the claim under section 80-IC of the Income-tax Act; 6. That the reliance by the CIT ( Appeals ) on the decision of the Hon'ble Supreme Court in the case of Liberty India Ltd. v. CIT is erroneous and in fact, the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee received Rs. 1,05,09,877 on account of standing charges on which deduction under section 80-IC of the Act has been claimed. 4. As regards eligibility of deduction under section 80-IC it was submitted by the assessee that the standing charges are mechanism of balancing the production cost in relation to normatic production agreed by HLL. Since the standing charges were payable only when sale decreased from normatic level and selling prices reduced when sale increased than the normatic production. Therefore, the standing charges are paid under a mechanism to increase and decrease the selling price to cover the fixed expenses. Hence, the nature of standing charges could be said as part of selling price of the product manufactured to cover the fixed cost incurred by the company while there was drop in normatic production volume. It was also submitted that standing charges were in the nature of reimbursement of fixed cost of production in relation to unit which could not be recovered due to drop in production volume from stipulated normatic level and therefore, the amount received on this account amounts to reduction of expenses and instead of showing in the income sid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant from Hindustan Lever Limited is on account of compensation for less than minimum guarantee of buying of goods from the eligible undertaking. The profits belong to the category of ancillary profit of such undertaking. The standing charges cannot be treated as sale consideration and are treated as separate items of income and are accounted for accordingly in the Profit and Loss account. Therefore, the profit belongs to the category of ancillary profit and not a direct profit from the manufacturing which is envisaged under section 80-IC. In the case under consideration it is an admitted fact that the appellant was receiving standing charges from Hindustan Lever Ltd. which are in the nature of compensation for "idle time" and "conversion cost". Thus, the payment received on account of standing charges by no stretch of imagination can be said to be derived from manufacturing. The AO has given cogent reason for making the disallowance. The Hon'ble Apex court in the case of Liberty India v. CIT ( supra ) has held that in order to be eligible for deduction under section 80-IA/80-IB, there has to be first degree income which is directly derived from the manufacturing. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C is not allowable. 7. We have heard both the parties and gone through the material available on record. Under section 80-IC where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2) the assessee will be eligible for deduction from such profits and gains to the extent specified in sub-section (3) of section 80-IC of the Act. The contention of the assessee is that standing charges received are in the nature of first degree income and, therefore, in view of decision of Hon'ble Supreme Court in the case of Liberty India (supra) the assessee is eligible for deduction under section 80-IC of the Act. There is no dispute that the assessee is eligible for deduction under section 80-IC. The only dispute is whether the standing charges have been derived from any business referred to in sub-section (2) of section 80-IC. Sub-section (2) applies to any undertaking or enterprise, which has begun to manufacture or produce any article or thing, not being any article or thing specified in thirteenth schedule or which manufactures or produces any article or thing, not being any article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be required for the purpose of industrial undertaking, the deposit required for its supply is a step removed from the business of industrial undertaking. It was held by the Hon'ble Court that the interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profit or gains derived by undertaking for the purpose of special deduction under section 80-HH of the Act. 9. In the case of Liberty India v. CIT ( supra ) Hon'ble Supreme Court held that section 80-IB provides for allowing of deduction in respect of profits and gains derived from eligible business. The connotation of words "derived from" is narrower as compared to that of words "attributable to". By using the expression "derived from" Parliament intended to cover sources not beyond the first degree. 10. Applying the ratio of decisions of Hon'ble Supreme Court referred to above to present case we find that the standing charges received by the assessee are reimbursement of expenses incurred by the assessee during idle p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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