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TMI Blog2010 (11) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... material found at the time of search, there is no scope of making any additions to already assessed income. The action of Ld. CIT (A) being without any merits or justification requires to be quashed. 2. Learned CIT (A) has further erred in adjudicating only the issue of disallowance of Interest earned on FDR claimed as deduction u/s 80-IB of the Act whereas has not adjudicated on other receipts disallowed by AO that were claimed by the appellant as deduction u/s 80-IB of the Act. Ld. CIT (A) ought to have adjudicated on every issue raised before him by the appellant and ought not to have ignored or overlooked the same. 3. Initiation of penalty proceedings u/s 271(1)(c) is not justified. 4. Initiation of levy of interest u/s 234A, 234B & 234C of the Act is not justified. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal. " 2. Subsequently on 29.10.2010, the assessee raised the following common additional grounds in these three appeals: "The notice issued under section 153A of the Act is bad in law and void ab initio in light of the fact that once the regular ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Sugar Mills v. CIT 161 CTR 241. As regards income under remaining sub-heads, the assessee merely stated that the said income was derived from manufacturing activity. However, the AO did not accept submissions of the assessee on the ground that nature of any income does not change by virtue of its usage. Accordingly, while distinguishing the decision relied upon on behalf of the assessee, the AO denied the claim for deduction u/s 80-IB of the Act on the aforesaid income in these three assessment years. 5. On appeal, the ld. CIT(A) has decided the issue in the AY 2000-01 as under:- "2. The only effective issue raised in this Appeal is that the AO was not justified in disallowing Rs. 79,538/- invoking the provisions of section 80-IB of the Income-tax Act, 1961, being 30% of Rs. 2,65,128/-. This disallowance was made on the basis that income of Excess Provision for IT (Rs.28,773/-), Insurance Claim on Printer (Rs.2,120/-), Interest on FDR (Rs.2,30,355/-) and Miscellaneous Income (Rs.3,880/-) do not form part of manufacturing income eligible for deduction u/s 80-IB. Learned Counsel contended that the Assessing Officer cannot question the items already allowed during the course of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it likes such as investment in Land, Property investments, Investment in Securities etc. It is under no obligation to utilize interest income to reduce liability to pay interest to creditors so as to reduce interest which formed part of actual cost of machinery as was held in case of CIT v. Karnal Coop. Sugar Mills Ltd. (243 ITR 2) relied upon by Learned Counsel. Hence, facts of the present case are different from the facts of the case of CIT v. Karnal Coop. Sugar Mills Ltd. (243 ITR 2) relied upon by Learned Counsel. Therefore, ratio of this judgment is not applicable e facts of the present case. Hence, the deduction u/s 80-IB is allowable only in respect of profits and gains derived by the assessee from manufacturing activities only and not in respect of each and every item of income assessable as business income. All Business income of an undertaking does not fall within the ambit of profits derived from manufacturing activities. However, where income accrues from an activity which is Incidental to the main activity then such income would fall within the expression manufacturing activities. Keeping in view of above facts and circumstances of the case, and respectfully relying up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders, the AO disallowed the claim for deduction u/s 80-IB of the Act on the items of receipts included in the other income on the ground the receipts by way of interest on fixed deposits with the bank, insurance , miscellaneous income ,excess provision for IT, sales tax refund, inspection charges, packing charges and scrap were not derived from the business of the industrial undertaking while the ld. CIT(A) decided the issue only in respect of claim for deduction u/s 80-IB of the Act in respect of interest on FDRs without recording any findings on the claim for such deduction in relation to other receipts nor even examined the nature of each of such receipts. As regards exclusion of interest on FDRs from the eligible profits for the purpose of deduction u/s 80-IB of the Act, the leading decision is that of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997], 227 ITR 172 which holds that interest earned on deposits placed for the purposes of obtaining loans for business cannot be treated as business income but only as income from other sources.. The decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172, which was rendered in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Supreme Court in Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 and followed by the Kerala High Court in Cochin Company v. CIT [1978] 114 ITR 822 and by the Bombay High Court in Hindustan Lever Ltd. v. CIT [1980] 121 ITR 951. In our opinion, the word "derive" to be found in s. 2(5)(a)(i) of the relevant Finance Act will have to be given a meaning consistent with what was decided in the above decisions. The words "derived from exports" cannot be accepted as equivalent to "referable to exports" or even indirectly or remotely connected with the exports by a nebulous link. 7.2 Hon'ble Punjab and Haryana High Court in the case of Nahar Exports v. CIT,288 ITR 494 upheld disallowance of claim for deduction u/s 80-IA of the Act on the interest income, in the light of aforesaid decisions of the Apex Court in Sterling Foods [1999] 237 ITR 579 (SC) and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278.. 7.3 For the purpose of claiming deduction under s. 80-IB of the Act, the assessee is not only required to establish that it was business profit of the industrial undertaking, but also to establish that this was a profit 'derived from' the business activity of an industrial undertaking, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 and the question, which was posed for consideration before the apex court was whether the interest on deposits with the Tamil Nadu Electricity Board should be treated as income derived by the industrial undertaking for the purpose of section 80HH or not, and the Hon'ble Supreme Court has observed that section 80HH of the Income-tax Act grants deduction in respect of profits and gains "derived from" an industrial undertaking and the words "derived from" in section 80HH of the Income-tax Act, 1961, must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking. The Supreme Court held that interest derived by the industrial undertaking of the assessee on deposits made with the Tamil Nadu Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the said deduction under section 80HH. In G.T.N. Textiles Ltd. v. Dy. CIT [2005] 279 ITR 72, the Kerala High Court held that interest on ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether or not these receipts were derived from the actual conduct of the business of the industrial undertaking and whether any expenditure was also actually incurred by the assessee in earning these receipts. A mere glance at the observations of the ld. CIT(A) in the impugned order reveals that the ld. CIT(A) have not passed a speaking order. We are of the opinion that the application of mind to the material facts and the arguments should manifest itself in the order. Section 250(6) of the Income Tax Act mandates that the order of the CIT(A) while disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the reason for the decision. As is apparent from the impugned order, in our opinion, the order passed by the ld. CIT(A) is cryptic and grossly violative of one of the facets of the rules of natural justice, namely, that every judicial/quasi-judicial body/authority must pass reasoned order, which should reflect application of mind by the concerned authority to the issues/points raised before it. The requirement of recording of reasons and communication thereof has been read as an integral part of the concept of fair pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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