TMI Blog2009 (12) TMI 649X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income-tax (Appeals) rightly held that it was not derived from any goods or services produced by the said unit and that it arose from the absence of any goods having been produced and supplied by the Daman unit. The ratio of Liberty (2009 - TMI - 34471 - SUPREME COURT) applied squarely, decision in favour of the Revenue holding that Rs.44,45,508 received as advance from the customers and forfeited by the assessee would not be eligible for deduction under section 80-IA of the Act. The appeal stands disposed of in the aforesaid manner - 251 of 2008 - - - Dated:- 23-12-2009 - SIKRI A. K., SIDDHARTH MRIDUL, JJ. JUDGMENT A. K. Sikri J.- 1. This appeal was heard on the following two questions of law : "(i) Whether, on the facts of the present case, the Tribunal was justified in law in allowing deduction under section 80-IA of the Act in disregard of the fact that the activity carried on by the assessee did not qualify as 'manufacturing activity' for the purpose of section 80-IA ?" (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the incidental busi- ness income derived by the assessee in the shape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own independent manufacturing unit at Noida to manufacture control panels required by its Daman unit. 5. It is contended that the assembly of components involves coupling and aligning with the engine and alternator. This is a matter of great skill and technical expertise. It is carried out manually. The assessee has on its rolls qualified engineers, technicians and electricians to perform this job. If the engine and alternator are not coupled properly, there could be server vibra- tion when the generating set is run, and this can damage the engine, the alternator and other components that are fitted in the DG set. Chain pulley blocks are used to lift the engine and the alternator at the time of coupling, as these are very heavy components. After the coupling is done, the engine and the alternator are mounted on a base frame. The base frame is a solid iron channel, designed and cut to suit the type of DG set to be assembled. It has to be strong not only to support the weight of the DG set mounted on it, but also to withstand the pressure when the DG set is run. Grooves are made in the base frame. The engine and the alternator are affixed to the base frame by means of nut and bol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the question in the affirmative, in favour of the assessee, the court explained the expression 'manufacture' as under : '13. The word "manufacture" has not been defined in the Act. In the absence of a definition of the word "manufacture" it has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to a manufacturing activity. 14. This court while determining as to what would amount to a manufacturing activity, held in CST v. Pio Food Packers [1980] 46 STC 63 ; [1980] Supp. SCC 174 that the test for determination whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity, but is recognized in the trade as a new and distinct commodity. It was observed : (SCC p.176, paragraph 5) (page 65 of 46 STC) : "Commonly manufacture is the end result of one or more pro- c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR as collateral security or not and then decide the issue. We are not concerned with this aspect in this appeal. The question as formulated clearly shows that we have to deal with other two aspects of income to find out as to whether those would be eligible for deduction under section 80-IA of the Act. 11. Before we do so, we make it clear that under section 80-IA, the assessee has to prove that the income was "derived from" industrial undertaking inasmuch as distinction is to be made from the income "derived from" and income "attributable to" the industrial undertaking. 12. Now, there is an authoritative pronouncement of the judgment by the Supreme Court in the case of Liberty India v. CIT [2009] 317 ITR 218 on this aspect, in the following words (pages 223-226) : "On the nature of DEPB it was submitted that the amount of DEPB was granted under the Exim-Policy issued in terms of powers conferred under section 5 of the Foreign Trade (Development and Regulation) Act, 1992. According to the appellant(s), the DEPB Scheme is a Duty Remission Scheme which allows drawback of import charges paid on inputs used in the export product. The object being to neutralize the incidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence was granted by the Government on the basis of exports made ; the same were granted gratuitously without antecedent cost having being incurred by the industrial undertaking, unlike duty drawback and DEPB, which had a direct link to the costs incurred by such industrial undertaking by way of payment of customs/excise duty in respect of the duty paid inputs used in the manufacture of goods meant for export and in such circumstances, profit from sale of import entitlements/REP licence was in the nature of windfall and it was in those circumstances, that the apex court held that source of profit on sale of import entitle- ments was not the industrial undertaking but the source was the Export Promotion Scheme. According to the appellant(s), in the case of sale of import entitlements/REP licence, the source was the Scheme framed by Government of India whereas in the case of the DEPB/duty drawback, the source was the fact of payment of duty in respect of inputs consumed/utilized in the manufacture of goods meant for export. That, but for such payments of duty on inputs used in the manufacture of goods meant for exports, industrial under- taking(s) would not be entitled to the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remium." 13. In this case, the interest was received from customers. The Assessing Officer held that the interest income was not derived from the undertaking and, therefore, did not allow deduction under section 80-IA in relation to the said interest. The Tribunal, however, has allowed this claim holding that the said interest income would be incidental or attributable of business of undertaking. 14. In so far as interest on late payment made by the customers is con- cerned, it has the same character as "sales" as held by the Gujarat High Court in the case of Nirma Industries Ltd. v. Deputy CIT [2006] 283 ITR 402 (Guj). 15. No doubt in the present case, it is stated that interest from customers was charged ; however, it is not clear as to whether it was on account of delayed payment. If that is the case, then the view of the Tribunal is correct in law. This aspect came up for consideration before this court in I. T. A. No. 248 of 2009 and other connected cases, entitled as CIT v. Advance Detergents Limited (decided on November 30, 2009) (since reported in [2011] 339 ITR 81 (Delhi) applying the principle of Liberty. It was held that the interest on delayed payment from c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated as "income from other sources".' The Gujarat High Court approached the issue from another angle for arriving at the same conclusion. It observed that when the asses- see enters into a contract for sale of its products it could either stipulate (a) that interest at the specified rate would be charged on the unpaid sale price and added to the outstanding till the point of time of realisation, or (b) that in case of delay the payment for sale of pro- ducts worth Rs. 100 to carry the sale price of Rs. 102 for the first month's delay, Rs. 104 for the second month's delay, Rs. 106 for the third month's delay and so on. If the contention of the Revenue is accepted, merely because the assessee has described the additional sale proceeds as interest in case of contract as per illustration (a) above, such payment would not be profits derived from industrial undertaking, but in case of illustration (b) above, if the payment is described as sale price it would be profits derived from the industrial undertaking. This can never be, because in sum and substance these are only two modes of realising sale consideration, the object being to realise sale proceeds at the earliest and without d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer, it has been explained by the assessee, vide letter dated August 22, 2000, that the company had received in the past at Daman, advances from 12 customers totalling Rs. 44,90,508 for supply of DG sets. These customers failed to take delivery of the DG sets for which had paid the advances. During this year, the assessee-company also refunded advances totalling Rs. 45,000 to two customers from whom advances received in the past were forfeited but upon request from the cus- tomers, these were refunded. The balance of Rs. 44,45,508 was carried over directly to the capital reserve account. The said amount has not been included in the profit and loss account or the computation of income filed. The assessee has alternatively also stated that as the sums forfeited are in respect of the Daman unit, the inclusion of this amount in the income of the assessee will also qualify for deduction under section 80-IA. 18. The Assessing Officer was of the opinion that because of the trading operation, the assessee had become richer by the said amount. It has thus become definite surplus. Thus, though the advances were initially not tax- able, their forfeiture rendered them to be treate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies had made claims and had filed suits does not alter that position. Therefore, the only issue that remains to consider is whether advances written off and appropriated by the assessee constituted its business income." 20. The Commissioner of Income-tax (Appeals) for this purpose took sup- port from the judgment of the Supreme Court in the case of CIT v. T. V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344. 21. The Tribunal reversed the opinion of the Commissioner of Income-tax (Appeals) by simply following its earlier judgment, as is clear from the following discussion : "3.3.2 We have heard both the parties, perusal the records and considered the matter carefully. We have already held following decisions of the Delhi Bench of the Tribunal in paragraph 3.1.3 of this order earlier that business income closely connected to the business of undertaking has to be considered for deduction under section 80-IA even if it is not directly derived from the undertaking. In this case, the Commissioner of Income-tax (Appeals) has himself held that a sum of Rs. 44,45,508 is assessable as business income. This income is no doubt is directly connected to the business of the under- ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the prin- ciple appears to be that if an amount is received in the course of trad- ing transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee." 24. Once it is treated as business income, the interesting question is as to whether deduction could be claimed under section 80-IA of the Act. Here again, we find that the Commissioner of Income-tax (Appeals) rightly held that it was not derived from any goods or services produced by the said unit and that it arose from the absence of any goods having been produced and supplied by the Daman unit. The ratio of Liberty would, therefore, be applied squarely. 25. We thus answer the question in favour of the Revenue holding that Rs.44,45,508 received as advance from the customers and forfeited by the assessee would not be eligible for deduction under section 80-IA of the Act. The appeal stands disposed of in the aforesaid manner. - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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