TMI Blog2007 (10) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... ain 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... others in respect of allowance of deduction under s. 80-IB. 3. The disallowance under s. 80HHC of the Act may again be sub-divided into four categories viz., (i) Non-inclusion of gain on foreign exchange rate fluctuation under EEFC account within profits and gains of business (in this case wholly export business) and, on the other hand, treatment of the same as income from other sources. The years concerned are asst. yrs. 2000-01, 2002-03, 2003-04 and 2004-05. The actions of the AO in this regard have been upheld in the respective first appeals. For the asst. yr. 2001-02, however, the CIT(A) allowed the claim of the assessee for inclusion of gain on foreign exchange rate fluctuation within profits and gains of business and the sale ground of the Department for that year is in respect of this issue and directed against the order of the CIT(A) allowing the claim of the assessee in this regard. (ii) Non-inclusion of interest on EEFC account and also interest on bank FDRs' kept for guarantee purpose in connection with the export business within profits and gains of business and treatment of the same as income from other sources. The issues are common in asst. yrs. 2000-01, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treatment should also be accorded to interest on FDRs maintained by way of guarantee for export operations. Since, furnishing of guarantees is closely linked up with the export business, there is no reason why the interest earned on such FDRs should not be considered as business income of the assessee. Hence, similar decision is being given on this issue also and the grounds taken by the assessee are being allowed for different years. So far as interest earned on ordinary FDRs are concerned, they merely represent placement of surplus money of the business of the assessee in the form of FDRs. Hence, they cannot be considered to be having any direct connection with the business of the assessee. 9. The learned Departmental Representative invited our attention to the decision of the Delhi High Court in the case of CIT vs. Shri Ram Honda Power Equip (2007) 207 CTR (Del) 689 : (2007) 289 ITR 475 (Del) holding that for the purpose of allowance of deduction under s. 80HHC of the Act, 'profit' would relate to only those items of income directly relatable to the business of export. The learned Departmental Representative has also cited a similar decision of Tribunal, Mumbai Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said disallowances. 14. We have heard both the parties and deal with their respective contentions in the paras hereinafter. While dealing with the same we will also deal with several aspects of the issue as discussed in the assessment order. 14.1 The contentions of the assessee before the AO were that it is a partnership firm engaged in the business of manufacture of readymade garments in its industrial undertaking at Malvia Nagar Industrial Area, Jaipur, which was set up in asst. yr. 1994-95. It is noted that the following items of machinery were purchased for the purpose of the said industrial undertaking and were installed therein: (a) Stitching machine 102 (b) Cloth cutting machine 1 (c) Button hole machine 2 (d) Button stitch machine 2 14.2 The AO has found out that the business of the assessee comprises of the following activities: (a) Purchase of grey fabric (b) Getting it dyed and printed (c) Fabrication of garments (d) Embroidery work on garments (e) Export of garments 14.3 The AO also noted that for the purpose of the industrial undertaking, the assessee company used to get the job of dyeing and printing of grey fabri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere all newly acquired and were set up in the industrial undertaking. Furthermore, it is pointed out that the undertaking manufactures articles or things, which are not appearing in the list of Eleventh Schedule and that the said undertaking started operation of manufacture and production prior to 31st March, 1995, although it being a small scale industrial undertaking as per sub-cl. (d), even when production begins within 31st March, 2000, the industrial undertaking shall qualify for deduction. It is further, submitted that requirement of employment of 10 or more workers in the undertaking has also duly been met. In this connection, it has been submitted during the course of hearing of the appeals that besides casual and job workers, the undertaking employed a team of 42 regular workers in one of the years under appeal and in any case, not less than 20 regular workers in the other years. Thus, it is contended that all the requirements of s. 80-IB(2) stood fully satisfied and, therefore, the assessee's claim for deduction under s. 80-IB was within the four corners of law and hence, allowable. 14.6 The AO, in his assessment order dt. 10th Feb., 2004, made disallowance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of the assessee have not been refuted in any way by the AO. 14.8 It has further, been clarified in this regard that, in fact, the assessee firm had neither taken on lease or on rent the premises at 109, Hi-Tech Industrial Centre, Jogeshwari, Mumbai, nor were they employing the contract labour for the purpose of production of article or thing. They have also not paid any remuneration or lease charges for the old machineries as alleged by the AO. They only got their job work done through M/s Mangalam Garments under the direct supervision of the assessee firm by providing them printed fabrics and stitching materials and have themselves performed the other activities, such as, putting buttons, packing, labelling, etc., and thereafter have sold/exported the said goods as per the export orders. On verification, we find the above contentions on behalf of the assessee to be correct. Hence, the question of allowing/denying deduction under s. 80-IB on the alleged unit at Mumbai does not arise. 14.9 So far as the actual industrial undertaking of the assessee at Jaipur is concerned, it is found that the AO, on the basis of the statement of the partners that activity of dyeing and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be interpreted more liberally inasmuch as what is held in reference to other sections may not strictly apply to the case of s. 80-I/80J and that in view of the above, the judgments relied upon by the AO may not strictly apply to the case of the present assessee. 17. It has further been argued by the learned counsel that the Bombay High Court in the case of CIT vs. Tata Locomotive Engineering Co. Ltd. (1968) 68 ITR 325 (Bom) held that assembling of the imported parts into a finished chassis amounted to the manufacture or production of an article within the meaning of s. 15C(2)(ii) of the Indian IT Act, 1922 (corresponding to s. 80J of the present Act). Hence, assembly of parts received in the knocked down condition is also considered to be manufacture. It is submitted that the above judgment has been followed by the Allahabad High Court in the case of U.P. State Agro Industrial Corpn. Ltd., and further, followed by the Mumbai Bench of the Tribunal in the case of Equinox Equipment Systems (P) Ltd. in ITA No. 8498/Mum/2004 for asst. yr. 2001-02. It is further argued that nowhere has it been laid down that in order to claim deduction under s. 80-IB, each and every aspect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. 19. Our attention was also drawn to the CBDT Circular No. 347, dt. 7th July, 1982 [(1982) 31 CTR (TLT) 5 : (1982) 137 ITR (St) 14], which lays down that the Board has accepted the view in certain decisions to the effect that it was not necessary that the assessee itself should carryon the entire activities of manufacture and that it was enough if such activity was carried on with the aid of other units under the supervision of the assessee. 20. In view of the above, 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. 21. Another important aspect that needs to be addressed is that if the said process of manufacture comprises of several activities each capable of being identified as a separate manufacturing activity then what should be the treatment? This issue stands answered by the Bombay High Court in the case of Tata Locomotive Engineering Co. Ltd., wherein it has been held- The assembly stage was a part and parcel of the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kharwar Sons 163 ITR 394 (also 242 ITR 162) Dyeing and printing is an independent manufacturing activity. The judgment merely says that dyeing is an independent manu- facturing activity. However, the case law says nothing about whether the same is to be considered independently while claiming deduction under section 80-IB. This question is suitably answered by discussion at paras 9.13-9.17 (supra). Rajeshwari Mills Ltd. v. CIT 50 ITR 129A Spinning unit set up after closure of weaving unit, is an independent unit for reckoning the period for purposes of section 15C The case is factually different from the case of the appellant in- asmuch as in the stated case spinning unit was set up as a separate unit after closure of the weaving unit. However, the case of the appellant is factually different inasmuch as dyeing, printing and fabrication were carried out simultaneously in the same industrial unit. Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 (SC) New unit established by assessee for manufacturing articles used as intermediate products in old division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be said that they were not in the employment of the assessee The case clearly brings out what the appellant had been emphasizing inasmuch as it clearly says that if the workers were working within the factory premises of the assessee and the assessee controlled their work, they automatically become the employees of the assessee. In this view of the matter all contract labour working for the assessee were his employees as they worked as per his instructions at his factory premises. Apparel Express Co. (P.) Ltd.'s case (supra) Held, that the payments made on piece rate basis to fabricators, dyers, printers, embroiderers, etc., had been treated as payment on piece rate basis to workers by the Tribunal. This showed that these persons were not on the assessee's pay roll. The Tribunal's conclusion that these persons were incidentally connected with the assessee's manufacturing process as employees, had no factual foundation. There was no material in this regard before the Tribunal. On the contrary, they were persons who operated independently and did such jobs not only for the assessee, but also for other persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 under s. 80-IB of the Act. 30. Finally, in view of the above factual and legal positions, it is being held that so far the grounds taken by the assessee regarding eligibility of deduction under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y drawback is derived from the industrial undertaking and, therefore, eligible for relief under s. 80J . 33. The learned counsel for the assessee further pointed out that following the aforesaid decision, the Mumbai Bench of the Tribunal in the case of M/s 1977 Klothings, Unit No. 1 vs. ITO, in ITA No. 3772/Mum/2005 for asst. yr. 2001-02 held that duty drawback received by the assessee forms part of profit derived from industrial undertaking. He also relied upon the decision of the Chandigarh Bench of the Tribunal in the case of ITO vs. Paramount Industrial Corpn. (2007) 109 TTJ (Chd) 295 holding that income earned on account of duty drawback is income earned from industrial undertaking eligible for deduction under s. 80-IB of the Act. So far as the decisions in the cases of CIT vs. Jameel Leathers and Uppers (2000) 246 ITR 97 (Mad) and CIT vs. Vishwanathan Co. (2003) 181 CTR (Mad) 335 : (2003) 261 ITR 737 (Mad), as relied upon by the Revenue are concerned, the learned counsel for the assessee submitted that the decision of the Hon'ble Gujarat High Court discussed above was arrived at after considering the said two decisions. 34. In view of the above legal position, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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