Case Law Details
RELEVANT PARAGRAPH
8. It is convenient for us to discuss the issue item-wise as given in the above format.
i) The first item is interest earned on bank deposits amounting to Rs. 1,55,000/-. This interest is in the nature of “unearned income” and cannot be treated as income derived from the unit eligible for deduction under Section 80IB. “Derived of income” connotes “an intimate nexus” which is genetic as well as functional.
The Honourable Supreme Court in the case of Pandian Chemicals Ltd. Vs. CIT, 262ITR 278 has discussed the law on the subject and has held that similar interest income cannot be considered as income derived from the eligible industrial unit. In view of the above, we uphold the decision of lower authorities on this point and hold that the bank interest of Rs. 1,55,000/- is not eligible to be considered for the purpose of section 80IB.
ii) Next item is Duty Draw Back amounting to Rs. 26,43,000/ -This amount also cannot be considered for quantifying the deduction under Section 80IB in view of the recent judgement of die Honourable Supreme Court in the case of Liberty India Ltd. Vs. CIT, 317 !TR 218. The lower authorities have rightly excluded the said amount from the ambit of section 80IB.
iii) The next item in the list is the income earned by the assessee on .sale of scrap. Scrap is essentially a remainder portion of the raw-materials/ finished goods. Scrap generates out of the inventories processed or out of the sales rejects or quality rejects etc. It is therefore clear that the scrap integrally forms part of the manufacturing activity of an industrial unit. It is essentially an incidental result of the activities carried on by an industrial undertaking. The Honourable Gujarat High Court in the case of DCIT Vs. Harjivandas Juthabhai Zaveri, 258 ITR 785 has considered a similar issue. The issue considered by the court in that case was the amount received by the assessee for job work, empty soda ash, bardatui, empty barrels, plastic wastes etc. The court held mat those amounts are eligible to be considered for deduction available under Section 801A. Accordingly, we accept the contention of the assessee and direct the assessing authority accordingly.
iv) The next item is sale of export quota amounting to Rs. 1,26,581/- This amount cannot be considered eligible for deduction under Section 801B in view of the judgement of the Honourable Supreme Court in 317 ITR 218,
v) Fifth item is the stock adjustment amounting to Rs. 31,52,697/ -. The stock adjustment amount represents the various personal accounts of parties dealing with the assessee who are liable to pay to the assessee for shortage of goods and materials. Therefore, this income is generated directly from the business turnover of the stock and materials handled by the assessee in its regular activities. Therefore, this income is in the nature of direct income generated from the operational activities of the eligible industrial unit. In fact it is in the nature of “earned income”. But for the manufacturing activities carried on by the assessee scrap would not have generated and in a way, this is additional sales proceeds received by the assessee from various parties. Therefore, there is no reason to exclude this amount from the computation of eligible profits for the purpose of section 80IB. We direct the AO to treat this amount of Rs. 31,52,697/ * as part of the eligible profits,
vi) Sixth item in the list is penal charges by way of interest on delayed deposits of sale proceeds by franchisees/ dealers. The very same issue was considered by the Honourable Gujarat High Court in the case of Nirma Industries Ltd. Vs. DCIT, 283 ITR 402. In that case, the assessee was claiming deduction available under Section 801 on the amount of interest received on late payment of sale consideration. After examining the nature of the said interest, the Court held that the amount was in fact derived from the business carried on by the assessee and accordingly held that these amounts are includible for the purpose of Section 801. The above ratio squarely applies to the present case as well. Accordingly, we direct the AO to treat the amount of Rs. 5,11,688/ – as part of 80IB profits.
vii) The seventh ground is penal charges on deposits. For the reasons stated above, this amount of Rs. 10,970/- is entitled to be considered as part of 8010 profits.
viii) The last item in the list is other income amounting to Rs. 2,24,273/ -. No details are available regarding the nature of the composition of the above amount. Therefore, it is not possible for us to hold that the said amount must be treated as part of Sec. 80IB profits. The lower authorities are justified in excluding the said amount of Rs. 2,24,273/ – while computing the profits eligible for deduction under Section 801.
9. After considering the issue raised by the assessee in respect of computation of deduction under Section 80IB, we may proceed to the disputes raised in the context of deduction claimed under Section 80HHC. Again we have to refer to the extract of various items of income considered for deciding the matters relating to 80IB.
i) The bank interest of Rs. 1,55,000/- cannot be considered as part of export income and therefore not eligible for the benefit of Section 80HHC
it) Duty Draw Back of Rs. 26,43,000/ – has to be considered as part of business profits while computing the deduction under Section 80HHC in the light of the Taxation Laws Amendment Act, 2005, but subject to the conditions prescribed in the amended law. Therefore, this issue is remitted back to the assessing authority to decide the matter in accordance with law.
iii) The next item is income against the sale of scrap amounting to Rs, 1,17,849/-. We have already held in the context of Section 801B that the income against the sale of scrap is essentially income generated from the operational activities of the assessee. Therefore, it is in the nature of business income. Accordingly, the said amount of Rs, 1,17,849/-needs to be treated as part of business profits for the purpose of Section 80HHC This issue is decided in favour of the assessee.
iv) The next issue is the sale of Export Quota amounting to Rs. 1,26,581/-. This issue is also remitted back to the AO at par with our decision on the item of Duty Draw Back discussed above.
v) The next item is stock adjustment income amounting to Rs. 31,52,697/. As already stated in the context of Section 8Q1B, the said income has been derived by way of recoveries made from dealers/show rooms towards discrepancy in the stock of goods manufactured by the new industrial undertaking. As elaborately considered alone in the order, this income is essentially in the nature of operational income of the industrial unit. This is the business income of the assessee. Therefore, it is to be treated as part of business profit for the purpose of section 80HHC.
vi) The next two items are penal charges of Rs. 5,11,688/- and Rs. 10,970/-. These amounts have already been held to be business income while discussing the issues of section 80IB. Accordingly, we direct the AO to treat these two amounts as part of business income for computation under section 80HHC.
vii) The last item is that of other income amounting to Rs. 2,24,273/- In the absence of details, the arguments of the assessee on this amount are rejected.
