The ACIT, Vapi Circle, Vapi V. Hamilton Houseware Pvt.Ltd., Dadra D & NH

ITA 2438/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8659 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 9 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 18-03-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 07-06-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Question of law; Cost of acquisition
• Section: 43B; 80HHC; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD BBENCH BEFORE SHRI G.D. AGARWAL, VICE-PRESIDENT (AZ) AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.2438/AHD/2007 [ASSTT.YEAR 2004-05] ASSTT. COMMISSIONER OF VS HAMILTON HOUSEWARE PVT . LTD. INCOME-TAX, VAPI CIRCLE, SURVEY NO.288/A, NEAR DA DRA VAPI DEMNI ROAD, DADRA, D & NH. PAN NO.AABCD1683Q (APPELLANT) (RESPONDENT) C.O. NO.218/AHD/2007 (ARISING OUT ITA NO.2428/AHD/2007) (ASSESSMENT YEAR: 2004-05) HAMILTON HOUSEWARE PVT. LTD. VS. ASSTT. COMMISSIONE R OF SURVEY NO.288/A, NEAR DADRA INCOME-TAX, VAPI CIRCL E, DEMNI ROAD, DADRA, D& NG VAPI (APPELLANT) (RESPONDENT) ORDER RESERVED FOR PRONOUNCEMENT ON 18/03/10 REVENUE BY :SMT.NEETA SHAH, SR-DR ASSESSEE BY: SHRI MAHUL K PATEL,AR O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THIS APPEAL BY REVENUE AND CROSS OBJECTION (CO) BY ASSESSEE ARE ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX (APP EALS)-VALSAD IN APPEAL NO.CIT(A)/VLS/383/06-07 DATED 13-02-2007. THE ASSES SMENT WAS FRAMED BY ACIT, VAPI U/S.143(3) OF THE INCOME-TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT) VIDE HIS ORDER DATED 29-12-2006 FOR THE ASSESSMENT YEAR 2004-05. 2. THE FIRST ISSUE IN THIS APPEAL OF THE REVENUE IS AGAINST THE ORDER OF CIT(A) DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFF ICER ON ACCOUNT OF BELATED PAYMENTS OF PF AND ESIC AMOUNTING TO RS.24,034/-. ITA NO.2428/AHD./2007 & CO 218/AHD/2007 A.Y.2004-05 ACIT, VAPI CIR. V. HAMILTON HOUSEWARE P. LTD. PAGE 2 3. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE, SHR I MEHUL K PATEL STATED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE IN THE CASE OF CIT V. ALOM EXTRUSIONS LTD. (2009) 319 ITR 306 (SC) AND HONBLE DELHI HIGH COURT IN THE CASE OF P.M. ELECTRONICS LT. (2008) 220 CTR 635 (DEL) WHEREIN, THE HONBLE DELHI HIGH COURT IN PARA-4 HAS HELD AS UNDER:- 4. ON 27 TH NOV., 1998 THE ASSESSEE HAD FILED A RETURN OF INCO ME DECLARING A LOSS OF RS.8,92,888. ON 11 TH MAY, 1999 THE RETURN WAS PROCESSED UNDER S. 143(1)(A) OF THE ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY. ACCORDINGLY, A NOTICE DT. 27 TH SEPT., 1999 UNDER S. 143(2) OF THE ACT WAS ISSUED TO THE ASSESSEE. IN RESPONSE TO THE NOTICE A ND ON EXAMINATION OF THE DETAILS SUBMITTED BY THE ASSESSEE WITH RESPECT TO P ROVIDENT FUND PAYMENTS MADE BOTH ON ACCOUNT OF EMPLOYERS AND EMPLOYEES S HARE REVEALED THAT PAYMENTS IN THE SUM OF RS.17,94,042 WERE LATE AS PE R THE PROVISIONS OF S. 36(1)(VA) R.W S. 2(24)(X) AND S. 43B. CONSEQUENTLY , THE AO DISALLOWED THE DEDUCTION AND ADDED A SUM OF RS.17,94,042 TOWARDS E PF CONTRIBUTION. AND SUBSEQUENTLY DECIDE THIS ISSUE IN PARA-10 TO 14 OF HON'BLE DELHI HIGH COURT, WHICH READ AS UNDER:- 10. IN VIEW OF THE ABOVE, IT IS QUITE EVIDENT THAT THE SPECIAL LEAVE PETITION WAS DISMISSED BY A SPEAKING ORDER AND WHILE DOING SO TH E SUPREME COURT HAD NOTICED THE FACT THAT THE MATTER IN APPEAL BEFORE I T PERTAINS TO A PERIOD PRIOR TO THE AMENDMENT BROUGHT ABOUT IN S. 43B OF THE ACT. T HE AFORESAID POSITION AS REGARDS THE STATE OF THE LAW FOR A PERIOD PRIOR TO THE AMENDMENT TO S. 43B HAS BEEN NOTICED BY A DIVISION BENCH OF THIS COURT IN DHARMENDRA SHARMA (SUPRA) . APPLYING THE RATIO OF THE DECISION OF THE SUPREME COURT IN VINAY CEMENT (SUPRA) A DIVISION BENCH OF THIS COURT DISMISSED TH E APPEALS OF THE REVENUE. IN THE PASSING WE MAY ALSO NOTE THAT A DIVISION BEN CH OF THE MADRAS HIGH COURT IN THE CASE OF CIT VS. NEXUS COMPUTER (P) LTD. BY A JUDGMENT DT. 19 TH AUG., 2008, PASSED IN TAX CASE (APPEAL) NO.1192/200 8 [REPORTED AT (2008) 219 CTR (MAD.) 54 ED.] DISCUSSED THE IMPACT OF BO TH THE DISMISSAL OF THE SPECIAL LEAVE PETITION IN THE CASE OF GEORGE WILLIAMSON (ASSAM) LTD. (SUPRA) AND VINAY CEMENT (SUPRA) AS WELL AS A CONTRARY VIEW OF THE DIVISION BENCH OF ITS OWN COURT IN SYNERGY FINANCIAL EXCHANGE (SUPRA). THE DIVISION BENCH OF THE MADRAS HIGH COURT HAS EXPLAINED THE EFFECT OF T HE DISMISSAL OF A SPECIAL LEAVE PETITION BY A SPEAKING ORDER BY RELYING UPON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF KUNHAYAMMED & ORS.VS. STATE OF KERALA & ANR. (2000) 162 CTR (SC) 97: 119 STC 505 AT P. 526 IN P ARA 40 AND NOTED THE FOLLOWING OBSERVATIONS : IF THE ORDER REFUSING LEAVE TO APPEAL IS A SPEAKIN G ORDER, I.E., GIVES REASONS FOR REFUSING THE GRANT OF LEAVE, THEN THE O RDER HAS TWO IMPLICATIONS. FIRSTLY, THE STATEMENT OF LAW CONTAIN ED IN THE ORDER IS A DECLARATION OF LAW BY THE SUPREME COURT WITHIN THE MEANING OF ART. 141 OF THE CONSTITUTION. SECONDLY, OTHER THAN THE DECLA RATION OF LAW, WHATEVER IS STATED IN THE ORDER ARE THE FINDINGS RE CORDED BY THE SUPREME COURT WHICH WOULD BIND THE PARTIES THERETO AND ALSO THE COURT. TRIBUNAL OR AUTHORITY IN ANY PROCEEDINGS SUB SEQUENT THERETO BY ITA NO.2428/AHD./2007 & CO 218/AHD/2007 A.Y.2004-05 ACIT, VAPI CIR. V. HAMILTON HOUSEWARE P. LTD. PAGE 3 WAY OF JUDICIAL DISCIPLINE, THE SUPREME COURT BEING THE APEX COURT OF THE COUNTRY. BUT, THIS DOES NOT AMOUNT TO SAYING TH AT THE ORDER OF THE COURT. TRIBUNAL OR AUTHORITY BELOW HAS STOOD MERGED IN THE ORDER OF THE SUPREME COURT REJECTING SPECIAL LEAVE PETITION OR T HAT THE ORDER OF THE SUPREME COURT IS THE ONLY ORDER BINDING AS RES JUDICATA IN SUBSEQUENT PROCEEDINGS BETWEEN THE PARTIES. 11. UPON NOTING THE OBSERVATIONS OF THE SUPREME COU RT IN KUNHAYAMMED & ORS. (SUPRA) THE DIVISION BENCH OF THE MADRAS HIGH COUR T IN THE CASE OF NEXUS COMPUTER (P) LTD. (SUPRA) CAME TO THE CONCLUSION THAT THE VIEW TAKEN BY THE SUPREME COURT IN VINAY CEMENT (SUPRA) WOULD BIND THE HIGH COURT AS IT WAS LAW DECLARED BY THE SUPREME COURT UNDER ART. 141 OF THE CONSTITUTION. 12. WE ARE IN RESPECTFUL AGREEMENT WITH THE REASONI NG OF THE MADRAS HIGH COURT IN NEXUS COMPUTER (P) LTD. (SUPRA). JUDICIAL DISCIPLINE REQUIRES US TO FOLLOW THE VIEW OF THE SUPREME COURT IN VINAY CEMEN T (SUPRA) AS ALSO THE VIEW OF THE DIVISION BENCH OF THIS COURT IN DHARMEN DRA SHARMA (SUPRA). 13. IN THESE CIRCUMSTANCES, WE RESPECTFULLY DISAGRE E WITH THE APPROACH ADOPTED BY A DIVISION BENCH OF THE BOMBAY HIGH COUR T IN PAMWI TISSUES LTD. (SUPRA). 14. IN THESE CIRCUMSTANCES INDICATED ABOVE, WE ARE OF THE OPINION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FOR OUR CONSIDER ATION IN THE PRESENT APPEAL. THE APPEAL IS, THUS, DISMISSED. 4. WE FIND THAT THE FACTS ARE CLEARLY ADMITTED THAT ESIC AND PF PAYMENTS ARE MADE BELATEDLY BUT WITHIN THE DUE DATE OF FILING OF RETURNS. THE CIT(A) HAS ONLY DIRECTED THE ASSESSING OFFICER TO VERIFY THE DATES AND ACCORDINGLY ALLOW THE CLAIM OF THE ASSESSEE. WE FIND THAT THE HON'BLE DELHI HIGH COURT IN THE CASE OF P.M. ELECTRONICS LTD. (SUPRA) HAS DECIDED THIS ISSUE OF PAYMENT OF EMPLOY EES CONTRIBUTION TOWARDS PROVIDENT FUND AFTER CONSIDERING THE DECISI ON OF HON'BLE APEX COURT IN THE CASE OF VINAY CEMENT (SUPRA) AND ALSO DISTINGUISHED THE CASE LAW REFERRED BY TH E LD. DR OF BOMBAY HIGH COURT IN PAMWI TISSUES LTD. (SUPRA) . ACCORDINGLY, FOLLOWING DELHI HIGH COURT IN P.M. ELECTRONICS LTD. (SUPRA), WE ALLOW THE CLAIM OF THE ASSESSEE. ACCORDINGLY THIS ISSUE OF THE REVENUES APPEAL IS D ISMISSED. 5. THE NEXT ISSUE IN THIS APPEAL OF THE REVENUE IS AGAINST THE ORDER OF CIT(A) IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE EXCI SE AND SALES TAX, WHILE COMPUTING THE DEDUCTION U/S.80HHC OF THE ACT, FROM TOTAL TURN OVER OF THE ASSESSEE. ITA NO.2428/AHD./2007 & CO 218/AHD/2007 A.Y.2004-05 ACIT, VAPI CIR. V. HAMILTON HOUSEWARE P. LTD. PAGE 4 6. AT THE OUTSET, WE FIND THAT THIS ISSUE IS SQUAR ELY COVERED BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF CIT VS. LAKSHMI MA CHINE WORKS (2007) 290 ITR 667 (SC), WHEREIN THE HONBLE APEX COURT HAS HELD A S UNDER:- 6. THE LEARNED CIT(APPEALS)-V, AHMEDABAD ERRED IN CONFIRMING THAT EXCISE DUTY IS PART OF TOTAL TURNOVER FOR THE PURPOSE OF C ALCULATION OF DEDUCTION U/S.80HHC OF THE ACT. IN FACT, IN CIVIL APPEAL NO.4409 OF 2005, THE ABOV E PROPOSITION HAS BEEN ACCEPTED BY THE ASSESSING OFFICER [SEE : PAGE NO.24 OF THE PAPER BOOK] , IF SO, THEN EXCISE DUTY AND SALES TAX ALSO CANNOT FORM PAR T OF THE TOTAL TURNOVER UNDER SECTION 80HHC(3), OTHERWISE THE FORMULA BECOM ES UNWORKABLE. IN OUR VIEW, SALES TAX AND EXCISE DUTY ALSO DO NOT HAVE AN Y ELEMENT OF TURNOVER WHICH IS THE POSITION EVEN IN THE CASE OF RENT, COM MISSION, INTEREST ETC., IT IS IMPORTANT TO BEAR IN MIND THAT EXCISE DUTY AND SALE S TAX ARE INDIRECT TAXES. THEY ARE RECOVERED BY THE ASSESSEE ON BEHALF OF THE GOVERNMENT. THEREFORE, IF THEY ARE MADE RELATABLE TO EXPORTS, THE FORMULA UNDER SECTION 80HHC WOULD BECOME UNWORKABLE. THE VIEW WHICH WE HAVE TAKEN IS IN THE LIGHT OF THE AMENDMENTS MADE TO SECTION 80HHC FROM TIME TO TIME. AS THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE A SSESSEE, WE DISMISS THIS ISSUE OF THE REVENUES APPEAL. ACCORDINGLY, THIS ISSUE OF TH E REVENUES APPEAL IS DISMISSED. 7. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IS AGAI NST THE ORDER OF CIT(A) IN ALLOWING THE NETTING OF INTEREST FOR DEDUCTION U/S. 80-IB OF THE ACT. 8. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE STA TED THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. SHRI RAM HONDA POWER EQUIP (2007) 289 ITR 475 (DEL) AND DELHI TRIBUNAL IN SPE CIAL BENCH IN THE CASE OF LALSON ENTERPRISE V. DCIT (2004) 82 TTJ 1048 (DEL) (SB). IN VIEW OF THE ABOVE DECISIONS, IT IS CLEAR THAT THE CIT(A) HAS RI GHTLY DIRECTED THE ASSESSING OFFICER TO ALLOWED THE CLAIM OF ASSESSEE AS REGARDS TO NETT ING ONLY. ACCORDINGLY, WE UPHOLD THE ORDER OF CIT(A) AND THIS ISSUE OF THE REVENUES APPEAL IS DISMISSED. 9. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IS AGAI NST THE ORDER OF CIT(A) IN ALLOWING DEDUCTION U/S.80HHC OF THE ACT FOR FOREIGN EXCHANGE GAINS. 10. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT TH IS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY T HE TRIBUNALS DECISION IN THE ITA NO.2428/AHD./2007 & CO 218/AHD/2007 A.Y.2004-05 ACIT, VAPI CIR. V. HAMILTON HOUSEWARE P. LTD. PAGE 5 CASE OF ACIT V. M/S. MITSU LTD. IN ITA NO.2445/AHD/2007 DATED 01-08-2008, WHEREIN THE TRIBUNAL HAS CONSIDERED THE ISSUE AS UN DER:- 43.3 WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THROUGH THE CASE RECORDS. WE HAVE ALSO PERUSED THE ASSESSMENT ORDERS AS WELL AS THE ORDER OF CIT(A). FIRST OF ALL, IT IS NOTICED THAT IN THE CASE OF FOR EIGN EXCHANGE REALIZATION, NO INCENTIVE HAS BEEN GRANTED BY ANY POLICY OF GOVT. O F INDIA. THE CURRENCY BETWEEN TWO COUNTRIES BEING DIFFERENT, THE GOVERNME NT OF THE RESPECTIVE COUNTRIES MANAGE THE PAYMENTS ON A COUNTRY TO COUNT RY BASIS. RESERVE BANK OF INDIA IS THE ADMINISTRATIVE AUTHORITY AND FEMA I S THE ADMINISTRATIVE LAW. THE INDIAN EXPORTERS MAY EXPORT GOODS OR IMPORT GOO DS FOR A PRICE WHICH MAY BE DESIGNATED IN INDIAN RUPEES OR IN FOREIGN CURREN CY. DEPENDING UPON THE DEMAND SUPPLY POSITION ON A GLOBAL BASIS, THE VAL UE OF THE CURRENCY FLUCTUATES ON DIFFERENT DATES. THE INDIAN PARTY HAS TO CALCULATE THEIR EARNINGS OR PAYMENTS IN INDIAN CURRENCY. IN ORDER TO REMOVE THE UNCERTAINTY IN EARNING THE RBI HAS PERMITTED HEDGING OF FUTURE REALIZATION OR PAYMENTS. FEMA AND RELATED RBI REGULATIONS ARE ONLY MECHANISMS TO FACI LITATE RISK MANAGEMENT OF FOREIGN EXCHANGE REALIZATION OR PAYMENTS. THIS IS T O FACILITATE FOREIGN TRADE BY MANAGING THE RISK OF INCREASE OR DECREASE IN THE VA LUE OF REALIZATION/PAYMENTS AND NOT FOR EARNING ANY INCOME. THE ENTIRE MECHANIS M IS NOT A PERMISSIBLE MODE OF EARNING INCOME DUE TO UPS AND DOWNS IN CURR ENCY VALUATION, BUT IS TO MANAGE AND CONTROL THE EROSION IN VALUE ON ACCOUNT OF DIFFERENCE IN EXPORT REALIZATION OR IMPORT PAYMENTS. FEMA OF 1999 DO NOT PERMIT SPECULATION IN FOREIGN EXCHANGE. THE UNDERLYING TRANSACTION IS THE RECEIVABLE/ PAYABLE GENERATED ON ACCOUNT OF EXPORT OR IMPORT TRANSACTIO N. THE AMOUNT RECEIVABLE IS FOR SALE OR PURCHASE OF GOODS. EVEN IF THE AMOUN T IS GIVEN BY THE BANK, AS AN AGENT, IT IS ULTIMATELY A PERMITTED TRANSACTION TO MAXIMIZE THE VALUE OF SALE OF GOODS AS AGAINST A POSSIBLE CURRENCY DETERIORATI ON, OR TO BRING CERTAINTY TO TRANSACTIONS. WITHOUT SALE OF GOODS AN EXPORTER CAN NOT HEDGE OR CLAIM TO HAVE CURRENCY EXPOSURE. THE BANK AS ONLY A MEDIUM, IS AN ADMINISTRATIVE AUTHORITY TO FACILITATE THE MECHANISM. AS AGAINST THE LD. DR S OBSERVATION THAT IT IS NOT ATTRIBUTABLE TO THE BUSINESS WE WOULD LIKE TO SUBMI T THAT IT IS DERIVED FROM THE BUSINESS. THE FOREIGN EXCHANGE REALIZATION IS ULTIM ATELY IN REGARD TO THE VALUE OF GOODS EXPORTED. THE MECHANISM ONLY MAXIMIZES THE VALUE REALIZATION OF EXPORT OF THE INVOLVED FOREIGN CURRENCY, WHICH IS R ECEIVED THROUGH EXPORT ACTIVITY. THE DECISION OF THE HONBE APEX COURT IN THE CASE OF CIT V. STERLING FOODS (1999) 237 ITR 579 (SC), IS WITH RESPECT TO T HE DEDUCTION U/S. 80HH AND NOT WITH RESPECT TO SEC. 80HHC OF THE ACT. IN T HE INSTANT CASE, THE ASSESSEE-COMPANY IS A MANUFACTURER EXPORTER AND HEN CE THE NATURE OF APPLICABLE DEDUCTION IS SEC. 80HHC OF THE ACT. THE SALE REALIZATION PROPOSED TO BE MAXIMIZED IS THE FOREIGN EXCHANGE VALUE OF TH E EXPORT DEALS. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS STATED THAT ANYBODY HAVING EXPOSURE IN FOREIGN CURRENCY CAN ENTER INTO FORWARD CONTRACT. BUT THAT DOES NOT PER SE MAKE THE GAIN FROM FORWARD FOREIGN EXCHANGE CONTRACT AS SPECULATION BUSINESS. ONLY IF FOREIGN EXCHANGE CONTRACT IS ALLO WED TO BE MADE BY ANY PERSON, EVEN WITHOUT EXPOSURE IN FOREIGN CURRENCY W ITHOUT ANY UNDERLYING TRANSACTION OF EXPORT / IMPORT THEN ONLY IT CAN BE SAID TO BE A SPECULATIVE TRANSACTION. THE LD DR RELIED ON THE DECISION OF HO NBLE GUJARAT HIGH COURT IN THE CASE OF CHIMANLAL CHOTALAL V. CIT (1968) 69 IT R 129 (GUJ.) AND THE FACTS OF THAT CASE ARE DIFFERENT FROM THE PRESENT CASE. THE ASSESSEE IN THAT CASE ITA NO.2428/AHD./2007 & CO 218/AHD/2007 A.Y.2004-05 ACIT, VAPI CIR. V. HAMILTON HOUSEWARE P. LTD. PAGE 6 HAD ENTERED INTO FORWARD CONTRACT OF SALE AS A HEDG E FOR THE PURPOSE OF GUARDING HIM AGAINST LOSS THROUGH PRICE FLUCTUATION S IN RESPECT OF HIS FORWARD CONTRACTS OF PURCHASE OF COTTON BALES. WHEREAS IN T HE PRESENT CASE, THE ASSESSEE-COMPANY IS A MANUFACTURER EXPORTER, AND HA S ONLY PARTICIPATED IN THE ADMINISTRATIVE MECHANISM PROVIDED BY THE GOVERN MENT OF INDIA THROUGH FEMA OF 1999 IN ORDER TO REALIZE THE AMOUNT DUE ON SALE OF GOODS. IN VIEW OF THE ABOVE DISCUSSIONS, WE ARE IN FULL AGREEMENT WIT H THE FINDING OF C IT(A) ALLOWING THE CLAIM OF DEDUCTION U/S. 80HHC OF THE A CT. ACCORDINGLY, THIS ISSUE OF THE REVENUES APPEAL IS DISMISSED. 11. AFTER GOING THROUGH THE FACTS OF THE CASE AND T HE DECISION OF THE TRIBUNAL IN THE CASE OF M/S. MITSU LTD. (SUPRA), WE FIND THAT GAIN RECORDED ON ACCOUNT OF FLUCTUATION IN EXCHANGE RATES BEARS THE CHARACTER O F THE INCOME WHICH IS TREATED AS DERIVED FROM THE EXPORT SALES AND IT IS PART AND PA RCEL OF THE EXPORT PROFITS ONLY. WE FIND THAT THE CIT(A) HAS RIGHTLY DIRECTED THE AO TO INCLUDE THE AMOUNT OF ACCOUNT OF GAINS ON CANCELLATION OF FORWARD COVER CONTRACTS OF RS.1,55,554/- WITHIN THE TERM PROFITS FROM BUSINESS WHILE COMPUTING DEDUCTION U/S .80HHC OF THE ACT. WE FIND NO INFIRMITY IN THE FINDINGS OF CIT(A) AND ACCORDINGLY WE UPHOLD THE SAME. THIS ISSUE OF THE REVENUES APPEAL IS DISMISSED. 12. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IS WHE THER IN VIEW OF THE PROVISIONS OF SECTION 80-IA(9) DEDUCTION U/S.S 80HHC OF THE AC T IS TO BE ALLOWED ON PROFIT AND GAINS AS REDUCED BY DEDUCTION U/S.80-IB OR 80-IA OF THE ACT OR NOT. 13. AT THE OUTSET, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY STATED THAT THE ISSUE IS SQUARELY COVERED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE BY THE DECISION OF SPECIAL BENCH, DELHI, OF THIS TRIBUNAL IN THE CA SE OF ACIT V. HINDUSTAN MINT & AGRO PRODUCTS (P) LTD. (2009) 119 ITD 107 (DEL) (SB) WHEREIN, IT WAS HELD : THAT IN VIEW OF THE PROVISIONS OF S. 80-IA(9) DEDU CTION UNDER S. 80HHC IS TO BE ALLOWED ON PROFITS AND GAINS AS REDUCED BY THE DEDU CTION CLAIMED AND ALLOWED UNDER S. 80-IB/80-IA. RESPECTFULLY FOLLOWING THE SA ID DECISION HON'BLE SPECIAL BENCH OF THE TRIBUNAL 14. RESPECTFULLY FOLLOWING THE DECISION OF DELHI TR IBUNAL, WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE BACK TO THE ORDER OF THE AO. THEREFORE, THIS GROUND OF APPEAL OF THE REVENUE IS ALLOWED. ITA NO.2428/AHD./2007 & CO 218/AHD/2007 A.Y.2004-05 ACIT, VAPI CIR. V. HAMILTON HOUSEWARE P. LTD. PAGE 7 15. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IS AGA INST THE ORDER OF CIT(A) NOT GRANTING DEDUCTION U/S. 80-IB ON THE AMOUNT OF PROF IT OF DEPB TO THE ASSESSEE. 16. AT THE OUTSET, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY STATED THAT THE ISSUE IS SQUARELY COVERED AGAINST THE ASSESSEE AND IN FAVOUR OF REVENUE BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF LIBERTY INDIA V. CIT (2009) 317 ITR 218 (SC), WHEREIN THE APEX COURT HAS ANALYZED THE PROVISIONS OF SECTION 80-IB AND 80-IA AND STATED THAT SECTION 80-IB PROVIDES FOR ALLOWING DED UCTION IN RESPECT OF PROFIT & GAINS DERIVED FROM THE ELIGIBLE BUSINESS. THE HONBLE AP EX COURT HELD THAT SECTION 80-IB PROVIDES FOR ALLOWING DEDUCTION IN RESPECT OF PROFI T & GAINS DERIVED FROM ELIGIBLE BUSINESS AND ANALYSIS THE PROVISIONS AS UNDER:- BEFORE ANALYSING SECTION 80-IB, AS A PREFATORY NOT E, IT NEEDS TO BE MENTIONED THAT THE 1961 ACT BROADLY PROVIDES FOR TWO TYPES OF TAX INCENTIVES, NAMELY, INVESTMENT-LINKED INCENTIVE S AND PROFIT- LINKED INCENTIVES. CHAPTER VI-A WHICH PROVIDES FOR INCENTIVES IN THE FORM OF TAX DEDUCTIONS ESSENTIALLY BELONG TO TH E CATEGORY OF PROFIT LINKED INCENTIVES. THEREFORE, WHEN SECTION 80-IA/80-TB REFERS TO PROFITS DERIVED FROM ELIGIBLE BUSINESS, I T IS NOT THE OWNERSHIP OF THAT BUSINESS WHICH ATTRACTS THE INCEN TIVES. WHAT ATTRACTS THE INCENTIVES UNDER SECTION 80-IA/80-IB I S THE GENERATION OF PROFITS (OPERATIONAL PROFITS). FOR EXAMPLE, AN A SSESSEE- COMPANY LOCATED IN MUMBAI MAY HAVE A BUSINESS OF BU ILDING HOUSING PROJECTS OR A SHIP IN NAVA SHEVA. OWNERSHIP OF A SHIP PER SE WILL NOT ATTRACT SECTION 80-IB(6). IT IS THE PROFITS ARISING FROM THE BUSINESS OF A SHIP WHICH ATTRACTS SUB-SECT ION (6). IN OTHER WORDS, DEDUCTION UNDER SUB-SECTION (6) AT THE SPECIFIED RATE HAS LINKAGE TO THE PROFITS DERIVED FROM THE SHIPPIN G OPERATIONS. THIS IS WHAT WE MEAN IN DRAWING THE DISTINCTION BET WEEN PROFIT- LINKED TAX INCENTIVES AND INVESTMENT-LINKED TAX INC ENTIVES. IT IS FOR THIS REASON THAT PARLIAMENT HAS CON FINED THE DEDUC TION TO PROFITS DERIVED FROM ELIGIBLE BUSINESSES MENTIONED IN SUB-S ECTIONS (3) TO (11A) (AS THEY STOOD AT THE RELEVANT TIME). ONE MOR E ASPECT NEEDS TO BE HIGHLIGHTED. EACH OF THE ELIGIBLE BUSIN ESS IN SUB SECTIONS (3) TO (11A) CONSTITUTES A STAND-ALONE ITE M IN THE MATTER OF COMPUTATION OF PROFITS. THAT IS THE REASON WHY T HE CONCEPT OF SEGMENT REPORTING STANDS INTRODUCED IN THE INDIAN ACCOUNTING STANDARDS (IAS) BY THE INSTITUTE OF CHARTERED ACCOU NTANTS OF INDIA (ICAT). ANALYSING CHAPTER VT-A, WE FIND THAT SECTION 80-113 /80-IA ARE A CODE BY THEMSELVES AS THEY CONTAIN BOTH SUBSTANTIVE AS WELL AS PROCEDURAL PROVISIONS. THEREFORE, WE NEED TO EXAMIN E WHAT THESE PROVISIONS PRESCRIBE FOR COMPUTATION OF PROFITS OF THE ELIGIBLE BUSINESS. IT IS EVIDENT THAT SECTION 80-IB PROVIDE S FOR ALLOWING OF DEDUCTION IN RESPECT OF PROFITS AND GAINS DERIVED F ROM THE ELIGIBLE BUSINESS. THE WORDS DERIVED FROM ARE NARROWER IN CONNOTATION ITA NO.2428/AHD./2007 & CO 218/AHD/2007 A.Y.2004-05 ACIT, VAPI CIR. V. HAMILTON HOUSEWARE P. LTD. PAGE 8 AS COMPARED TO THE WORDS ATTRIBUTABLE TO. IN OTHE R WORDS, BY USING THE EXPRESSION DERIVED FROM, PARLIAMENT INT ENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGREE. IN THE PRESENT BATCH OF CASES, THE CONTROVERSY WHICH ARISES FOR DETERMINATI ON IS: WHETHER THE DEPB CREDIT/DUTY DRAWBACK RECEIPT COMES WITHIN THE FIRST DEGREE SOURCES? ACCORDING TO THE ASSESSEE(S), DEPB CREDIT/DUTY DRAWBACK RECEIPT REDUCES THE VALUE OF PURCHASES (CO ST NEUTRALIZATION), HENCE, IT COMES WITHIN FIRST DEGRE E SOURCE AS IT INCREASES THE NET PROFIT PROPORTIONATELY. ON THE OT HER HAND, ACCORDING TO THE DEPARTMENT, DEPB CREDIT/DUTY DRAWB ACK RECEIPTS DO NOT COME WITHIN FIRST DEGREE SOURCE AS THE SAID INCENTIVES FLOW FROM THE INCENTIVE SCHEMES ENACTED BY THE GOVERNMEN T OF INDIA OR FROM SECTION 75 OF THE CUSTOMS ACT, 1962. HENCE, ACCORDING TO THE DEPARTMENT, IN THE PRESENT CASES, THE FIRST DEG REE SOURCE IS THE INCENTIVE SCHEME/PROVISIONS OF THE CUSTOMS ACT. IN THIS CONNECTION, THE DEPARTMENT PLACES HEAVY RELIANCE ON THE JUDGMENT OF THIS COURT IN STERLING FOODS [1999) 237 ITR 579 . THEREFORE, IN THE PRESENT CASES, IN WHICH WE ARE RE QUIRED TO EXAMINE THE ELIGIBLE BUSINESS OF AN INDUSTRIAL UNDE RTAKING, WE NEED TO TRACE THE SOURCE OF THE PROFITS TO MANUFACT URE. (SEE CIT V. KIRLOSKAR OIL ENGINES LTD. REPORTED IN [1986] 157 I TR 762.) CONTINUING OUR ANALYSIS OF SECTION 80-IA/80-IB IT M AY BE MENTIONED THAT SUB-SECTION (13) OF SECTION 80-LB PR OVIDES FOR APPLICABILITY OF THE PROVISIONS OF SUB-SECTION (5) AND SUB-SECTIONS (7) TO (12) OF SECTION 80-IA, SO FAR AS MAY BE, APP LICABLE TO THE ELIGIBLE BUSINESS UNDER SECTION 80-LB. THEREFORE, A T THE OUTSET, WE STATED THAT ONE NEEDS TO READ SECTIONS 80-I, 80-IA AND 80-IB AS HAVING A COMMON SCHEME. ON A PERUSAL OF SUB-SECTION (5) OF SECTION 80-LA, IT IS NOTICED THAT IT PROVIDES FOR T HE MANNER OF COMPUTATION OF PROFITS OF AN ELIGIBLE BUSINESS. ACC ORDINGLY, SUCH PROFITS ARE TO BE COMPUTED AS IF SUCH ELIGIBLE BUSI NESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. THEREFORE, THE DE VICES ADOPTED TO REDUCE OR INFLATE THE PROFITS OF ELIGIBL E BUSINESS HAVE GOT TO BE REJECTED IN VIEW OF THE OVERRIDING PROVIS IONS OF SUBSECTION (5) OF SECTION 80-IA, WHICH ARE ALSO REQ UIRED TO BE READ INTO SECTION 80-TB. (SEE SECTION 80-IB(13)). W E MAY REITERATE THAT SECTIONS 80-I, 80-IA AND 80-IB HAVE A COMMON SCHEME AND IF SO READ IT IS CLEAR THAT THE SAID SEC TIONS PROVIDE FOR INCENTIVES IN THE FORM OF DEDUCTION(S) WHICH ARE LI NKED TO PROFITS AND NOT TO INVESTMENT. ON AN ANALYSIS OF SECTIONS 8 0-IA AND 80-IB IT BECOMES CLEAR THAT ANY INDUSTRIAL UNDERTAKING, W HICH BECOMES ELIGIBLE ON SATISFYING SUB-SECTION (2), WOULD BE EN TITLED TO DEDUCTION UNDER SUB-SECTION (1) ONLY TO THE EXTENT OF PROFITS DERIVED FROM SUCH INDUSTRIAL UNDERTAKING AFTER SPEC IFIED DATE(S). HENCE, APART FROM ELIGIBILITY, SUB-SECTION (1) PURP ORTS TO RESTRICT THE QUANTUM OF DEDUCTION TO A SPECIFIED PERCENTAGE OF PROFITS. THIS IS THE IMPORTANCE OF THE WORDS DERIVED FROM I NDUSTRIAL UNDERTAKING AS AGAINST PROFITS ATTRIBUTABLE TO IN DUSTRIAL UNDERTAKING. ITA NO.2428/AHD./2007 & CO 218/AHD/2007 A.Y.2004-05 ACIT, VAPI CIR. V. HAMILTON HOUSEWARE P. LTD. PAGE 9 DEPB IS AN INCENTIVE. IT IS GIVEN UNDER THE DUTY EX EMPTION REMISSION SCHEME. ESSENTIALLY, IT IS AN EXPORT INCE NTIVE. NO DOUBT, THE OBJECT BEHIND DEPB IS TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY PAYMENT ON THE IMPORT CONTENT OF EXPOR T PRODUCT. THIS NEUTRALIZATION IS PROVIDED FOR BY CREDIT TO CU STOMS DUTY AGAINST EXPORT PRODUCT. UNDER DEPB, AN EXPORTER MAY APPLY FOR CREDIT AS A PERCENTAGE OF THE FOB VALUE OF EXPORTS MADE IN FREELY CONVERTIBLE CURRENCY. CREDIT IS AVAILABLE ONLY AGAI NST THE EXPORT PRODUCT AND AT RATES SPECIFIED BY THE DGFT FOR IMPO RT OF RAW MATERIALS, COMPONENTS, ETC., DEPB CREDIT UNDER THE SCHEME HAS TO BE CALCULATED BY TAKING INTO ACCOUNT THE DEEMED IMPORT CONTENT OF THE EXPORT PRODUCT AS PER BASIC CUSTOMS DUTY AND SPECIAL ADDITIONAL DUTY PAYABLE ON SUCH DEEMED IMPORTS. THE REFORE, IN OUR VIEW, DEPB/DUTY DRAWBACK ARE INCENTIVES WHICH F LOW FROM THE SCHEMES FRAMED BY CENTRAL GOVERNMENT OR FROM SECTIO N 75 OF THE CUSTOMS ACT, 1962, HENCE, INCENTIVES PROFITS ARE NO T PROFITS DERIVED FROM THE ELIGIBLE BUSINESS UNDER SECTION 80 -113. THEY BELONG TO THE CATEGORY OF ANCILLARY PROFITS OF SUCH UNDERTAKINGS. THE NEXT QUESTION IS WHAT IS DUTY DRAWBACK? SECTI ON 75 OF THE CUSTOMS ACT, 1962, AND SECTION 37 OF THE CENTRAL EX CISE ACT, 1944, EMPOWER THE GOVERNMENT OF INDIA TO PROVIDE FO R REPAYMENT OF CUSTOMS DUTY AND EXCISE DUTY PAID BY AN ASSESSEE . THE REFUND IS OF THE AVERAGE AMOUNT OF DUTY PAID ON MATERIALS OF ANY PARTICULAR CLASS OR DESCRIPTION OF GOODS USED IN TH E MANUFACTURE OF EXPORT GOODS OF SPECIFIED CLASS. THE RULES DO NO T ENVISAGE A REFUND OF AN AMOUNT ARITHMETICALLY EQUAL TO CUSTOMS DUTY OR CENTRAL EXCISE DUTY ACTUALLY PAID BY AN INDIVIDUAL IMPORTER-CUM- MANUFACTURER. SUB-SECTION (2) OF SECTION 75 OF THE CUSTOMS ACT REQUIRES THE AMOUNT OF DRAWBACK TO BE DETERMINED ON A CONSIDERATION OF ALL THE CIRCUMSTANCES PREVALENT IN A PARTICULAR TRADE AND ALSO BASED ON THE FACTS SITUATION RELEVAN T IN RESPECT OF EACH OF VARIOUS CLASSES OF GOODS IMPORTED. BASICALL Y, THE SOURCE OF THE DUTY DRAWBACK RECEIPT LIES IN SECTION 75 OF THE CUSTOMS ACT AND SECTION 37 OF THE CENTRAL EXCISE ACT. ANALYSING THE CONCEPT OF REMISSION OF DUTY DRAWBACK AND DEPB, WE ARE SATISFIED THAT THE REMISSION OF DUTY IS ON A CCOUNT OF THE STATUTORY/POLICY PROVISIONS IN THE CUSTOMS ACT/SCHE ME(S) FRAMED BY THE GOVERNMENT OF INDIA. IN THE CIRCUMSTANCES, W E HOLD THAT PROFITS DERIVED BY WAY OF SUCH INCENTIVES DO NOT FA LL WITHIN THE EXPRESSION PROFITS DERIVED FROM INDUSTRIAL UNDERTA KING IN SECTION 80-LB. SINCE RELIANCE WAS PLACED ON BEHALF OF THE ASSESSEE (S) ON AS-2 WE NEED TO ANALYSE THE SAID STANDARD. AS-2 DEALS WITH VALUATION OF INVENTORIES. INVENTORI ES ARE ASSETS HELD FOR SALE IN THE COURSE OF BUSINESS; IN THE PRO DUCTION FOR SUCH ITA NO.2428/AHD./2007 & CO 218/AHD/2007 A.Y.2004-05 ACIT, VAPI CIR. V. HAMILTON HOUSEWARE P. LTD. PAGE 10 SALE OR IN THE FORM OF MATERIALS OR SUPPLIES TO BE CONSUMED IN THE PRODUCTION. INVENTORY SHOULD BE VALUED AT THE LOWER OF COST A ND NET REALIZABLE VALUE (NRV). THE COST OF INVENTORY SHO ULD COMPRISE ALL COSTS OF PURCHASE, COSTS OF CONVERSION AND OTHE R COSTS INCLUDING COSTS INCURRED IN BRINGING THE INVENTORY TO THEIR PRESENT LOCATION AND CONDITION. THE COST OF PURCHASE INCLUDES DUTIES AND TAXES (OTH ER THAN THOSE SUBSEQUENTLY RECOVERABLE BY THE ENTERPRISE FROM THE TAXING AUTHORITIES), FREIGHT INWARDS AND OTHER EXPENDITURE DIRECTLY ATTRIBUTABLE TO THE ACQUISITION HENCE, TRADE DISCOU NTS, REBATE, DUTY DRAWBACK, AND SUCH SIMILAR ITEMS ARE DEDUCTED IN DETERMINING THE COSTS OF PURCHASE. THEREFORE, DUTY DRAWBACK, REBATE, ETC., SHOULD NOT BE TREATED AS ADJUSTMENT ( CREDITED) TO THE COST OF PURCHASE OR MANUFACTURE OF GOODS. THEY SHOU LD BE TREATED AS SEPARATE ITEMS OF REVENUE OR INCOME AND ACCOUNTE D FOR ACCORDINGLY (SEE PAGE 44 OF THE INDIAN ACCOUNTING S TANDARDS AND GAAP BY DOLPHY DSOUZA). THEREFORE, FOR THE PURPOSE S OF AS-2, CENVAT CREDITS SHOULD NOT BE INCLUDED IN THE COST O F PURCHASE OF INVENTORIES. EVEN THE INSTITUTE OF CHARTERED ACCOUN TANTS OF INDIA (1CM) HAS ISSUED GUIDANCE NOTE ON ACCOUNTING TREATM ENT FOR CENVAT/MODVAT UNDER WHICH THE INPUTS CONSUMED AND T HE INVENTORY OF INPUTS SHOULD BE VALUED ON THE BASIS O F PURCHASE COST NET OF SPECIFIED DUTY ON INPUTS (I.E., DUTY RE COVERABLE FROM THE DEPARTMENT AT A LATER STAGE) ARISING ON ACCOUNT OF REBATES, DUTY DRAWBACK, DEPB BENEFIT, ETC. PROFIT GENERATION COULD BE ON ACCOUNT OF COST CUTTING, COST RATIONALIZATION, BUSI NESS RESTRUCTURING, TAX PLANNING ON SUNDRY BALANCES BEIN G WRITTEN BACK, LIQUIDATION OF CURRENT ASSETS, ETC. THEREFORE, WE A RE OF THE VIEW THAT THE DUTY DRAWBACK, DEPB BENEFITS, REBATES, ETC ., CANNOT BE CREDITED AGAINST THE COST OF MANUFACTURE OF GOODS D EBITED IN THE PROFIT AND LOSS ACCOUNT FOR PURPOSES OF SECTION 80- IA/80-IB AS SUCH REMISSIONS (CREDITS) WOULD CONSTITUTE INDEPEND ENT SOURCE OF INCOME BEYOND THE FIRST DEGREE NEXUS BETWEEN PROFIT S AND THE INDUSTRIAL UNDERTAKING. AS THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE R EVENUE BY THE ABOVE DECISION OF HONBLE APEX COURT, WE ALLOW THIS ISSUE OF THE REVE NUES APPEAL. NOW WE WILL TAKE UP ASSESSEES CO NO.218/AHD/2007. 17. IN THE ASSESSEES CO., THE GROUND NOS 1 TO 7 ARE SUPPORTIVE OF THE ORDER OF CIT(A) AND ACCORDINGLY REQUIRE NO ADJUDICATION. ITA NO.2428/AHD./2007 & CO 218/AHD/2007 A.Y.2004-05 ACIT, VAPI CIR. V. HAMILTON HOUSEWARE P. LTD. PAGE 11 18. THE GROUND NOS. 8 TO 10 IN THIS CO OF THE ASSESSEE ARE AGAINST THE ORDER O F CIT(A) CONFIRMING THE DISALLOWANCE OF EXPENSES OF P RODUCT DEVELOPMENT AND DESIGN CHARGES AT RS.72,000/-, OUT OF REPAIR & MAINTENANCE OF FURNITURE AT RS.1,38,583/- AND THE PRELIMINARY AND PRE-OPERATIVE EXPENSES AT RS.75 ,727/-. 19. AS REGARDS TO PRODUCT DEVELOPMENT AND DESIGN CH ARGES, WE FIND THAT CIT(A) HAS ALREADY ALLOWED DEPRECIATION ON THESE EXPENDITU RES TREATING THE SAME AS CAPITAL IN NATURE REASON BEING THAT THE PURCHASES ARE MADE OF DICE WHICH EXISTS IN SEPARATE BLOCK. WE FIND NO REASON TO INTERFERE WITH THIS FI NDING. AS REGARDS TO REPAIR & MAINTENANCE OF FURNITURE, THE CIT(A) HAS ALREADY AL LOWED DEPRECIATION ON THE PURCHASE OF FURNITURE AND THERE IS NO INFIRMITY IN THE SAME. AS REGARDS TO THE DISALLOWANCE OF PRELIMINARY AND PRE-OPERATIVE EXPEN SES, THE CIT(A) HAS CATEGORICALLY RECORDED A FINDING THAT U/S.35D OF THE ACT THE ASSE SSEE IS ELIGIBLE ONLY FOR SPECIFIED EXPENDITURE AND THE EXPENSES CLAIMED DOES NOT FALL WITHIN THE SCOPE OF THIS SECTION AND ACCORDINGLY WE FIND NO INFIRMITY IN THE ORDER O F CIT(A). ACCORDINGLY, THESE GROUNDS OF ASSESSEES CO ARE DISMISSED. 20. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOWED A ND THAT OF ASSESSEES CO IS DISMISSED. ORDER PRONOUNCED ON THIS DAY OF 26 TH MARCH,2010 SD/- SD/- ( G.D.AGARWAL ) ( MAHAVIR SINGH ) (VICE PRESIDENT) (JUDICIAL MEMBER) AHMEDABAD, DATED :26/03/2010 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- VALSAD 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD