Kiri Dyes & Chemicals (P) Ltd., Ahmedabad V. Income tax Officer, Ward-4(2), Ahmedabad

ITA 389/AHD/2005

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 2029 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 29-10-2009
• Assessment Year: 2001-2002
• Appeal Filed On: 07-02-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NEETA SHAH
• Assessee Lawyers: S N SOPARKAR; M K KAJIARS
• Keywords: Business income; Retrospective amendment; Cost of acquisition; Initiation of penalty proceedings; Liquidation
• Section: 80HHC; 234B; 80IB; 143(1); 80IA; 251; 80HH; 143(2); 192; 139(1); 37; 56; 28

Judgement Text

IN THE INCOME_TAX APPELLATE TRIBUNAL B BENCH, AH MEDABAD BEFORE SHRI H.L.KARWA,JM AND SHRI A.N.PAHUJA,AM ITA NO.389/AHD/2005 (ASSESSMENT YEAR : 2001-02) M/S KIRI DYES & CHEMICALS PVT. LTD.,53, MANEK BAUG SOCIETY, AMBAWADI, AHMEDABAD. [PAN: AAACK9025C] VS. ITO WARD- 4(2) AHMEDABAD. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S.N.SOPARKAR AND SHRI M.K.KAJI,ARS RESPONDENT BY : SMT. NEETA SHAH, DR ( )/ ORDER AN PAHUJA: THIS APPEAL BY THE ASSESSEE AGAINST AN ORDER DATED 30/11/2004 OF THE LD. CIT(A)-VIII, AHMEDABAD, RAISES THE FOLLOWING GR OUNDS: 1. LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CON FIRMING THE ACTION OF A.O. IN DISALLOWING RS.26,256/- BEING THE AMOUNT OF EMPLOYEES CONTRIBUTION RELATING TO ESI & PF BY INVOKING PROVI SIONS OF S.2(24)(X) R.W.S. 36(1)(VA) OF THE ACT. 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF A.O. IN DENYING DEDUCTION UNDER SECTION 8 0IB OF THE ACT ON DEPB INCOME AMOUNTING TO RS.2,60,16,401/- AND DEPB DIFFERENCE OF RS.18,81,687/- ON THE GROUND THAT THE SAME IS NOT D ERIVED FROM THE INDUSTRIAL UNDERTAKING OUT OF ITS MANUFACTURING ACT IVITIES. 3. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF A.O. IN DENYING DEDUCTION UNDER SECTION 8 0IB OF ON BANK INTEREST OF RS.1,05,488/- ON THE GROUND THAT THE SA ME IS NOT DERIVED FROM THE INDUSTRIAL UNDERTAKING OUT OF ITS MANUFACT URING ACTIVITIES. 4. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF A.O. IN DENYING DEDUCTION UNDER SECTION 8 0IB OF THE ACT ON SALES TAX SET OFF AMOUNTING TO RS.54,097/- ON THE G ROUND THAT THE SAME IS NOT DERIVED FROM THE INDUSTRIAL UNDERTAKING OUT OF ITS MANUFACTURING ACTIVITIES. 5. LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN HOLDING THAT SALE PROCEEDS OF DEPB LICENSE AMOUNTING TO RS.2,60,16,40 1/- AND DEPB DIFFERENCE OF RS.18,81,687/- ARE COVERED BY S.28(II IB) AND CONSEQUENTLY DEDUCTION U/S 80HHC OF THE ACT IS AVAI LABLE ONLY TO THE EXTENT OF 90% OF THE SAID DEPB LICENSE. LD. CIT(A) FAILED TO APPRECIATE THAT THE SAID SALE PROCEEDS OF THE DEPB LICENSE ARE COVERED BY ITA NO.389/AHD/2005 2 S.28(IV) OF THE ACT AND THEREFORE DEDUCTION U/S 80H HC OF THE ACT OUGHT TO HAVE BEEN ALLOWED FULLY ON THE SAME. 6. LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF A.O. IN REDUCING PROFITS OF THE BUSINESS ON ACCOUNT OF THE FLOWING ITEMS: SR.NO. ITEM AMOUNT RS. 1 BANK INTEREST RS.1,05,488/- 2 RENT & INTEREST RS.3,032/- 3 SALES TAX SET OFF RS.54,97/- 4 VATAV/KASAR RS.2,59,656/- 5 DISCOUNT INCOME RS.1,57,578/- 6 RATE DIFFERENCE RS.1,45,627/- WHILE CALCULATING DEDUCTION U/S 80HHC OF THE ACT ON THE ERRONEOUS GROUND THAT THESE ITEMS ARE NOT DERIVED FROM THE EX PORT BUSINESS OF THE APPELLANT. ALTERNATIVELY AND WITHOUT PREJUDICE, ONL Y THE NET INCOME UNDER THESE HEADS CAN BE REDUCED FROM THE PROFITS OF THE BUSINE SS. 7. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF ASSESSING OFFICER HOLDING THAT WHILE CALC ULATING THE DEDUCTION UNDER SEC. 80HHC OF THE ACT, IF THE RESULT OF TRADI NG AND MANUFACTURING EXPORT IS LOSS, NO DEDUCTION U/S 80HHC OF THE ACT O N INCENTIVES CAN BE GRANTED. 8. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT S.80IB OF THE ACT IS AN INDEPENDENT SECTION AN D DEDUCTION CLAIMED THEREIN DOES NOT AFFECT THE RIGHT TO CLAIM DEDUCTIO N UNDER ANY OTHER SECTION. THE LEARNED CIT(A) OUGHT TO HAVE ALLOWED D EDUCTION U/S 80HHC AS WELL AS S.80IB OF THE ACT ON THE GROSS TOT AL INCOME. 9. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE LEVY OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT. 10. INITIATION OF PENALTY PROCEEDINGS ARE NOT JUSTI FIED. 2. FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE T HAT RETURN DECLARING NIL INCOME FILED ON 30.10.2001 BY THE ASSESSEE, MANUFACTURING AND EX PORTING DYES/CHEMICALS, AFTER BEING PROCESSED ON 29.8.2002 U/S 143(1) OF THE INCO ME-TAX ACT,1961[HEREINAFTER REFERRED TO AS THE ACT], WAS SELECTED FOR SCRUTIN Y WITH THE ISSUE OF NOTICE U/S 143(2) OF THE ACT ON 30.10.2002.DURING THE COURSE OF ASSES SMENT PROCEEDINGS, THE ITA NO.389/AHD/2005 3 ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASS ESSEE DID NOT DEPOSIT EMPLOYEES CONTRIBUTION TOWARDS PF-RS.23,606/- AND TOWARDS ESI -RS.2,950/- WITHIN THE TIME STIPULATED UNDER THE RELEVANT ENACTMENTS. ACCORDING LY, THE AO ADDED THESE AMOUNTS U/S 2(24)(X) READ WITH SEC.36(1)(VA) OF THE ACT. 3. ON APPEAL, THE LD. CIT(A) UPHELD THE ADDITION OF THE AFORESAID AMOUNT OF RS.26,256/- 4. THE ASSESSEE IS NOW IN APPEAL AGAINST THE AFORE SAID FINDING OF THE LD. CIT(A). AT THE OUTSET, BOTH THE PARTIES AGREED THAT THE ISS UE IS SQUARELY COVERED BY THE DECISION IN THE CASE OF CIT V. P.M.ELECTRONICS LTD. , 220 ITR 635 (DELHI) AND THE AHMEDABAD BENCHES HAVE BEEN FOLLOWING THE SAID DECI SION.. 5. WE HAVE HEARD BOTH THE SIDES AND HAVE GONE THROU GH THE FACTS OF THE CASE. WE FIND THAT HONBLE DELHI HIGH COURT IN THEIR AFO RESAID DECISION IN THE CASE OF P.M.ELECTRONICS LTD.(SUPRA), FOLLOWING THE DECISION OF HONBLE APEX COURT IN THE CASE OF VINAY CEMENT LTD.(SUPRA), ALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE EMPLOYEES CONTRIBUTION TOWARDS PF. IN THE LIGHT OF THE SAID DECISION , WE HAVE NO HESITATION IN HOLDING THAT THE EMPLOYEES CONTRI BUTION TOWARDS PF/ESI HAVING BEEN MADE BY THE ASSESSEE WITHIN THE DUE DATE OF FI LING OF RETURN U/S 139(1) OF THE ACT FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, TH ERE IS NO GROUND FOR DISALLOWING THE SAME. THEREFORE, GROUND NO.1 IN THE APPEAL IS A LLOWED. 6. GROUND NO.2 IN THE APPEAL RELATES TO DEDUCTI ON U/S 80IB OF THE ACT ON THE DEPB INCOME OF RS. 2,60,16,401/- AND DEPB DIFFERENC E OF RS. 18,81,687/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICE D THAT THE ASSESSEEE IN THEIR PROFIT AND LOSS ACCOUNT ACCOUNTED FOR DEPB INCOME O F RS.2,60,16,401/- AND THE DEPB RELATED TO THE TRADING ACTIVITY - RS.14.19 LAC S. ACCORDING TO THE AO, DEPB RECEIPTS WERE NOT AT ALL INCOME DIRECTLY DERIVED F ROM THE INDUSTRIAL ACTIVITY OF THE UNDERTAKING OF THE ASSESSEE WHILE THE ASSESSEE ITSE LF WITHDREW THEIR CLAIM FOR DEDUCTION U/S 80IB ON THE PORTION OF DEPB ATTRIBUTA BLE TO TRADING IN THEIR SUBMISSIONS. THEREFORE,, RELYING UPON THE DECISION IN THE CASE OF CIT VS. STERLING ITA NO.389/AHD/2005 4 FOODS,237 ITR 579(SC), THE AO CONCLUDED THAT DE PB INCENTIVES HAVING BEEN GRANTED BY THE GOVERNMENT FOR THE PROMOTION OF EXPO RTS, DEDUCTION U/S 80IB OF THE ACT IS NOT ADMISSIBLE ON THESE INCENTIVES. 8. ON APPEAL, THE LD. CIT(A) UPHELD THE DISALLOW ANCE OF CLAIM FOR DEDUCTION U/S 80IB OF THE ACT ON THE DEPB INCOME. 9. THE ASSESSEE IS NOW IN APPEAL AGAINST THE AFO RESAID FINDINGS OF THE LD. CIT(A). BEFORE US, BOTH THE PARTIES AGREED THAT THE ISSUE I S SQUARELY COVERED BY THE DECISION DATED 31.8.2009 OF THE HONBLE APEX COURT IN THE CA SE OF M/S LIBERTY INDIA VS. CIT IN A CIVIL APPEAL ARISING OUT OF SLP NO. 5827 OF 2007. 10. WE HAVE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE. ON A SIMILAR ISSUE AS TO WHETHER THE PROFIT FROM DUTY E NTITLEMENT PASSBOOK SCHEME (DEPB) AND DUTY DRAWBACK SCHEME ARE DERIVED FROM T HE BUSINESS OF THE INDUSTRIAL UNDERTAKING AND CONSEQUENTLY ELIGIBLE FOR DEDUCTIO N U/S 80-IB, THE HONBLE APEX COURT OBSERVED THAT THE ACT BROADLY PROVIDES FOR TW O TYPES OF TAX INCENTIVES, NAMELY, INVESTMENT LINKED INCENTIVES AND PROFIT LINKED INCE NTIVES. CHAPTER VI-A ESSENTIALLY BELONGS TO THE CATEGORY OF PROFIT LINKED INCENTIVE S WHILE SS. 80-IA/80-IB REFER TO PROFITS DERIVED FROM ELIGIBLE BUSINESS, IT IS NOT T HE OWNERSHIP OF THAT BUSINESS WHICH ATTRACTS THE INCENTIVES BUT THE GENERATION OF PROFI TS (OPERATIONAL PROFITS) AND EACH OF THE ELIGIBLE BUSINESS IN SUB-SECTIONS (3) TO (11A) CONSTITUTES A STAND-ALONE ITEM IN THE MATTER OF COMPUTATION OF PROFITS. IT WAS FURT HER HELD THAT SS. 80-IB/80-IA ARE A CODE BY THEMSELVES AS THEY CONTAIN BOTH SUBSTANTIVE AS WELL AS PROCEDURAL PROVISIONS. S. 80-IB ALLOWS DEDUCTION OF PROFITS AN D GAINS DERIVED FROM THE ELIGIBLE BUSINESS. THE WORDS DERIVED FROM IS NARROWER IN C ONNOTATION AS COMPARED TO THE WORDS ATTRIBUTABLE TO. BY USING THE EXPRESSION D ERIVED FROM, PARLIAMENT INTENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGREE; THOU GH THE OBJECT BEHIND DEPB ETC IS TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY PAYMENT ON THE IMPORT CONTENT OF EXPORT PRODUCT DEPB CREDIT/DUTY DRAWBACK RECEIPT DO NOT CO ME WITHIN THE FIRST DEGREE SOURCE AS THE SAID INCENTIVES FLOW FROM INCENTIVE S CHEMES ENACTED BY THE GOVERNMENT OR FROM S. 75 OF THE CUSTOMS ACT. SUCH I NCENTIVES PROFITS ARE NOT PROFITS ITA NO.389/AHD/2005 5 DERIVED FROM THE ELIGIBLE BUSINESS U/S 80-IB. THEY ARE ANCILLARY PROFITS OF SUCH UNDERTAKINGS AND EVEN AS PER AS-2 AND THE ICAI GUID ANCE NOTE, DUTY DRAWBACK, DEPB BENEFITS, REBATES ETC. CANNOT BE CREDITED AGAI NST THE COST OF MANUFACTURE OF GOODS BUT HAVE TO BE SHOWN AS AN INDEPENDENT SOURCE OF INCOME BEYOND THE FIRST DEGREE NEXUS BETWEEN PROFITS AND THE INDUSTRIAL UND ERTAKING. THE HONBLE APEX COURT CONCLUDED THAT 16. DEPB IS AN INCENTIVE. IT IS GIVEN UNDER DUTY E XEMPTION REMISSION SCHEME. ESSENTIALLY, IT IS AN EXPORT INCENTIVE. NO DOUBT, T HE OBJECT BEHIND DEPB IS TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY PAYMENT ON THE IMPORT CONTENT OF EXPORT PRODUCT. THIS NEUTRALIZATION IS PROVIDED FOR BY CRE DIT TOCUSTOMS DUTY AGAINST EXPORT PRODUCT. UNDER DEPB, AN EXPORTER MAY APPLY FOR CRED IT AS PERCENTAGE OF FOB VALUE OF EXPORTS MADE IN FREELY CONVERTIBLE CURRENCY. CR EDIT IS AVAILABLE ONLY AGAINST THE EXPORT PRODUCT AND AT RATES SPECIFIED BY DGFT FOR I MPORT OF RAW MATERIALS, COMPONENTS ETC.. DEPB CREDIT UNDER THE SCHEME HAS T O BE CALCULATED BY TAKING INTO ACCOUNT THE DEEMED IMPORT CONTENT OF THE EXPORT PRO DUCT AS PER BASIC CUSTOMS DUTY AND SPECIAL ADDITIONAL DUTY PAYABLE ON SUCH DEEMED IMPORTS. THEREFORE, IN OUR VIEW, DEPB/DUTY DRAWBACK ARE INCENTIVES WHICH FLOW FROM THE SCHEMES FRAMED BY CENTRAL GOVERNMENT OR FROM SECTION 75 OF THE CUSTOM S ACT,1962, HENCE, INCENTIVES PROFITS ARE NOT PROFITS DERIVED FROM THE ELIGIBLE B USINESS UNDER SECTION 80-IB. THEY BELONG TO THE CATEGORY OF ANCILLARYPROFITS OF SUCH UNDERTAKINGS. 17. THE NEXT QUESTION IS WHAT IS DUTY DRAWBACK? S ECTION 75 OF THE CUSTOMS ACT, 1962 AND SECTION 37 OF THE CENTRAL EXCISE ACT, 1944 EMPOWER GOVERNMENT OF INDIA TO PROVIDE FOR REPAYMENT OF CUSTOMS AND EXCISE DUTY PAID BY AN ASSESSEE. THE REFUND IS OF THE AVERAGE AMOUNT OF DUTY PAID ON MAT ERIALS OF ANY PARTICULAR CLASS OR DESCRIPTION OF GOODS USED IN THE MANUFACTURE OF EXP ORT GOODS OF SPECIFIED CLASS. THE RULES DO NOT ENVISAGE A REFUND OF AN AMOUNT ARITHME TICALLY 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 REQUIR ES THE AMOUNT OF DRAWBACK TO BE DETERMINED ON A CONSIDERATION OF ALL THE CIRCUMSTAN CES PREVALENT IN A PARTICULAR TRADE AND ALSO BASED ON THE FACTS SITUATION RELEVANT IN R ESPECT OF EACH OF VARIOUS CLASSES OF GOODS IMPORTED. BASICALLY, THE SOURCE OF DUTY DR AWBACK RECEIPT LIES IN SECTION 75 OF THE CUSTOMS ACT AND SECTION 37 OF THECENTRAL EXC ISE ACT. 18. ANALYSING THE CONCEPT OF REMISSION OF DUTY DRAW BACK AND DEPB, WE ARE SATISFIED THAT THE REMISSION OF DUTY IS ON ACCOUNT OF THE STA TUTORY/POLICY PROVISIONS IN THE CUSTOMS ACT/SCHEME(S) FRAMED BY THE GOVERNMENT OF I NDIA. IN THE CIRCUMSTANCES, WE HOLD THAT PROFITS DERIVED BY WAY OF SUCH INCENTI VES DO NOT FALL WITHIN THE EXPRESSION PROFITS DERIVED FROM INDUSTRIAL UNDERTA KING IN SECTION 80-IB. 19. SINCE RELIANCE WAS PLACED ON BEHALF OF THE ASSE SSEE(S) ON AS-2 WE NEED TO ANALYSE THE SAID STANDARD. ITA NO.389/AHD/2005 6 20. AS-2 DEALS WITH VALUATION OF INVENTORIES. INVEN TORIES ARE ASSETS HELD FOR SALE IN THE COURSE OF BUSINESS; IN THE PRODUCTION FOR SUCH SALE OR IN FORM OF MATERIALS OR SUPPLIES TO BE CONSUMED IN THE PRODUCTION. 21. INVENTORY SHOULD BE VALUED AT THE LOWER OF CO ST AND NET REALIZABLE VALUE (NRV). THE COST OF INVENTORY SHOULD COMPRISE ALL COSTS O F PURCHASE, COSTS OF CONVERSION AND OTHER COSTS INCLUDING COSTS INCURRED IN BRINGIN G THE INVENTORY TO THEIR PRESENT LOCATION AND CONDITION. 22. THE COST OF PURCHASE INCLUDES DUTIES AND TAXES (OTHER THAN THOSE SUBSEQUENTLY RECOVERABLE BY THE ENTERPRISE FROM TAXING AUTHORITI ES), FREIGHT INWARDS AND OTHER EXPENDITURE DIRECTLY ATTRIBUTABLE TO THE ACQUISITIO N. HENCE TRADE DISCOUNTS, REBATE, DUTY DRAWBACK, AND SUCH SIMILAR ITEMS ARE DEDUCTED IN DETERMINING THE COSTS OF PURCHASE. THEREFORE, DUTY DRAWBACK, REBATE ETC.SHOU LD NOT BE TREATED AS ADJUSTMENT (CREDITED) TO COST OF PURCHASE OR MANUFACTURE OF GO ODS. THEY SHOULD BE TREATED AS SEPARATE ITEMS OF REVENUE OR INCOME AND ACCOUNTED F OR ACCORDINGLY (SEE: PAGE 44 OF INDIAN ACCOUNTING STANDARDS & GAAP BY DOLPHY DSOUZ A). THEREFORE, FOR THE PURPOSES OF AS-2, CENVAT CREDITS SHOULD NOT BE INCL UDED IN THE COST OF PURCHASE OF INVENTORIES. EVEN INSTITUTE OF CHARTERED ACCOUNTANT S OF INDIA (ICAI) HAS ISSUED GUIDANCE NOTE ON ACCOUNTING TREATMENT FOR CENVAT/MO DVAT UNDER WHICH THE INPUTS CONSUMED AND THE INVENTORY OF INPUTS SHOULD BE VALU ED ON THE BASIS OF PURCHASE COST NET OF SPECIFIED DUTY ON INPUTS (I.E. DUTY REC OVERABLE FROM THE DEPARTMENT AT LATER STAGE) ARISING ON ACCOUNT OF REBATES, DUTY DR AWBACK, DEPB BENEFIT ETC. PROFIT GENERATION COULD BE ON ACCOUNT OF COST CUTTING, COS T RATIONALIZATION, BUSINESS RESTRUCTURING, TAX PLANNING ON SUNDRY BALANCES BEIN G WRITTEN BACK, LIQUIDATION OF CURRENT ASSETS ETC. THEREFORE, WE ARE OF THE VIEW T HAT DUTY DRAWBACK, DEPB BENEFITS, REBATES ETC. CANNOT BE CREDITED AGAINST THE COST OF MANUFACTURE OF GOODS DEBITED IN THE PROFIT & LOSS ACCOUNT FOR PURPOSES OF SECTIONS 80-IA/80-IB AS SUCH REMISSIONS (CREDITS) WOULD CONSTITUTE INDEPENDENT SOURCE OF IN COME BEYOND THE FIRST DEGREE NEXUS BETWEEN PROFITS AND THE INDUSTRIAL UNDERTAKIN G. 24. IN THE CIRCUMSTANCES, WE HOLD THAT DUTY DRAWBAC K RECEIPT/DEPB BENEFITS DO NOT FORM PART OF THE NET PROFITS OF ELIGIBLE INDUSTRIAL UNDERTAKING FOR THE PURPOSES OF SECTIONS 80I/80-IA/80-IB OF THE 1961 ACT . 10.1. IN THE LIGHT OF AFORESAID DECISION OF THE HO NBLE APEX COURT, WE HOLD THAT DEPB BENEFITS DO NOT FORM PART OF THE NET PROFITS O F ELIGIBLE INDUSTRIAL UNDERTAKING FOR THE PURPOSES OF SECTIONS 80-IB OF THE ACT. THEREFO RE, WE HAVE NO OPTION BUT TO DISMISS GROUND NO.2 OF THE APPEAL 11. GROUND NOS. 3 & 4 RELATE TO DEDUCTION U/S 8 0IB OF THE ACT ON THE INTEREST RECEIVED FROM THE BANK TO THE EXTENT OF RS.1,05,488 /-AND SALES TAX SET OFF OF RS.54,097/-. THE AO CONCLUDED THAT THE INTEREST RE CEIVED FROM THE BANK CANNOT BE ITA NO.389/AHD/2005 7 TREATED AS INCOME WHICH FORM PART OF ELIGIBLE PROFI T FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80IB OF THE ACT, RELYING ,INTER ALIA, . ON THE DECISION IN THE CASE OF PANDIAN CHEMICALS VS. CIT 262 ITR 278(SC) WHEREIN I T WAS HELD THAT INTEREST ON DEPOSIT IS NOT DERIVED FROM BUSINESS UNDERTAKING. L IKEWISE CLAM FOR DEDUCTION ON SALES TAX SET OFF OF RS. 54,070/- WAS ALSO DISALLO WED. 12. ON APPEAL, THE LD. CIT(A) UPHELD THE ACTI ON OF THE AO, FOLLOWING THE APEX COURT DECISIONS REFERRED TO BY THE AO. 13. THE ASSESSEE IS IN APPEAL AGAINST THE AFORES AID FINDINGS OF THE LD. CIT(A). 14. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE. AS REGARDS CLAIM FOR DEDUCTION U/S 80IB OF THE ACT IN RESPECT OF BANK INTEREST ON FIXED DEPOSITS KEPT FOR OBTAINING GUARANTEES OR FOR FURN ISHING WARANTIES, THE LEADING DECISION IS THAT OF THE HON'BLE SUPREME COURT IN TU TICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. [1997] 227 ITR 172 WHICH HOLDS THAT INTEREST EARNED ON DEPOSITS PLACED FOR THE PURPOSES OF OBTAINING LOANS FOR BUSI NESS CANNOT BE TREATED AS BUSINESS INCOME BUT ONLY AS INCOME FROM OTHER SOURC ES. IT WAS FURTHER HELD THAT THE ASSESSEE CANNOT CLAIM ADJUSTMENT OF EXPENDITURE AG AINST INTEREST ASSESSABLE UNDER SECTION 56. SECTION 57 OF THE ACT SETS OUT IN ITS C LAUSES (I) TO (III) THE EXPENDITURES WHICH ARE ALLOWABLE AS DEDUCTION FROM INCOME ASSESS ABLE UNDER SECTION 56. IT IS NOT THE CASE OF THE ASSESSEE THAT THE INTEREST PAYABLE BY IT ON TERM LOANS IS ALLOWABLE AS DEDUCTION UNDER SECTION 57 OF THE ACT.. THE DECISIO N IN TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. [1997] 227 ITR 172 , WHICH WAS RENDERED IN THE CONTEXT OF SECTIONS 56 AND 57, HAS BEEN FOLLOWED IN CIT V. AUT OKAST LTD. [2001] 248 ITR 110 (SC). LIKEWISE, IN CIT V. DR. V. P. GOPINATHAN [200 1] 248 ITR 449 (SC) INTEREST ON FIXED DEPOSITS WAS HELD NOT TO QUALIFY FOR SETTING OFF AGAINST INTEREST ON LOANS BORROWED. THE OTHER DECISIONS ON THE SAME LINES, IN THE CONTEXT OF SECTION 80HHC ARE CIT V. STERLING FOODS [1999] 237 ITR 579 (SC) AND PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 (SC). IN THESE DECISIONS, THE HON'BLE SUPREME COUR T REITERATED THE NEXUS THEORY AND DECLINED TO TREAT S UCH INTEREST EARNED AS BUSINESS INCOME. THE DECISION OF THE MADRAS HIGH COURT IN SO UTH INDIA SHIPPING CORPORATION ITA NO.389/AHD/2005 8 LTD. V. CIT [1999] 240 ITR 24 WAS ALSO RENDERED IN THE CONTEXT OF TREATING CERTA IN RECEIPTS NOT AS BUSINESS INCOME BUT INCOME FROM OTH ER SOURCES FOR THE PURPOSES OF SECTION 56 READ WITH SECTION 57(III) OF THE ACT. IN CASES WHERE THE EXPORTER IS REQUIRED TO MANDATORILY KEEP MONIES IN FIXED DEPOSIT IN ORDE R TO AVAIL OF CREDIT FACILITY FOR THE EXPORT BUSINESS, THE ARGUMENT ON BEHALF OF THE ASSE SSEES IS THAT BUT FOR SUCH A STIPULATION BY THE BANK THERE WAS NO NEED FOR THE E XPORTER TO KEEP THE MONEY IN FIXED DEPOSIT AND THEREFORE, THE INCOME EARNED FROM SUCH FIXED DEPOSITS BEARS A DIRECT NEXUS TO THE BUSINESS ACTIVITY ITSELF. GIVEN THE RE PEATED AFFIRMATION BY THE HON'BLE SUPREME COURT IN THE VARIOUS CASES, WE ARE OF THE O PINION THAT INTEREST EARNED FROM HE BANK, DOES NOT HAVE AN IMMEDIATE NEXUS WITH THE EXPORT BUSINESS OF THE ASSESSEE AND THEREFORE, CAN NOT BE SAID DERIVED FRO M THE BUSINESS OF INDUSTRIAL UNDERTAKING . 14.1 BEFORE THE AO , THE ASSESSEE CLAIMED THAT IN TEREST FROM BANK WAS DERIVED FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING . HOWEV ER, THE AO AND THE LD. CIT(A) , RELIED UPON CERTAIN DECISIONS OF HONBLE SUPREME CO URT AND DECLINED TO ALLOW DEDUCTION U/S 80IB OF THE ACT . THERE IS NO MATERIA L BEFORE US SUGGESTING THAT INTEREST RECEIVED FROM THE BANK WAS DERIVED FROM TH E BUSINESS OF INDUSTRIAL UNDERTAKING. REGARDING THE CLAIM FOR NETTING OFF O F THE INTEREST, THE LD. AR RELIED UPON DECISION OF HONBLE DELHI HIGH COURT IN CIT V S. SHRIRAM HONDA POWER EQUIPMENT LTD.,289 ITR 475(DELHI) IN THE CONTEXT O F DETERMINING BUSINESS PROFITS FOR THE PURPOSE OF SEC. 80HHC OF THE ACT. IN THE SAID D ECISION, HONBLE HIGH COURT LAID DOWN THAT I) AO HAS TO FIRST 'COMPUTE' THE PROFITS OF THE BUS INESS UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION.' IN OTHER WORDS, H E WILL HAVE TO COMPUTE BUSINESS PROFITS, IN TERMS OF THE ACT, BY APPLYING THE PROVI SIONS OF SECTIONS 28 TO 44 THEREOF. (II) IN ARRIVING AT PROFITS OF THE BUSINESS BY THE ABOVE METHOD, THE ASSESSING OFFICER WILL EXCLUDE ALL SUCH INCOMES WHICH PARTAKE OF THE CHARACTER OF 'INCOME FROM OTHER SOURCES' WHICH IN ANY EVENT ARE TREATED UNDER SECTI ONS 56 AND 57 OF THE ACT AND ARE THEREFORE NOT TO BE RECKONED FOR THE PURPOSES OF SE CTION 80HHC. THE ASSESSING OFFICER WILL APPLY THE LAW AS EXPLAINED IN THE JUDG MENTS OF THE KERALA HIGH COURT REFERRED TO ABOVE WHICH HAVE BEEN AFFIRMED BY THE H ON'BLE SUPREME COURT. (III) WHERE SURPLUS FUNDS ARE PARKED WITH THE BANK AND INTEREST IS EARNED THEREON IT CAN ONLY BE CATEGORISED AS INCOME FROM OTHER SOURCE S. THIS RECEIPT MERITS SEPARATE TREATMENT UNDER SECTION 56 OF THE ACT WHICH IS OUTS IDE THE RING OF PROFITS AND GAINS FROM BUSINESS AND PROFESSION. IT GOES ENTIRELY OUT OF THE RECKONING FOR THE PURPOSES OF SECTION 80HHC. ITA NO.389/AHD/2005 9 (IV) INTEREST EARNED ON FIXED DEPOSITS FOR THE PURP OSES OF AVAILING OF CREDIT FACILITIES FROM THE BANK, DOES NOT HAVE AN IMMEDIATE NEXUS WIT H THE EXPORT BUSINESS AND THEREFORE HAS TO NECESSARILY BE TREATED AS INCOME F ROM OTHER SOURCES AND NOT BUSINESS INCOME. (V) ONCE BUSINESS INCOME HAS BEEN DETERMINED BY APP LYING ACCOUNTING STANDARDS AS WELL AS THE PROVISIONS CONTAINED IN THE ACT, THE ASSESSEE WOULD BE PERMITTED TO, IN TERMS OF SECTION 37 OF THE ACT, CLAIM AS DEDUCTI ON, EXPENDITURE LAID OUT FOR THE PURPOSES OF EARNING SUCH BUSINESS INCOME. (VI) IN THE SECOND STAGE, THE ASSESSING OFFICER WIL L DEDUCT FROM THE PROFITS OF THE BUSINESS COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' THE FOLLOWING SUMS IN ORDER TO ARRIVE AT THE 'PROFITS O F THE BUSINESS' FOR THE PURPOSES OF SECTION 80HHC(3): .. IN THE CASE OF CIT V. STERLING FOODS [1999] 237 ITR 579 , THE ASSESSEE ENGAGED IN PROCESSING PRAWNS AND OTHER SEA FOOD, WHICH WAS EXP ORTED, EARNED SOME INCOME FROM THE IMPORT ENTITLEMENTS GRANTED BY THE CENTRAL GOVERNMENT UNDER THE EXPORT PROMOTION SCHEME. THE ASSESSEE WAS ENTITLED TO USE THE IMPORT ENTITLEMENTS ITSELF OR SELL THE SAME TO OTHERS. THE ASSESSEE CLAIMED RE LIEF UNDER SECTION 80HH IN RESPECT OF THE SALE PROCEEDS OF THE IMPORT ENTITLEM ENTS. THE TRIBUNAL HELD THAT THE RELIEF COULD NOT BE GRANTED. THE HON'BLE APEX COURT REVERSING THE DECISION OF THE HIGH COURT WHILE INTERPRETING THE WORDS 'DERIVED FR OM' HELD THAT THERE MUST BE, FOR THE APPLICATION OF THE WORDS 'DERIVED FROM', A DIRE CT NEXUS BETWEEN THE PROFITS AND GAINS AND THE INDUSTRIAL UNDERTAKING. AS THE NEXUS WAS ONLY INCIDENTAL AND NOT DIRECT, THE RECEIPTS FROM THE SALE OF IMPORT ENTITLEMENTS C OULD NOT BE INCLUDED IN THE INCOME OF THE ASSESSEE FOR THE PURPOSE OF COMPUTING THE RE LIEF UNDER SECTION 80HH OF THE ACT. SIMILAR VIEWS WERE EXPRESSED BY THE HON'BLE AP EX COURT IN THE CASE OF PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 . 14.11 IN THE CASE OF AHMEDABAD MANUFACTURING AN D CALICO PRINTING CO. LTD. VS. CIT,137 ITR 616(GUJ),HONBLE JURISDICTIONAL HIGH CO URT HELD WE ARE IN FULL AGREEMENT WITH THE VIEW TAKEN BY TH E BOMBAY HIGH COURT AND TO SOME EXTENT WITH THE VIEW TAKEN BY THE KERALA HIGH COURT. PROFITS AND GAINS CAN BE SAID TO HAVE BEEN ' DERIVED ' FROM AN ACTIVITY CARR IED ON BY A PERSON ONLY IF THE SAID ACTIVITY IS AN IMMEDIATE AND EFFECTIVE SOURCE OF TH E SAID PROFIT OR GAIN. THERE MUST BE A DIRECT NEXUS BETWEEN THE ACTIVITY AND THE EARNING OF THE PROFITS AND GAINS. IN OTHER WORDS, WHAT WE HAVE TO CONSIDER IS THE PROXIMATE SO URCE AND NOT THE SOURCE TO WHICH THE PROFIT OR GAIN MAY IN A REMOTE INDIRECT W AY BE REFERABLE. THE VIEW TO THIS EFFECT OF THE PRIVY COUNCIL IN CIT V. KAMAKHYA NARA YAN SINGH [1948] 16 ITR 325 WAS APPROVED BY THE SUPREME COURT IN MRS. BACHA F. GUZDAR V. CIT [1955] 27 ITR ITA NO.389/AHD/2005 10 1 AND FOLLOWED BY THE KERALA HIGH COURT IN COCHIN CO MPANY V. CIT [1978] 114 ITR 822 AND BY THE BOMBAY HIGH COURT IN HINDUSTAN LEVER LT D. V. CIT [1980] 121 ITR 951 . IN OUR OPINION, THE WORD ' DERIVE ' TO BE FOUND I N S. 2(5)(A)(I) OF THE RELEVANT FINANCE ACT WILL HAVE TO BE GIVEN A MEANING CONSIST ENT WITH WHAT WAS DECIDED IN THE ABOVE DECISIONS. THE WORDS 'DERIVED FROM EXPORTS' C ANNOT BE ACCEPTED AS EQUIVALENT TO ' REFERABLE TO EXPORTS ' OR EVEN INDI RECTLY OR REMOTELY CONNECTED WITH THE EXPORTS BY A NEBULOUS LINK. 14.12 HONBLE PUNJAB AND HARYANA HIGH COURT IN T HE CASE OF NAHAR EXPORTS VS. CIT,288 ITR 494 UPHELD DISALLOWANCE OF CLAIM FOR DE DUCTION U/S 80IB OF THE ACT ON THE INTEREST INCOME, IN THE LIGHT OF AFORESAID DEC ISIONS OF THE APEX COURT . 14.13 FOR THE PURPOSE OF CLAIMING DEDUCTION UND ER 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, WHICH MEANS A DIRECT NEXUS BETWEEN THE PROFITS AND INDUSTRIAL UNDERTAKING. THE MERE FACT THAT SUCH INCOME WAS A BUSINESS INCOME WOULD NOT ENTITLE THE ASSESSEE FOR DEDUCTION UNDER S. 80-IB OF THE ACT. THOUGH THE ASSESSEE MAY NECESSARILY HAVE TO MAKE THE DEPOSIT W ITH THE BANK FOR CERTAIN GUARANTEES OR WARRANTIES , THE INCOME ON ACCOUNT OF INTEREST FROM SUCH DEPOSITS WITH THE BANK CANNOT BE SAID TO HAVE BEEN DERIVED F ROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. THE IMMEDIATE SOURCE OF INT EREST IS THE DEPOSIT ITSELF, AND THE EFFECTIVE SOURCE OF THE GENEALOGY OF THE SOURCE OF THE INTEREST INCOME IS THE DEPOSIT AND NOT BUSINESS, AS THE INDUSTRIAL UNDERTAKING IS REMOVED BY ONE STEP FROM THE SOURCE OF INCOME FOR THE INTEREST. IN OTHER WORDS, THE IMMEDIATE AND EFFECTIVE SOURCE OF THE INTEREST IS THE DEPOSIT AND NOT THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. AS HELD BY THE HONBLE SUPREME COURT IN CAMBAY ELECTRI C SUPPLY INDUSTRIAL CO. LTD. V. CIT [1978] 113 ITR 84 , THE PROFITS OR GAINS ELIGIBLE FOR DEDUCTION UNDER SECTION 80IA OF THE ACT MUST BE DERIVED FROM THE ACTUAL CONDUCT OF THE BUSINESS, AND UNLESS THE PROFITS OR GAINS ARE DERIVED FROM THE ACTUAL CONDUC T OF THE BUSINESS, IT CANNOT BE STATED THAT THE INTEREST IS DERIVED FROM THE BUSINE SS OF THE INDUSTRIAL UNDERTAKING. IN OTHER WORDS, THE INDUSTRIAL UNDERTAKING MUST DIRECT LY YIELD THE PROFIT, AND IT CANNOT BE THE MEANS TO YIELD THE INCOME. THE DEPOSIT MIGHT BE AN INCIDENTAL INVESTMENT WITH THE BUSINESS OF THE INDUSTRIAL UNDERTAKING AND THAT WOULD NOT BE SUFFICIENT TO RENDER THE INTEREST INCOME AS PROFITS AND GAINS DERIVED FR OM THE INDUSTRIAL UNDERTAKING. ITA NO.389/AHD/2005 11 THE FACT THAT THE AMOUNT WAS ASSESSED AS BUSINESS I NCOME ITSELF WOULD NOT BE SUFFICIENT TO HOLD THAT THE INTEREST INCOME WAS DER IVED FROM THE ACTUAL CONDUCT OF THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. IN OTHER WO RDS, IT IS NOT ALL BUSINESS RECEIPTS THAT WOULD QUALIFY FOR THE DEDUCTION AND THE LEGISL ATURE HAS APPARENTLY NOT INTENDED TO GIVE THE BENEFIT OF DEDUCTION TO ALL BUSINESS IN COME. IF THE INTENTION OF THE LEGISLATURE WAS TO GRANT RELIEF TO ALL BUSINESS INC OME, IT COULD HAVE USED THE EXPRESSION, 'PROFITS AND GAINS OF INDUSTRIAL UNDERT AKING', THE FACT THAT THE LEGISLATURE HAS USED THE EXPRESSION 'PROFITS AND GAINS DERIVED FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING' HAS SOME SIGNIFICANCE AND IT CONNOTES THAT THE IMMEDIATE AND EFFECTIVE SOURCE OF INCOME ELIGIBLE FOR GRANT OF RELIEF UNDER SECTION 80IB OF THE ACT MUST BE THE INDUSTRIAL UNDERTAKING ITSELF AND NOT ANY OTHER SOU RCE. THE MANDATE OF LAW IS THAT UNLESS THE SOURCE OF THE PROFIT IS THE UNDERTAKING, THE ASSESSEE IS NOT ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION 80IB OF THE ACT. MERE COMMERCIAL CONNECTION BETWEEN THE INCOME AND THE INDUSTRIAL UNDERTAKING WOULD NOT BE SUFFICIENT. THE DERIVATION OF THE INCOME MUST BE DIRECTLY CONNECTED WITH THE BUSI NESS IN THE SENSE THAT THE INCOME IS GENERATED BY THE BUSINESS. IT WOULD NOT B E SUFFICIENT IF IT IS GENERATED BY THE EXPLOITATION OF A BUSINESS ASSET. 14.14 HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT VS.GASKETS AND RADIATORS DISTRIBUTORS, 296 ITR 440(GUJ) IN THE CON TEXT OF DEDUCTION U/S 80HHC OF THE ACT IN RESPECT OF INCOME ON ACCOUNT OF INTEREST ON FIXED DEPOSITS HELD IDENTICAL QUESTION CAME TO BE CONSIDERED BY THE HO N'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 I NCOME 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 AC T GRANTS DEDUCTION IN RESPECT OF PROFITS AND GAINS 'DERIVED FROM' AN INDUSTRIAL UNDE RTAKING 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 WIT H THE ASSESSEE'S INDUSTRIAL UNDERTAKING. THE SUPREME COURT HELD THAT INTEREST D ERIVED BY THE INDUSTRIAL UNDERTAKING OF THE ASSESSEE ON DEPOSITS MADE WITH T HE TAMIL NADU ELECTRICITY BOARD FOR THE SUPPLY OF ELECTRICITY FOR RUNNING THE INDUS TRIAL UNDERTAKING COULD NOT BE SAID TO FLOW DIRECTLY FROM THE INDUSTRIAL UNDERTAKING ITSEL F AND WAS NOT PROFITS OR GAINS DERIVED BY THE UNDERTAKING FOR THE PURPOSE OF THE SAID DEDU CTION UNDER SECTION 80HH. IN G.T.N. TEXTILES LTD. V. DY. CIT [2005] 279 ITR 72 , THE KERALA HIGH COURT HELD THAT INTEREST ON BANK DEPOSITS WAS NOT PROFIT DERIVED FR OM EXPORT OF GOODS. THE KERALA HIGH COURT HAS FURTHER HELD THAT THE INTEREST EARNE D BY THE ASSESSEE ON FIXED ITA NO.389/AHD/2005 12 DEPOSITS, COMMISSION RECEIVED ON SALE OF MACHINERY, ETC., WERE NOT BUSINESS INCOME AND CONSEQUENTLY THE ASSESSEE WAS NOT ENTITLED TO C OMPUTATION OF ELIGIBLE DEDUCTION UNDER SECTION 80HHC OF THE ACT BY INCLUDING THOSE R ECEIPTS UNDER BUSINESS INCOME. THEREFORE, CONSIDERING THE AFORESAID TWO DECISIONS, WE MUST HOLD THAT THE TRIBUNAL AS WELL AS THE COMMISSIONER OF INCOME-TAX (APPEALS) , BOTH COMMITTED AN ERROR IN TREATING THE INTEREST ON DEPOSITS AS 'BUSINESS INCO ME' AND GRANTING THE ASSESSEE THE DEDUCTION UNDER SECTION 80HHC OF THE ACT.. 14.15 IN VIEW OF THE FOREGOING, ESPECIALLY WHEN THERE IS NOTHING TO ESTABLISH THE NEXUS OF EARNING OF INTEREST INCOME FROM THE BANK A ND EXPENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF INTEREST, IN THE LIGHT OF T HE AFORESAID JUDICIAL PRONOUNCEMENTS, INCLUDING THE JUDGMENTS IN CAMBAY E LECTRIC SUPPLY INDUSTRIAL CO. LTD. V. CIT [1978] 113 ITR 84 (SC), CIT V. COCHIN REFINERIES LTD. [1982] 135 ITR 278 (KER.) AND PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 (SC) AS ALSO OF JURISDICTIONAL HIGH COURT IN THE CASE OF GASKETS AN D RADIATORS DISTRIBUTORS(SUPRA), WE HAVE NO ALTERNATIVE BUT TO UPHOLD THE CONCLUSIO N OF THE LD. CIT(A). THUS, THE GROUND RELATING TO CLAIM FOR DEDUCTION U/S 80IB OF THE ACT ON THE INTEREST INCOME IS DISMISSED. 15. AS REGARDS CLAIM FOR DEDUCTION U/S 80IB ON THE AMOUNT OF SALES TAX SET OFF, NO SPECIFIC SUBMISSIONS HAVE BEEN MADE BEFORE US BY TH E LD. AR ON BEHALF OF THE ASSESSEE. SINCE THERE IS NO MATERIAL BEFORE US TH AT THE SAID AMOUNT ON ACCOUNT OF SALES TAX SET OFF IS DERIVED FROM THE BUSINESS OF I NDUSTRIAL UNDERTAKING, IN VIEW OF DETAILED REASONS GIVEN WHILE CONSIDERING GROUND NO S 2 & 3 OF THE APPEAL AND IN THE LIGHT OF DECISIONS REFERRED TO THEREIN, WE HAVE NO HESITATION IN UPHOLDING THE CONCLUSIONS OF THE LD. CIT(A). 16. IN VIEW OF THE FOREGOING, GROUND NOS. 3 & 4 OF THE APPEAL ARE DISMISSED. 17. GROUND NO. 6 RELATES TO CLAIM FOR DEDUCTION U /S 80HHC OF THE ACT ON THE AMOUNT OF BANK INTEREST, RENT AND INTEREST, SALES TAX SET OFF, VATAV AND KASAR, DISCOUNT INCOME AND RATE DIFFERENCE. THE AO ,WHILE DETERMIN ING PROFITS OF THE BUSINESS FOR THE PURPOSE OF DEDUCTION U/S 80HHC OF THE ACT, EXCL UDED 90% OF THE AFORESAID RECEIPTS SHOWN UNDER THE HEAD OTHER INCOME IN TER MS OF EXPLANATION (BAA) TO SEC. ITA NO.389/AHD/2005 13 80HHC OF THE ACT. ON APPEAL, THE LD. CIT(A) UPHELD THE FINDINGS OF THE AO IN RESPECT OF AFORESAID RECEIPTS. 18. THE ASSESSEE IS NOW IN APPEAL BEFORE US. 19. WE HAVE HEARD BOTH PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO RELEVANT DECISIONS . IN THEIR DECISION ON THE INTE RPRETATION OF EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT, HONBLE SUPREME COURT IN THE CASE OF CIT V. K. RAVINDRANATHAN NAIR, 295 ITR 228(SC) HELD THAT THE FORMULA IN SECTION 80HHC(3) PROVIDED FOR A FRACTION OF EXPORT TURNOVER DIVIDED BY THE TOTAL TURNOVER TO BE APPLIED TO BUSINESS PROFITS CALCULATED AFTER DEDUCTING 90 PER CENT OF THE SUMS MENTIONED IN CLAUSE (BAA) OF THE EXPLANATION. PROFIT INCENTIVES LIKE RENT, COMMISSION, BROKERAGE CHARGES, ETC., THOUGH THEY FORMED PART OF THE GROSS TOTAL INCOME, HAD TO BE EXCLUDED AS THESE WERE INDEPENDENT INCOMES WHICH HAD NO EL EMENT OF EXPORT TURNOVER. ALL THE FOUR VARIABLES IN THE SECTION ARE REQUIRED TO B E KEPT IN MIND. IF ALL THE FOUR VARIABLES ARE KEPT IN MIND, IT BECOMES CLEAR THAT E VERY RECEIPT IS NOT INCOME AND EVERY INCOME WOULD NOT NECESSARILY INCLUDE THE ELEM ENT OF EXPORT TURNOVER. CLAUSE (BAA) OF THE EXPLANATION STATES THAT 90 PER CENT OF THE INCENTIVE PROFITS OR RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARG ES OR ANY OTHER RECEIPT OF LIKE NATURE INCLUDED IN BUSINESS PROFITS HAVE TO BE DEDU CTED FROM BUSINESS PROFITS COMPUTED IN TERMS OF SECTIONS 28 TO 44D. IN OTHER W ORDS, RECEIPTS CONSTITUTING INDEPENDENT INCOME HAVING NO NEXUS WITH EXPORTS WER E REQUIRED TO BE DEDUCTED FROM BUSINESS PROFITS UNDER CLAUSE (BAA). HONBLE S UPREME COURT FURTHER OBSERVED THAT A BARE READING OF CLAUSE (BAA)(1) INDICATES TH AT RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT CHARGES, ETC., FORMED PA RT OF THE GROSS TOTAL INCOME BEING BUSINESS PROFITS. BUT FOR THE PURPOSE OF WORKING OUT OF FORMULA AND I N ORDER TO AVOID DISTORTION IN ARRIVING AT THE EXPORT PROFITS CLAUSE (BAA) STOOD INSERTED TO SAY THAT ALTHOUGH INCENTIVE PROFITS AND INDEPENDEN T INCOMES CONSTITUTED PART OF THE GROSS TOTAL INCOME, THESE HAD TO BE EXC LUDED FROM GROSS TOTAL INCOME BECAUSE SUCH RECEIPTS HAD NO NEXUS WITH THE EXPORT TURNOVER. IT WAS CONCLUDED BY THE HONBLE SUPREME COURT THAT IN THE ABOVE FORMULA THERE EXISTED FOUR VARIABLES, NAMELY, BUSINESS PROFITS, EXPORT TURNOVER, TOTAL TURNOVER AND 90 PER CENT. OF THE SUMS REFERRED ITA NO.389/AHD/2005 14 TO IN CLAUSE (BAA) TO THE SAID EXPLANATION. IN THE COMPUTATION OF DEDUCTION UNDER SECTION 80HHC ALL FOUR VARIABLES HA D TO BE TAKEN INTO ACCOUNT. ALL FOUR VARIABLES WERE REQUIRED TO BE GIV EN WEIGHTAGE. THE SUBSTITUTION OF SECTION 80HHC(3) SECURES PROFITS DE RIVED FROM THE EXPORTS OF ELIGIBLE GOODS. THEREFORE, IF ALL THE FO UR VARIABLES ARE KEPT IN MIND, IT BECOMES CLEAR THAT EVERY RECEIPT IS NOT IN COME AND EVERY INCOME WOULD NOT NECESSARILY INCLUDE ELEMENT OF EXP ORT TURNOVER. THIS ASPECT NEEDS TO BE KEPT IN MIND WHILE INTERPRETING CLAUSE (BAA) TO THE SAID EXPLANATION. THE SAID CLAUSE STATED THAT 90 PE R CENT. OF INCENTIVE PROFITS OR RECEIPTS BY WAY OF BROKERAGE, COMMISSION , INTEREST, RENT, CHARGES OR ANY OTHER RECEIPT OF LIKE NATURE INCLUDE D IN BUSINESS PROFITS, HAD TO BE DEDUCTED FROM BUSINESS PROFITS COMPUTED I N TERMS OF SECTIONS 28 TO 44D OF THE INCOME-TAX ACT. IN OTHER WORDS, RE CEIPTS CONSTITUTING INDEPENDENT INCOME HAVING NO NEXUS WITH EXPORTS WER E REQUIRED TO BE REDUCED FROM BUSINESS PROFITS UNDER CLAUSE (BAA). A BARE READING OF CLAUSE (BAA)(1) INDICATES THAT RECEIPTS BY WAY OF B ROKERAGE, COMMISSION, INTEREST, RENT, CHARGES, ETC., FORMED P ART OF GROSS TOTAL INCOME BEING BUSINESS PROFITS. BUT FOR THE PURPOSES OF WORKING OUT THE FORMULA AND IN ORDER TO AVOID DISTORTION OF ARRIVIN G AT THE EXPORT PROFITS, CLAUSE (BAA) STOOD INSERTED TO SAY THAT ALTHOUGH IN CENTIVE PROFITS AND 'INDEPENDENT INCOMES' CONSTITUTED PART OF GROSS TOT AL INCOME, THEY HAD TO BE EXCLUDED FROM GROSS TOTAL INCOME BECAUSE SUCH RECEIPTS HAD NO NEXUS WITH THE EXPORT TURNOVER. THEREFORE, IN THE A BOVE FORMULA, WE HAVE TO READ ALL THE FOUR VARIABLES. ON READING ALL THE VARIABLES IT BECOMES CLEAR THAT EVERY RECEIPT MAY NOT CONSTITUTE SALE PROCEEDS FROM EXPORTS. THAT, EVERY RECEIPT IS NOT INCOME UNDER TH E INCOME-TAX ACT AND EVERY INCOME MAY NOT BE ATTRIBUTABLE TO EXPORTS. TH IS WAS THE REASON FOR THIS COURT TO HOLD THAT INDIRECT TAXES LIKE EXC ISE DUTY WHICH ARE RECOVERED BY THE TAXPAYERS FOR AND ON BEHALF OF THE GOVERNMENT, SHALL NOT BE INCLUDED IN THE TOTAL TURNOVER IN THE ABOVE FORMULA. BEFORE CONCLUDING WE STATE THAT THE NATURE OF EVER Y RECEIPT NEEDS TO BE ASCERTAINED IN ORDER TO FIND OUT WHETHER THE SAID R ECEIPT FORMS PART OF/OR THAT IT HAS AN ATTRIBUTE OF AN EXPORT TURNOVER. WHE N AN INDIRECT TAX IS COLLECTED BY THE TAXPAYER ON BEHALF OF THE GOVERNME NT THE TAX RECOVERED IS FOR THE GOVERNMENT. IT MAY BE AN INCOM E IN THE CONCEPTUAL SENSE OR EVEN UNDER THE INCOME-TAX ACT BUT WHILE WO RKING OUT THE FORMULA UNDER SECTION 80HHC(3) OF THE INCOME-TAX AC T AND WHILE APPLYING THE FOUR VARIABLES ONE HAS TO ASCERTAIN WH ETHER THE RECEIPT HAS AN ATTRIBUTE OF EXPORT TURNOVER . 19.1 HONBLE GUJARAT HIGH COURT IN THE CASE OF A LEMBIC CHEMICAL WORKS LTD. VS. DCIT [ 266 ITR 47](GUJ) IN THE CONTEXT OF EXPLANAT ION (BAA) HAVE HELD THAT (D) WHETHER THE TRIBUNAL WAS RIGHT IN LAW IN HOLDI NG THAT FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION 80HHC, 90 PER CENT. OF THE INCOME RELATABLE TO RENT, COMPUTER CHARGES, SERVICE CHARGES, MISCELLANEOUS INCOME AND INSURANCE CLAIM WAS REQUIR ED TO BE DEDUCTED ITA NO.389/AHD/2005 15 FROM THE PROFITS UNDER EXPLANATION (BAA) TO SECTION 8OHHC(4A), IGNORING USE OF THE WORD OR BETWEEN REFERENCE TO CLAUSES (IIIA), (IIIB) AND (IIIC) OF SECTION 28 IN CLAUSE (1) OF THE SAID EXPLANATION AND OTHER ITEMS ABOVE REFERRED TO, AND FURTHER ERRED IN READI NG THE WORD OR AS AND ? IV. DEDUCTION UNDER SECTION 80HHC OF THE ACT ON A PLAIN READING OF THE PROVISION AS IT STANDS IT IS APPARENT THAT WHAT THE PROVISION STIPULATES IS THAT PROFITS OF THE BU SINESS FOR THE PURPOSE OF SECTION 80HHC OF THE ACT MEAN THE PROFITS OF THE BU SINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION. WHILE COMPUTING SUCH PROFITS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION IF ANY SUM REFERRED TO IN CLAUSE (IIIA) , (IIIB) OR (IIIC) OF SECTION 28 OF THE ACT HAS BEEN INCLUDED IN SUCH PROFITS THE SAME HAS TO BE REDUCED BY 90 PER CENT. FROM THE PROFITS COMPUTED A S AFORESAID. SIMILARLY IF ANY RECEIPT BY WAY OF BROKERAGE, COMMI SSION, INTEREST, RENT, CHARGES, OR ANY OTHER RECEIPT OF A SIMILAR NATURE I S INCLUDED IN SUCH PROFITS, I.E. PROFITS OF THE BUSINESS, SUCH PROFITS HAVE TO BE REDUCED BY THE SAID FIGURE, I.E., BY 90 PER CENT. WHILE COMPUT ING (PROFITS OF THE BUSINESS) FOR THE PURPOSE OF SECTION 8OHHC OF THE A CT. THEREFORE, ONCE THE SUMS OR THE RECEIPTS OF THE NATURE SPECIFIED IN SUB- CLAUSE (1) OF CLAUSE (BAA) OF THE EXPLANATION ARE INCLUDED WHILE COMPUTING THE PROFITS AND GAINS OF BUSINESS THEN SUCH SUMS OR RECEIPTS AR E TO BE REDUCED TO THE EXTENT OF 90 PER CENT. FROM THE PROFITS OF THE BUSINESS. ONCE THE LANGUAGE EMPLOYED BY THE PROVISION IS CLEAR IT IS N OT NECESSARY FOR THE COURT TO READ ANYTHING INTO THE SAID LANGUAGE NOR G O BEHIND THE LANGUAGE EMPLOYED BY THE LEGISLATURE SO AS TO ASCER TAIN THE INTENTION OF THE LEGISLATURE. THIS WOULD BECOME NECESSARY ONLY W HEN THE LANGUAGE EMPLOYED BY THE STATUTE IS AMBIGUOUS IN ANY MANNER. IN THE PRESENT CASE THAT CANNOT BE TERMED TO BE THE SITUATION. THE REFORE, THE GROUND RAISED ON BEHALF OF THE APPELLANT AS REGARDS THE IN TERPRETATION TO BE PLACED ON CLAUSE (BAA) OF THE EXPLANATION TO SECTIO N 8OHHC OF THE ACT DOES NOT MERIT ACCEPTANCE AND FAILS. 19.2 IN VIEW OF THE AFORESAID JUDGMENT OF THE APE X COURT IN THE CASE OF K. RAVINDRANATHAN NAIR(SUPRA) AND OF THE HONBLE JURIS DICTIONAL HIGH COURT , IT IS EVIDENT THAT ANY INCOME WHICH IS NOT DERIVED FROM THE EXPOR T ACTIVITIES IN TERMS OF SECTION 80HHC(2) OF THE ACT BUT IS OTHERWISE ASSESSED AS BUSINESS INCOME, IS LIABLE TO BE INCLUDED IN THE TOTAL TURNOVER AND 90% OF THE SAME HAS TO BE REDUCED FROM THE PROFITS OF THE BUSINESS IN TERMS OF EXPLANATION (BA A) TO SEC. 80HHC OF THE ACT. 19.3 IN KRM MARINE EXPORTS LTD. VS. ACIT,288 ITR 151(MAD),HONBLE HIGH ITA NO.389/AHD/2005 16 COURT HELD THAT THAT THE SERVICE CHARGES OR THE IN CENTIVE RECEIVED AT 3.5 PER CENT. OF THE INVOICE VALUE BY THE ASSESSEE CANNOT BE CONSIDE RED AS EXPORT TURNOVER AS IT HAS NOT BEEN RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE A S REQUIRED IN THE SECTION. HENCE THAT PART OF THE SUM IS NOT ELIGIBLE FOR THE BENEFI T GRANTED UNDER SECTION 80HHC AND REDUCTION BY 90 PER CENT. AS PROVIDED UNDER CLAUSE (BAA) IS CORRECT . 19.4 A BARE PERUSAL OF PROVISIONS OF SEC. 80HHC OF THE ACT REVEALS THAT THE INCOME WHICH IS UNDERSTOOD TO BE COMPUTED UNDER THI S PROVISION MUST HAVE BEEN DERIVED BY THE ASSESSEE FROM THE EXPORT OF SUCH GOO DS OR MERCHANDISE. ADMITTEDLY THE INTEREST INCOME WAS NOT DERIVED BY EXPORT OF GO ODS OR MERCHANDISE. A DIVISION BENCH OF THE HONBLE KERALA HIGH COURT IN NANJI TOP ANBHAI AND CO. V. ASST. CIT [2000] 243 ITR 192 WAS CONSIDERING THE QUESTION AS TO WHETHER THE INT EREST EARNED ON FIXED DEPOSIT WAS INCOME ARISING OUT OF EXPORT O R INCOME FROM OTHER SOURCES. THE HONBLE HIGH COURT HELD (HEADNOTE): 'UNDER SECTION 80HHC OF THE INCOME-TAX ACT, 1961, T HE ASSESSEE WHO IS ENGAGED IN EXPORT BUSINESS IS ALLOWED, IN COMPUTING THE TOTAL INCOME, A DEDUCTION OUT OF THE INCOME DERIVED FROM THE EXPORT OF SUCH GOODS. UNLES S THE ASSESSEE IS ABLE TO SHOW THAT THE INCOME RECEIVED BY WAY OF INTEREST FROM TH E FIXED DEPOSIT IS DERIVED FROM THE EXPORT BUSINESS, IT WILL NOT BE ENTITLED TO CLAIM D EDUCTION UNDER SECTION 80HHC IN RESPECT OF IT'. 19.5 IN ANOTHER JUDGMENT REPORTED IN CIT V. COCHI N REFINERIES LTD. [1985] 154 ITR 345 , HONBLE KERALA HIGH COURT HELD: 'PROFITS AND GAINS ARE WELL UNDERSTOOD TO MEAN ONLY THE BUSINESS INCOME, AND NOT ANY OTHER INCOME. SO LONG AS THE COMPANY HAS NO BUS INESS OF LENDING MONEY, AND SO LONG AS THE ADMITTED CASE OF THE COMPANY IS THAT THE INCOME DERIVED IS ONLY ON ACCOUNT OF THE PECULIAR SITUATION ARISING FROM THE TIME SCHEDULE FOR REPAYMENT OF THE LOANS, IT CANNOT BE STATED THAT THE INCOME YIELDED BY THE DEPOSITS OR INVESTMENTS WAS RECEIVED IN THE COURSE OF THE COMPANY'S BUSINES S SO AS TO BE TREATED AS A BUSINESS PROFIT' 19.6 WE FIND THAT IN URBAN STANISLAUS CO. [2003] 263 ITR 10 (KER) WHERE THE ASSESSEE HAD CONTENDED THAT AS A CONDITION FOR OBTA INING A LOAN FROM THE BANK, 29 PER CENT. OF THE SALE RECEIPTS HAD TO BE DEPOSIT ED BY WAY OF SECURITY. IT WAS CLAIMED THAT THE INTEREST EARNED ON SUCH DEPOSIT WA S BUSINESS INCOME FOR THE PURPOSE OF SECTION 80HHC. THIS WAS NEGATIVED BY THE HONBLE KERALA HIGH ITA NO.389/AHD/2005 17 COURT BY OBSERVING THAT: 'THE ASSESSEE CAN CLAIM DEDUCTION IN RESPECT OF THE PROFITS DERIVED FROM THE EXPORT OF GOODS ONLY WHEN IT IS ESTABLISHED THAT THE INCOM E IS SOLELY RELATED TO THE EXPORT. THE OBVIOUS INTENTION BEHIND THE PROVISION IN SECTI ON 80HHC IS TO PROMOTE EXPORTS. HOWEVER, THE INCOME EARNED BY WAY OF INTEREST FROM FIXED DEPOSIT IS NOT AN INCOME FROM EXPORTS. THUS, IT WAS RIGHTLY TAKEN INTO ACCOU NT AS INCOME FROM OTHER SOURCES'. 19.7 THIS DECISION HAS BEEN AFFIRMED BY THE HON'B LE SUPREME COURT BY THE DISMISSAL OF THE SPECIAL LEAVE PETITION. IN K. RAVI NDRANATHAN NAIR [2003] 262 ITR 669 (KER), IN DEALING WITH A SIMILAR ISSUE, THE HONBLE KERALA HIGH COURT HELD: 'THE INTEREST FROM SHORT-TERM DEPOSITS RECEIVED BY THE APPELLANT IS NOT THE DIRECT RESULT OF ANY EXPORT OF ANY GOODS OR MERCHANDISE. T HE FIXED DEPOSIT WAS MADE ONLY FOR THE PURPOSE OF OPENING LETTERS OF CREDIT AND FO R GETTING OTHER BENEFITS WHICH ARE NECESSARY REQUIREMENTS TO ENABLE THE APPELLANT TO M AKE THE EXPORT. FROM THE ABOVE IT IS CLEAR THAT THE INTEREST INCOME RECEIVED ON TH E SHORT-TERM DEPOSITS THOUGH IT CAN BE ATTRIBUTED TO THE EXPORT BUSINESS CANNOT BE TREA TED AS INCOME WHICH IS DERIVED FROM THE EXPORT BUSINESS. IN THE ABOVE CIRCUMSTANCE S, EVEN ASSUMING THAT THE BANK HAS INSISTED FOR MAKING SHORTTERM DEPOSITS FOR OPEN ING LETTERS OF CREDIT AND FOR OTHER FACILITIES, IT CANNOT BE SAID THAT THE INCOME IS DE RIVED FROM THE EXPORT BUSINESS.' 19.8 THE ABOVE DECISION IN K. RAVINDRANATHAN NAIR [2003] 262 ITR 669 (KER) HAS BEEN AFFIRMED BY THE HON'BLE SUPREME COURT BY THE D ISMISSAL OF THE SPECIAL LEAVE PETITION. TO THE SAME EFFECT IS THE JUDGMENT OF THE SAME HIGH COURT IN SOUTHERN CASHEW EXPORTERS V. DEPUTY CIT [2003] 130 TAXMAN 20 3 (KER) WHICH HAS BEEN AFFIRMED BY THE HON'BLE SUPREME COURT ON ACCOUNT OF THE DISMISSAL OF THE SPECIAL LEAVE PETITION. THE RESULTANT POSITION IS THAT ON T HREE OCCASIONS, THE HON'BLE SUPREME COURT HAS AFFIRMED THE JUDGMENTS OF THE KER ALA HIGH COURT THAT HAS CONSISTENTLY HELD THAT INTEREST EARNED ON FIXED DEP OSITS FOR THE PURPOSES OF AVAILING OF CREDIT FACILITIES FROM THE BANK, DOES NOT HAVE AN I MMEDIATE NEXUS WITH THE EXPORT BUSINESS AND, THEREFORE HAS TO NECESSARILY BE TREAT ED AS INCOME FROM OTHER SOURCES AND NOT AS BUSINESS INCOME. IN CIT V. STERLING FOOD S [1999] 237 ITR 579 (SC) AND PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 (SC), THE HON'BLE SUPREME COURT REITERATED THE NEXUS THEORY AND DECLINED TO TREAT S UCH INTEREST EARNED AS BUSINESS INCOME. AN ASSESSEE WHO IS ENGAGED IN THE BUSINESS OF EXPORTS AND INVESTS THE SURPLUS FUNDS IN FIXED DEPOSITS WILL NOT BE ABLE TO TREAT THE INTEREST EARNED THEREON AS BUSINESS INCOME SINCE IT DOES NOT BEAR ANY DIRECT N EXUS WITH THE EXPORT BUSINESS OF ITA NO.389/AHD/2005 18 THE ASSESSEE. HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. GASKETS & RADIATORS DISTRIBUTORS,296 ITR 440(GUJ) R ELYING ,INTER ALIA, ON THE DECISION OF THE HONBLE SUPREME COURT IN PA NDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 HELD THAT RECEIPTS ON ACCOUNT OF INTEREST ON DEPOSITS IS NOT REQUIRED TO BE CONSIDERED FOR DEDUC TION U/S 80HHC OF THE ACT. HONBLE HIGH COURT HELD IN FOLLOWING TERMS : IDENTICAL QUESTION CAME TO BE CONSIDERED 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 W HETHER THE INTEREST ON DEPOSITS WITH THE TAMIL NADU ELECTRICITY BOARD SHOULD BE TRE ATED AS INCOME DERIVED BY THE INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF SECTION 8 0HH 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 INC OME-TAX ACT, 1961, MUST BE UNDERSTOOD AS SOMETHING WHICH HAS A DIRECT OR IMMED IATE 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 T HE TAMIL NADU ELECTRICITY BOARD FOR THE SUPPLY OF ELECTRICITY FOR RUNNING THE INDUS TRIAL UNDERTAKING COULD NOT BE SAID TO FLOW DIRECTLY FROM THE INDUSTRIAL UNDERTAKING ITSEL F AND WAS NOT PROFITS OR GAINS DERIVED BY THE UNDERTAKING FOR THE PURPOSE OF THE SAID DEDU CTION UNDER SECTION 80HH. IN G.T.N. TEXTILES LTD. V. DY. CIT [2005] 279 ITR 72 , THE KERALA HIGH COURT HELD THAT INTEREST ON BANK DEPOSITS WAS NOT PROFIT DERIVED FR OM EXPORT OF GOODS. THE KERALA HIGH COURT HAS FURTHER HELD THAT THE INTEREST EARNE D BY THE ASSESSEE ON FIXED DEPOSITS, COMMISSION RECEIVED ON SALE OF MACHINERY, ETC., WERE NOT BUSINESS INCOME AND CONSEQUENTLY THE ASSESSEE WAS NOT ENTITLED TO C OMPUTATION OF ELIGIBLE DEDUCTION UNDER SECTION 80HHC OF THE ACT BY INCLUDING THOSE R ECEIPTS UNDER BUSINESS INCOME. THEREFORE, CONSIDERING THE AFORESAID TWO DECISIONS, WE MUST HOLD THAT THE TRIBUNAL AS WELL AS THE COMMISSIONER OF INCOME-TAX (APPEALS) , BOTH COMMITTED AN ERROR IN TREATING THE INTEREST ON DEPOSITS AS 'BUSINESS INCO ME' AND GRANTING THE ASSESSEE THE DEDUCTION UNDER SECTION 80HHC OF THE ACT . 19.9 IN CIT VS. RAKESH RAKHEJA ,166 TAXMAN 50 (DELHI), HONBLE HIGH COURT HELD THAT THE INCOME EARNED BY THE ASSESSEE FROM FD RS IS REQUIRED TO BE ASSESSED AS INCOME FROM OTHER SOURCES. THE SAID INCOME IS TH EREFORE OUTSIDE THE PURVIEW OF SECTION 80HHC OF THE ACT AND 100 PER CENT OF THE IN TEREST IS REQUIRED TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS IN TERMS OF EXPLAN ATION ( BAA ) TO SECTION 80HHC OF THE ACT. 19.10 IN CIT VS. KRAFT LAND INDIA, 162 TAXMAN 123 (DEL),HONBLE DELHI HIGH COURT HELD THAT INTEREST RECEIVED ON FDRS PLEDGED FOR SHI PPING LOAN/DEPOSITORY LOAN, WAS ITA NO.389/AHD/2005 19 NOT BUSINESS INCOME AND THEREFORE, INTEREST PAID BY THE ASSESSEE COULD NOT BE REDUCED FROM THE INTEREST RECEIVED WHILE CALCULATIN G DEDUCTION U/S 80HHC READ WITH EXPLANAYION (BAA) THERETO. 19.11 IN CIT VS. MALWA COTTON SPINNING MILLS LTD. ,166 TAXMAN 457(PB. & HARYANA) ,HONBLE HIGH COURT HELD THAT 6. CLAUSE (BAA), AS REFERRED TO ABOVE, TALKS OF PRO CEDURES, AS TO HOW PROFITS OF BUSINESS ARE TO BE COMPUTED. IT PROVIDES THAT IN CA SE, INCOMES OF THE KIND INCLUDING INTEREST ARE INCLUDED IN THE PROFITS OF BUSINESS, 9 0 PER CENT THEREOF SHALL BE REDUCED THEREFROM. IT DOES NOT MAKE ANY DISTINCTION BETWEEN THE INTEREST EARNED FROM SOURCE 'A' OR SOURCE 'B'. INTEREST FROM WHEREVER IT IS EAR NED RETAINS THE CHARACTER OF INTEREST. BE IT AN INTEREST FROM THE CUSTOMER ON DELAYED PAYM ENT OF DUES. 19.12 IN VIEW OF THE FOREGOING, ESPECIAL LY WHEN THE AFORESAID RECEIPTS ON ACCOUNT OF BANK INTEREST, RENT AND INTEREST, SALES TAX SET OFF, VATAV AND KASAR, DISCOUNT INCOME AND RATE DIFFERENCE ARE INDEPENDENT INCOMES , WE ARE NOT INCLINED TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). T HESE RECEIPTS HAVE NO RELATION WITH EXPORTS MADE BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. THERE IS NO MATERIAL BEFORE US THAT ANY EXPENDITURE HAS BEEN IN CURRED FOR EARNING THE AFORESAID RECEIPTS NOR SUCH AN ISSUE SEEMS TO HAVE BEEN RAISE D BEFORE THE LD. CIT(A).THEREFORE, EVEN THE ALTERNATE CLAIM MADE BY THE ASSESSEE IN THEIR GROUND OF APPEAL IS NOT TENABLE. THUS, GROUND NO. 6 IS DISM ISSED. . 20. GROUND NOS. 5 & 7 RELATE TO FINDINGS OF THE LD. CIT(A) THAT IF THE RESULT OF TRADING AND MANUFACTURING EXPORT IS LOSS, NO DEDUCTION U/S 80HHC ON PROFIT ON SALE OF DEPB INCENTIVES CAN BE GRANTED. THE AO OBSERVED THAT INC ENTIVES RECEIVED FROM THE GOVERNMENT AND DEPB WERE NOT PROFIT DERIVED FROM EX PORT AND IF THE ELEMENT OF OTHER INCOME SUCH AS INCENTIVE, INTEREST ETC. ARE D EDUCTED FROM BUSINESS PROFITS FOR THE PURPOSE OF ARRIVING AT ELIGIBLE PROFITS FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S80HHC, THEN THE PROFITS OF THE BUSINESS WORKED OUT AS UNDER: BUSINESS INCOME RS.28460489/- LESS: 90% OF INCENTIVES AND OTHER INCOME OF RS.72014174/- RS.64812756/- ELIGIBLE BUSINESS INCOME (-) RS.36352267/- ITA NO.389/AHD/2005 20 ========= SINCE THE PROFITS OF THE BUSINESS WORKED OUT AT A NEGATIVE FIGURE, THE AO CONCLUDED THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION IN TERMS OF PROVISIONS OF SEC. 80HHC(3) (A)(B) AND (C ) OF THE ACT AND IF THE TRAD ING PROFIT IS ALSO TAKEN INTO CONSIDERATION ,THE ADJUSTED PROFIT WILL BE FURTHER REDUCED. THE AO FURTHER HELD THAT SINCE THE ELIGIBLE PROFIT WORKED OUT IS A NEGATIVE FIGURE, ANY FURTHER ADDITION AGAINST INCENTIVE DOES NOT ARISE IN VIEW OF THE FACT THAT A S PER SECTION 80HHC, THE TOTAL PROFIT AS PER CLAUSE (C ) OF SUB.SEC.3 SHOULD BE FURTHER I NCREASED BY 90% OF THE EXPORT INCENTIVES, BUT WHERE THERE IS A BUSINESS LOSS IN E XPORT ACTIVITY AS PER SUB SEC. (3) (C), THE ADDITION OF 90% OF INCENTIVES IS NOT REQUI RED, INTER ALIA IN VIEW OF THE DECISION OF HONBLE MUMBAI HIGH COURT IN THE CASE OF IPCA LA BORATORIES 251 ITR 401. 21. ON APPEAL, THE LD. CIT(A) UPHELD THE FINDINGS OF THE A IN VIEW OF DECISION OF THE HONBLE APEX COURT IN IPCA LABORATORIES VS. CIT, 266 ITR 571(SC). 22 THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). BEFORE US BOTH THE PARTIES AGREED T HAT THE ASSESSEE IS ENTITLED TO DEDUCTION UNDER SECTION 80HHC ON THE PROFIT ON DEPB PREMIUM IN VIEW OF AMENDED PROVISIONS OF SECTION 28(IIID) AND THE 3RD AS WELL AS FIFTH PROVISOS INSERTED IN SECTION 80HHC OF THE ACT W.E.F. 1-4-1998 BY THE TAXATION LA WS (SECOND AMENDMENT ) ACT,2005 . THE LD. AR ,INTER ALIA, RELIED UPON THE DECISION IN THE CASE OF TOPMAN EXPORTS VS. ITO,318ITR(AT)87(MUMBAI)(SB). 23. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. WE FIND THAT THE EXPORT TURNOVER OF THE ASSESSEE E XCEEDS RS. 10 CRORES, DEDUCTION U/S 80HHC OF THE ACT ON THE PROFIT ON ACCOUNT OF D EPB BENEFITS BY THE ASSESSEE IN THIS CASE IS NOW GOVERNED BY THE THIRD AND FIFTH PROVISOS TO SECTION 80HHC(3) OF THE ACT, INSERTED BY THE TAXATION LAWS(SECOND AMEN DMENT) ACT,2005 READ WITH SECTION 28(IIID) W.E.F. 1.4.1998, WHICH STIPULATES AS UNDER: THIRD PROVISO PROVIDED ALSO THAT IN THE CASE OF AN ASSESSEE HAVI NG EXPORT TURNOVER EXCEEDING RUPEES TEN CRORES DURING THE PREVIOUS YEA R, THE PROFITS ITA NO.389/AHD/2005 21 COMPUTED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE ( E) OF THIS SUB- SECTION OR AFTER GIVING EFFECT TO THE FIRST PROVISO , AS THE CASE MAY BE, SHALL BE FURTHER INCREASED BY THE AMOUNT WHICH BEAR S TO NINETY PER CENT OF ANY SUM REFERRED TO IN CLAUSE (IIID) OF SECTION 28, THE SAME PROPORTION AS THE EXPORT TURNOVER BEARS TO THE TOTA L TURNOVER OF THE BUSINESS CARRIED ON BY THE ASSESSEE, IF THE ASSESSE E HAS NECESSARY AND SUFFICIENT EVIDENCE TO PROVE THAT,- (A) HE HAD AN OPTION TO CHOOSE EITHER THE DUTY DRAW BACK OR THE DUTY ENTITLEMENT PASS BOOK SCHEME, BEING THE DUTY REMISSION SCHEME; AND (B) THE RATE OF DRAWBACK CREDIT ATTRIBUTABLE TO THE CUSTOMS DUTY WAS HIGHER THAN THE RATE OF CREDIT ALLOWABLE U NDER THE DUTY ENTITLEMENT PASS BOOK SCHEME, BEING THE DU TY REMISSION SCHEME. FIFTH PROVISO PROVIDED ALSO THAT IN CASE THE COMPUTATION UNDE R CLAUSE (A) OR CLAUSE (B) OR CLAUSE (C) OF THIS SUB-SECTION IS A LOSS, SUCH LOSS SHALL BE SET OFF AGAINST THE AMOUNT WHICH BEARS TO NINETY PER CENT OF- (A) ANY SUM REFERRED TO IN CLAUSE (IIIA) OR CLAUSE (IIIB) OR CLAUSE (IIIE), AS THE CASE MAY BE, OR (B) ANY SUM REFERRED TO IN CLAUSE (IIID) OR CLAUSE (IIIE), AS THE CASE MAY BE, OF SECTION 28, AS APPLICABLE IN TH E CASE OF AN ASSESSEE REFERRED TO IN THE SECOND OR THE THI RD OR THE FOURTH PROVISO, AS THE CASE MAY BE, THE SAME PROPORTION AS THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER OF THE MESS CARRIED ON BY THE ASSESSEE . 24. BOTH THE LD. CIT(A) AND THE AO DID NOT HA VE THE BENEFIT OF THE AFORESAID PROVISIONS INSERTED BY THE TAXATION LAWS(SECOND A MENDMENT )ACT,2005 AT THE TIME OF PASSING THE RESPECTIVE ORDERS. WE FIND THAT THE LAW IS WELL-SETTLED BY THE DECISION OF THE HONBLE SUPREME COURT IN M. K. VEN KATACHALAM, ITO V. BOMBAY DYEING AND MFG. CO. LTD. [1958] 34 ITR 143 THAT THE EFFECT OF THE PROVISION THAT A PARTICULAR AMENDMENT SHALL BE DEEMED TO COME INTO F ORCE FROM A PARTICULAR DATE WITH RETROSPECTIVE EFFECT IS THAT THE AMENDMENT MUST BE DEEMED TO HAVE BEEN INCLUDED IN ITA NO.389/AHD/2005 22 THE PRINCIPAL ACT AS FROM THAT DATE FOR ALL PURPOSE S. THAT BEING SO, SECTION 80HHC AS AMENDED MUST BE DEEMED TO BE IN EXISTENCE ON THE DATE OF PASSING OF THE ORDER OF ASSESSMENT BY THE AO AND APPLICABLE TO THE ASSES SMENT UNDER CONSIDERATION. THE AO IS BOUND TO GIVE EFFECT TO THE PARLIAMENTARY LEGISLATION WHICH HAS UNDONE THE EFFECT OF THE ORDER OF THE LD. CIT(A) . SINCE DEDUCTION U/S 80HHC OF THE ACT ON THE AMOUNT OF DEPB PREMIUM HAS TO BE COMPUTED IN TERMS OF THE AMENDED PROVISIONS, ACCORDINGLY, WE VACATE THE FINDINGS OF THE LD. CIT (A) AND RESTORE THE MATTER TO THE FILE OF THE AO WITH THE DIRECTIONS TO RECOMPUTE DED UCTION U/S 80HHC OF THE ACT IN TERMS OF THE AFORESAID THIRD & FIFTH PROVISOS TO SE CTION 80HHC(3) OF THE ACT AND IN THE LIGHT OF DECISION OF THE MUMBAI SPECIAL BENCH IN TH E CASE OF TOPMAN EXPORTS(SUPRA). THUS, ISSUE RAISED IN TERMS OF GROUND NOS. 5 & 7 AR E DISPOSED OF AS INDICATED HEREINBEFORE. 25. GROUND NO. 8 RELATES TO CLAIM FOR DEDUCTI ON U/S 80HHC AND 80IB OF THE ACT ON THE GROSS TOTAL INCOME. THERE IS NO DISCUSSION O N THIS ASPECT IN THE IMPUGNED ORDERS NOR ANY SPECIFIC GROUND APPEARS TO HAVE BEEN TAKEN BEFORE THE LD. CIT(A). EVEN BEFORE US THE LD. AR ON BEHALF OF THE ASSESSEE CONTENDED THAT ISSUE IS SQUARELY COVERED BY A RECENT DECISION DATED 23.6.2 009 OF THE ITAT SPECIAL BENCH, DELHI [5 MEMBERS] IN THE CASE OF ACIT VS. M/S HINDUSTAN MINT & AGRO PRODUCTS PVT. LTD.,CHANDAUSI,119 ITD 107 . THE LD. DR DID NOT DISPUTE THESE SUBMISSIONS ON BEHALF OF THE ASSESSEE. 26. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. WE FIND THAT THE ISSUE IS NOW SQUARELY COVERED BY THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF M/S HINDUSTAN MINT & AGRO PRODUCTS PVT. LTD(SUPRA). EARLIER IN ACIT VS ROGINI GARMENTS 108 ITD 49, THE SPECIAL BENCH AT CHENNAI HELD THAT RELIEF ALLOWED U/S 80-IA HAD TO BE DEDUCTED FROM PR OFITS AND GAINS OF THE BUSINESS ON WHICH RELIEF U/S 80HHC OF THE ACT IS TO BE COMPU TED. SUBSEQUENTLY, HONBLE MADRAS HIGH COURT IN SCM CREATIONS, 304 ITR 319 TOOK A CONTRARY VIEW. THE QUESTION WHETHER ROGINI GARMENTS WAS IMPLIEDLY OVERRULED WAS REFERRED TO A FIVE MEMBER SPECIAL BENCH. THE SPECIAL BENCH UPHELD THE CORRECTNESS OF ROGINI GARMENTS, HOLDING THAT SCM CREATIONS I S NOT AN AUTHORITY ON HOW S. 80-IA (9) IS TO ITA NO.389/AHD/2005 23 BE APPLIED BECAUSE THE EFFECT AND IMPLEMENTATION OF ABOVE PROVISION WAS NEITHER RAISED NOR EXAMINED AND NOR EVEN DECIDED BY THE HON BLE HIGH COURT. IT WAS HELD THAT A DECISION IS AN AUTHORITY FOR THE PROPOSITION THAT IT DECIDES AND NOT WHAT CAN LOGICALLY BE DEDUCED THERE FROM. A POINT NOT RAISED NOR ARGUED AT THE BAR CANNOT BE SAID TO BE THE RATIO OF THE DECISION. ACCORDINGLY, THE SPECIAL BENCH RULED THAT SCM CREATION DID NOT IMPINGE UPON THE RATIO OF ROGINI G ARMENTS. IT WAS, ACCORDINGLY, CONCLUDED THAT ROGINI GARMENTS WAS CORRECTLY DECIDED AND DID NOT REQUIRE RECONSIDERATION. THE LANGUAGE OF S. 80-IA (9)/80-IB (9A) WAS CLEAR AND UNAMBIGUOUS AND WAS REQUIRED TO BE GIVEN EFFECT TO. DEDUCTION O F PROFIT AND GAINS ALLOWED U/S 80- IA/80-IB HAD TO BE DEDUCTED FROM PROFITS AND GAINS OF THE BUSINESS ON WHICH DEDUCTION U/S 80HHC HAD TO BE COMPUTED. THE SPECIA L BENCH , THEREFORE, HELD IN FOLLOWING TERMS: 27. . WE AGREE THAT ALL THE PROVISIONS SHOULD BE READ TOGETHER AND GIVEN A HARMONIOUS CONSTRUCTION. ALL PROVISIONS ARE INTER-R ELATED AND CANNOT BE READ DE HORS ONE AND OTHER. THE SPECIAL BENCH IN THE CASE OF ROG INI GARMENTS HAS HELD THAT THE RESTRICTION IMPOSED BY SUB-SECTION (9) ON ACCOUNT O F 80-IA IS TO BE READ IN ALL THE PROVISIONS OF CHAPTER VI-A AND IT IS NOT POSSIBLE T O IGNORE THE RESTRICTION THAT PROFIT AND GAINS CLAIMED AND ALLOWED AS EXEMPT UNDER SUB-S ECTION (9), (TO THE EXTENT ALLOWED) CAN NOT BE ALLOWED UNDER ANY OTHER PROVISI ON OF CHAPTER C. ABOVE CONSTRUCTION IN READING RESTRICTION IN ALL RELEVANT PROVISIONS UNDER CHAPTER C, IN OUR OPINION, IS LEADING TO NO CONTRADICTION OR ABSURDIT Y AND IS REASONABLE. IT IS THE LEGISLATIVE POLICY NOT TO ALLOW REPEATED DEDUCTION OF SAME PROFIT UNDER SECTIONS OF DEDUCTIONS IN CHAPTER VI-A. WE, THEREFORE, SEE NO C ONFLICT OR CONTRADICTION IN GIVING EFFECT TO THE LEGISLATIVE MANDATE. DOING OTHERWISE WOULD, NO DOUBT, BE DOING VIOLENCE TO THE CLEAR LANGUAGE. THE ARGUMENT IS ACCORDINGLY REJECTED. . 29. HAVING DONE SO, WE ARE UNABLE TO FIND ANY SUBST ANCE IN THE ARGUMENT ADVANCED ON BEHALF OF THE TAXPAYERS. THE NOTES ON OBJECTS AN D ACCOMPANYING REASONS ARE ONLY AN AID TO CONSTRUCTION. SUCH AID TO CONSTRUCTI ON IS NEEDED WHEN LITERAL READING OF PROVISION LEADS TO AMBIGUOUS RESULTS OR ABSURDIT Y. WHERE LANGUAGE IS CLEAR AND THERE IS NO AMBIGUITY OR ABSURDITY, NOTES ON CLAUSE S NEED NOT BE REFERRED TO. THEREFORE, ON FACTS, WE DO NOT SEE ANY SUPPORT FOR THE ASSESSEE FROM NOTES ON CLAUSES OF THE FINANCE ACT. AS REGARDS CIRCULAR NO. 772 DATED 23.12.1998, WE HAVE ALREADY HELD THAT THE SAID CIRCULAR WAS DEALING WIT H RESTRICTION (B) WHICH PROVIDED THAT DEDUCTION (UNDER OTHER PROVISION WITH HEADING C), SHALL IN NO CASE EXCEED PROFIT AND GAINS OF BUSINESS OR HOTEL AS THE CASE M AY BE. THE ABOVE PORTION OF THE SECTION IS SEPARATED FROM THE OTHER PORTION OF THE SUB-SECTION BY WORD AND. IT IS, THEREFORE, CLEAR THAT THERE ARE TWO RESTRICTIONS IN THE SUB-SECTION AND CIRCULAR OF THE BOARD IS DEALING ONLY WITH THE SECOND RESTRICTION. IT IS DIFFICULT TO ACCEPT THAT CIRCULAR WAS ISSUED TO DO AWAY WITH FIRST RESTRICTION INCORP ORATED IN THE PROVISIONS. THERE IS ABSOLUTELY NO JUSTIFICATION FOR ALLOWING REPEATED D EDUCTIONS ON PROFIT AND GAIN ON ITA NO.389/AHD/2005 24 WHICH DEDUCTION HAS BEEN ALLOWED U/S 80-IA OR 80-IB OF THE ACT. THE SPECIAL BENCH IN THE CASE OF ROGINI GARMENTS RIGHTLY HELD THAT RE PEATED DEDUCTIONS OF SAME PROFIT AND GAINS OF UNDERTAKING WAS NOT INTENDED TO BE DIS ALLOWED. ABOVE CONCLUSION, IN OUR OPINION, WAS RIGHTLY ARRIVED AT AND IS CONFIRME D. 32. . IN OUR CONSIDERED OPINION, THE LANGUAGE U SED IN SECTION 80-IA(9)/80- IB(9A) IS CLEAR AND UNAMBIGUOUS AND IS REQUIRED TO BE GIVEN EFFECT TO. DEDUCTION OF PROFIT AND GAINS ALLOWED U/S80-IA/80-IB IS NOT TO B E ALLOWED AGAIN UNDER ANY OTHER PROVISION. THERE IS THEN FURTHER RESTRICTION ON TO TAL DEDUCTION NOT EXCEEDING ELIGIBLE PROFIT OF THE UNDERTAKING. NO USEFUL PURPOSE WOULD BE SERVED IN REPEATING WHAT WE HAVE OBSERVED ABOVE. 35. IN OUR CONSIDERED OPINION, ALL STATUTO RY PROVISIONS ARE INTER- RELATED AND ARE PART OF ONE SCHEME. THIS CANNOT BE READ DE HORS ONE AND OTHER. RESTRICTION IMPOSED IN SECTION 80-IA(9)/80-IB(9A) A RE TO BE READ IN ALL SECTIONS AND GIVEN EFFECT TO. THIS WOULD ONLY GIVE HARMONIOUS RE ADING. THE DECISION OF SUPREME COURT RELIED UPON BY SHRI VOHRA ALSO SUPPORT ABOVE PROPOSITION ALTHOUGH THEY DO NOT DEAL WITH SECTION 80-IA/80-IB OF THE ACT. WE ARE UN ABLE TO FIND ANY SUBSTANCE IN ABOVE ARGUMENT OF THE LEARNED COUNSEL. 36. SHRI VOHRA, ON THE APPLICABILITY OF THE DECISIO N OF HONBLE MADRAS HIGH COURT IN THE CASE OF SCM CREATIONS (SUPRA), SUBMITTED THAT P RINCIPLE HIGH COURT BEING DECISION OF A SUPERIOR COURT HAS TO BE GIVEN PREFER ENCE OVER THE DECISION OF ROGINI GARMENTS (SPECIAL BENCH). IN SUPPORT OF THIS CONTEN TION, IT WAS SUBMITTED THAT EVEN DECISION OF NON-JURISDICTIONAL HIGH COURT IS TO BE GIVEN PREFERENCE OVER THE SPECIAL BENCH DECISION. IN THIS CONNECTION, RELIANCE WAS PL ACED ON THE DECISION OF MADHYA PRADESH HIGH COURT IN THE CASE OF NATIONAL TEXTILE CORPORATION LTD. VS CIT (2008) 171 TAXMAN 339 (M.P.) AS ALSO ON THE DECISION OF HO NBLE DELHI HIGH COURT IN THE CASE OF ALL INDIA LAKSHMI COMMERCIAL BANK OFFICERS UNION VS. UNION OF INDIA 150 ITR 1. SHRI VOHRA ALSO SUBMITTED THAT CERTAIN OBSER VATIONS OF THE BENCH OF ITAT IN THE CASE OF NODI EXPORTS VS ACIT, MORADABAD, CLEARL Y EXCEEDED ITS JURISDICTION. AFTER CAREFUL CONSIDERATION OF DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF SCM CREATIONS(SUPRA), WE HAVE ALREADY HELD THAT THE SAID DECISION CANNOT BE TREATED AS A PRECEDENT. THE ISSUE HAS BEEN DISCUSSE D THREADBARE AND THOSE REASONS NEED NOT BE REPEATED AGAIN. OBSERVATIONS OF HONBLE MADRAS HIGH COURT IN THE LATER DECISION DATED 20.12.08 IN CASE OF GENER AL OPTICS (ASIA ) LTD. (SUPRA) HAS PUT THE CONTROVERSY BEYOND ANY SHADOW OF DOUBT. IN THE ABOVE CASE, AMENDMENT BROUGHT W.E.F. 1.4.99 INTRODUCING SECTION 9 AND (9A ) IN 80-IA AND 80-IB RESPECTIVELY WERE CLEARLY NOTICED. THESE AMENDMENTS WERE NOT BRO UGHT TO THE KNOWLEDGE OF THE HONBLE COURT IN THE CASE OF SCM CREATIONS. THEREFO RE, THERE IS NO QUESTION OF SUPERSESSION OF SPECIAL BENCH DECISION IN THE CASE OF ROGINI GARMENTS. THE SAID DECISION IS APPLICABLE WITH FULL FORCE. WE DO AGREE THAT CORRECT PROPOSITIONS IN THE CASE NODI EXPORTS ARE OVERSTATED. THERE IS NO QUEST ION OF TRIBUNAL NOT FOLLOWING AND APPLYING DECISION OF SUPERIOR COURT. THE QUESTION I NVOLVED HERE IS WHETHER DECISION OF SCM CREATIONS CAN BE TREATED AS A PRECEDENT. FOR THE REASONS ALREADY GIVEN, THE SAID DECISION DID NOT LAY DOWN THAT SECTION 80-IA(9 ) OR 809-IB(13) SHOULD BE DISREGARDED WHILE COMPUTING DEDUCTION U/S 80HHC OR OTHER DEDUCTION UNDER CHAPTER C OF VI-A. ITA NO.389/AHD/2005 25 37. WE ACCORDINGLY HOLD THAT DEDUCTION TO BE ALLOWE D UNDER ANY OTHER PROVISION OF CHAPTER VI-A WITH THE HEADING C IS TO BE REDUCED BY AMOUNT OF DEDUCTION ALLOWED U/S 80-IB/80-IA OF THE I.T. ACT . WE ANSWER THE QUE STION REFERRED TO THE SPECIAL BENCH IN THE AFFIRMATIVE I.E. IN FAVOUR OF THE REVE NUE. 27. IN THE LIGHT OF AFORESAID VIEW TAKEN BY THE SPECIAL BENCH OF THE ITAT AND CONSIDERING THE FACTS OF THE CASE UNDER CONSIDERATI ON, GROUND NO. 8 IS DISMISSED. 28. AS REGARDS GROUND NO.9 RELATING TO LEVY OF IN TEREST U/S 234B AND 234C OF THE ACT , THE LD. AR ON BEHALF OF THE ASSESSEE DID NOT MAKE ANY SUBMISSIONS BEFORE US. LEVY OF INTEREST U/S 234B & 234C OF THE ACT, BEING MANDATORY [COMMISSIONER OF INCOME TAX.VS ANJUM M. H. GHASWALA AND OTHERS,252 ITR 1(SC)] AND NO INFIRMITY HAVING BEEN POINTED OUT IN ITS LEVY, THIS GROUND IS DISMISSED. HOWEVER, THE AO SHALL ALLOW CONSEQUENTIAL RELIEF WHILE GIVING EFFECT TO T HIS ORDER. 29. GROUND NO. 10 RELATES TO INITIATION OF PENALTY PROCEEDINGS. THE LD. AR ON BEHALF OF THE ASSESSEE DID NOT MAKE ANY SUBMISSIONS BEFORE US ON THIS GROUND .SINCE MERE INITIATION OF PENALTY PROCEEDINGS IS NOT APPEALABLE WHILE NO ADDITIONAL GROUND HAVING BEEN RAISED IN TERMS OF RESIDUARY GROUND ,ACCORDING LY, THESE GROUNDS ARE DISMISSED. 3-. IN THE RESULT, APPEAL IS PARTLY ALLOWED, BUT FOR STATISTICAL PURPOSES THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 23 .1 2.2009. SD/- (H.L.KARWA) JUDICIAL MEMBER SD/- (A.N.PAHUJA) ACCOUNTANT MEMBER AHMEDABAD, DATED: 23 .12.2009 COPY TO : (1) THE ASSESSEE (2) ITO WARD- 4(2),AHMEDABAD. (3) CIT(A)-VIII, AHMEDABAD (4) THE CIT, CONCERNED,(5) THE DR, ITAT, AHMEDABA D, (6) GUARD FILE. BY ORDER ASSTT. REGISTRAR/ DEPUTY REGISTRAR