Dhanlaxmi Pigments Pvt.Ltd., Bharuch V. The Dy.CIT.,Bharuch Circle, Bharuch

ITA 4113/AHD/2008

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1929 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 03-11-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 23-12-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA
• Assessee Lawyers: S V AGRAWAL
• Keywords: Unexplained expenditure; Gift; Business income; Deemed to accrue or arise in india; Cost of acquisition; Capital Gains
• Section: 69C; 69B; 64; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER, AND SHRI D. C. AGRAWAL, ACCOUNTANT MEMBER ITA NO.4133/AHD/2008 ASSESSMENT YEAR: 2005-06 DATE OF HEARING:3.11.09 DRAFTED:17.11.09 DHANLAXMI PIGMENTS PVT. LTD., PLOT 3020/3021, GIDC ESTATE, PANOLI PAN NO.AABCD014H V/S . DCIT, BHARUCH CIRCLE, BHARUCH (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI S.V. AGRAWAL, AR RESPONDENT BY:- SHRI C.K. MISHRA, SR. DR O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THIS APPEAL BY THE ASSESSEE IS ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-VI, BARODA IN APPEAL NO.CAB /VI-281/07-08 DATED 16- 09-2008. THE ASSESSMENT WAS FRAMED BY THE DCIT, BHA RUCH CIRCLE, BHARUCH U/S.143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) VIDE HIS ORDER DATED 26-09-2007 FOR THE ASSESSMENT YEAR 2005-06. 2. THE ONLY ISSUE IN THIS APPEAL OF THE ASSESSEE IS AGAINST THE ORDER OF CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSING OF FICER IN TREATING THE INCOME DECLARED DURING THE COURSE OF SURVEY U/S.133A OF TH E ACT ON ACCOUNT OF CASH GIFTS AS INCOME FROM OTHER SOURCES THEREBY DISALLOW ING DEDUCTION U/S.80-IB OF THE ACT. FOR THIS SOLITARY ISSUE, THE ASSESSEE HAS RAISED THE FOLLOWING FIVE GROUNDS :- ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 2 [1] THE LEARNED CIT(A)S ORDER TREATING CASH DEPOS ITS OF RS.1,44,000/- TO BE NON-BUSINESS INCOME, IS ERRONEOUS IN AS MUCH AS THE COMPANY WAS INCORPORATED WITH A MAIN OBJECT TO CARRY OUT MA NUFACTURING OF CHEMICAL PIGMENTS AND EXCEPT MANUFACTURING A PRODUC T, CPC BLUE, NON OTHER BUSINESS ACTIVITY HAD BEEN CARRIED OUT SINCE THE YEAR OF INCORPORATION. [2] THE REVENUE AUTHORITIES HAD NOT OBSERVED ANY OT HER MANUFACTURING ACTIVITY INCOMPETENT FOR THE CLAIM OF DEDUCTION U/S .80IB. THUS, THE EXCESS CASH & CASH DEPOSITS DECLARED AS INCOME, RES EMBLE CASH GENERATED & DERIVED FROM THE MAIN & NORMAL MANUFACT URING ACTIVITY OF THE ASSESSEE COMPANY, ELIGIBLE FOR DEDUCTION U/S.80 IB. [3] THE LEARNED CIT(A) SHOULD HAVE APPRECIATED AT POINT NO.16 OF THE STATEMENT RECORDED DURING THE COURSE OF SURVEY, THE DEPARTMENT ITSELF HAD PROPOSED THE ADDITIONAL INCOME OF RS.12,44,000/ - TO BE PART OF INCOME OF THE BUSINESS OF THE ASSESSEE AND THE DIRE CTOR OF THE COMPANY HAD AGREED WITH THE PROPOSITION, THE FOLLOWING WAS THE QUESTION AT POINT NO.16 AND CORRESPONDING ANSWER; Q-16. LOOKING TO YOUR ABOVE DEALINGS IT CANNOT BE B ELIEVED THAT ON 30.08.04, THE DIRECTOR AND THE FAMILY MEMBERS HAVE RECEIVED THE GIFT OF RS.12,44,000/-. YOU ARE BEING ASKED ONCE AGAIN IF T HE GIFT RECEIVED BY DIRECTOR AND HIS FAMILY MEMBERS IS NOTHING BUT THE INCOME OF YOUR BUSINESS WHICH HAS BEEN CREDITED TO THE DIRECTOR AND HIS FA MILY MEMBERS IN THE FORM OF GIFT. IT IS AN APPREHENSION THAT IT HAS, IN FACT, TAKEN FROM THE INCOMES IN ADDITION TO INCOMES DISCL OSED AS PER YOUR BOOKS. YOU ARE BEING GIVEN ONE MORE OPPORTUNITY TO DISCLOSE THE TRUE FACT IN RELATION TO THE AFORESAID MATTER. A AS AN ANSWER TO YOUR QUESTION I, AFTER DISCUSSION WITH OTHER DIRECTOR MR. MANUBHAI P RAMOLIA, WHO IS MY BROTHER AND WITH FULL UNDERSTANDING, INFORM YOU THAT AMOUNT OF GIFTS, IS, IN REALITY, THE INCOME OF THE COMPANY DHANLAXMI PIGMENTS PVT. LTD. FOR THE CURRENT YEAR I.E. F.Y 2004-05. I ACCEPT THE SAID AM OUNT AS ADDITIONAL INCOME OF THIS COMPANY AND I AM READY TO PAY REQUIR ED TAX ON IT. [4] THE LEARNED CIT(A) SHOULD HAVE APPRECIATED THE JUDGMENT OF HBLE AMRITSAR TRIBUNAL IN KASHMIR STEEL ROLLING MILLS V . DCIT (1991) 39 TTJ 126; INCOME DISCLOSED UNDER THE AMENSTY SCHEME - NO MATE RIAL BROUGHT ON RECORD BY THE REVENUE TO PROVE THAT THE INCOME DISCLOSED WAS NOT DERIVED FROM ASSESSEES INDUSTRIA L UNDERTAKING BUT FROM SOME DIFFERENT SOURCE. THIS BEING THE ONLY SOURCE OF INCOME OF THE ASSESSEE-FIRM, THERE IS STRONG CIRCUM STANTIAL EVIDENCE TO CONCLUDE THAT SUCH INCOME WAS DERIVED F ROM THE INDUSTRIAL UNDERTAKING. [5] THE APPELLANT CRAVES LEAVE TO ADD/AMEND/ALTER/M ODIFY ALL OR ANY OF THE ABOVE GROUNDS DURING THE COURSE OF HEARING ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 3 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF CHEMICALS. A SURVEY U /S.133A OF THE ACT WAS CONDUCTED ON THE BUSINESS PREMISES OF THE ASSESSEE- COMPANY ON 27-10-2004 AND DURING THE COURSE OF SURVEY, THE FOLLOWING ADDI TIONAL INCOME WAS DECLARED BY THE ASSESSEE:- I ON ACCOUNT OF CASH GIFT RS.12,44,000 II ON ACCOUNT OF CASH RS. 2,32,625 III ON ACCOUNT OF EXCESS STOCK OF WORK-IN-PROGRESS RS. 3,33,500 TOTAL RS.18,10,125 DURING THE COURSE OF SURVEY FROM THE PREMISES OF TH E ASSESSEE EIGHT BANK RECEIPTS REPRESENTING VARIOUS DEPOSITS IN THE NAME OF DIRECTORS AND THEIR FAMILY MEMBERS WERE FOUND TOTALING TO RS.12.44 LAKH S. THIS AMOUNT WAS DISCLOSED AS ADDITIONAL INCOME AT THE TIME OF SURVE Y BY THE DIRECTORS OF THE ASSESSEE-COMPANY SHRI MANUBHAI P RAMOLIA. THE ASSES SING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT T HE ASSESSEE HAS CLAIMED DEDUCTION U/S.80IB OF THE ACT ON THIS INCOME DISCLO SED ON ACCOUNT OF CASH GIFTS AMOUNTING TO RS.12.44 LAKHS AND AFTER DISCUSS ING THE SUBMISSION OF THE ASSESSEE, DISALLOWED THE DEDUCTION U/S.80IB OF THE ACT OF THIS AMOUNT OF RS.12.44 LAKHS VIDE PARA-7 OF HIS ASSESSMENT ORDER AS UNDER:- 7. ON VERIFICATION, IT IS SEEN THAT THE ASSESSEE H AS CLAIMED DEDUCTION U/S.80IB OF THE ACT OF RS.6,71,279/- WORKED OUT ON TOTAL INCOME OF RS.22,37,597/- COMPUTED BY THE ASSESSEE. AS STATED ABOVE, DURING THE SURVEY ACTION, THE ASSESSEE ADMITTED RS.18,10,125/- AS ADDITIONAL INCOME. THE DISCLOSED INCOME IS CONSIST OF AS UNDER :- 1. ON ACCOUNT OF CASH GIFTS RS.12,44,000 2. ON ACCOUNT OF CASH RS. 2,32,625 3. ON ACCOUNT OF EXCESS STOCK IN WORK IN PROGRESS RS. 3,33,500 RS.18,10,125 ========== THE DEDUCTION U/S.80IB OF THE ACT IS ADMISSIBLE FOR THE INCOME OF THE INDUSTRIAL UNDERTAKING AS PER THE PROVISIONS OF THE I.T. ACT. THE INCOME DISCLOSED BY THE ASSESSEE IS NOT A BUSINESS INCOME BUT IT IS INCOME FROM OTHER SOURCES. THE ASSESSEE HAS ADMITTED THE GIFT OF ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 4 RS.12,44,000/- AND CASH OF RS.2,3,65/- AS ADDITIONA L INCOME. THIS INCOME IS NOT THE BUSINESS INCOME HENCE THE ASSESSE E WAS ASKED AS TO WHY THE DEDUCTION U/S.80IB OF THE ACT SHOULD NOT BE DISALLOWED ON THIS INCOME SHOWN IN THE RETURN OF INCOME FILED. THE ASS ESSEE SUBMITTED REPLY DATED 17/09/007 WHICH IS AS UNDER:- ELIGIBLE OF DEDUCTION U/S.80IB ON THE VALUE OF EXCE SS STOCK AS MENTIONED EARLIER, THE ABOVE EXCESS STOCK WAS A SEMI FINISHED GENERATED PIECE BY PIECE OVER DIFFERENT MANUFACTURI NG PROCESS WITHIN THE FACTORY PREMISES OF THE ASSESSEE. HERE, THE ACTIVITY OF MANUFACTURING CPC BLUE WAS ELIGIBLE FOR DEDUCTION U /S.80IB. THE ASSESSEE COMPANY HAD BEEN, SINCE ITS INCORPORATION, CARRYING OUT A SOLE MANUFACTURING WHICH WAS ELIGIBLE FOR DEDUCTI ON U/S. 80IB. THE ASSESSEE COMPANY HAD, SINCE ITS INCORPORATION, NEVER CARRIED OUT ANY OTHER MANUFACTURING ACTIVITY NOT ELIGIBLE F OR DEDUCTION U/S.80IB. ALSO, DURING THE COURSE OF SURVEY, THE IN COME-TAX DEPARTMENT HAD NOT OBSERVED ANY OTHER MANUFACTURING ACTIVITY INCOMPETENT FOR THE CLAIM OF DEDUCTION U/S.80IB. SINCE, THE DECLARED INCOME OF RS.3,33,500/- WAS DIR ECTLY PERTAINING & DERIVED FROM THE MANUFACTURING ACTIVIT Y OF THE ASSESSEE, THE SAME IS ELIGIBLE FOR DEDUCTION U/S.80 IB. ELIGIBLE OF DEDUCTION U/S.80IB ON THE INCOME BEING EXCESS CASH FOUND DURING SURVEY & ON LOANS. THE ASSESSEE COMPANY HAD DECLARED AS INCOME OF RS.18,10,125/- OF WHICH RS.14,76,625/- IS FOR CASH AND LOANS, RS.232625/- FOR EXCESS CASH FOUND AT THE TIME OF SU RVEY & RS.12,44,000/- ADDITION FOR UNSECURED LOAN. AS MENT IONED AT POINT NO.3, THE ASSESSEE COMPANY HAS BEEN MANUFACTURING C PC BLUE SINCE, THE YEAR OF ITS INCORPORATION & IT WAS A SOL E MANUFACTURING ACTIVITY CARRIED OUT SINCE THEN TO THE DATE OF SURV EY, BEING ELIGIBLE FOR DEDUCTION U/S.80IB. THE FOLLOWING IS THE MAIN OBJECT AS PER MEMORANDUM OF ASSOCIATION:- TO CARRY OF BUSINESS AS MANUFACTURERS, FORMULATORS , PROCESSORS, PRODUCERS, MAKERS, BUYERS, SELLERS, RE- SELLERS, IMPORTERS, EXPORTERS, DISTRIBUTORS, SUPPLIERS, FERM ENTATIONS, DISTILLERS, REFINERS, STOCKIEST, AGENTS, MERCHANTS, DEVELOPERS, CONSULTANTS AND DEALERS, IN ALL TYPES, FORMS (SOLID LIQUID AND GASEOUS) AND OF ALL KINDS OF CHEM ICALS AND CHEMICALS COMPOUNDS (ORGANIC AND INORGANIC) HEAVY CHEMICALS, ACIDS, ALKALIES, TANNIS, TANNIS EXTRACTS , SOLVENTS, DYESTUFFS, DYES, PIGMENTS, COLOURS, RESINS, CHEMICA L, AUXILIARIES, MICROC CRYSTALLINER, BIO AND COLLOIDAL CHEMICAL ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 5 SPARAY DRIED PRODUCTS, ITS INTERMEDIATES, DERIVATIV ES SUSPENSIONS, GELS, POWDERS, FORMULATIONS, DOWNSTREA MS, INGREDIENTS AND BYPRODUCTS AND THEIR RELATED PREPAR ATIONS ACTIVITIES AND PRODUCTS.: ALSO, THE MEMORANDUM OF ASSOCIATIONS, IN ITS MAIN O BJECT CLAUSE, MENTIONS THE OBJECT OF THE COMPANY IS TO MANUFACTURE CHEMICALS AND THE MAIN OBJECT CLAUSE HA S NOT BEEN AMENDED SINCE, THE DATE OF INCORPORATION. THUS , THE VIEW THAT THE MANUFACTURING ACTIVITY CARRIED OUT BY THE COMPANY WAS A MAIN OBJECT FOR THE INCORPORATION OF THE COMPANY, IS BEING SUPPORTED BY THE MEMORANDUM OF ASSOCIATION. IN FACT FOR CARRYING OUT ANY OTHER ACT IVITY, THE COMPANY REQUIRES TO CHANGE THE MAIN OBJECT CLAUSE W ITH PASSING A SPECIAL RESOLUTION. ALSO, DURING THE COURSE OF SURVEY, THE INCOME-TAX DEPARTMENT HAD NOT OBSERVED ANY OTHER MANUFACTURING ACTIVITY INCOMPETENT FOR THE CLAIM OF DEDUCTION U/S .80IB. THUS, THE EXCESS CASH AND LOANS DISCLOSED AS INCOME , RESEMBLES THE CASH GENERATED & DERIVED FROM MAIN & NORMAL MANUFACTURING ACTIVITY OF THE ASSESSEE COMPA NY AND HENCE, THE SAME IS ELIGIBLE FOR DEDUCTION U/S.8 0IB. THE REPLY OF THE ASSESSEE IS CONSIDERED. SO FAR AS THE DEDUCTION U/S.80IB OF THE ACT ON THE ADDITIONAL INCOME SHOWN BY WAY OF WORK IN PROGRESS OF RS.3,33,500/- IS CONCERNED IT C AN BE ALLOWED. HOWEVER, FOR THE REMAINING AMOUNT, THE DEDUCTION U/ S.80IB OF THE ACT CANNOT BE ALLOWED. THE ADDITIONAL INCOME ADMITT ED AT THE TIME OF SURVEY ACTION U/S.133A OF THE ACT IS OF THE CASH DEPOSITED IN THE VARIOUS BANK ACCOUNTS, WHICH WERE DISCLOSED AS GIFT AMOUNTING TO RS.12,44,000/- AND CASH OF RS.2,32,625 /-, WHICH WAS NOT RECONCILED WITH THE CASH BOOK. THESE ARE NO T THE BUSINESS INCOME OF THE ASSESSEE. THE ADDITIONAL INC OME DISCLOSED IS THE INCOME FROM OTHER SOURCES AS THE SOURCE OF THIS INCOME IS NOT KNOWN AND THEREFORE THIS INCOME IS CH ARGED TO TAX AS INCOME FROM OTHER SOURCES. THIS FACT IS ALSO S UPPORTED BY GUJARAT HIGH COURT DECISION IN THE CASE OF FAKIR MOHMED HAJI HASAN V/S. C.I.T. REPORTED IN 247 ITR 290. THEREFORE, THE ASSESSEE IS NOT ENTITLED TO THE DEDUCTION U/S.80IB OF THE ACT ON THIS INCOME. IN VIEW OF THIS THE DEDUCTION U/S.80IB OF THE ACT IS WORKED OUT ON RS.12,69,972/- @ 30% WHICH COMES TO RS.3,80,991 WHICH IS ALLOWED AS DEDUCTION U/S.80IB OF THE ACT. ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 6 4. THE ASSESSING OFFICER IN COMPUTATION OF INCOME HAS ADDED THIS INCOME FROM OTHER SOURCES BY STATING AS UNDER:- ADD: INCOME FROM OTHER SOURCES DISCLOSED AT THE TI ME OF SURVEY U/S.133A OF THE ACT RS.14,76,625/- 5. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE CIT(A) AND HE CONFIRMED THE DISALLOWANCE AFTER DISTINGUISHING THE CASE LAW IN THE CASE OF KASHMIR STEEL ROLLING MILLS (1991) 39 TTJ 126 (AMR); LAKHMICHAND BAIJNATH V. CIT (1959) 35 ITR 416 (SC) AND ALSO DAULATRAM RAWAT MULL V. CIT (1967) 64 ITR 593 (CAL) BY GIVING FOLLOWING FINDING IN PARA-11 AND 12 OF HIS APPELLATE ORDER:- 11. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF APPELLANT, ASSESSMENT ORDER AND THE DECISIONS CITED IN THE CON TEXT. DEDUCTIONS OUT OF TOTAL INCOME UNDER CHAPTER VIA ARE PROVIDED WITH SPECIFIC PURPOSE AND INTENTION, I.E. TO PROMOTE SAVING, TO PROMOTE I NDUSTRIALIZATION, PROMOTE DEVELOPMENT OF BACKWARD AREA, DEVELOP INFRA STRUCTURE, PROMOTE EXPORT AND SO ON. DEDUCTION UNDER SECTION 8 0IB IS PROVIDED INTER ALIA FOR SETTING UP OF NEW INDUSTRIAL UNDERTAKING AND F OR DEVELOPMENT OF BACKWARD DISTRICTS. TO SECURE SUCH D EDUCTION IT IS PRESUMED THAT THE ASSESSEE WOULD FOLLOW THE LAW OF LAND AND ALSO SATISFY THE CONDITIONS STIPULATED IN SECTION 80IB. IF THE ELIGIBLE BUSINESS IS NOT OPERATED ACCORDING TO THE ESTABLISHED BUSINE SS AND ACCOUNTING PRINCIPLES AND CORRECT TURN OVER IS NOT DISCLOSED O R CORRECT TAXES ARE NOT PAID, THE ASSESSEE CANNOT SEEK BENEFIT OF THE CONCE SSIONAL PROVISIONS. IN THE INSTANT CASE, DURING THE COURSE OF SURVEY IT WAS REVEALED THAT INCOME TO THE EXTENT OF RS.147665/- HAD NOT BEEN DI SCLOSED TO THE DEPARTMENT AND ON BEING FOUND OUT THE APPELLANT CLA IMED THAT IT WAS GENERATED OUT OF THE BUSINESS ACTIVITIES. IF THAT BE SO THEN THERE WOULD BE UNDISCLOSED PURCHASES, UNDISCLOSED EXPENSES AND UNDISCLOSED SALES. IN OTHER WORDS THE BOOK RESULTS WOULD HAVE N O SANCTITY. NEITHER IN ASSESSMENT OR APPELLATE PROCEEDINGS THE APPELLANT H AS DISCLOSED THE MODU9S OPERANDI AS TO HOW SUCH UNDISCLOSED INCOME HAS BEEN EARNED. IN OTHER WORDS IN THE ABSENCE OF DETAILS, IT IS NOT EVIDENT THAT THE SAID INCOME WAS CONCLUSIVELY FROM ITS BUSINESS ACTIVITIE S. THE ACTIVITIES OF THE ASSESSEE ARE WITHIN ITS SPECIAL KNOWLEDGE AND S ECTION 106 OF THE EVIDENCE ACT REQUIRES THE ASSESSEE, NOT THE DEPARTM ENT, TO DISCLOSE IT AND PROVE IT. THE APPELLANT CANNOT BE ALLOWED TO PR OFIT FROM HIS MISCHIEF. 12. IN VIEW OF THE ABOVE AND CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, IN MY HUMBLE VIEW THE APPELLANT IS NOT ELIGIBLE FOR BENEFIT U/S.80IB OF THE ACT. THE DISALLOWANCE OF RS.14,76,6 25/- IS THEREFORE CONFIRMED. ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 7 AGGRIEVED, THE ASSESSEE CAME IN SECOND APPEAL BEFOR E US. 6. BEFORE US LD. COUNSEL FOR THE ASSESSEE STATED TH AT THE ASSESSEE- COMPANY WAS INCORPORATED ON 23-10-1998 WITH AN OBJE CT TO MANUFACTURE PIGMENTS & ORGANIC AND INORGANIC CHEMICALS AND THE COMPANY HAS BEEN MANUFACTURING A SOLE PRODUCT, NAMELY, CPC BLUE SINC E THE YEAR OF ITS INCORPORATION. ACCORDING TO THE ASSESSEE, IT WAS SO LE PRODUCT WHICH HAS BEEN MANUFACTURED & SOLD BY THE COMPANY SINCE ITS INCORP ORATION AND FURTHER CLAIMED THAT THE ASSESSEE-COMPANY WAS ELIGIBLE TO C LAIM DEDUCTION U/S.80IB OF THE ACT. HE STATED THAT THE ASSESSEE-COMPANY WA S SUBJECT TO INCOME-TAX SURVEY ON 27-10-2004 AND THE ASSESSEE ADMITTED AN A DDITIONAL INCOME OF RS.18,10,125/- AS STATED BELOW:- RS. 1. ON ACCOUNT OF CASH DEPOSITS FOUND TO HAVE BEEN 12,44,000 MADE IN BANKS ACCOUNTS OF DIRECTOR S AND FAMILY MEMBERS. 2. EXCESS CASH FOUND 2,32,625 3. EXCESS WORK-IN-PROGRESS 3,33,500 DECLARED INCOME 18,10,125 ======== HE NARRATED THE FACT THAT ON DATE OF SURVEY AT THE PREMISES OF THE ASSESSEE- COMPANY BANK DEPOSIT SLIPS WERE FOUND AGGREGATING C ASH DEPOSIT OF RS.12,44,000/- IN THE BANK ACCOUNTS OF THE DIRECTOR S AND THEIR FAMILY MEMBERS. HE STATED THAT THE DEPARTMENT TREATED THE SAME AS AN INCOME OF THE ASSESSEE-COMPANY SINCE THE BANK DEPOSIT SLIPS W ERE LYING AT THE PREMISES OF THE ASSESSEE-COMPANY AND WHILE FILING THE RETURN OF INCOME, THE ASSESSEE- COMPANY TREATED THE DECLARED INCOME OF RS.18,10,125 /- TO BE PART OF BUSINESS INCOME AND ACCORDINGLY TAKEN THE SAME INTO CONSIDER ATION WHILE COMPUTATION OF DEDUCTION U/S.80IB OF THE ACT. HE NARRATED THAT THE ASSESSING OFFICER, DURING THE ASSESSMENT PROCEEDINGS TREATED ONLY EXCE SS WORK-IN-PROGRESS RS.3,33,500/- TO BE PART OF BUSINESS INCOME AND TRE ATED THE BALANCE DECLARED ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 8 INCOME OF RS.14,76,625/- PERTAINING TO EXCESS CASH AND CASH DEPOSITS TO BE NON-BUSINESS INCOME AND DISALLOWED THE ASSESSEES C LAIM OF DEDUCTION U/S.80IB TO THAT EXTENT. THE LD. COUNSEL FOR THE A SSESSEE DRAWN OUR ATTENTION TO THE ASSESSEES PAPER BOOK PAGES-10 TO 13 AND PARTICULARLY QUESTION NO.14 TO 16 AND 19 TO 20 AND STATED THAT VIDE QUESTION NO .16 WHILE THE ASSESSING OFFICER HIMSELF HAS ADMITTED THIS INCOME AS INCOME FROM BUSINESS AND NOW HE CANNOT TREAT THE SAME AS INCOME FROM OTHER SOURCES. ACCORDINGLY, THE LD. COUNSEL FOR THE ASSESSEE URGED THE BENCH TO DEDUCTI ON U/S.80-IB ON THIS INCOME. 7. ON THE OTHER HAND, LD. SR. DR, SHRI C.K. MISHRA STATED THAT THE GIFT RECEIVED BY THE DIRECTORS AND THEIR FAMILY MEMBERS CANNOT BE THE BUSINESS INCOME OR INCOME FROM INDUSTRIAL UNDERTAKING SO AS TO ELIGIBLE U/S.80-IB OF THE ACT. HE STATED THAT EVEN THIS INCOME IS ACCEPTED A S BUSINESS INCOME, IT CANNOT BE CALLED AS DERIVED FROM INDUSTRIAL UNDERTA KING AND HE RELIED ON THE CASE OF LAW OF HONBLE APEX COURT IN THE CASE OF LIBERTY INDIA LTD. V. CIT (2009) 317 ITR 218 (SC) AND HE ARGUED THAT THE LOWER AUTHORITIES HAVE RIGHT LY TREATED THE INCOME DISCLOSED AT THE TIME OF SURVEY AS INCOME FROM OTHER SOURCES. HE FURTHER STATED THAT THE ASSESSEE-COMPA NY NEITHER BEFORE THE LOWER AUTHORITIES NOR BEFORE THE TRIBUNAL IS ABLE T O EXPLAIN HOW THIS INCOME IS RELATED TO OR DERIVED FROM NEW INDUSTRIAL UNDERTAKI NG OR INDUSTRIAL UNDERTAKING SET UP IN BACKWARD AREAS. THE UNEXPLAINED GIFTS CR EDITED IN THE ACCOUNTS OF THE DIRECTORS OR THE FAMILY MEMBERS OF THE ASSESSEE -COMPANY CANNOT BE TREATED AS INCOME DERIVED FROM INDUSTRIAL UNDERTAKI NG AND THERE IS NO NEXUS WITH THE EARNING OF THIS INCOME WITH THE NEW INDUST RIAL UNDERTAKING OR INDUSTRIAL UNDERTAKING SET UP IN BACKWARD AREA. IN VIEW OF THE SE ARGUMENTS, THE LD. SR. DR URGED THE BENCH TO CONFIRM THE ORDERS OF THE LOW ER AUTHORITIES. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE CASE RECORDS INCLUDING THE ASSESSMENT ORDER, THE ORDER OF CIT(A) AND THE SUBMISSIONS AND PAPER BOOK FILED BY THE ASSESSEE. WE HAVE ALSO CON SIDERED THE CASE LAW ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 9 RELIED ON BY BOTH THE SIDES. THE BRIEF FACTS NARRA TED ARE UNDISPUTED THAT DURING THE COURSE OF SURVEY ON THE PREMISES OF THE ASSESSEE ON 27-10-2004 CASH GIFTS WERE SURRENDERED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER. IT WAS CONTENDED BY THE ASSESSEE THAT IT HAD SOLE MANU FACTURING UNIT SINCE INCORPORATION AND NEVER CARRIED OUT ANY OTHER BUSIN ESS ACTIVITY. ACCORDING TO HIM, THE DEPARTMENT COULD NOT FIND OUT ANY OTHER AC TIVITY AND ACCORDINGLY EXCESS CASH OR LOANS FOUND DEPOSITED IN THE BANK AC COUNTS OF THE DIRECTORS OR THE RELATIVES AND DISCLOSED AS BUSINESS INCOME IS D ERIVED FROM MANUFACTURING ACTIVITY AND IS ELIGIBLE FOR DEDUCTION U/S.80IB OF THE ACT. THE ASSESSING OFFICER FOUND THAT THE ADDITIONAL INCOME IN RESPECT OF CASH DEPOSITED IN VARIOUS BANK ACCOUNTS ON ACCOUNT OF THE GIFTS RECEIVED FROM RELA TIVES WERE NOT TREATED BY THE AO AS BUSINESS INCOME BUT AS INCOME FROM OTHER SOURCES PLACING RELIANCE ON THE DECISION OF HONBLE JURISDICTIONAL HIGH COUR T IN THE CASE OF SHRI FAKIR MOHMMED HAJI HASSAN V. CIT (2007) 247 ITR 290 (GUJ). NOW, WE HAVE TO GO THROUGH THE STATEMENT OF SHRI CHATURBHAI PHOPTBHAI RAMOLIA RECORDED AT THE TIME OF SURVEY ON 27-10-2004 AT THE PREMISES OF ASS ESSEE AND THIS STATEMENT WAS REFERRED BY THE LD. COUNSEL FOR THE ASSESSEE AN D HE REFERRED PARTICULARLY QUESTION NO.14 TO 16 AND THEREAFTER QUESTION NO.19. HE PARTICULARLY REFERRED TO QUESTION NO.16 AND STATED THAT THE AO HIMSELF HA S ACCEPTED THIS AS INCOME FROM BUSINESS BY ASKING THAT THE GIFTS RECEIVED BY THE DIRECTORS AND HIS FAMILY MEMBERS ARE NOTHING BUT INCOME FROM BUSINESS, WHICH HAVE BEEN RECORDED IN THE NAMES OF DIRECTORS AND HIS FAMILY MEMBERS IN TH E FORM OF GIFTS. THE FOLLOWING ARE THE QUESTIONS ASKED DURING THE COURSE OF STATEMENT AND THE RELEVANT QUESTIONS READ AS:- Q-14 DURING THE SURVEY CONDUCTED TODAY WE HAVE OBT AINED BANK SLIP BOOK (ANK. NAG. SAH. BANK) AND PASS BOOK OF ORIENTA L BANK OF COMMERCE (OBC) AND COMPUTERIZED STATEMENT IN WHICH INFORMATION REGARDING NAME OF PERSON AND AMOUNT RECEIVED IS SHO WN. VERIFY THE GIVEN ANNEXURE B WHEREIN INVENTORY OF THESE THREE I TEMS IS SHOWN AND EXPLAIN ABOUT IT. A. AFTER VERIFYING THE STATEMENT, BANK PASS BOOK AN D SLIP IN ANNEXURE B I EXPLAIN THAT NAMES OF THE PERSON ARE THAT OF DIRE CTOR AN HIS FAMILY MEMBERS. THE AMOUNT RELATES TO CASH DEPOSITED IN BA NK AND ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 10 RECEIVED AMOUNT RELATES TO THAT RECEIVED FROM RELAT IVES OF DIRECTORS. THE DIRECTOR HAS RECEIVED GIFTS FROM RELATIVES FOR HIMSELF AS WELL AS FOR HIS FAMILY MEMBERS. THIS AMOUNT OF GIFT HAS BEE N TAKEN BY DEMAND DRAFT OF ANK. NAG. SAH. BANK ON 30-08-2004. THE SAID AMOUNT IS CREDITED IN OBC BANK IN THE DIRECTORS AN D HIS FAMILY MEMBERS NAME. Q-15 AS STATED BY YOU THAT THE GIFT HAS BEEN RECEIV ED IN THE NAME OF DIRECTOR AND HIS FAMILY MEMBER DISCLOSE NAME, ADDRE SS AND OCCUPATION OF THE PERSON WHO HAVE DONATED THE GIFT. ALSO STATE AND EXPLAIN ABOUT THE CASH DEPOSITED BY THEM ON SAME DATE, 30-08-04 W ITH ANK. NAG. SAH. BANK. A. THE PERSONS WHO HAVE PRESENTED THE GIFT ARE THE RESIDENTS OF DISTRICT-AMRELI. THEY BELONG TO THE VILLAGE OF THE DIRECTOR. THEY ARE FARMERS. Q-16 LOOKING TO YOUR ABOVE DEALINGS, IT CANNOT BE B ELIEVED THAT ON 30- 0-2004, THE DIRECTOR AND THE FAMILY MEMBERS HAVE RE CEIVED THE GIFT OF RS.12,44,000. YOU ARE BEING ASKED ONCE AGAIN IF THE GIFT RECEIVED BY DIRECTOR AND HIS FAMILY MEMBERS IS NOTHING BUT THE INCOME FROM BUSINESS WHICH HAS BEEN CREDITED TO THE DIRECTOR AN D HIS FAMILY MEMBERS IN THE FORM OF GIFT. IN FACT, IT IS TAKEN O UT OF THE INCOMES IN ADDITION TO INCOMES DISCLOSED AS PER YOUR BOOKS. YO U ARE BEING GIVEN ONE MORE OPPORTUNITY TO DISCLOSE THE TRUE FACT IN R ELATION TO THE AFORESAID MATTER. A. AS AN ANSWER TO YOUR QUESTION I, AFTER DISCUSSIO N WITH OTHER DIRECTOR MR. MANUBHAI P ROMALIA, WHO IS MY BROTHER AND WITH FULL UNDERSTANDING, INFORM YOU THAT AMOUNT OF GIFTS, IS IN REALITY, THE INCOME OF THE COMPANY DHANLAXMI PIGMENTS, PVT. LTD. EARNED IN THE CURRENT YEAR I.E. F.Y. 2004-05. I ACCEPT THE SAID A MOUNT AS ADDITIONAL INCOME OF THIS COMPANY AND I AM READY TO PAY REQUIR ED TAX ON IT. Q-19 TODAY WE FOUND CASH FROM YOUR PLACE OF RS.2,32 ,625 AND AS YOU EXPLAINED CASH BOOK IS NOT WRITTEN AND HENCE CASH O N HAND AS PER BOOKS CAN NOT BE ASCERTAINED. SO EXPLAIN THIS CASH AND WHY THE CASH OF RS.232625/- SHOULD NOT BE TREATED AS ADDITIONAL INC OME OF YOUR BUSINESS. A. I AGREE THAT OUR COMPANYS CASH BOOK IS NOT UPDA TED. SO I AGREE THAT THE ADDITIONAL AMOUNT FOUND IN OUR COMPANYS OFFICE IS OUR ADDITIONAL INCOME AND I PROMISE TO PAY THE TAX ON THE SAME. 9. WE FURTHER FIND THAT THIS INCOME DECLARED BY T HE ASSESSEE-COMPANY DURING THE COURSE OF SURVEY WAS ON ACCOUNT OF CASH DEPOSIT ED IN THE BANK A/C. OF THE ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 11 ASSESSEE-COMPANY AS GIFTS RECEIVED FROM DIRECTORS O R RELATIVES OF DIRECTORS. THE ASSESSEE COULD NOT ADDUCE ANYTHING THAT THESE G IFTS ARE GENERATED OUT OF THE BUSINESS INCOME OF INDUSTRIAL UNDERTAKING ELIGI BLE FOR DEDUCTION. FOR THIS THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE CASE LAW IN THE CASE OF KASHMIR STEEL ROLLING MILLS V. DCIT (1991 39 TTJ 126 (AMR), WHEREIN THE TRIBUNAL HAS ALLOWED DEDUCTION U/S.80HH AND 80-I ON THE INCOME DISCLOSED UNDER THE AMNESTY SCHEME, WHERE THE REVENUE COULD N OT PROVE THAT THE INCOME DISCLOSED WAS NOT DERIVED FROM THE ASSESSEE S INDUSTRIAL UNDERTAKING BUT FROM SOME OTHER SOURCES. BUT IN THE PRESENT CAS E BEFORE US, REVENUE IS ABLE TO ASSESS THE INCOME AS INCOME FROM OTHER SOUR CES BY PROVING THAT THE GIFTS RECEIVED BY THE DIRECTORS AND HIS FAMILY MEMB ERS OF THE ASSESSEE- COMPANY IS INCOME FROM OTHER SOURCES BEING NON-GENU INE GIFTS. FURTHER IN THE CASE OF LAKHMICHAND BAIJNATH (SUPRA) WAS THAT THE INCOME RECEIVED REPRESENTING CASH CREDIT IS BUSINESS INCOME DERIVED FROM THE BUSINESS OF THE ELIGIBLE UNIT BUT IN THE PRESENT CASE, THE FACTS AR E ENTIRELY DIFFERENT. 10. AFTER GOING THROUGH THE PROVISIONS OF SECTION 8 0-IB OF THE ACT, WHICH PROVIDES FOR ALLOWING DEDUCTION IN RESPECT OF PROFI T & GAINS DERIVED FROM THE ELIGIBLE BUSINESS, WE FIND THAT IN THE PRESENT CASE THE CASH GIFTS DISCLOSED BY THE DIRECTORS AND THEIR RELATIVES AS DEPOSITED IN T HE BANK ACCOUNTS AS BUSINESS INCOME CANNOT BE A PROFIT & GAINS DERIVED FROM THE ELIGIBLE BUSINESS. THE ASSESSING OFFICER HAS RECORDED A CATEGORICAL FI NDING THAT THE INCOME DISCLOSED ON ACCOUNT OF GIFTS RECEIVED AND DEPOSITE D IN THE NAME OF DIRECTORS AND THEIR RELATIVES BY THE ASSESSEE-COMPANY IS INCO ME FROM OTHER SOURCES AS THE ASSESSEE-COMPANY COULD NOT PROVE THAT THIS INCO ME IS DERIVED FROM ELIGIBLE BUSINESS OF THE ASSESSEE-COMPANY, I.E. FRO M MANUFACTURING UNIT OF THE ASSESSEE-COMPANY. THIS VIEW HAS BEEN FORTIFIED BY T HE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF SHRI FAKIR MOHMMED HAJI HASSAN (SUPRA), WHEREIN IT IS HELD ( PAGES-293-294) AS UNDER:- THE SCHEME OF SECTIONS 69, 69A, 69B AND 69C OF THE INCOME-TAX ACT, 1961, WOULD SHOW THAT IN CASES WHERE THE NATURE AND SOURCE OF ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 12 INVESTMENTS MADE BY THE ASSESSEE OR THE NATURE AND SOURCE OF ACQUISITIONS OF MONEY, BULLION, ETC., OWNED BY THE ASSESSEE OR THE SOURCE OF EXPENDITURE INCURRED BY THE ASSESSEE ARE NOT EXPLAINED AT ALL, OR NOT SATISFACTORILY EXPLAINED, THEN, THE VALUE OF SUCH INVESTMENTS AND MONEY OR THE VALUE OF ARTICLES NOT RECORDED IN THE BOOKS OF ACCOUNT OR THE UNEXPLAINED EXPENDITURE MAY BE DEEMED TO BE THE INCOME OF SUCH ASSESSEE. IT FOLLOWS THAT THE MOMENT A SATISFACTORY EXPLANATION IS GIVEN ABOUT SUCH NATURE AND SOURCE BY THE ASSESSEE, THEN THE SOURCE WOULD STAND DISCLOSED AND WILL, THEREFORE, BE KNOWN AND T HE INCOME WOULD BE TREATED UNDER THE APPROPRIATE HEAD OF INCOME FOR AS SESSMENT AS PER THE PROVISIONS OF THE ACT. HOWEVER, WHEN THESE PROVISIO NS APPLY BECAUSE NO SOURCE IS DISCLOSED AT ALL ON THE BASIS OF WHICH THE INCOME CAN BE CLASSIFIED UNDER ONE OF THE HEADS OF INCOME UNDER S ECTION 14 OF THE ACT, IT WOULD NOT BE POSSIBLE TO CLASSIFY SUCH DEEMED IN COME UNDER ANY OF THESE HEADS INCLUDING INCOME FROM OTHER SOURCES W HICH HAVE TO BE SOURCES KNOWN OR EXPLAINED. WHEN THE INCOME CANNOT BE SO CLASSIFIED UNDER ANY ONE OF THE HEADS OF INCOME UNDER SECTION 14, IT FOLLOWS THAT THE QUESTION OF GIVING ANY DEDUCTIONS UNDER THE PRO VISIONS WHICH CORRESPOND TO SUCH HEADS OF INCOME WILL NOT ARISE. IF IT IS POSSIBLE TO PEG THE INCOME UNDER ANY ONE OF THOSE HEADS BY VIRTUE O F A SATISFACTORY EXPLANATION BEING GIVEN, THEN THESE PROVISIONS OF S ECTIONS 69, 69A, 60B AND 69C WILL NOT APPLY, IN WHICH EVENT, THE PROVISI ONS REGARDING DEDUCTIONS ETC., APPLICABLE TO THE RELEVANT HEAD OF INCOME UNDER WHICH SUCH INCOME FALLS WILL AUTOMATICALLY BE ATTRACTED. THE OPENING WORDS OF SECTION 14 SAVE AS OTHERWISE PROVIDED BY THIS ACT CLEARLY LEAVE SCOPE FOR DEEMED INCOME OF THE NATURE COVERED UNDER THE SCHEME OF SECTIONS 69, 60A, 60B AND 60C B EING TREATED SEPARATELY, BECAUSE SUCH DEEMED INCOME IS NOT INCOM E FROM SALARY, HOUSE PROPERTY, PROFITS AND GAINS OF BUSINESS OR PR OFESSION, OR CAPITAL GAINS, NOR IS IT INCOME FROM OTHER SOURCES BECAUS E THE PROVISIONS OF SECTIONS 69, 69A, 69B AND 69C TREAT UNEXPLAINED INV ESTMENTS, UNEXPLAINED MONETARY, BULLION, ETC., AND UNEXPLAINE D EXPENDITURE AS DEEMED INCOME WHERE THE NATURE AND SOURCE OF INVEST MENT, ACQUISITION OR EXPENDITURE, AS THE CASE MAY BE, HAVE NOT BEEN E XPLAINED OR SATISFACTORILY EXPLAINED. THEREFORE, IN THESE CASES , THE SOURCE NOT BEING KNOWN, SUCH DEEMED INCOME WILL NOT FALL EVEN UNDER THE HEAD INCOME FROM OTHER SOURCES. THEREFORE, THE CORRESPONDING D EDUCTIONS WHICH ARE APPLICABLE TO THE INCOMES UNDER ANY OF THESE VARIOU S HEADS, WILL NOT BE ATTRACTED IN THE CASE OF DEEMED INCOMES WHICH ARE C OVERED UNDER THE PROVISIONS OF SECTIONS 69, 69A, 69B AND 69C OF THE ACT IN VIEW OF THE SCHEME OF THOSE PROVISIONS. IT IS, THEREFORE, CLEAR THAT, WHEN THE INVESTMENT IN OR ACQUISITION OF GOLD, WHICH WAS RECOVERED FROM THE ASSESSEE WAS NOT RECOR DED IN THE BOOKS OF ACCOUNT AND THE ASSESSEE OFFERED NO EXPLANATION ABOUT THE NATURE ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 13 AND SOURCE OF SUCH INVESTMENT OR ACQUISITION AND TH E VALU9E OF SUCH GOLD WAS NOT RECORDED IN THE BOOKS OF ACCOUNT, NOR THE NATURE AND SOURCE OF ITS ACQUISITION EXPLAINED, THERE COULD AR ISE NO QUESTION OF TREATING THE VALUE OF SUCH GOLD, WHICH WAS DEEMED T O BE THE INCOME OF THE ASSESSEE, AS A DEDUCTIBLE TRADING LOSS ON ITS C ONFISCATION, BECAUSE, SUCH DEEMED INCOME DID NOT FALL UNDER THE HEAD OF I NCOME PROFITS AND GAINS OF BUSINESS OR PROFESSION. 11 RECENTLY HONBLE APEX COURT IN THE CASE OF LIBERTY INDIA LTD. (SUPRA) HAS ANALYZED THE PROVISIONS OF SECTION 80-IB AND 80-IA AND STATED THAT SECTION 80- IB PROVIDES FOR ALLOWING DEDUCTION IN RESPECT OF PR OFIT & GAINS DERIVED FROM THE ELIGIBLE BUSINESS. THE HONBLE APEX COURT HELD THA T SECTION 80-IB PROVIDES FOR ALLOWING DEDUCTION IN RESPECT OF PROFIT & GAINS DER IVED 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 INCENTIVES AND PROFIT-LINKED INCENTIVES. CHAPTER VI-A WHICH PR OVIDES FOR INCENTIVES IN THE FORM OF TAX DEDUCTIONS ESSENTIALL Y BELONG TO THE CATEGORY OF PROFIT LINKED INCENTIVES. THEREFO RE, WHEN SECTION 80-IA/80-TB REFERS TO PROFITS DERIVED FROM ELIGIBLE BUSINESS, IT IS NOT THE OWNERSHIP OF THAT BUSINESS WHICH ATTRACTS THE INCENTIVES. WHAT ATTRACTS THE INCENTIV ES UNDER SECTION 80-IA/80-IB IS THE GENERATION OF PROFITS (O PERATIONAL PROFITS). FOR EXAMPLE, AN ASSESSEE-COMPANY LOCATED IN MUMBAI MAY HAVE A BUSINESS OF BUILDING HOUSING PROJ ECTS 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 TH E BUSINESS OF A SHIP WHICH ATTRACTS SUB-SECTION (6). IN OTHER WOR DS, DEDUCTION UNDER SUB-SECTION (6) AT THE SPECIFIED RA TE HAS LINKAGE TO THE PROFITS DERIVED FROM THE SHIPPING OP ERATIONS. THIS IS WHAT WE MEAN IN DRAWING THE DISTINCTION BET WEEN PROFIT-LINKED TAX INCENTIVES AND INVESTMENT-LINKED TAX INCENTIVES. IT IS FOR THIS REASON THAT PARLIAMENT H AS CON FINED THE DEDUCTION TO PROFITS DERIVED FROM ELIGIBLE BUSI NESSES MENTIONED IN SUB-SECTIONS (3) TO (11A) (AS THEY STO OD AT THE RELEVANT TIME). ONE MORE ASPECT NEEDS TO BE HIGHLIG HTED. EACH OF THE ELIGIBLE BUSINESS IN SUB SECTIONS (3) TO (11 A) CONSTITUTES A STAND-ALONE ITEM IN THE MATTER OF COMPUTATION OF PROFITS. THAT IS THE REASON WHY THE CONCEPT OF SEGMENT REPO RTING ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 14 STANDS INTRODUCED IN THE INDIAN ACCOUNTING STANDARD S (IAS) BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (IC AT). ANALYSING CHAPTER VT-A, WE FIND THAT SECTION 80-113 /80-IA ARE A CODE BY THEMSELVES AS THEY CONTAIN BOTH SUBST ANTIVE AS WELL AS PROCEDURAL PROVISIONS. THEREFORE, WE NEED T O EXAMINE WHAT THESE PROVISIONS PRESCRIBE FOR COMPUTATION OF PROFITS OF THE ELIGIBLE BUSINESS. IT IS EVIDENT THAT SECTION 80-IB PROVIDES FOR ALLOWING OF DEDUCTION IN RESPECT OF PROFITS AND GAINS DERIVED FROM THE ELIGIBLE BUSINESS. THE WORDS DERI VED FROM ARE NARROWER IN CONNOTATION AS COMPARED TO THE WORD S ATTRIBUTABLE TO. IN OTHER WORDS, BY USING THE EXP RESSION DERIVED FROM, PARLIAMENT INTENDED TO COVER SOURCE S NOT BEYOND THE FIRST DEGREE. IN THE PRESENT BATCH OF CA SES, THE CONTROVERSY WHICH ARISES FOR DETERMINATION IS: WHET HER 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 P URCHASES (COST NEUTRALIZATION), HENCE, IT COMES WITHIN FIRST DEGREE SOURCE AS IT INCREASES THE NET PROFIT PROPORTIONATE LY. ON THE OTHER HAND, ACCORDING TO THE DEPARTMENT, DEPB CREDI T/DUTY DRAWBACK RECEIPTS DO NOT COME WITHIN FIRST DEGREE S OURCE AS THE SAID INCENTIVES FLOW FROM THE INCENTIVE SCHEMES ENACTED BY THE GOVERNMENT OF INDIA OR FROM SECTION 75 OF THE C USTOMS ACT, 1962. HENCE, ACCORDING TO THE DEPARTMENT, IN T HE PRESENT CASES, THE FIRST DEGREE SOURCE IS THE INCENTIVE SCHEME/PROVISIONS OF THE CUSTOMS ACT. IN THIS CONNE CTION, 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 REQUIRED TO EXAMINE THE ELIGIBLE BUSINESS OF AN INDUSTRIAL UNDERTAKING, WE NEED TO TRACE THE SOURCE OF THE PROFITS TO MANUFACTURE. (SE E 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 MA Y BE, APPLICABLE TO THE ELIGIBLE BUSINESS UNDER SECTION 8 0-LB. THEREFORE, AT THE OUTSET, WE STATED THAT ONE NEEDS TO READ SECTIONS 80-I, 80-IA AND 80-IB AS HAVING A COMMON S CHEME. ON A PERUSAL OF SUB-SECTION (5) OF SECTION 80-LA, I T IS NOTICED THAT IT PROVIDES FOR THE MANNER OF COMPUTATION OF P ROFITS OF AN ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 15 ELIGIBLE BUSINESS. ACCORDINGLY, SUCH PROFITS ARE TO BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. THEREFORE, THE DEVICES ADOPTED TO REDUCE OR INFLATE THE PROFITS OF ELIGIBLE BUSINESS HAVE GOT TO BE REJ ECTED IN VIEW OF THE OVERRIDING PROVISIONS OF SUBSECTION (5) OF S ECTION 80-IA, WHICH ARE ALSO REQUIRED TO BE READ INTO SECTION 80- TB. (SEE SECTION 80-IB(13)). WE 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 SECTIONS PROVIDE FOR INCENTIVES IN TH E FORM OF DEDUCTION(S) WHICH ARE LINKED TO PROFITS AND NOT TO INVESTMENT. ON AN ANALYSIS OF SECTIONS 80-IA AND 80-IB IT BECOM ES CLEAR THAT ANY INDUSTRIAL UNDERTAKING, WHICH BECOMES ELIG IBLE ON SATISFYING SUB-SECTION (2), WOULD BE ENTITLED TO DE DUCTION UNDER SUB-SECTION (1) ONLY TO THE EXTENT OF PROFITS DERIVED FROM SUCH INDUSTRIAL UNDERTAKING AFTER SPECIFIED DATE(S) . HENCE, APART FROM ELIGIBILITY, SUB-SECTION (1) PURPORTS TO RESTRICT THE QUANTUM OF DEDUCTION TO A SPECIFIED PERCENTAGE OF P ROFITS. THIS IS THE IMPORTANCE OF THE WORDS DERIVED FROM INDUST RIAL UNDERTAKING AS AGAINST PROFITS ATTRIBUTABLE TO IN DUSTRIAL UNDERTAKING. 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 EX PORT PRODUCT. THIS NEUTRALIZATION IS PROVIDED FOR BY CRE DIT TO CUSTOMS DUTY AGAINST EXPORT PRODUCT. UNDER DEPB, AN EXPORTER MAY APPLY FOR CREDIT AS A PERCENTAGE OF TH E FOB VALUE OF EXPORTS MADE IN FREELY CONVERTIBLE CURRENC Y. CREDIT IS AVAILABLE ONLY AGAINST THE EXPORT PRODUCT AND AT RA TES SPECIFIED BY THE DGFT FOR IMPORT 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 SP ECIAL 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 FR OM SECTION 75 OF THE CUSTOMS ACT, 1962, HENCE, INCENTI VES PROFITS ARE NOT PROFITS DERIVED FROM THE ELIGIBLE BUSINESS UNDER SECTION 80-113. THEY BELONG TO THE CATEGORY OF ANCI LLARY PROFITS OF SUCH UNDERTAKINGS. ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 16 THE NEXT QUESTION IS WHAT IS DUTY DRAWBACK? SECTI ON 75 OF THE CUSTOMS ACT, 1962, AND SECTION 37 OF THE CENTRA L EXCISE ACT, 1944, EMPOWER THE GOVERNMENT OF INDIA TO PROVI DE FOR REPAYMENT OF CUSTOMS DUTY AND EXCISE DUTY PAID BY A N ASSESSEE. THE REFUND IS OF THE AVERAGE AMOUNT OF DU TY PAID ON MATERIALS OF ANY PARTICULAR CLASS OR DESCRIPTION OF GOODS USED IN THE MANUFACTURE OF EXPORT GOODS OF SPECIFIED CLA SS. THE RULES DO NOT ENVISAGE A REFUND OF AN AMOUNT ARITHME TICALLY EQUAL TO CUSTOMS DUTY OR CENTRAL EXCISE DUTY ACTUAL LY PAID BY AN INDIVIDUAL IMPORTER-CUM-MANUFACTURER. SUB-SECTIO N (2) OF SECTION 75 OF THE CUSTOMS ACT REQUIRES THE AMOUNT O F DRAWBACK TO BE DETERMINED ON A CONSIDERATION OF ALL THE CIRCUMSTANCES PREVALENT IN A PARTICULAR TRADE AND A LSO BASED ON THE FACTS SITUATION RELEVANT IN RESPECT OF EACH OF VARIOUS CLASSES OF GOODS IMPORTED. BASICALLY, 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 I S ON ACCOUNT OF THE STATUTORY/POLICY PROVISIONS IN THE C USTOMS ACT/SCHEME(S) FRAMED BY THE GOVERNMENT OF INDIA. IN THE CIRCUMSTANCES, WE HOLD THAT PROFITS DERIVED BY WAY OF SUCH INCENTIVES DO NOT FALL WITHIN THE EXPRESSION PROFI TS DERIVED FROM INDUSTRIAL UNDERTAKING 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 PRODUCTION FOR SUCH SALE OR IN THE FORM OF MATERIAL S 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 OTHER COSTS INCLUDING COSTS INCURRED IN BRINGING THE INV ENTORY TO THEIR PRESENT LOCATION AND CONDITION. THE COST OF PURCHASE INCLUDES DUTIES AND TAXES (OTH ER THAN THOSE SUBSEQUENTLY RECOVERABLE BY THE ENTERPRISE FR OM THE TAXING AUTHORITIES), FREIGHT INWARDS AND OTHER EXPE NDITURE ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 17 DIRECTLY ATTRIBUTABLE TO THE ACQUISITION HENCE, TRA DE DISCOUNTS, REBATE, DUTY DRAWBACK, AND SUCH SIMILAR ITEMS ARE D EDUCTED 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 SHOULD BE TREATED AS SEPARATE ITEMS OF REVENUE OR INCOME AND ACCOUNTED FOR ACCORDINGLY (SEE PAGE 44 OF THE INDIAN ACCOUNTI NG STANDARDS AND GAAP BY DOLPHY DSOUZA). THEREFORE, F OR THE PURPOSES OF AS-2, CENVAT CREDITS SHOULD NOT BE INCL UDED IN THE COST OF PURCHASE OF INVENTORIES. EVEN THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (1CM) HAS ISSUED GUI DANCE NOTE ON ACCOUNTING TREATMENT FOR CENVAT/MODVAT UNDE R WHICH THE INPUTS CONSUMED AND THE INVENTORY OF INPUTS SHO ULD BE VALUED ON THE BASIS OF PURCHASE COST NET OF SPECIFI ED DUTY ON INPUTS (I.E., DUTY RECOVERABLE 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, BUSINESS RESTRUCTURI NG, TAX PLANNING ON SUNDRY BALANCES BEING WRITTEN BACK, LIQ UIDATION OF CURRENT ASSETS, ETC. THEREFORE, WE ARE OF THE VIEW THAT THE DUTY DRAWBACK, DEPB BENEFITS, REBATES, ETC., CANNOT BE C REDITED AGAINST THE COST OF MANUFACTURE OF GOODS DEBITED IN THE PROFIT AND LOSS ACCOUNT FOR PURPOSES OF SECTION 80-IA/80-I B AS SUCH REMISSIONS (CREDITS) WOULD CONSTITUTE INDEPENDENT S OURCE OF INCOME BEYOND THE FIRST DEGREE NEXUS BETWEEN PROFIT S AND THE INDUSTRIAL UNDERTAKING. 12. AS IN THE PRESENT CASE, THE INCOME DISCLOSE D DURING THE COURSE OF SURVEY IS NOT ARISING OUT OF UNDISCLOSED PURCHASES, UNDISCLOSED EXPENSES OR UNDISCLOSED SALES, RATHER, IT IS ON ACCOUNT OF DISC LOSURE OF ADDITIONAL INCOME ON ACCOUNT OF CASH GIFTS RECEIVED BY THE DIRECTORS AND THEIR FAMILY MEMBERS AND DEPOSITED IN ASSESSEES BANK ACCOUNT. AS REFERR ED BY THE LD. COUNSEL FOR THE ASSESSEE THE CASE LAW OF THIS TRIBUNAL IN THE C ASE OF ASSOCIATED POWER STRUCTURE PVT LTD. V ACIT IN ITA NO.3660/AHD/2007 D ATED 8/5/2009 IS CLEARLY DISTINGUISHABLE ON THE FACTS ASIN THAT CASE THE SUR RENDER AMOUNT OF RS. 11.20 WAS OUT OF SCRAPS GENERATED OUT OF ASSESSEES ELIGI BLE BUSINESS BUT SAME IS NOT THE CASE HERE. WE FIND THAT THE PROVISIONS OF S ECTION 80-IB PRESCRIBE FOR COMPUTATION OF PROFITS OF THE ELIGIBLE BUSINESS A ND ALLOWS DEDUCTION IN RESPECT OF PROFITS AND GAINS DERIVED FROM THE ELIGI BLE BUSINESS. ACCORDINGLY THE ITA NO.4113/AHD/2008 A.Y 2005-06 DHANLAXMI PIGMENTS PVT. LTD. V. DCIT BHARUCH PAGE 18 WORD DERIVED FROM ARE NARROWER IN CONNOTATION AS COMPARED TO THE WORDS ATTRIBUTABLE TO AND THE LEGISLATURE BY USING THE EXPRESSION DERIVED FROM INTENDED TO COVER SOURCES NOT BEYOND THE INCOMES GE NERATED OUT OF ELIGIBLE BUSINESS, WHICH IS OUT OF PROFITS AND GAINS FROM CE RTAIN INDUSTRIAL UNDERTAKINGS OR OF INDUSTRIALLY BACKWARD STATES SPECIFIED IN THE EIGHTH SCHEDULE. ACCORDINGLY, THE INCOME DECLARED BY THE ASSESSEE DU RING THE COURSE OF SURVEY OUT OF THE CASH GIFTS DEPOSITED IN THE BANK ACCOUNT S OF RELATIVES AND DIRECTORS OF THE ASSESSEE-COMPANY IS INCOME FROM OTHER SOURCE S AND IS NOT DERIVED OUT OF ELIGIBLE BUSINESS AND DEDUCTION U/S. 80-IB IS NO T AVAILABLE TO THE ASSESSEE ON THIS INCOME. ACCORDINGLY, WE CONFIRM THE ORDERS OF THE LOWER AUTHORITIES AND THIS ISSUE OF THE ASSESSEES APPEAL IS DISMISSE D. 13. IN THE RESULT, ASSESSEES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 31 /12 /2009 SD/- SD/- (D.C.AGRAWAL) (MAHAVIR SIN GH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD, DATED : 31/12/2009 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-VI, BARODA 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD