The DCIT, Circle-10, Ahmedabad V. Jay chem, Ahmedabad

ITA 532/AHD/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0195 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-08-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 29-07-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 13-02-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUDHANSHU S JHA
• Keywords: Cost of acquisition
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE SHRI N.S.SAINI, ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.532/AHD/2008 ASSESSMENT YEAR:2004-05 DATE OF HEARING:29.7.10 DRAFTED:29.7.10 DY. COMMISSIONER OF INCOME-TAX, CIRCLE-1O, AHMEDABAD V/S . M/S. JAY CHEM. 803, SHSILP BUILDING, C.G. ROAD, AHMEDABAD PAN NO.AACFJ1923F (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI SUDHANSHU S JHA, DR RESPONDENT BY:- SHRI BANDISH SOPARKAR, AR O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THIS APPEAL BY THE REVENUE IS ARISING OUT OF THE O RDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-XVI, AHMEDABAD IN APPEAL NO. C IT(A)-XVI/AC(OSD) /R.10/13906-07 DATED 28-11-2007. THE ASSESSMENT WAS FRAMED BY ACIT, CIRCLE-10, AHMEDABAD U/S.143(3) OF THE INCOME-TAX ACT, 1961 (H EREINAFTER REFERRED TO AS THE ACT) VIDE HIS ORDER DATED 31-10-2006 FOR ASSESSMEN T YEAR 2004-05. 2. THE ONLY ISSUE IN THIS APPEAL OF REVENUE IS AGAI NST THE ORDER OF CIT(A) IN DIRECTING THE ASSESSING OFFICER TO RE-COMPUTE THE D EDUCTION U/S.80IB BY TREATING THE DUTY DRAW BACK INCOME AS INCOME FROM INDUSTRIAL UND ERTAKING. 3. THE BRIEF FACTS ARE THAT THE ASSESSING OFFICER D ISALLOWED DEDUCTION U/S.80IB ON DUTY DRAW BACK AMOUNTING TO RS.19.80 LAKH. THE C IT(A) ALLOWED THE CLAIM OF THE ASSESSEE. AGGRIEVED, REVENUE CAME IN APPEAL BEFORE US. 4. AT THE OUTSET, LD. DEPARTMENTAL REPRESENTATIVE S HRI SUDHANSHU S JHA STATED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE BY THE DECISION OF HONBLE APEX COURT IN T HE CASE OF LIBERTY INDIA LTD. V. ITA NO.532/AHD/2008 A.Y. 2004-05 DCIT, CIR-10 ABD V. M/S. JAY CHEM PAGE 2 CIT (2009) 317 ITR 218 (SC) THE HONBLE APEX COURT HELD THAT SECTION 80-IB PROVIDES FOR ALLOWING DEDUCTION IN RESPECT OF PROFI T & GAINS DERIVED FROM ELIGIBLE BUSINESS AND ANALYSIS THE PROVISIONS AS UNDER:- BEFORE ANALYSING SECTION 80-IB, AS A PREFATORY NOT E, IT NEEDS TO BE MENTIONED THAT THE 1961 ACT BROADLY PROVIDES FOR TWO TYPES OF TAX INCENTIVES, NAMELY, INVESTMENT-LINKED INCENTIVE S AND PROFIT- LINKED INCENTIVES. CHAPTER VI-A WHICH PROVIDES FOR INCENTIVES IN THE FORM OF TAX DEDUCTIONS ESSENTIALLY BELONG TO TH E CATEGORY OF PROFIT LINKED INCENTIVES. THEREFORE, WHEN SECTION 80-IA/80-TB REFERS TO PROFITS DERIVED FROM ELIGIBLE BUSINESS, I T IS NOT THE OWNERSHIP OF THAT BUSINESS WHICH ATTRACTS THE INCEN TIVES. WHAT ATTRACTS THE INCENTIVES UNDER SECTION 80-IA/80-IB I S THE GENERATION OF PROFITS (OPERATIONAL PROFITS). FOR EXAMPLE, AN A SSESSEE- COMPANY LOCATED IN MUMBAI MAY HAVE A BUSINESS OF BU ILDING HOUSING PROJECTS OR A SHIP IN NAVA SHEVA. OWNERSHIP OF A SHIP PER SE WILL NOT ATTRACT SECTION 80-IB(6). IT IS THE PROFITS ARISING FROM THE BUSINESS OF A SHIP WHICH ATTRACTS SUB-SECT ION (6). IN OTHER WORDS, DEDUCTION UNDER SUB-SECTION (6) AT THE SPECIFIED RATE HAS LINKAGE TO THE PROFITS DERIVED FROM THE SHIPPIN G OPERATIONS. THIS IS WHAT WE MEAN IN DRAWING THE DISTINCTION BET WEEN PROFIT- LINKED TAX INCENTIVES AND INVESTMENT-LINKED TAX INC ENTIVES. IT IS FOR THIS REASON THAT PARLIAMENT HAS CON FINED THE DEDUC TION TO PROFITS DERIVED FROM ELIGIBLE BUSINESSES MENTIONED IN SUB-S ECTIONS (3) TO (11A) (AS THEY STOOD AT THE RELEVANT TIME). ONE MOR E ASPECT NEEDS TO BE HIGHLIGHTED. EACH OF THE ELIGIBLE BUSIN ESS IN SUB SECTIONS (3) TO (11A) CONSTITUTES A STAND-ALONE ITE M IN THE MATTER OF COMPUTATION OF PROFITS. THAT IS THE REASON WHY T HE CONCEPT OF SEGMENT REPORTING STANDS INTRODUCED IN THE INDIAN ACCOUNTING STANDARDS (IAS) BY THE INSTITUTE OF CHARTERED ACCOU NTANTS OF INDIA (ICAT). ANALYSING CHAPTER VT-A, WE FIND THAT SECTION 80-113 /80-IA ARE A CODE BY THEMSELVES AS THEY CONTAIN BOTH SUBSTANTIVE AS WELL AS PROCEDURAL PROVISIONS. THEREFORE, WE NEED TO EXAMIN E WHAT THESE PROVISIONS PRESCRIBE FOR COMPUTATION OF PROFITS OF THE ELIGIBLE BUSINESS. IT IS EVIDENT THAT SECTION 80-IB PROVIDE S FOR ALLOWING OF DEDUCTION IN RESPECT OF PROFITS AND GAINS DERIVED F ROM THE ELIGIBLE BUSINESS. THE WORDS DERIVED FROM ARE NARROWER IN CONNOTATION AS COMPARED TO THE WORDS ATTRIBUTABLE TO. IN OTHE R WORDS, BY USING THE EXPRESSION DERIVED FROM, PARLIAMENT INT ENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGREE. IN THE PRESENT BATCH OF CASES, THE CONTROVERSY WHICH ARISES FOR DETERMINATI ON IS: WHETHER THE DEPB CREDIT/DUTY DRAWBACK RECEIPT COMES WITHIN THE FIRST DEGREE SOURCES? ACCORDING TO THE ASSESSEE(S), DEPB CREDIT/DUTY DRAWBACK RECEIPT REDUCES THE VALUE OF PURCHASES (CO ST NEUTRALIZATION), HENCE, IT COMES WITHIN FIRST DEGRE E SOURCE AS IT INCREASES THE NET PROFIT PROPORTIONATELY. ON THE OT HER HAND, ACCORDING TO THE DEPARTMENT, DEPB CREDIT/DUTY DRAWB ACK RECEIPTS DO NOT COME WITHIN FIRST DEGREE SOURCE AS THE SAID INCENTIVES FLOW FROM THE INCENTIVE SCHEMES ENACTED BY THE GOVERNMEN T OF INDIA ITA NO.532/AHD/2008 A.Y. 2004-05 DCIT, CIR-10 ABD V. M/S. JAY CHEM PAGE 3 OR FROM SECTION 75 OF THE CUSTOMS ACT, 1962. HENCE, ACCORDING TO THE DEPARTMENT, IN THE PRESENT CASES, THE FIRST DEG REE SOURCE IS THE INCENTIVE SCHEME/PROVISIONS OF THE CUSTOMS ACT. IN THIS CONNECTION, THE DEPARTMENT PLACES HEAVY RELIANCE ON THE JUDGMENT OF THIS COURT IN STERLING FOODS [1999) 237 ITR 579 . THEREFORE, IN THE PRESENT CASES, IN WHICH WE ARE RE QUIRED TO EXAMINE THE ELIGIBLE BUSINESS OF AN INDUSTRIAL UNDE RTAKING, WE NEED TO TRACE THE SOURCE OF THE PROFITS TO MANUFACT URE. (SEE CIT V. KIRLOSKAR OIL ENGINES LTD. REPORTED IN [1986] 157 I TR 762.) CONTINUING OUR ANALYSIS OF SECTION 80-IA/80-IB IT M AY BE MENTIONED THAT SUB-SECTION (13) OF SECTION 80-LB PR OVIDES FOR APPLICABILITY OF THE PROVISIONS OF SUB-SECTION (5) AND SUB-SECTIONS (7) TO (12) OF SECTION 80-IA, SO FAR AS MAY BE, APP LICABLE TO THE ELIGIBLE BUSINESS UNDER SECTION 80-LB. THEREFORE, A T THE OUTSET, WE STATED THAT ONE NEEDS TO READ SECTIONS 80-I, 80-IA AND 80-IB AS HAVING A COMMON SCHEME. ON A PERUSAL OF SUB-SECTION (5) OF SECTION 80-LA, IT IS NOTICED THAT IT PROVIDES FOR T HE MANNER OF COMPUTATION OF PROFITS OF AN ELIGIBLE BUSINESS. ACC ORDINGLY, SUCH PROFITS ARE TO BE COMPUTED AS IF SUCH ELIGIBLE BUSI NESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. THEREFORE, THE DE VICES ADOPTED TO REDUCE OR INFLATE THE PROFITS OF ELIGIBL E BUSINESS HAVE GOT TO BE REJECTED IN VIEW OF THE OVERRIDING PROVIS IONS OF SUBSECTION (5) OF SECTION 80-IA, WHICH ARE ALSO REQ UIRED TO BE READ INTO SECTION 80-TB. (SEE SECTION 80-IB(13)). W E MAY REITERATE THAT SECTIONS 80-I, 80-IA AND 80-IB HAVE A COMMON SCHEME AND IF SO READ IT IS CLEAR THAT THE SAID SEC TIONS PROVIDE FOR INCENTIVES IN THE FORM OF DEDUCTION(S) WHICH ARE LI NKED TO PROFITS AND NOT TO INVESTMENT. ON AN ANALYSIS OF SECTIONS 8 0-IA AND 80-IB IT BECOMES CLEAR THAT ANY INDUSTRIAL UNDERTAKING, W HICH BECOMES ELIGIBLE ON SATISFYING SUB-SECTION (2), WOULD BE EN TITLED TO DEDUCTION UNDER SUB-SECTION (1) ONLY TO THE EXTENT OF PROFITS DERIVED FROM SUCH INDUSTRIAL UNDERTAKING AFTER SPEC IFIED DATE(S). HENCE, APART FROM ELIGIBILITY, SUB-SECTION (1) PURP ORTS TO RESTRICT THE QUANTUM OF DEDUCTION TO A SPECIFIED PERCENTAGE OF PROFITS. THIS IS THE IMPORTANCE OF THE WORDS DERIVED FROM I NDUSTRIAL UNDERTAKING AS AGAINST PROFITS ATTRIBUTABLE TO IN DUSTRIAL UNDERTAKING. DEPB IS AN INCENTIVE. IT IS GIVEN UNDER THE DUTY EX EMPTION REMISSION SCHEME. ESSENTIALLY, IT IS AN EXPORT INCE NTIVE. NO DOUBT, THE OBJECT BEHIND DEPB IS TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY PAYMENT ON THE IMPORT CONTENT OF EXPOR T PRODUCT. THIS NEUTRALIZATION IS PROVIDED FOR BY CREDIT TO CU STOMS DUTY AGAINST EXPORT PRODUCT. UNDER DEPB, AN EXPORTER MAY APPLY FOR CREDIT AS A PERCENTAGE OF THE FOB VALUE OF EXPORTS MADE IN FREELY CONVERTIBLE CURRENCY. CREDIT IS AVAILABLE ONLY AGAI NST THE EXPORT PRODUCT AND AT RATES SPECIFIED BY THE DGFT FOR IMPO RT OF RAW MATERIALS, COMPONENTS, ETC., DEPB CREDIT UNDER THE SCHEME HAS TO BE CALCULATED BY TAKING INTO ACCOUNT THE DEEMED IMPORT CONTENT OF THE EXPORT PRODUCT AS PER BASIC CUSTOMS DUTY AND SPECIAL ADDITIONAL DUTY PAYABLE ON SUCH DEEMED IMPORTS. THE REFORE, IN ITA NO.532/AHD/2008 A.Y. 2004-05 DCIT, CIR-10 ABD V. M/S. JAY CHEM PAGE 4 OUR VIEW, DEPB/DUTY DRAWBACK ARE INCENTIVES WHICH F LOW FROM THE SCHEMES FRAMED BY CENTRAL GOVERNMENT OR FROM SECTIO N 75 OF THE CUSTOMS ACT, 1962, HENCE, INCENTIVES PROFITS ARE NO T PROFITS DERIVED FROM THE ELIGIBLE BUSINESS UNDER SECTION 80 -113. THEY BELONG TO THE CATEGORY OF ANCILLARY PROFITS OF SUCH UNDERTAKINGS. THE NEXT QUESTION IS WHAT IS DUTY DRAWBACK? SECTI ON 75 OF THE CUSTOMS ACT, 1962, AND SECTION 37 OF THE CENTRAL EX CISE ACT, 1944, EMPOWER THE GOVERNMENT OF INDIA TO PROVIDE FO R REPAYMENT OF CUSTOMS DUTY AND EXCISE DUTY PAID BY AN ASSESSEE . THE REFUND IS OF THE AVERAGE AMOUNT OF DUTY PAID ON MATERIALS OF ANY PARTICULAR CLASS OR DESCRIPTION OF GOODS USED IN TH E MANUFACTURE OF EXPORT GOODS OF SPECIFIED CLASS. THE RULES DO NO T ENVISAGE A REFUND OF AN AMOUNT ARITHMETICALLY EQUAL TO CUSTOMS DUTY OR CENTRAL EXCISE DUTY ACTUALLY PAID BY AN INDIVIDUAL IMPORTER-CUM- MANUFACTURER. SUB-SECTION (2) OF SECTION 75 OF THE CUSTOMS ACT REQUIRES THE AMOUNT OF DRAWBACK TO BE DETERMINED ON A CONSIDERATION OF ALL THE CIRCUMSTANCES PREVALENT IN A PARTICULAR TRADE AND ALSO BASED ON THE FACTS SITUATION RELEVAN T IN RESPECT OF EACH OF VARIOUS CLASSES OF GOODS IMPORTED. BASICALL Y, THE SOURCE OF THE DUTY DRAWBACK RECEIPT LIES IN SECTION 75 OF THE CUSTOMS ACT AND SECTION 37 OF THE CENTRAL EXCISE ACT. ANALYSING THE CONCEPT OF REMISSION OF DUTY DRAWBACK AND DEPB, WE ARE SATISFIED THAT THE REMISSION OF DUTY IS ON A CCOUNT OF THE STATUTORY/POLICY PROVISIONS IN THE CUSTOMS ACT/SCHE ME(S) FRAMED BY THE GOVERNMENT OF INDIA. IN THE CIRCUMSTANCES, W E HOLD THAT PROFITS DERIVED BY WAY OF SUCH INCENTIVES DO NOT FA LL WITHIN THE EXPRESSION PROFITS DERIVED FROM INDUSTRIAL UNDERTA KING IN SECTION 80-LB. SINCE RELIANCE WAS PLACED ON BEHALF OF THE ASSESSEE (S) ON AS-2 WE NEED TO ANALYSE THE SAID STANDARD. AS-2 DEALS WITH VALUATION OF INVENTORIES. INVENTORI ES ARE ASSETS HELD FOR SALE IN THE COURSE OF BUSINESS; IN THE PRO DUCTION FOR SUCH SALE OR IN THE FORM OF MATERIALS OR SUPPLIES TO BE CONSUMED IN THE PRODUCTION. INVENTORY SHOULD BE VALUED AT THE LOWER OF COST A ND NET REALIZABLE VALUE (NRV). THE COST OF INVENTORY SHO ULD COMPRISE ALL COSTS OF PURCHASE, COSTS OF CONVERSION AND OTHE R COSTS INCLUDING COSTS INCURRED IN BRINGING THE INVENTORY TO THEIR PRESENT LOCATION AND CONDITION. THE COST OF PURCHASE INCLUDES DUTIES AND TAXES (OTH ER THAN THOSE SUBSEQUENTLY RECOVERABLE BY THE ENTERPRISE FROM THE TAXING AUTHORITIES), FREIGHT INWARDS AND OTHER EXPENDITURE DIRECTLY ATTRIBUTABLE TO THE ACQUISITION HENCE, TRADE DISCOU NTS, REBATE, DUTY DRAWBACK, AND SUCH SIMILAR ITEMS ARE DEDUCTED IN DETERMINING THE COSTS OF PURCHASE. THEREFORE, DUTY DRAWBACK, REBATE, ETC., SHOULD NOT BE TREATED AS ADJUSTMENT ( CREDITED) TO THE COST OF PURCHASE OR MANUFACTURE OF GOODS. THEY SHOU LD BE TREATED AS SEPARATE ITEMS OF REVENUE OR INCOME AND ACCOUNTE D FOR ACCORDINGLY (SEE PAGE 44 OF THE INDIAN ACCOUNTING S TANDARDS AND ITA NO.532/AHD/2008 A.Y. 2004-05 DCIT, CIR-10 ABD V. M/S. JAY CHEM PAGE 5 GAAP BY DOLPHY DSOUZA). THEREFORE, FOR THE PURPOSE S OF AS-2, CENVAT CREDITS SHOULD NOT BE INCLUDED IN THE COST O F PURCHASE OF INVENTORIES. EVEN THE INSTITUTE OF CHARTERED ACCOUN TANTS OF INDIA (1CM) HAS ISSUED GUIDANCE NOTE ON ACCOUNTING TREATM ENT FOR CENVAT/MODVAT UNDER WHICH THE INPUTS CONSUMED AND T HE INVENTORY OF INPUTS SHOULD BE VALUED ON THE BASIS O F PURCHASE COST NET OF SPECIFIED DUTY ON INPUTS (I.E., DUTY RE COVERABLE FROM THE DEPARTMENT AT A LATER STAGE) ARISING ON ACCOUNT OF REBATES, DUTY DRAWBACK, DEPB BENEFIT, ETC. PROFIT GENERATION COULD BE ON ACCOUNT OF COST CUTTING, COST RATIONALIZATION, BUSI NESS RESTRUCTURING, TAX PLANNING ON SUNDRY BALANCES BEIN G WRITTEN BACK, LIQUIDATION OF CURRENT ASSETS, ETC. THEREFORE, WE A RE OF THE VIEW THAT THE DUTY DRAWBACK, DEPB BENEFITS, REBATES, ETC ., CANNOT BE CREDITED AGAINST THE COST OF MANUFACTURE OF GOODS D EBITED IN THE PROFIT AND LOSS ACCOUNT FOR PURPOSES OF SECTION 80- IA/80-IB AS SUCH REMISSIONS (CREDITS) WOULD CONSTITUTE INDEPEND ENT SOURCE OF INCOME BEYOND THE FIRST DEGREE NEXUS BETWEEN PROFIT S AND THE INDUSTRIAL UNDERTAKING. 5. WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FA VOUR OF REVENUE AND AGAINST THE ASSESSEE BY THE DECISION OF HONBLE SUPREME COU RT IN THE CASE OF LIBERTY INDIA LTD. (SUPRA) AND ON THIS ISSUE REVENUES APPEALS IS ALL OWED. 6. IN THE RESULT, REVENUES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 06/08/2010 SD/- SD/- (N.S.SAINI) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD, DATED : 06/08/2010 *DKP COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)-XVI, AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD