ACIT, UDAIPUR V. M/s. Secure Meters Ltd., UDAIPUR

ITA 542/JODH/2007

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 7908 (ITAT-JODHPUR)
• Duration Of Justice: 5 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 26-07-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 21-06-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUBHASH CHANDRA
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Earning of tax free income; Retrospective amendment; Cost of acquisition; Revenue expenditure; Capital expenditure
• Section: 80HHC; 115JB; 80IB; 37(1); 54; 37; 10; 11

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JODHPUR BENCH JODHPUR. ( BEFORE SHRI R.K. GUPTA AND SHRI N.K. SAINI ) ITA NOS. 542/JU/2007 & 349/JU/2009 ASSTT. YEARS : 2004-05 & 2005-06 PAN: AACCS 8785 M THE ACIT VS. M/S. SECURE METERS LTD. CIRCLE- 2 E-CLASS, PRATAP NAGAR INDUSTRIAL AREA UDAIPUR UDAIPUR (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI SUBHASH CHANDRA ASSESSEE BY : SHRI AMIT KOTHARI DATE OF HEARING : 26.07.2012. DATE OF PRONOUNCEMENT : 28-08-2012 ORDER DATED : 28 /08/2012. PER R.K. GUPTA, J.M. BOTH THESE APPEALS HAVE BEEN FILED BY THE REVENUE AGAINST TWO DIFFERENT ORDERS OF THE LD.CIT(A) UDAIPUR DATED 12-03-2007 & 23-03-2 009 FOR THE ASSESSMENT YEARS 2004- 05 AND 2005-06 RESPECTIVELY. 2.0 FIRST OF ALL, WE SHALL TAKE UP THE APPEAL OF TH E REVENUE IN ITA NO.542/JU/2007 FOR THE ASSESSMENT YEAR 2004-05. 2.1 THE FIRST GROUND OF THE REVENUE IS AGAINST DELE TION OF THE APPORTIONMENT OF R&D EXPENDITURE ON CAPITAL ASSETS AND DEPRECIATION ON C OMMON ASSES FOR THE PURPOSE OF DEDUCTION U/S 80IB AND 80IC IN RESPECT OF BATED AN D BAROTIWALA UNITS RESPECTIVELY. 2.2 THE BRIEF FACT OF THE CASE ARE THAT THE AO REST RICTED THE CLAIM OF DEDUCTION U/S 80IB AMOUNTING TO RS. 6,69,68,594/- FOR BATED UNIT AND U/S 80IC AMOUNTING TO 2 RS. 18,70,22,005/- FOR BAROTIWALA UNIT AS AGAINST R S. 7,98,80,615/- AND RS. 28,75,20,135/- RESPECTIVELY. WHILE REDUCING THE PRO FIT, THE AO HAS OBSERVED AT PAGES 3 TO 7 IN HIS ORDER AS UNDER:- THE ASSESSEE COMPANY HAS CLAIMED RS.2,04,07,539/- AS R&D EXPENDITURE ON CAPITAL ASSETS IN THE COMPUTATION OF INCOME. THIS EXPENDITURE SINCE CLAIMED IN THE COMPUTATION OF INCOME HAS NOT BEEN APPORTIONED BETWEEN THE THREE UNITS. SIMILARLY ALTHOUGH THE ASSESSEE HA S APPORTIONED CORPORATE (COMMON) EXPENSES, BUT NO ALLOCATION HAS BEEN MADE IN RESPECT OF DEPRECIATION CLAIMED ON CORPORATE/COMMON ASSETS. THEREFORE, THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE ABOVE R&D EXPENSES AND DEPREC IATION ON HEAD OFFICE ASSETS SHOULD NOT BE APPORTIONED BETWEEN THE THREE UNITS I N THE PROPORTION OF TURNOVER. IN RESPONSE TO WHICH THE ASSESSEE SUBMITTED EXPLANATIO N AS UNDER REGARDING APPORTIONMENT OF DEPRECIATION ON ASSETS OF HEAD OFFICE AND CAPITAL EXPENDITURE ON R&D BE APPORTIONED BETWEEN T HREE UNITS AS THE SERVICES ARE SHARED BETWEEN THEM. IN THIS REGARD, WE SUBMIT THAT THE OTHER UNITS OF THE COMPANY CANNOT USE THE FIXED ASSETS OF THE HEAD OFF ICE. FOR EXAMPLE PLANT AND MACHINERY OF UDAIPUR UNIT AR USED WHOLLY AND EXCLUS IVELY FOR MANUFACTURING THE PRODUCTS OF UDAIPUR UNIT ITSELF AND NOT FOR MANUFAC TURING PRODUCTS OF OTHER UNITS. MOREOVER, THE OFFICE EQUIPMENTS, FURNITURE & FIXTUR ES, COMPUTERS ETC. OF UDAIPUR UNIT IS ALSO EXCLUSIVELY USED FOR DAY TO DA Y WORKING OF UDAIPUR UNIT (HEAD OFFICE) AND ARE NOT USED FOR OTHER UNITS OF T HE COMPANY IN VIEW OF THE ABOVE FACTS, YOUR GOODSELF WOULD OBS ERVE THAT THE USE OF OTHER ASSETS OF THE COMPANY BY OTHER UNITS ARE VERY NEGLIGIBLE AS SUCH THE QUESTION FOR APPORTIONMENT OF DEPRECIATION ON OTHER ASSETS O F THE HEAD OFFICE DOES NOT ARISE. AS REGARDS APPORTIONMENT OF CAPITAL EXPENDITURE ON RESEARCH AND DEVELOPMENT BETWEEN THE THREE UNITS, WE SUBMIT THAT DURING THE YEAR UNDER CONSIDERATION, WE INCURRED RS.2,04,07,540/- ON CAPI TAL EXPENDITURE ON R&D AND THE BREAK UP OF THE ABOVE EXPENDITURE ARE AS UNDER :- S.NO. NATURE OF EXPENDITURE AMOUNT 1. R&D BUILDING RS.11,63,149/- 2. R&D EQUIPMENTS RS.1,92,44,391/- TOTAL RS.2,04,07,540/- THAT AS SUBMITTED EARLIER, OURS IS A HIGH TECH ELEC TRONIC UNIT, ENGAGED IN MANUFACTURING ELECTRONIC ENERGY METERS BY USING HIG HLY SOPHISTICATED TECHNOLOGY 3 AND HAS ITS OWN R&D DIVISION. THE R&D TEAM OF OUR C OMPANY IS CONTINUOUSLY WORKING ON DEVELOPMENT/IMPROVEMENT OF NEW PRODUCT AS WELL AS EXISTING PRODUCTS FOR ALL THE UNITS OF THE COMPANY. THAT OUR R&D UNIT IS APPROVED BY THE GOVT. OF INDIA, MINISTRY OF SCIENCE & TECHNOLOGY, D EPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH, NEW DELHI. WE HAVE MADE ADDITI ON IN EXISTING BUILDING AMOUNTING TO RS.11,63,149/- DURING THE YEAR UNDER A SSESSMENT AND HAVE NOT BIFURCATED THE AFORESAID AMOUNT PROPORTIONATELY TO OUR OTHER NEW INDUSTRIAL UNDERTAKING I.E. BAROTIWALA AND BATED UNITS. KINDLY APPRECIATE THAT THE AFORESAID AMOUNT OF ADDITION IN R&D BUILDING AT UDAIPUR UNIT IS OF PERMANENT NATURE, THEREFORE, THE QUESTION FOR APPORTIONMENT OF CAPITA L EXPENDITURE INCURRED FOR R&D BUILDING DOES NOT ARISE. THE CAPITAL EXPENDITURE FOR PURCHASE OF R&D EQUIPME NTS WERE USED FOR DAY TO DAY RESEARCH WORK AND DEVELOPING/IMPROVEMENT OF NEW PRODUCTS SO MANUFACTURED BY ALL THE UNITS OF THE COMPANY. AS DE SIRED, THE APPORTIONMENT OF CAPITAL EXPENDITURE INCURRED FOR THE PURCHASE OF R& D EQUIPMENTS OF ALL THE THREE UNITS IN TURNOVER RATIO ARE AS UNDER:- S.NO. UNIT RATIO AMOUNT 1. UDAIPUR 44.72% 86,06,092/- 2. BAROTIWALA 26.37% 50,74,746/- 3. BATED 28.91% 55,63,556/- TOTAL 1,92,44,394/- THE AO HAS CONSIDERED THE ABOVE SUBMISSION AND STAT ED THAT THE BAROTIWALA AND BATED ARE UNITS/INDUSTRIAL UNDERTAKI NGS UNDER THE AEGIS OF M/S.SML. THESE UNITS UTILIZE THE CORPORATE AND ADMI NISTRATIVE SET UP OF SML FOR VARIOUS SERVICES AND AMENITIES WHICH ARE IMPERATIVE HAD IT BEEN SEPARATE INDUSTRIAL UNDERTAKING ON HIS OWN. THE ASSESSEE HAS NOT APPORTIONED THE COMMON EXPENSES WHILE ARRIVING AT THE PROFIT OF THESE TWO UNITS. THE AO FURTHER OBSERVED AS UNDER:- AT THIS STAGE, IT WILL BE PERTINENT TO ILLUSTRATE THE RELEVANT PROVISIONS OF THE INCOME TAX ACT. THE CONTENTS OF SECTION 80IA SU B SECTION 5,7,8, 10 (APPLICABLE FOR SECTION 80IB AND 80IC BY VIRTUE OF SUB SECTION 13 OF SECTION 80IB AND SUB SECTION 7 OF SECTION 80IC) WHICH ARE RELEVANT HERE ARE REPRODUCED BY THE AO ON PAGE 4 & 5 OF THE ORDER. UNDER SUB SECTION (5) THE LEGISLATURE HAS LAID DOWN THE MOST IMPORTANT PRINCIPLE FOR DETERMINING THE QUANTUM OF PROFITS OF ELIGIBLE BUSINESS. IT READ THAT PROFITS WILL BE COMPUTED AS IF SUCH ELIGIBLE BUSIN ESS WERE THE ONLY SOURCE OF THE INCOME OF THE ASSESSEE DURING THE PREVIOUS YEAR REL EVANT TO THE INITIAL ASSESSMENT YEAR AND TO EVERY SUBSEQUENT ASSESSMENT YEAR UPTO A ND INCLUDING THE ASSESSMENT YEAR FOR WHICH DETERMINATION IS TO BE MADE. THE L EGISLATURE HAS PROVIDED THE IMPORTANT CLUE THAT TO DETERMINE THE PROFITS, PRESU MPTION HAS TO BE MADE THAT THE 4 ELIGIBLE BUSINESS WAS THE ONLY BUSINESS OF THE ASSE SSEE. IN PRACTICAL TERMS THIS MEANS AND ONLY THE RECEIPTS THAT WOULD HAVE BEEN DE RIVED WHICH WOULD HAVE BEEN INCURRED IF THE ELIGIBLE BUSINESS WAS THE ONLY BUSI NESS WILL BE CHARGED TO THE PROFIT AND LOSS ACCOUNT DRAWN FOR THE PURPOSE OF DETERMINI NG THE PROFITS OF ELIGIBLE BUSINESS. THE INTENTION OF TH THIS SUB SECTION WILL BECOME CLEAR WHEN READ WITH SUB SECTION (8). SUBSECTION (8) ESTABLISHES THE SEC OND MOST IMPORTANT PRINCIPLE FOR DETERMINATION OF PROFITS OF ELIGIBLE BUSINESS AND A LONGWITH SUB SECTION (5) LAYS DOWN THE CORE FOUNDATION OF PROCESS TO BE ADOPTED W HILE COMPUTING SUCH PROFITS. WHILE SUB SECTION (5) PLACES THE ELIGIBLE BUSINESS IN FOUR WALLS FROM THE AL OTHER BUSINESS ACTIVITIES. SUB SECTION (8) MENTIONS THAT TRANSFER OF ANY GOODS OR SERVICES FROM THE ELIGIBLE BUSINESS TO THE OTHER BUSINESS AN D VICE-VERSA SHALL BE DONE AT MARKET VALUE OF SUCH GODS OR SERVICES AS ON THAT DA TE. THE BASIC THEME OF THESE PROVISIONS RELATING TO INFRA GROUP TRANSFER PRICING IS TO PREVENT INFLATION OF PROFITS ATTRIBUTABLE TO ELIGIBLE BUSINESS BY WAY OF MANIPUL ATION OF SUCH PRICES. SUCH PROVISIONS ARE PROVIDED ONLY IN CASE OF TRANSACTION S OF THE ELIGIBLE BUSINESS WITH THE RELATED PARTIES AND NOT IN OTHER CASES BECAUSE SAME PERSONS RUN THE OPERATIONS OF BOTH AND THEIR DECISIONS ARE LIKELY TO BE GUIDED BY CONSIDERATIONS OTHER THAN MARKET FORCES. AFTER LAYING DOWN THE BASIC PRINCIPLES UNDER SUB SE CTION (5) AND SUB SECTION (8), THE LEGISLATURE HAS PROVIDED ANOTHER P ARALLEL MECHANISM TO CHECK ANY POSSIBLE MANIPULATION UNDER SUB SECTION (10). UNDER THIS SUB SECTION THE AO HAS BEEN EXPLICITLY EMPOWERED TO RECOMPUTE THE PROFITS OF THE ELIGIBLE BUSINESS UNDER CERTAIN CIRCUMSTANCES WHERE THE ABOVE PROVISIONS FA IL. THE PLAIN READING OF SUB SECTION 5,8,10 AND 11 OF S ECTION 80IA MAKES IT VERY CLEAR THAT THE BENEFIT PROVIDED UNDER THIS SEC TION IS BOUND BY CERTAIN LIMITATIONS. THE ASSESSEE IS REQUIRED TO FULFILL CE RTAIN CONDITIONS TO CLAIM THE ABOVE DEDUCTION. THE SPIRIT OF SUB SECTIONS IS TO SAFEGUA RD AGAINST THE POSSIBLE MISUSE. THESE SUB SECTION MAKES SURE THAT THE BENEFIT OF DE DUCTION IS FAIR AND REASONABLE AND THE QUANTUM OF DEDUCTION IS SUCH THAT IT ACTUAL LY ACCRUES FROM THE PURPOSE FOR WHICH DEDUCTION IS GRANTED. THE AO ALSO PLACED RELI ANCE OF JURISDICTIONAL HIGH COURT IN THE CASE OF RAJASTHAN STATE WAREHOUSING CO RPORATION VS. CIT REPORTED IN 209 ITR 271 WHEREIN IT HAS BEEN HELD THAT IF THE ASSESSEE IS DERIVING INCOME FROM DIFFERENT SOURCES FROM TAXABLE AND SOME NON TA XABLE THE ALLOCATION OF EXPENDITURE ON PROPORTIONATE BASIS IS JUSTIFIED. THE AO FURTHER STATED THAT AS REGARDS, THE COMMON A SSETS, AGAIN THE ASSESSEES CONTENTIONS DO NOT HOLD GOODS. AS THE AS SESSEE HAS CLAIMED DEPRECIATION IN RESPECT OF THE ASSETS WHICH ARE EXC LUSIVELY LIKED TO THE BAROTIWALA AND BATED UNITS IN THEIR P&L ACCOUNT. BUT NO ALLOC ATION HAS BEEN MADE BETWEEN THE THREE UNITS IN RESPECT OF HEAD OFFICE ASSETS. T HE ASSESSEE HAS NOT DENIED THE USE OF HEAD OFFICE ASSETS FOR OTHER UNITS ALTHOUGH IT STATED THAT SUCH USE IS NEGLIGIBLE. OBVIOUSLY THE HEAD OFFICE SET UP IS BEI NG UTILIZED FOR THE VARIOUS SERVICES RENDERED FOR AND ON BEHALF OF THE UNITS OF BAROTIWALA AND BATED. THE 5 ASSESSEE CLAIMS DEPRECIATION ON THE ASSETS WHICH PE RTAIN TO UDAIPUR UNIT, HO WHICH IS ALSO IN UDAIPUR AND BRANCH OFFICES SPREAD ALL OVER INDIA, IN THE BOOKS OF UDAIPUR. HOWEVER, ALL ASSETS WHICH RELATED TO THE H O AND BRANCHES ARE SHARED BY ALL THE THREE UNITS. IDEALLY THE ASSESSEE SHOULD HA VE IDENTIFIED THE ASSETS PERTAINING TO UDAIPUR UNIT EXCLUSIVELY AND SHOULD HAVE CHARGED THE SAME IN THE UDAIPUR UNIT AND THE REMAINING ASSETS USED AT HO AND BO SHOULD H AVE BEEN APPORTIONED BETWEEN THE THREE UNITS IN THE RATIO OF TURNOVER. B UT THE ASSESEE HAS NOT DONE SO. THE AO MADE THE BASIS OF ALLOCATION AS UNDER :- PARTICULARS DEPRECIATION AS PER I.T.ACT (RS) (A) BUILDING 2077895 (B) COMPUTERS 13580980 (C) FURNITURE AND FIXTURE 1557435 (D) MOTOR VEHICLES 1674114 )E) OFFICE EQUIPMENTS 15% OF RS.21227812 3184172 TOTAL 22074596 HOWEVER, CONSIDER THE FACT, THAT SOME OF THE ASSETS OUT OF THE ABOVE ARE SPECIFIC TO UDAIPUR UNIT, IT WILL BE JUST AND FAIR TO FIRST APPORTION THE ABOVE E DEPRECIATION IN THE RATIO OF CORPORATE EXPENSES TO TOTAL ADMINISTRATIVE EXPENSES AS UNDER :- TOTAL CORPORATE EXPENSES CONSIDERED FOR APPORTION MENT RS.18.61 CRORE TOTAL EXPENSES IN THE CONSOLIDATED BALANCE SHEET ON THE HEAD WHICH HAVE BEEN CONSIDERED IN CORPORATE EXPENSES : RS.46.63 CR ORE (SC.18 & 19 OF B/S) THE PART OF DEPRECIATION PERTAINING TO COMMON USE I S EQUAL TO 0.399 X 22074496/- = RS.8809056/- THEREFORE THE TOTAL EXPENSES TO BE APPORTIONED AR E: R & D EXPENSES ON CAPITAL ASSETS RS.20407539/- DEPN. PERTAINING TO COMMON ASSETS RS.88,09,956 /- GRANT TOTAL RS.29217495/- THESE EXPENSES HAVE TO BE ALLOCATED TO BAROTIWALA A ND BATED UNIT IN THE RATIO OF TURNOVER: BAROTIWALA BATED TURNOVER 26.37% 28.91% EXPENSES ALLOCATED 7704653 8446778 6 IN VIEW OF THE ABOVE THE AO REDUCED THE PROFIT IN R ESPECT OF BAROTIWALA AND BATED UNIT BY RS.77,04,653/- AND RS. 84,46,778/- RESPECTIVELY FOR CALCULATION OF DEDUCTION U/S 80HB/ 80IC OF THE ACT. 2.3 DETAILED SUBMISSIONS WERE FILED BEFORE THE LD. CIT(A) WHICH ARE AVAILABLE AT PAGES 8 TO 16 OF HIS ORDER AND THE SAME IS REPRODUC ED AS UNDER:- 1.1 THE APPELLANT HAS CLAIMED DEDUCTION U/S 80IB AND 80IC IN RESPECT OF THE TWO INDUSTRIAL UNDERTAKINGS SET UP I N HIMACHAL PRADESH. THE LD.ACIT CRICELE-2, UDAIPUR HAS RESTRICTED THE C LAIM FOR THIS DEDUCTION AS UNDER :- UNITS CLAIM MADE CLAIM ALLOWED BY AO (I) BATED UNIT (80IB) RS. 7,98,80,615 RS. 6,69,68,5 94 (II) BAROTIWALA UNIT (80IC) RS. 28,75,20,135 RS. 18 ,70,22,005 THUS, THE CLAIM FOR DEDUCTION IS REDUCED BY RS.1,29 ,12,021/- IN BATED UNIT AND BY RS.10,04,98,130/- IN BAROTIWALA U NIT. 1.2 THE SAID AO HAS RESTRICTED THE ABOVE CLAIM BY D EDUCTING THE FOLLOWING AMOUNT FROM INCOME ELIGIBLE FOR DEDUC TION U/S 80 IB/80IC IN RESPECT OF THE ABOVE UNITS. S.N. PARTICULARS BATED UNIT (U/S 80IB) BAROTIWALA UNIT (U/S 80IC) (I) CAPITAL EXPENDITURE FOR R.D, AND DEPRECIATION OF ASSETS AT UDAIPUR UNIT ALLOCATED TO THESE UNITS ON TURNOVER RATIO 84,46,778 77,04,653 (II) OTHER INCOME NOT CONSIDERED AS DERIVED FOR INDUSTRIAL UNDERTAKING 40,92,664 6,70,15,169 (III) INCOME TREATED AS FROM TRADING ACTIVITY NOT ALLOWED FOR DEDUCTION U/S 80IB/80IC 3,72,579 2,57,78,308 TOTAL RS. 1,29,12,021 10,04,98,130 7 1.3 THE SAID AO HAS DISCUSSED THE ABOVE ISSUES IN P ARA 3 TO 5 OF THE ASSESSMENT ORDE3R AT PAGE 2 TO 14 OF THE ASS ESSMENT ORDER. THE APPELLANT SUBMITS THAT THE ABOVE ADJUSTMENTS MADE I N THE COMPUTATION OF INCOME ELIGIBLE FOR DEDUCTION U/S 80 IB/80 IC ARE N OT AT ALL JUSTIFIED. THE APPELLANT HAS EXPLAINED THE REASONS FOR THE SAME IN THE SUBMISSIONS MADE BEFORE THE SAID A.O. IN THE VARIOUS LETTERS AND STA TEMENTS SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS AS UNDER : S.N. ISSUES SUBMISSIONS PAGES FROM TO (I) APPORTIONMENT OF CAPITAL EXPENDITURE ON R&D AND DEPRECIATION ON ASSETS AT UDAIPUR LETTER DATED 04-12-2006 1 7 (II) OTHER INCOME NOT CONSIDERED AS DERIVED LETTER DATED 10-11-2006 LETTER DATED 4- 12-2006 8 1 16 7 (III) INCOME TREATED FROM TRADING ACTIVITY LETTER DATED 19-09-2006 17 44 SUBMISSIONS:- 1.4 APPORTIONMENT OF CAPITAL EXPENDITURE ON R & D ASSET S AT UDAIPUR (I) IT IS SUBMITTED THAT THE COMPANYS R & D UNIT I S SITUATED AT UDAIPUR FACTORY. THE CAPITAL EXPENDITURE OF RS.2,04 ,07,540/- WAS INCURRED DURING THE YEAR AS UNDER . (A) R&D BUILDING 11,63,149 (B) R & D PLANT & EQUIPMENTS 1,92,44,391 RS. 2,04,07,54 0 THE APPELLANT HAS CLAIMED DEDUCTION FOR THE ABOVE E XPENDITURE U/S 35(1)(IV) READ WITH SECTION 35 (2) (IA) OF THE INCO ME TAX ACT. SINCE THE R & D BUILDING AND PLANT AND EQUIPMENTS ARE SITUATED AT UDAIPUR FACTORY, THE DEDUCTION IS CLAIMED AGAINST THE PROFITS OF THA T UNIT. SINCE THE RESULTS OF THE R&D ACTIVITY ARE SHARED WITH OTHER UNITS, PROPO RTIONATE REVENUE EXPENSES ARE RECOVERED BY UDAIPUR UNIT FROM THE TWO UNITS AT BATED AND BAROTIWALA. THE CAPITAL ASSETS SUCH AS R & D BUILDI NGS, PLANTS & EQUIPMENTS ARE NOT SHARED WITH OTHER UNITS AND, THE REFORE, THE CAPITAL COST IS NOT RECOVERED FROM THOSE UNITS. IT IS SUBMITTED THAT U/S 80 IB (13) AND 80 8 IC (7) READ WITH SECTION 80IA (8) IT IS PROVIDED TH AT WHEN SOME SERVICES ARE RENDERED BY ONE UNIT TO THE OTHER UNIT, THE VAL UE OF SUCH SERVICES SHOULD BE RECOVERED FROM THE OTHER UNIT. THERE IS NO PROVISION FOR SHARING THE COST OF ASSETS INCURRED BY ONE UNIT FOR RENDERI NG SUCH SERVICES TO THE OTHER UNIT. R & D DEPARTMENT AT UDAIPUR CARRIES ON RESEARCH AND DEVELOPMENT ACTIVITY RELATING TO PRODUCTS. THE REVE NUE EXPENSES RELATING TO R & D DEPT. SUCH AS MANPOWER COST, STORE CONSUM ED, POWER AND OTHER DAY TO DAY EXPENSES OF R & D DEPT. ARE SHARED BETWE EN THE THREE UNITS IN THE RATIO OF TURNOVER R&D ACTIVITY IS A CONTINUOUS ACTIVITY AND DOES NOT RESULT IN ANY TANGIBLE ACHIEVEMENT IN ONE YEAR. THE RESULTS MAY OR MAY NOT BE ACHIEVED OVER A PERIOD OF YEARS. THEREFORE, IT C ANNOT BE SAID THAT UDAIPUR IS RENDERING ANY TANGIBLE SERVICE TO OTHER UNITS WHICH CAN HAVE ANY MARKET VALUE. R & D ACTIVITY IS FOR INTERNAL CO NSUMPTION ONLY AND ITS RESULTS ARE NOT FOR SALE. IN FACT, NO COMPANY WOULD LIKE TO SHARE ITS ACHIEVEMENTS THROUGH R & D WITH ANY THIRD PARTY. TH EREFORE, IT IS SUBMITTED THAT SHARING OF REVENUE EXPENSES BETWEEN THE THREE UNITS IS THE CORRECT METHOD OF DETERMINING THE PROFITS OF EACH U NIT. (II) THE LD.AO HAS TAKEN THE VIEW THAT THE COST OF CAPITAL ASSETS, PURCHASED BY UDAIPUR UNIT SHOULD HAVE BEEN SHARED B Y THE THREE UNITS ON THE BASIS OF TURNOVER. HE HAS ACCORDINGLY BIFURCATE D THE EARLIER COST OF RS.2,04,07,539/- BETWEEN THE THREE UNITS AS UNDER : - UDAIPUR 44.72% 91,26,273 BATED 28.91% 58,99,808 BAROTIWALA 26.37% 53,81,458 100.00 2,04,07,539 ON THE ABOVE BASIS HE HAS DEDUCTED RS.58,99,808/- F ROM THE INCOME OF BATED UNIT AND RS.53,81,458/- FROM THE IN COME OF BAROTIWALA UNIT FOR THE PURPOSE OF COMPUTING EXEMPT INCOME U/S 80 IB/80 IC. IT IS SUBMITTED SUCH ALLOCATION IS NOT PERMITTED U/S 80 I B/80 IC AS THERE IS NO PROVISION FOR SHARING COST OF CAPITAL ASSETS. (III) THE SAID AO HAS REFERRED TO THE PROVISIONS OF SECTION 80 IA (5) ON PAGE 4 OF THE ASSESSMENT ORDER. THIS SECTION ONLY S TATES THAT FOR THE PURPOSES OF DEDUCTION U/S 80 IB/ 80 IC, THE INCOME FROM BUSINESS OF THE ELIGIBLE UNIT SHALL BE CONSIDERED AS IF THE BUSINES S OF THE SAID UNIT WAS THE ONLY SOURCE OF INCOME. THE EFFECT OF THIS SECTION I S THAT IF THERE IS ANY LOSS IN THE ELIGIBLE UNIT IN ANY YEAR, THE SAME WILL BE SET OFF AGAINST INCOME OF THAT UNIT FOR THE SUBSEQUENT YEAR FOR THE PURPOSE O F DEDUCTION UNDER THE ABOVE SECTION, EVEN IF THE LOSS HAS BEEN ADJUSTED A GAINST OTHER INCOME OF THE EARLIER FOR THE COMPUTATION OF TOTAL INCOME. IT IS, THEREFORE, SUBMITTED IN THE FACTS OF THE APPELLANTS CASE, THE ABOVE SEC TION IS NOT APPLICABLE. 9 (IV) THE SAID AO HAS ALSO REFERRED TO PROVISIONS OF SECTION 80 IA (10) ON PAGE 5 OF THE ASSESSMENT ORDER. IT IS SUBMITTED THAT THIS SECTION REFERS TO TRANSACTIONS BETWEEN THE ELIGIBLE UNIT AND OTHER AS SOCIATED ENTITY. IT IS SUBMITTED THAT THIS SECTION DOES NOT APPLY TO THE F ACTS OF THE APPELLANTS CASE. (V) THE SAID AO HAS, ON PAGE 7 OF THE ASSESSMENT OR DER, RELIED ON THE DECISION OF RAJASTHAN HIGH COURT IN THE CASE OF RAJ ASTHAN STATE WAREHOUSING CORPORATION VS CIT (209 ITR 271) FOR AL LOCATION OF CAPITAL COST OF R & D ASSETS. IT IS SUBMITTED THAT THIS DEC ISION IS REVERSED BY THE SUPREME COURT IN THE CASE OF RAJASTHAN STATE WAREHO USING CORPORATION VS CIT (242 ITR 450). IN THIS CASE THE SUPREME COURT H AS HELD AS UNDER .- THE FOLLOWING PRINCIPLES MAY BE LAID DOWN : (I) I F THE INCOME OF AN ASSESSEE IS DERIVED FROM VARIOUS HEADS OF INCOME, HE IS ENTITLED TO CLAIM DEDUCTION PERMISSIBLE UNDER TH E RESPECTIVE HEAD, WHETHER OR NOT COMPUTATION UNDER EACH HEAD RE SULTS IN TAXABLE INCOME (II) IF THE INCOME OF AN ASSESSEE AR ISES UNDER ANY OF THE HEADS OF INCOME BUT FROM DIFFERENT ITEMS. E.G., DIFFERENT HOUSE PROPERTIES OR DIFFERENT SECURITIES, ETC. AND INCOME FROM ONE OR MORE ITEMS ALONE IS TAXABLE WHEREAS INCOME FROM THE OTHE R ITEM IS EXEMPT UNDER THE ACT, THE ENTIRE PERMISSIBLE EXPEND ITURE IN EARNING THE INCOME FROM THAT HEAD IS DEDUCTIBLE; AND (III) IN COMPUTING THE PROFITS AND GAINS OF BUSINESS OR PROFESSION WHE N AN ASSESSEE IS CARRYING ON BUSINESS IN VARIOUS VENTURES AND SOME A MONG THEM YIELD TAXABLE INCOME AND THE OTHERS DO NOT, THE QUE STION OF ALLOWABILITY OF THE EXPENDITURE UNDER SECTION 37 OF THE INCOME TAX ACT, 1961, WILL DEPEND ON : (A) FULFILLMENT OF REQ UIREMENTS OF THAT PROVISION, NAMELY, THAT (I) THE EXPENDITURE SHOULD NOT BE IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE; (II) IT SHOULD HAVE BEEN LAID OUT OR EXPENDED WHOLL Y AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PRO FESSION; AND (III) IT SHOULD HAVE BEEN EXPENDED IN THE PREVIOUS YEAR; AND (B) ON THE FACT WHETHER ALL THE VENTURES CARRIE D ON BY HIM CONSTITUTED ONE INDIVISIBLE BUSINESS S OR NOT; IF THEY DO THE ENTIRE EXPENDITURE WILL BE A PERMISSIBLE DEDUCTION, BUT IF THEY DO NOT, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDIT URE WILL APPLY, BECAUSE THERE WILL BE NO NEXUS BETWEEN THE EXPENDIT URE ATTRIBUTABLE TO THE VENTURE NOT FORMING AN INTEGRAL PART OF THE BUSINESS AND THE EXPENDITURE SOUGHT TO BE DEDUCTED AS THE BUSINESS EXPENDITURE OF THE ASSESSEE........................ ........ HELD, REVERSING THE DECISION OF THE HIGH COURT, THA T IN VIEW OF THE FACT THAT A PERUSAL OF THE QUESTION ITSELF D ISCLOSED THAT INCOME 10 FROM VARIOUS VENTURES WAS EARNED IN THE COURSE OF O NE INDIVISIBLE BUSINESS, THE IMPUGNED ORDER UPHOLDING THE APPORTIO NMENT OF THE EXPENDITURE AND ALLOWING DEDUCTION OF ONLY THAT PRO PORTION OF IT WHICH WAS REFERABLE TO THE TAXABLE INCOME, WAS UNSU STAINABLE. 1.5 APPORTIONMENT OF DEPRECIATION ON CAPITAL ASSETS AT UDAIPUR HEAD OFFICE. (I) THE SAID AO HAS APPORTIONED DEPRECIATION OF RS.88,09,956/- RELATING TO CERTAIN CAPITAL ASSETS A T HEAD OFFICE IN UDAILPUR ON THE GROUND THAT THESE ASSETS MAY HAVE B EEN USED AT HEAD OFFICE FOR ADMINISTRATIVE PURPOSES OF UDAIPUR, BATED AND BROTIWALA UNITS. HE HAS DISCUSSED THE ISSUE ON PAGE S 8 AND 9 OF THE ASSESSMENT ORDER. THE A.O. HAS ALLOCATED THE DEPREC IATION ON TURNOVER BASIS AS UNDER:- ASSETS DEPRECIATION (A) BUILDING 20,77,895 (B) COMPUTERS 1,35,80,980 FURNITURE FIXTURES 15,57,435 (D) MOTOR VEHICLE 16,74,114 (E) OFFICE EQUIPMENTS ESTIMATED @ 15% OF TOTAL DEPRECIATION ON PLANT & MACHINERY (2,12,27,812) 31,84,172 2,20,74,596 PROPORTIONATE DEPRECIATION RELATING TO COMMON CORPORATE EXPENSES AS COMPARED TO TOTAL DEPRECIATION (0.399 X 2,20,74,596) 88,09,956 . UNIT TURNOVER ALLOCATION UDAIPUR 44.72% 39,.39,791 BATED 28.91% 25,46,970 BAROTIWALA 26.37% 23,23,195 100 88,09,956 (II) IT IS SUBMITTED THAT THE VARIOUS ASSETS AT HEA D OFFICE AS LISTED IN (I) ABOVE ARE USED FOR DAY TO DAY WORK AT HEAD OFFICE. THESE ASSETS ARE NOT USED FOR THE ACTIVITIES AT THE TWO UNITS AT BATED AND BAROTIWALA WHICH ARE SET UP IN HIMACHAL PRADESH . AT HEAD OFFICE AT UDAIPUR THE COMPANY HAS TO PERFORM CERTAI N CORPORATE FUNCTIONS AND THESE ASSETS ARE USED FOR THAT PURPO SE. AGAIN, AS HELD BY THE SUPREME COURT IN THE CASE OF RAJASTHAN STAT E WAREHOUSING CORPORATION (242 ITR 450) AS REFERRED TO IN PARA 1. 4 (V) ABOVE, NO 11 SUCH APPORTIONMENT CAN BE MADE. THEREFORE, FOR THE REASONS STATED IN PARA 1.4 ABOVE THE APPELLANT SUBMITS THAT THE AB OVE APPORTIONMENT MADE BY THE SAID A.O. IS NOT JUSTIFIE D. PARTICULARS UDAIPUR BAROTIWALA BATED TOTAL SALES 1122672395 590818983 647729445 2361220823 GROSS PROFIT 372957496 354806360 213437957 9412018 13 GROSS PROFIT RATIO 33.22% 60.05% 32.95% 39.86% NET PROFIT -32687283 291325347 82936883 341574947 NET PROFIT % -2.91% 49.31% 12.80% 14.47% THE APPELLANT HAS CLAIMED DEDUCTION IN THIS YEAR U/ S 80IC AT 100% AT RS.,28,75,20,135/- IN RESPECT OF BAROTIWALA UNIT AND U/S 80IB AT 100% AT RS.7,98,80,615/- IN RESPECT OF BATE D UNIT. THERE IS A SIGNIFICANT DIFFERENCE IN GP AND NP RATIO OF THE THREE UNITS. THE NET PROFIT RATIO OF BAROTIWALA UNIT IS SIGNIFICANTL Y HIGHER THAN THE BATED UNIT. THERE IS NET LOSS IN UDAIPUR UNIT. ON A NALYSIS OF FACTS SUBMITTED BY THE APPELLANT, THE AO FOUND THAT ALTHO UGH THE APPELLANT HAD ALLOCATED CORPORATE EXPENSES INCLUDIN G REVENUE EXPENDITURE ON R&D BUT NOT APPORTIONED DEPRECIATION ON THE COMMON ASSETS AND DEPRECIATION ON THE ASSETS USED F OR R&D FACILITIES. FURTHER, REASON BEHIND THE HIGH N.P. RA TIO OF BAROTIWALA UNIT OF INTER UNIT TRANSFER OF INTEREST ENTRY. THE TOTAL EXPENDITURE ON R&D FACILITIES IS RS.2,04, 07,539/-. THE APPELLANT WAS ASKED TO EXPLAIN AS TO WHY R&D EX PENSES AND DEPRECIATION ON HO ASSETS SHOULD NOT BE APPORTIONED BETWEEN THE THREE UNITS IN THE PROPORTION OF TURNOVER. THE APPE LLANT SUBMITTED DURING THE ASSESSMENT PROCEEDINGS THAT THE OTHER UN ITS OF THE COMPANY CANNOT USE THE FIXED ASSETS OF THE HO. FOR EXAMPLE THE PLANT AND MACHINERY OF UDAIPUR I.E. (HO) ARE USED W HOLLY AND EXCLUSIVELY FOR MANUFACTURING THE PRODUCT OF UDAIPU R UNITITSELF AND NOT FOR MANUFACTURING PRODUCTS OF OTHER UNITS. MOREOVER THE OFFICE EQUIPMENTS, FURNITURE AND FIXTURE ETC. OF UD AIPUR UNIT IS ALSO EXCLUSIVELY USED FOR DAY TO DAY WORKING OF UDAIPUR UNIT (HO) AND ARE NOT USED FOR THE OTHER UNIT OF THE APPELLANT. T HE BREAK UP OF THE CAPITAL EXPENDITURE ON R&D IS AS UNDER:- R & D BUILDING RS.11,63,149/- R & D EQUIPMENTS RS.1,92,44,391/- TOTAL RS.2,04,07,540/- 12 THE R & D UNIT IS APPROVED BY THE GOVT. OF INDIA, M INISTRY OF SCIENCE AND TECHNOLOGY, DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH, NEW DELHI. MOREOVER THE APPORT IONMENT OF CAPITAL EXPENDITURE IN RESPECT OF PURCHASE OF R & D EQUIPMENTS OF ALL THE THREE UNITS IN TURNOVER RATIO IS AS UNDER : - R & D BUILDING RS.11,63,149/- R & D EQUIPMENTS RS.1,92,44,391/- TOTAL RS.2,04,07,540/- THE AO WAS NOT SATISFIED WITH THE REPLY OF THE APPE LLANT. THE AO HAS FOR THIS PURPOSE REFERRED TO SUB SECTION (5) OF SECTION 80IA, SUB SECTION (8) OF SECTION 80IA, SUB SECTION (10) OF SECTION 80IA AND IMPRESSED UPON THE FACT THAT SUB SECTION ( 5), (8), (10) AND (11) OF SECTION 80IA MAKE IT VERY CLEAR THAT THE BE NEFIT PROVIDED UNDER THIS SECTION IS BOUND BY CERTAIN LIMITATIONS. THE SPIRIT OF SUB SECTION IS TO SAFEGUARD AGAINST POSSIBLE MISUSE. TH E LEGISLATURE HAS PROVIDED EXPLICIT MECHANISM THROUGH THE MISUSE OF T HE PROVISION WOULD BE EFFECTIVELY CHECKED. THE INTENTION OF THE LEGISLATURE IS TWO FOLD, FIRSTLY IT IS TO PROVIDE 100% TAX DEDUCTI ON ON CERTAIN ELIGIBLE BUSINESS ACTIVITIES BUT AT THE SAME TIME I T ASPIRES TO LIMIT THE REAL ELIGIBLE BENEFICIARIES AND TO A QUANTUM OF PROFIT THAT WAS REASONABLY DERIVED FROM SUCH ELIGIBLE BUSINESS. THE AO HAS ALSO PLACED RELIANCE ON THE DECISION OF THE HONBLE HIGH COURT OF RAJASTHAN IN THE CASE OF RAJASTHAN STATE WAREHOUSI NG CORPORATION VS. CIT 209 ITR 271 WHEREIN IT HAS BEEN HELD THAT I F THE ASSESSEE IS DERIVING INCOME FROM DIFFERENCE SOURCES FROM TAX ABLE AND SOME NON TAXABLE, THE COST OF EXPENDITURE ON PROPORTIONA TE BASIS IS JUSTIFIED. THE AO HAS ANALYSED THE CASE OF THE APPE LLANT IN THIS BACKGROUND. UDAIPUR BEING THE HO, NATURALLY THE R & D UNIT HAS TO BE INSTALLED AT UDAIPUR. HOWEVER, THE APPELLANT BEI NG THE SAME, THE BENEFIT SHALL ACCRUE TO THE OTHER UNITS ALSO WHICH UNDISPUTABLE. IN THE LIGHT OF THE FACT THAT UDAIPUR UNIT IS NOT A SE PARATE CENTRE IN THE BOOKS OF THE APPELLANT AND THE APPELLANT IS NOT CHA RGING ANY SUM FROM THE OTHER TWO UNITS FOR THE VARIOUS R & D ACTI VITIES CARRIED OUT AT UDAIPUR, THE BENEFITS OF WHICH ARE TRANSFER RED TANGIBLE/INTANGIBLE FOR THE OTHER UNITS AS WELL. FU RTHER, THE ASSESSEE ITSELF HAS ALLOCATED THE R & D EXPENDITURE WHICH IS REVENUE IN NATURE AND CLAIMED IN P & L ACCOUNT BETWEEN THE THR EE UNITS. SO THERE IS NO JUSTIFICATION FOR NOT APPORTIONING THE CAPITAL EXPENDITURE ON R & D. THE TWO OF THEM (CAPITAL AND REVENUE) BEI NG INTER LINKED WITH EACH OTHER. IN CASE OF COMMON ASSETS AL SO THE APPELLANT HAS CLAIMED DEPRECIATION IN RESPECT OF ASSETS WHICH ARE EXCLUSIVELY LINKED TO BAROTIWALA UNIT AND BATED UNIT IN THEIR P & L ACCOUNT. BUT NO ALLOCATION HAS BEEN MADE BETWEEN THREE UNITS IN RESPECT OF 13 HO ASSETS. THE APPELLANT HAS NOT DENIED THE USE OF HO ASSETS FOR OTHER UNITS ALTHOUGH IT IS STATED THAT SUCH USE IS NEGLIGIBLE. OBVIOUSLY THE HO SET UP IS BEING UTILIZED FOR THE V ARIOUS SERVICES RENDERED FOR AND ON BEHALF OF THE BAROTIWALA AND BA TED UNITS. THE APPELLANT CLAIMED DEPRECIATION ON THE ASSETS WHICH PERTAIN TO UDAIPUR UNIT, HO AND BRANCH OFFICE SPREAD ALL OVER INDIA IN THE BOOKS OF UDIAPUR. HOWEVER, ALL THE ASSETS WHICH REL ATES TO THE HO AND BRANCHES ARE SHARED BY ALL THE THREE UNITS. IDE ALLY THE ASSESSEE SHOULD HAVE IDENTIFIED THE ASSETS PERTAINING TO UDA IPUR UNIT EXCLUSIVELY AND SHOULD HAVE CHARGED THE UDIAPUR UNI T AND REMAINING ASSETS USED AS HO AND BRANCH OFFICE SHOUL D HAVE BEEN APPORTIONED BETWEEN THE THREE UNITS IN THE RATIO OF TURNOVER. THE APPELLANT HAS NOT DONE SO. THE AO HAS, THEREFORE, W ORKED OUT THE BASIS OF ALLOCATION FIRST APPORTIONING THE ABOVE DE PRECIATION IN THE RATIO OF CORPORATE EXPENSES TO THE TOTAL ADMINISTRA TIVE EXPENSES AND THEN APPORTIONING THE TOTAL EXPENSES IN THE RATIO O F TURNOVER WHICH IS 26.37% FOR BAROTIWALA AND 28.91% FOR BATED UNIT AND HAVE THUS REDUCED THE PROFIT BY RS.77,04,653/- AND RS.84,46,7 78/- RESPECTIVELY. THE LD.A/R HAS SUBMITTED THAT THE APPELLANT HAS CLA IMED DEDUCTION U/S 80IB AND 80IC IN RESPECT OF TWO INDUS TRIAL UNITS AT BATED AND BAROTIWALA. THE AO HAD RESTRICTED THE CLA IM BY DEDUCTING THE FOLLOWING AMOUNT FROM INCOME ELIGIBLE FOR DEDUCTION U/S 80IB/80IC IN RESPECT OF THE ABOVE TWO UNITS:- 2.4 AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE P ARTIES AND PERUSING THE MATERIALS AVAILABLE ON RECORD, THE LD. CIT(A) FOUND THAT THE AO WAS NOT CORRECT IN REDUCING DEDUCTION CLAIMED BY THE ASSESSEE. THE LD. CIT(A) H AS ALSO OBSERVED THAT THE AO DISALLOWED THE CLAIM OF THE ASSESSEE FOLLOWING THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF RAJASTHAN STATE WAREHOUSING CO RPORATION VS. CIT, 209 ITR 271. HOWEVER, THIS DECISION HAS BEEN REVERSED BY THE HON 'BLE APEX COURT IN THE CASE OF RAJASTHAN STATE WAREHOUSING CORPORATION VS. CIT, 24 2 ITR 450. ACCORDINGLY, HE DELETED THE DISALLOWANCES AND ALLOWED THE CLAIM OF THE ASSESSEE. 14 2.5 THE LD. DR PLACED RELIANCE ON THE ORDER OF THE AO AND THE CONCERNED PORTION OF THE AOS ORDER WAS ALSO READ DURING THE COURSE OF H EARING. THE LD. DR ALSO FILED THE BRIEF NOTE IN SUPPORT OF THE ORDER OF THE AO. 2.6 ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSE SSEE PLACED RELIANCE ON THE ORDER OF THE LD. CIT(A). HOWEVER, THE DETAILED WRITTEN SUBMI SSIONS WHICH WERE FILED BEFORE THE LD. CIT(A) WERE ALSO FILED HERE BEFORE US. THE RELIANCE WAS PLACED ON VARIOUS CASE LAWS MENTIONED IN THE WRITTEN SUBMISSIONS. 2.7 WE HAVE HEARD THE RIVAL CONTENTIONS AND CONSIDE RED THEM CAREFULLY. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE MATERI ALS AVAILABLE ON RECORD, WE FOUND THAT THE LD. CIT(A) WAS JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE. THE LD. CIT(A) HAS CONSIDERED THE ORDER OF THE AO AND WRITTEN SUBMISSI ONS OF THE ASSESSEE AND THEN HE CAME TO THE CONCLUSION THAT THE ORDER OF THE AO WAS NOT CORRECT ON THIS POINT. THE LD. CIT(A) HAS GIVEN HIS FINDING IN PARA 2.3 AT PAGES 16 TO 23 OF HIS ORDER WHICH ARE REPRODUCED AS UNDER:- 2.3. DECISION: I HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISS IONS OF THE LD.A/R AND FOUND THAT THE APPELLANT COMPANY HAS MANUFACTURED UNITS OF SOLID STATE ELECTRONIC ENERGY METER AT E- CLASS PRATAP NHAGAR INDUSTRIAL AREA, UDAIPUR, BATED AND BAROTIWALA, SOLAN, HIMACHAL PRADESH. THE TRADING OF ALL THE THREE UNITS IS AS UNDER :- PARTICULARS UDAIPR BAROTIWALA BATED TOTAL SALES 1122672395 590818983 647729445 2361220823 GROSS PROFIT 372957496 354806360 213437957 9412018 13 GROSS PROFIT RATIO 33.22% 60.05% 32.95% 39.86% NET PROFIT -32687283 291325347 82936883 341574947 NET PROFIT % -2.91 49.31% 12.80% 14.47% 15 THE APPELLANT HAS CLAIMED DEDUCTION FOR THIS YHEAR U/S 80IC AT 100% AT RS.28,75,20,135/- IN RESPECT OF BAROTIWA LA UNIT AND U/S 80IB AT 100% AT RS.7,98,80,615/- IN RESPECT OF BATE D UNIT. THERE IS A SIGNIFICANT DIFFERENCE IN G.P. AND N.P. RATIO OF THE THREE UNITS. THE NET PROFIT RATIO OF BAROTIWALA UNIT IS SIGNIFIC ANTLY HIGHER THAN THE BATGED UNIT. THERE IS NET LOSS IN UDAIPUR UNIT. ON ANALYSIS OF FACTS SUBMITTED BY THE APPELLANT, THE AO FOUND THAT ALTHOUGH THE APPELLANT HAD ALLOCATED CORPORATE EXPENSES INCLUDIN G REVENUE EXPENDITURE ON R & D BUT NOT APPORTIONED DEPRECIATI ON ON THE COMMON ASSETS USED FOR THE R & D FACILITIES. FURTHE R REASON BEHIND THE HIGH N.P. RATIO OF BAROTIWALA UNIT IS OF INTER UNIT TRANSFER OF INTEREST ENTRY. THE TOTAL EXPENDITURE ON R & D FACILITIES IS RS.2,04,07,439/-. THE APPELLANT WAS ASKED TO EXPLAI N AS TO WHY R & D EXPENSES AND DEPRECIATION ON HO ASSETS SHOULD N OT BE APPORTIONED BETWEEN THE THREE UNITS IN THE PROPORTI ON OF TURNOVER. THE APPELLANT SUBMITTED DURING THE ASSESSMENT PROCE EDINGS THAT THE OTHER UNITS OF THE COMPANY CANNOT USE THE FIXED ASS ETS OF THE HO. FOR E.G. THE PLANTS AND MACHINERY OF UDAIPUR (HO) A RE USED WHOLLY AND EXCLUSIVELY FOR MANUFACTURING THE PRODUCT OF UD AIPUR UNIT ITSELF AND NOT FOR MANUFACTURING PRODUCT OF OTHER U NITS. MOREOVER THE OFFICE EQUIPMENT, FURNITURE AND FIXTURE ETC. OF UDAIPUR UNIT IS ALSO EXCLUSIVELY USED FOR DAY TO DAY WORKING OF UDA IPUR UNIT (HO) AND ARE NOT USED FOR THE OTHER UNIT OF THE COMPANY. THE BREAK UP OF THE CAPITAL EXPENDITURE ON R & D IS AS UNDER :- R & D BUILDING RS.11,63,149/- R & D EQUIPMENT RS.1,92,44,391/- TOTAL RS.2,04,07,540/- THE R & D UNIT IS APPROVED BY THE GOVT. OF INDIA, M INISTRY OF SCIENCE AND TECHNOLOGY, DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH, NEW DELHI. THE APPORTIONMENT O F CAPITAL IN RESPECT OF PURCHASE OF R & D EQUIPMENT OF ALL THE T HREE UNITS IN TURNOVER RATIO IS AS UNDER ; S.N UNIT RATIO AMOUNT 1. UDAIPUR 44.72% 86,06,092 2. BAROTIWALA 26.37% 50,74,746 3. BATED 28.91% 55,63,556 TOTAL 1,92,44,394 THE AO WAS NOT SATISFIED WITH THE REPLY OF THE APPE LLANT. THE AO HAS, FOR THIS PURPOSE REFERRED TO SUB SECTIO N (5) OF SECTION 80IA, SUB SECTION (8) OF SECTION 80IA, SUB SECTION 10 OF SECTION 16 80IA AND IMPRESSED UPON THE FACT THAT SECTION 5,8, 10 AND 11 OF SECTION 80IA MAKE IT VERY CLEAR THAT THE BENEFIT PR OVIDED UNDER THIS SECTION IS BOUND BY CERTAIN LIMITATIONS. THE SPIRI T OF SUB SECTION IS TO SAFE GUARD AGAINST THE POSSIBLE MISUSE. THE LEG ISLATURE HAS DIRECTED EXPLICIT MECHANISM THROUGH THE MISUSE OF T HE PROVISIONS WOULD BE EFFECTIVELY CHECKED. THE INTENTION OF LEG ISLATURE IS TWO FOLD, FIRSTLY IT IS TO PROVIDE 100% TAX DEDUCTION O N CERTAIN ELIGIBLE BUSINESS ACTIVITIES BUT AT THE SAME TIME IT ASPIRES TO LIMIT THE REAL ELIGIBLE BENEFICIARIES AND TO A QUANTUM OF PROFIT T HAT WAS REASONABLY DERIVED FROM SUCH ELIGIBLE BUSINESS. TH E AO HAS ALSO PLACED RELIANCE ON THE DECISION OF HONBLE HIGH COU RT OF RAJASTHAN IN THE CASE OF RAJASTHAN STATE WAREHOUSING CORPORAT ION VS. CIT 209 ITYR 271 WHEREIN IT HAS BEEN HELD THAT IF THE ASSESSEE IS DERIVING INCOME FROM DIFFERENT SOURCES FROM TAXABLE AND SOME NON TAXABLE, THE COST OF EXPENDITURE ON PROPORTIONATE B ASIS IS JUSTIFIED. THE AO HAS AT LAST ANALYSED THE CASE OF THE APPELLA NT IN THIS BACKGROUND. UDAIPUR BEING THE HO, NATURALLY R&D UN IT HAS TO BE INSTALLED AT UDAIPUR. HOWEVER, THE ASSESSEE BEING SHALL ACCRUE TO THE OTHER UNITS ALSO WHICH UNDISPUTABLE. IN THE LI GHT OF THE FACT THAT UDAIPUR UNIT IS NOT A SEPARATE SEGMENT IN THE BOOKS OF THE APPELLANT AND THE ASSESSEE IS NOT CHARGING ANY SUM FROM OTHER TWO UNITS FOR THE VARIOUS R&D ACTIVITIES CARRIED OUT AT UDAIPUR. THE BENEFITS OF WHICH ARE TRANSFERRED TANGIBLE/INTANGIBLE IN THE OT HER UNITS AS WELL. FURTHER, THE ASSESSEE ITSELF HAS ALLOCATED THE R&D EXPENDITURE WHICH IS REVENUE IN NATURE AND CLAIMED IN P&L ACCOU NT BETWEEN THE THREE UNITS. THEREFORE, THERE IS NO JUSTIFICAT ION FOR NOT APPORTIONING THE CAPITAL EXPENDITURE ON R&D. THE T WO OF THEM (CAPITAL AND REVENUE ) BEING INTER LINKED WITH EACH OTHER. IN CASE OF COMMO9N ASSETS ALSO9 THE ASSESSEE HAS CLAIMED DE PRECIATION IN RESPECT OF THE ASSETS WHICH ARE EXCLUSIVELY LINKED TO BAROTIWALA UNIT AND BATED UNIT IN THEIR P&L ACCOUNT. BUT NO A LLOCATION HAS BEEN MADE BETWEEN THE THREE UNITS IN RESPECT OF HO ASSETS. THE ASSESSEE HAS NOT DENIED THE USE OF HO ASSETS FOR OT HER UNITS ALTHOUGH IT IS STATED THAT SUCH USE IS NEGLIGIBLE. OBVIOUSLY THE HO SET UP IS BEING UTILIZED FOR THE VARIOUS SERVICES R ENDERED FOR AND ON BEHALF OF THE BAROTIWALA AND BATED UNITS. THE ASS ESSEE CLAIMED DEPRECIATION ON THE ASSETS WHICH PERTAIN TO UDAIPUR UNIT, HO AND BRANCH OFFICE SPREAD ALL OVER INDIA IN THE BOOKS OF UDAIPUR. HOWEVER, ALL THE ASSETS WHICH RELATES TO THE HO AND BRANCH ARE SHARED BY ALL THE THREE UNIT AND IDEALLY THE ASSES SEE SHOULD HAVE IDENTIFIED THE ASSETS PERTAINING TO UDAIPUR UNIT EX CLUSIVELY AND SHOULD HAVE CHARGED THE UDAIPUR UNIT AND THE REMAIN ING ASSETS USED AS HO AND BRANCH OFFICE SHOULD HAVE BEEN APPOR TIONED BETWEEN THE THREE UNITS IN THE RATIO OF TURNOVER. THE APPELLANT HAS NOT DONE SO. THE AO HAS THEREFORE WORKED OUT THE B ASIS OF ALLOCATION FIRST APPORTIONING THE DEPRECIATION IN T HE RATIO OF 17 CORPORATE EXPENSES TO THE TOTAL ADMINISTRATIVE EXPE NSES AND THEN APPORTIONING THE TOTAL EXPENSES IN THE RATIO OF TUR NOVER WHICH 26.37% FOR BAROTIWALA AND 28.91% FOR BATED UNITS AN D HAVE THUS REDUCED THE PROFIT BY RS. 77,04,653/- AND RS. 84,46 ,46,778/- RESPECTIVELY. THE A/R HAS SUBMITTED THAT THE APPELLANT HAS CLAIME D DEDUCTION U/S 80IB AND 80IC IN RESPECT OF TWO INDUS TRIAL UNITS AT BATED AND BAROTIWALA. THE AO HAS RESTRICTED THE CLA IM BY DEDUCTING THE FOLLOWING AMOUNT FROM INCOME ELIGIBLE FOR DEDUCTION U/S 80IB/80IC IN RESPECT OF ABOVE TWO UNI TS AS UNDER :- S.N. PARTICULARS BATED UNIT (U/S 80IB) BAROTIWALA UNIT (U/S 80IC) 1. CAPITAL EXPENDITURE OF R&D AND DEPRECIATION OF ASSETS AT UDIAPUR UNIT ALLOCATED TO THESE UNITS ON TURNOVER RATIO 8446774 7704653 2. OTHER INCOME NOT CONSIDERED AS DERIVED FROM INDUSTRIAL UNDERTAKING 4092664 67015169 3. INCOME TREATED AS FROM TRADING ACTIVITY NOT ALLOWED FOR DEDUCTION U/S 80IB/80IC 372579 25778308 TOTAL 12912021 100498130 THE CO.S R&D UNIT IS SITUATED AT UDAIPUR FACTORY. THE TOTAL CAPITAL EXPENDITURE OF RS.2,04,07,540/- HAS B EEN INCURRED DURING THE YEAR. THE APPELLANT HAS CLAIMED DEDUCTIO N FOR THE ABOVE EXPENDITURE U/S 35(1)(IV) READ WITH SECTION 35(2)(I A) OF THE ACT. THE R&D PLANT AND EQUIPMENTS ARE SITUATED AT UDAIP UR FACTORY, THE DEDUCTION IS, THEREFORE, CLAIMED AGAINST THE PR OFIT OF UDAIPUR UNIT. SINCE THE RESULTS OF THE R & D ACTIVITY ARE S HARED WITH OTHER UNITS, PROPORTIONATE REVENUE EXPENSES ARE RECOVERED BY UDAIPUR UNIT FROM OTHER TWO UNITS OF BAROTIWALA AND BATED A ND THE CAPITAL ASSETS SUCH AS R & D BUILDING, PLANT AND EQUIPMENTS ARE NOT SHARED WITH OTHER UNITS AND, THEREFORE, THE CAPITAL COST A RE NOT RECOVERED FROM THESE UNITS U/S 80IB(13) AND 80IC (7) READ WIT H SECTION 80IA(8), THERE IS NO PROVISION FOR SHARING COST OF ASSETS INCURRED BY ONE UNIT FOR RENDERING SUCH SERVICES TO THE OTHER U NITS. THE R & D ACTIVITY IS A CONTINUOUS ACTIVITY AND DOES NOT RESU LT INTO ANY TANGIBLE ACHIEVEMENT IN ANY YEAR. THE RESULT MAY OR MAY NOT BE ACHIEVED FOR A PERIOD OF YEARS. THEREFORE, IT CANNO T BE SAID THAT THE UDAIPUR UNIT IS RENDERING ANY TANGIBLE SERVICE TO T HE OTHER UNITS WHICH CAN HAVE ANY MARKET VALUE. THEREFORE, SHARING THE REVENUE 18 EXPENSES BETWEEN THREE UNITS IS THE CORRECT METHOD OF DETERMINING THE PROFITS OF EACH UNIT. AS THE AO HA TAKEN THE VI EW THAT COST OF CAPITAL ASSETS PURCHASED BY THE UDAIPUR UNIT SHOU LD HAVE BEEN SHARED BY THREE UNITS ON THE BASIS OF TURNOVER, HE HAS ACCORDINGLY BIFURCATED THE COST BETWEEN THREE UNITS AS UNDER :- UDAIPUR 44.72% RS.9126272/- BATED 28.91% RS.5899808/- BAROTI 26.37% RS.5381458/- RS.2,04,07,539/- THE A/R HAS SUBMITTED THAT THE PROVISIONS OF SECTIO N 80IA(5) AND SECTION 80IA(10) DISCUSSED ON PAGE 4 & 5 OF THE ASSESSMENT ORDER ARE NOT APPLICABLE TO THE APPELLAN TS CASE. AS FAR AS THE DECISION OF THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF RAJASTHAN STATE WAREHOUSING CORPORATION VS. CIT 209 ITR 271 IS CONCERNED THE SAME HAS BEEN REVERSED BY THE HONBLE SUPREME COURT IN THE CASE OF RAJASTHAN STATE WAREHOUSING CO RPORATION VBS. CIT 242 ITR 450 HELD AS UNDER :- THE FOLLOWING PRINCIPLES MAY BE LAID DOWN : (I) I F THE INCOME OF AN ASSESSEE IS DERIVED FROM VARIOUS H EADS OF INCOME, HE IS ENTITLED TO CLAIM DEDUCTION PERMISSIB LE UNDER THE RESPECTIVE HEAD, WHETHER OR NOT COMPUTATION UND ER EACH HEAD RESULTS IN TAXABLE INCOME (II) IF THE INCOME O F AN ASSESSEE ARISES UNDER ANY OF THE HEADS OF INCOME BU T FROM DIFFERENT ITEMS, E.G., DIFFERENT HOUSE PROPERTIES O R DIFFERENT SECURITIES, ETC. AND INCOME FROM ONE OR MORE ITEMS ALONE IS TAXABLE WHEREAS INCOME FROM THE OTHER ITEM IS EXEMP T UNDER THE ACT, THE ENTIRE PERMISSIBLE EXPENDITURE I N EARNING THE INCOME FROM THAT HEAD IS DEDUCTIBLE; AND (III) IN COMPUTING THE PROFITS AND GAINS OF BUSINESS OR PROFESSION WHEN AN ASSESSEE IS CARRYING ON BUSINE SS IN VARIOUS VENTURES AND SOME AMONG THEM YIELD TAXABLE INCOME AND THE OTHERS DO NOT, THE QUESTION OF ALLOW ABILITY OF THE EXPENDITURE UNDER SECTION 37 OF THE INCOME T AX ACT, 1961, WILL DEPEND ON; (A) FULFILLMENT OF REQUIREMEN TS OF THAT PROVISION, NAMELY, THAT (I) THE EXPENDITURE SHOULD NOT BE IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPEN SES OF THE ASSESSEE; (II) IT SHOULD HAVE BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSI NESS OR PROFESSION; AND (III) IT SHOULD HAVE BEEN EXPENDED IN THE PREVIOUS YEAR; 19 AND (B) ON THE FACT WHETHER ALL THE VENTURES CARRIE D ON BY HIM CONSTITUTED ONE INDIVISIBLE BUSINESS OR N OT; IF THEY DO THE ENTIRE EXPENDITURE WILL BE A PERMISSIBL E DEDUCTION, BUT IF THEY DO NOT, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDITURE WILL APPLY, BECAUS E THERE WILL BE NO NEXUS BETWEEN THE EXPENDITURE ATTRIBUTAB LE TO THE VENTURE NOT FORMING AN INTEGRAL PART OF THE BUSINES S AND THE EXPENDITURE SOUGHT TO BE DEDUCTED AS THE BUSINESS EXPENDITURE OF THE ASSESSEE........................ ... HELD, REVERSING THE DECISION OF THE HIGH COURT, THA T IN VIEW OF THE FACT THAT A PERUSAL OF THE QUESTION ITSELF DISCLOSED THAT INCOME FROM VARIOUS VENTURES WAS EAR NED IN THE COURSE OF ONE INDIVISIBLE BUSINESS, THE IMPUGNE D ORDER UPHOLDING THE APPORTIONMENT OF THE EXPENDITURE AND ALLOWING DEDUCTION OF ONLY THAT PROPORTION OF IT WH ICH WAS REFERABLE TO THE TAXABLE INCOME, WAS UNSUSTAINABLE. THE AO HAS APPORTIONED DEPRECIATION OF RS.88,09,956 /- RELATING TO CERTAIN CAPITAL ASSETS AT HO IN UDIPUR ON THE GROUND THAT THESE ASSETS MAY HAVE BEEN USED AT HO FOR ADMINISTR ATIVE PURPOSES OF UDAIPUR, BATED AND BAROTIWALA UNIT ON TURNOVER B ASIS AS UNDER :- UNITS TURNOVER ALLOCATION UDAIPUR 44.72% 3939791/- BATED 28.91% 2546970/- BAROTIWALA 26.37% 2323195/- 100% 8809956/- THE VARIOUS ASSETS AT HO ARE USED FOR DAY TO DAY WO RKING AT HO. THESE ASSETS ARE NOT USED FOR THE ACTIVITIES AT THE TWO UNITS AT BATED AND BAROTIWALA. AT HO AT UDAIPUR, THE COMPANY HAS TO PERFORM CERTAIN CORPORATE FUNCTIONS AND THESE ASSET S ARE USED FOR THAT PURPOSE. AS HELD BY THE HONBLE SUPREME COURT IN THE DECISION 242 ITR 450 NO SUCH APPORTIONMENT CAN BE M ADE. THEREFORE, THE APPORTIONMENT MADE BY THE AO IS NOT JUSTIFIED. DURING DISCUSSION WITH THE LD.A/R OF THE APPELLANT AND THE AO, PRESENT IT WAS POINTED OUT BY THE AO THAT THE S EGMENT ANALYSIS AS PER ACCOUNTING STANDARD 17 WAS NOT FURNISHED AT THE TIME OF ASSESSMENT PROCEEDINGS. IT HAS BEEN SUBMITTED BY TH E A/R THAT THE COMPANY IS ENGAGED IN THE MANUFACTURING OF ONLY ONE TYPE OF PRODUCT I.E. ELECTRONIC ENERGY METER WHICH IS CLASS IFIED TO BE ONE 20 SEGMENT. THE COMPANY IS NOT ENGAGED IN MANUFACTURI NG OF ANY OTHER PRODUCT EXCEPT THE ABOVE ONE. THEREFORE, THE SEGMENT REPORT IS NOT REQUIRED AS THE FINANCIAL FIGURES RELATING T O ONE AND ONLY SEGMENT OF MANUFACTURING PRODUCT, THE STATUTORY AUD ITOR HAS GIVEN THE SEGMENT INFORMATION A NOTE TO CORROBORATE THE A BOVE LEGAL POSITION UNDER SCH.21 VIDE POINT NO.10, NOTES TO TH E ACCOUNT OF THE ANNUAL REPORT OF THE COMPANY. I HAVE CONSIDERED THE ABOVE AND FOUND THAT AS FAR A S THE CLAIM OF DEDUCTION U/S 80IB AND 80IC IS CONCERNED T HERE IS NO DISPUTE. IT IS ONLY THE TOTAL REVENUE EXPENSES INCU RRED BY THE UDAIPUR UNIT (HO) WHICH HAS BEEN APPORTIONED AMONG THE THREE UNITS BUT NOT THE TOTAL CAPITAL EXPENDITURE OF RS.2 ,04,07,539/- INCURRED ON R & D ACTIVITY AND DEPRECIATION OF RS.8 8,09,956/- ON FIXED ASSETS. FOR THIS PURPOSE THE AO HAS REFERRED THE PROVISIONS OF SUB SECTION (5), (8) AND (10 OF SECTION 80IA(1) AND ALS O THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF RAJASTH AN WAREHOUSING CORPORATION VS. CIT 209 ITR 271. THE PR OVISIONS OF SUB SECTION 80IA(5) DEALS WITH DEDUCTION U/S 80IB/ 80IC IN THE SENSE THAT INCOME FROM BUSINESS OF THE ELIGIBLE UNI T SHALL BE CONSIDERED AS IF THE BUSINESS OF THE SAID UNIT WAS ONLY SOURCE OF INCOME. THE EFFECT OF THIS SECTION IS THAT IF THER E IS ANY LOSS IN THE ELIGIBLE UNIT IN ANY YEAR THE LOSS WILL BE SET OFF AGAINST THE INCOME OF THAT UNIT IN THE SUBSEQUENT YEAR FOR THE PURPOSE OF DEDUCTION UNDER THE ABOVE SECTION, EVEN IF THE LOSS HAS BEEN ADJUSTED AGAINST OTHER INCOME OF THE EARLIER YEARS FOR THE COMPUTATI ON OF TOTAL INCOME. IN OTHER WORDS THE ABOVE SECTION IS NOT APP LICABLE IN THE CASE OF THE APPELLANT. BECAUSE ALL THE THREE UNITS AT UDAIPUR, BATED AND BAROTIWALA ARE HAVING ONLY SOURCE OF INCOME I.E . INCOME FROM BUSINESS OF ELECTRONIC ENERGY METER. AS FAR AS DECI SION OF HONBLE HIGH COURT OF RAJASTHAN IS CONCERNED IT HAS BEEN RE VERSED BY THE HONBLE SUPREME COURT IN THE SAME CASE VIDE 242 ITR 450/ IT HAS BEEN HELD THAT WHERE ALL THE VENTURE CARRIED ON BY THE APPELLANT CONSTITUTED ONE INDIVISIBLE BUSINESS OR NOT. IF THE Y DO, THE ENTIRE EXPENDITURE WILL BE A PERMISSIBLE DEDUCTION. BUT IF THEY DO NOT, THE PRINCIPLES OF APPORTIONMENT OF THE EXPENDITURE WILL APPLY. BECAUSE THERE WILL BE NO NEXUS BETWEEN THE EXPENDITURE ATTR IBUTABLE TO THE VENTURE NOT FORMING OF AN INTEGRAL PART OF THE BUSI NESS AND NOT SOUGHT TO BE DEDUCTED AS BUSINESS EXPENDITURE OF TH E ASSESSEE. FURTHER THAT INCOME FROM VARIOUS VENTURES WAS EARNE D DURING THE COURSE OF ONE INDIVISIBLE BUSINESS. THE IMPUGNED OR DER UPHOLDING THE APPORTIONMENT OF THE EXPENDITURE AND ALLOWING D EDUCTION OF 21 ONLY THAT PORTION OF WHICH IT WAS REASONABLE TO THE TAXABLE INCOME WAS UNSUSTAINABLE. CONSIDERING THE ABOVE FACTS AND LEGAL POSITION, THE RE IS NO QUESTION OF APPORTIONMENT OF R & D CAPITAL EXPENDIT URE AND SIMILARLY DEPRECIATION ON FIXED ASSETS ALSO AMONG T HREE UNITS. THEREFORE, THE ACTION OF THE AO IS UNJUSTIFIED AND THE ADDITION MADE IS DELETED. THE APPEAL IS ALLOWED ON THIS GROU ND. 2.8 THE ABOVE FINDINGS OF THE LD. CIT(A) IN OUR CON SIDERED VIEW ARE IN CONSONANCE WITH THE DECISION OF HON'BLE APEX COURT IN THE CASE OF RAJASTHAN STATE WAREHOUSING CORPORATION VS. CIT (SUPRA). THE FINDINGS OF THE HO N'BLE APEX COURT HAS ALSO BEEN TABULATED IN THE ORDER OF THE LD. CIT(A) AT PAGES 2 0 AND 21 OF HIS ORDER. THE LD. CIT(A) HAS GIVEN THE CATEGORICAL FINDINGS THAT VARIOUS ASS ETS AT HO ARE USED FOR DAY TO DAY WORKING AT HO. THESE ASSETS ARE NOT USED FOR THE AC TIVITIES OF THE TWO UNITS AT BATED AND BAROTIWALA. AT HO AT UDAIPUR, THE COMPANY HAS TO PE RFORM CERTAIN CORPORATE FUNCTIONS AND THESE ASSETS ARE USED FOR THAT PURPOSE. THE HON 'BLE SUPREME COURT HELD THAT NO SUCH EXPENSES CAN BE APPORTIONED AGAINST THE SEPARATE IN DEPENDENT UNIT. THE AO HAS MAINLY RELIED ON THE ORDER OF THE HON'BLE HIGH COURT IN TH E CASE OF RAJASTHAN STATE WAREHOUSING CORPORATION VS. CIT (SUPRA) WHICH HAS BEEN REVERSED BY THE HON'BLE SUPREME COURT. THEREFORE, THE LD. CIT(A) HELD THAT APPORTIONMENT O N ACCOUNT OF HO MADE BY THE AO WAS NOT JUSTIFIED. THE LD. DR ALSO MAINLY RELIED ON THE ORDER OF THE AO INCLUDING THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT. HOWE VER, THE LD. DR COULD NOT POINT OUT AS TO WHY THE ORDER OF THE HON'BLE JURISDICTIONAL HIGH COURT IS STILL APPLICABLE WHEN THE SAME HAS BEEN REVERSED BY THE HON'BLE APEX COURT, W HICH HAS BEEN CONSIDERED BY THE LD. CIT(A). THEREFORE, IN VIEW OF THE FACTS AND CIRCUMS TANCES OF THE CASE AND IN VIEW OF THE FINDINGS GIVEN BY THE LD. CIT(A) WHICH ARE REPRODUC ED SOMEWHERE ABOVE IN THIS ORDER, 22 WE HOLD THAT THE LD. CIT(A) WAS JUSTIFIED IN ALLOWI NG THE CLAIM OF THE ASSESSEE. ACCORDINGLY, WE CONFIRM THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. 3.1 THE SECOND GROUND OF THE DEPARTMENT IS AS UNDE R:- THE LD. CIT(A) HAS ERRED IN ALLOWING OF NETTING O F INTEREST INCOME FOR THE PURPOSE OF EXCLUSION AS OTHER INCOM E FOR CALCULATING DEDUCTION U/S 80IB/80IC IN RESPECT OF BATED AND BAROTIWALA UNITS AND ALLOWING DEDUCTION U/S 80IB/80 IC ON EXCHANGE RATE FLUCTUATION, SCRAP SALES, LIQUIDATED DAMAGES, SUNDRY CREDIT BALANCE WRITTEN OFF, EXCISE DUTY PROVISION, PACKAGING & FORWARDING CHARGES. 3.2 THE BRIEF FACTS OF THE CASE ARE THAT THE AO WHI LE ALLOWING DEDUCTION U/S 80IB AND 80IC HAS NOT CONSIDERED THE OTHER INCOME OF RS. 7,1 1,07,833/- AS PROFIT DERIVED BY THE NEW INDUSTRIAL UNDERTAKING UNIT AND NOT ALLOWING DE DUCTION U/S 80IB/80IC OF THE ACT. THE AO WHILE NOT CONSIDERING THE INCOME FOR THE PURPOSE OF DEDUCTION U/S 80IB/80IC HAS OBSERVED THAT FROM THE PERUSAL OF THE PROFIT AND LO SS ACCOUNT OF BAROTIWALA UNIT AND BATED UNIT, IT WAS SEEN THAT THERE WAS AN AMOUNT OF RS. 6,70,15,169/- IN BAROTIWALA UNIT AND RS. 40,69,662/- IN BATED UNIT SHOWN AS OTHER IN COME RESPECTIVELY. THE ASSESSEE FURNISHED THE BREAK UP OF THE SAME AS UNDER:- OTHER INCOME BAROTIWALA BATED INTEREST RECEIVED 61304598 2432623 EXCHANGE RATE DIFFERENCE 644129 246050 MISC. INCOME 5066442 1413991 TOTAL 67015169 4092662 GRAND TOTAL OF OTHER INCOME 71107831 IT WAS FURTHER SEEN THAT THE INTEREST INCOME IN THE ABOVE TWO UNITS RELATES TO THE INTEREST ENTRY CREDITED FOR INTER UNIT TRANSFER OF FUND. THE ASSESSEE HAS CLAIMED DEDUCTION U/S 80IB/80IC IN RESPECT OF OTHER INCOME ALSO. HOWEVER , THE DEDUCTION U/S 80IB/80IC IS 23 AVAILABLE ONLY IN RESPECT OF THE PROFITS DERIVED F ROM THE INDUSTRIAL UNDERTAKING. THEREFORE, THE ASSESSEE WAS ASKED TO EXPLAIN WHY NO T THE OTHER INCOME SHOULD BE EXCLUDED FOR ARRIVING AT THE FIGURE OF ELIGIBLE DED UCTION U/S 80IB/80IC. IN REPLY, THE ASSESSEE SUBMITTED THAT REGARDING EXCLUDING OTHER INCOME FROM THE PROFIT OF NEW INDUSTRIAL UNDERTAKING, AS SUBMITTED EARLIER, PROFI T OF BAROTIWALA AND BATED UNIT INCLUDES OTHER INCOME AMOUNTING TO RS. 6,70,15 ,169/- AND RS. 40,92,664/- RESPECTIVELY, WHICH RELATES TO INTEREST , FOREIGN EXCHANGE RATE DIFFERENCE AND MISC. INCOME ETC. WHICH ARE PART AND PARCEL OF THE PROFITS OF THE NEW INDUSTRIAL UNDERTAKING AND IS ELIGIBLE FOR DEDUCTION U/S 80IC AND 80IB OF THE ACT THE AO CONSIDERED THE EXPLANATION OF THE ASSESSEE A ND OBSERVED THAT THE DEDUCTION U/S 80IB/80IC IS AVAILABLE ONLY IN RESPECT OF INCOME D ERIVED FROM INDUSTRIAL UNDERTAKING. A PLAIN READING OF THE SECTION INDICATES THAT FOR THE PURPOSE OF CALCULATING DEDUCTION U/S 80IB/80IC ONLY THE PROFIT AND GAINS DERIVE FROM AN INDUSTRIAL UNDERTAKING HAVE TO BE TAKEN INTO ACCOUNT. THE AO ALSO REPRODUCED THE RELE VANT PART OF SUB-SECTION (4). THE AO ALSO RELIED ON THE DECISION OF HON'BLE SUPREME COU RT IN THE CASE OF PANDIAN CHEMICALS VS. CIT, 262 ITR 278 AND HELD SQUARELY APPLICABLE I N THE CASE OF THE ASSESSEE. THE AO FURTHER STATED IN ASSESSEE'S OWN CASE, THE ITAT JOD HPUR BENCH IN ITA NO.405/JDPR FOR THE ASSESSMENT YEAR 1996-97 UPHELD THE EXCLUSION OF INTEREST FROM THE PROFIT ELIGIBLE FOR DEDUCTION U/S 80I. IN VIEW OF ABOVE FACTS AND FOLLO WING THE DECISION OF ITAT (SUPRA), THE AO EXCLUDED THE OTHER INCOME AMOUNTING TO RS. 7,11, 07,831/- FROM THE ELIGIBLE PROFITS FOR DEDUCTION U/S 80IB/80IC AND ACCORDINGLY CALCULA TED THE DEDUCTION U/S 80IB/80IC OF THE ACT. 3.3 IT WAS SUBMITTED BY THE LD. AR BEFORE THE LD. CIT(A) AS UNDER:- 24 1.6 OTHER INCOME NOT CONSIDERED AS DERIVED FROM INDUSTRIAL UNITS (I) THE ASSESSEE HAS SHOWN THE FOLLOWING RECEIPTS U NDER THE HEAD OTHER INCOME IN THE TWO UNITS. NATURE OF RECEIPTS BATED UNIT U/S 80IB BAROTIWALA UNIT U/S 80IB (A) INTEREST RECEIVED 24,32,623 6,13,04,598 (B) EXCHANGE RATE DIFFERENCE RECEIVED 2,46,050 6,44,129 MISC. RECEIPTS 14,31,991 50,66,442 40,92,664 6,70,15,169 GRAND TOTAL RS. 7,11,07,831 (II) THE SAID AO HAS TAKEN THE VIEW THAT THE ABOVE RECEIPTS ARE NOT DERIVED FROM THE TWO UNITS AND THEREFORE, DEDUC TION U/S 80IB AND 80IC IS NOT ALLOWABLE FOR THE SAME. HE HAS DISC USSED THE ISSUE IN PARA 4 OF THE ASSESSMENT ORDER AT PAGES 9-11. HE HAS ACCORDINGLY REDUCED THE CLAIM FOR DEDUCTION U/S 80IB/80IC BY RS . 7,11,07,831/- (III) THE ASSESSEE HAS SUBMITTED THE DETAILS OF THE ABOVE RECEIPTS DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS. TH EE DETAILS RELATING TO THE TWO UNITS ARE ENCLOSED AS UNDER:- PAGES FROM TO (A) INTEREST RECEIVED 58 - 58 (B) INTEREST PAID 59 - 59 MISC. RECEIPTS 60 - 60 (IV) INTEREST RECEIVED (A) IT IS SUBMITTED THAT INTEREST RECEIVED IS MAINL Y FROM INTER UNIT BALANCES. THERE IS A CURRENT A/C WITH THE HEAD OFFICE AS WELL AS WITH THE OTHER UNITS AND INTEREST IS EITHER RECE IVED OR PAID ON THESE BALANCES. FROM THE DETAILS OF THE INTEREST RE CEIVED AT PAGE 58 AND THE DETAILS OF THE INTEREST PAID AT PAGE 59, IT WILL BE SEEN THAT THESE ARE RECEIPTS/PAYMENTS ON INTER UNIT TRANSACTI ONS WHICH FORM INTRINSIC PART OF THE BUSINESS OF THE UNDERTAKING. IT CANNOT BE SAID THAT MONIES HAVE BEEN ADVANCED TO ANY THIRD PARTY F OR THE PURPOSE OF EARNING INTEREST. WHATEVER MONEY IS AVAILABLE WI TH THE VARIOUS UNITS ARE USED FOR THE PURPOSE OF BUSINESS OF THAT UNIT AND THEREFORE, IT IS SUBMITTED THAT THE RECEIPTS ARE DERIVED FROM THE ACTIVITIES OF THE BUSINESS OF THE INDUSTRIAL UNDERTAKINGS. WHAT S ECTION 25 80IB/80IC PROVIDES IS THAT THE PROFITS AND GAINS SH OULD BE DERIVED FROM THE BUSINESS OF THE ELIGIBLE UNITS. THEREFORE, WHEN THE SOURCE OF THE RECEIPT IS THE BUSINESS ACTIVITY OF THE UNDE RTAKING, IT CANNOT BE SAID THAT THE RECEIPT IS NOT DERIVED FROM THE BU SINESS OF THE UNDERTAKING. (B) WITHOUT PREJUDICE TO THE ABOVE, IT IS SUBMITTED THAT THESE ARE ITEMS OF INTEREST RECEIVED AS WELL AS INTEREST PAID AND THEREFORE, WE HAVE TO CONSIDER THE NET FIGURE OF INTEREST RECE IVED OR PAID. THE AMOUNT OF INTEREST PAID HAS DIRECT NEXUS WITH THE I NTEREST RECEIVED AND THEREFORE, THE TWO FIGURES SHOULD BE NETTED OFF FOR THE PURPOSE OF CONSIDERING THE RESULTANT FIGURE OF PROFITS AND GAINS DERIVED FROM THE INDUSTRIAL UNDERTAKING. THE ASSESSEE SUBMITS TH AT THE PRINCIPLE OF NETTING OFF OF INTEREST PAID AGAINST INTEREST RE CEIVED AS WELL AS NETTING OFF OF EXPENSES AGAINST RECEIPTS SUNDER THE SAME HEAD HAS BEEN ACCEPTED IN SEVERAL JUDICIAL PRONOUNCEMENTS AS UNDER:- 1. LALSONS ENTERPRISES VS. DCIT, 89 ITD 25 (DEL.) (SB) IN THIS CASE, ONE OF THE QUESTIONS WAS WHETHER INTE REST PAID SHOULD BE REDUCED FROM THE INTEREST RECEIVED WHILE COMPUTI NG PROFIT DERIVED FROM THE EXPORT BUSINESS U 80HHC. THE SPECI AL BENCH HAS HELD AS UNDER:- THE PRINCIPLE OF NETTING IS PRESSED INTO SERVE AN D NOT ON THE BASIS OF THE THEORY OF REAL INCOME BUT ON THE BASIS OF TH E COMPUTATION PROVISIONS RELATING TO THE BUSINESS INCOME. IF THE INTEREST RECEIVED IS FOUND TO HAVE A NEXUS WITH THE BUSINESS, STILL I T REMAINS TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS BY VIRTUE OF EXPLANATION (BAA), BUT THE CLAIM IS THAT THE QUANTUM OF SUCH IN TEREST INCOME TO BE EXCLUDED MUST BE DETERMINED IN ACCORDANCE WITH T HE COMPUTATION PROVISIONS RELATING TO BUSINESS BY ALLO WING EXPENDITURE BY WAY OF INTEREST WHICH BEARS A NEXUS WITH THE INTEREST RECEIPT. THE COMPUTATION PROVISIONS INCLUD ES SECTION 37(1) UNDER WHICH ANY EXPENDITURE INCURRED OR LAID WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS IS TO B E ALLOWED AS DEDUCTION. THEREFORE, ANY EXPENDITURE INCURRED WHI CH HAS A CONNECTION OR NEXUS WITH THE INTEREST RECEIPT HAS TO BE ALLOWED AS A DEDUCTION AND ONLY THE BALANCE CAN BE EXCLUDED FROM THE BUSINESS PROFITS. THERE MAY BE OTHER PROVISIONS IN THE COMPU TATION SECTIONS PERMITTING OTHER ALLOWANCES OR DEDUCTIONS PROVIDED A NEXUS IS ESTABLISHED BETWEEN THE EXPENDITURE AND THE INTERES T RECEIPT. THUS, THERE ARE STATUTORY PROVISIONS WHICH AUTHORIZE THE CLAIM OF THE ASSESSEE IN THE INSTANT CASE WHEN THEY CONTEND THAT THE NET INCOME 26 BY WAY OF INTEREST BE COMPUTED AND EXCLUDED FROM BU SINESS PROFITS.. FOR THE PURPOSE OF APPLYING EXPLANATION ( BAA) BELOW SUB- SECTION (4B) OF SECTION 80HHC AND WHILE REDUCING 90 % OF THE RECEIPT BY WAY OF INTEREST FROM THE PROFITS OF THE BUSINESS, IT IS ONLY THE 90% OF THE NET INTEREST REMAINING AFTER ALLOWIN G A SET OFF OF INTEREST PAID, WHICH HAS A NEXUS WITH THE INTEREST RECEIVED THAT CAN BE REDUCED AND NOT 90 PERCENT OF THE GROSS INTEREST . A COPY OF THIS DECISION IS ENCLOSED AT PAGES 61 TO 100 2. PINKSTAR VS. DCIT 72 ITD 137 (MUMBAI) IN THIS CASE, INTEREST WAS PAID TO THE BANK WHICH W AS DEBITED TO THE PROFIT AND LOSS ACCOUNT. INTEREST WAS RECEIVED WHIC H WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT .THE ASSESSEE SOUGHT TO ADJUST INTEREST PAID AGAINST THE INTEREST RECEIVED FOR CALCULATING PROFIT FROM THE EXPORT BUSINESS U/S 80HHC. IT WAS HELD BY MUMBAI BE NCH OF ITAT TRIBUNAL THAT CREDITS AND DEBITS OF THE SAME N ATURE SHOULD BE NETTED OUT AGAINST EACH OTHER IN ORDER TO AVOID ANY DISTORTION IN THE PROFITS. IT COULD NOT BE DENIED THAT DESPITE EARNI NG INTEREST OF RS. 1,97,500/- THE SAID EARNING OF INTEREST HAS MERELY GONE TO REDUCE THE NET INTEREST BURDEN OF THE ASSESSEE FROM RS. 36 ,21,595/- TO RS. 34,24,095/-. THUS IN EFFECT, THERE WAS NO INCOME ON ACCOUNT OF INTEREST IN THE PROFITS OF BUSINESS AND HENCE NO RE DUCTION WHATSOEVER WAS CALLED FOR THE PURPOSE OF COMPUTING PROFITS DERIVED FROM INTEREST U/S 80HHC. IT MAY BE NOTED TH AT THE DEPARTMENT FILED APPEAL AGAINST THE ABOVE DECISION IN BOMBAY HIGH COURT BUT THEY HAD TAKEN OTHER ISSUES INVOLVED IN THIS APPEAL, BUT THEY HAD NOT OBJECTED THE DECISION ABOUT NETTIN G OFF INTEREST IN THE SAID APPEAL BEFORE BOMBAY HIGH COURT. DECISION OF BOMBAY HIGH COURT IS REPORTED IN 245 ITR 757 (BOMBAY). COP Y OF THE ABOVE DECISION IN 72 ITD 137 IS ENCLOSED AT PAGE 10 1 TO 118. 3. CIT VS. BOKARO STEEL LTD. , 236 ITR 314 (SC) IN THIS CASE, THE ASSESSEE CHARGED RENT TO CONTRACT ORS FOR HOUSING WORKERS AND STAFF EMPLOYED BY THE CONTRACTOR. IT HA D ALSO RECEIVED HIRE CHARGES FOR PLANT AND MACHINERY GIVEN TO CONTR ACTORS AND ALSO RECEIVED INTEREST FOR ADVANCING MONIES TO THE CONTR ACTORS. THE SUPREME COURT HAS HELD THAT THERE RECEIPTS WERE INT RINSICALLY CONNECTED WITH THE CONSTRUCTION ACTIVITY AND THEREF ORE, THE SAME CANNOT BE ADJUSTED AGAINST THE COT OF THE PROJECT. THIS PRINCIPLE HAS BEEN FOLLOWED BY SUPREME COURT IN CIT VS. KARNAL CO OPERATIVE SUGAR MILLS LTD. 243 ITR 2 (SC). COPY OF THE ABOVE DECISION IS ENCLOSED AT PAGES 19 TO 128. 27 4. JAGDISH PRASAD M JOSHI VS. DCIT, 97 TTJ 924 ( MUMBAI) IN THIS CASE, IT IS HELD THAT THE ASSESSEE WAS 100% EXEMPTED UNIT U/S 80IA. THEREFORE, THE INTEREST RECEIVED ON FIXED DEP OSITS WITH THE BANKS WAS A PART OF ASSESSEE'S BUSINESS INCOME OF S ECTION 80IA UNIT AND DEDUCTION FOR THE SAME WAS ALLOWABLE U/S 8 0IA. THE TRIBUNAL HAS RELIED UPON THE PRINCIPLE LAID DOWN IN THE DECISION OF THE BOMBAY HIGH COURT IN CIT VS. PUNIT COMMERCIAL L TD., 225 ITR 550. COPY OF THIS DECISION IS AT PAGES 129 TO 1 32. ON PAGE 11 OF THE ASSESSMENT ORDER, THE SAID AO H AS STATED THAT IN THE ASSESSEE'S CASE FOR THE ASSESSMENT YEAR 1994-95 TO 1998- 99, THE ITAT JODHPUR BENCH HAS DECIDED THAT INCOME INTEREST SHOULD BE EXCLUDED FROM BUSINESS INCOME FOR DEDUCTI ON U/S 80I. COPIES OF THESE ORDERS DATED 2-12-2005 (A.Y. 1996-9 7) AND 22-09- 2006 (A.Y. 1994-95, 1995-06, 1997-98 AND 1998-99) A RE AT PAGES 133 TO 136. IT IS SUBMITTED THAT THIS DECISION IS N OT APPLICABLE TO DEDUCTION CLAIMED U/S 80IB/80IC AS THE WORKING OF T HE SECTIONS ARE DIFFERENT AS STATED BELOW. SECTION 80I (1) WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE INCLUDES ANY PROFITS AND GAINS DERIVED FRO M AN INDUSTRIAL UNDERTAKING. SECTION 80 IB (1) WHERE THE GROSS TOTAL INCOME O F AN ASSESSEE INCLUDES ANY PROFITS AND GAINS DERIVED FRO M BUSINESS REFERRED TO IN SUB-SECTION (3) TO (11). SECTION 80IC (1) WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE INCLUDES ANY PROFITS AND GAIN DERIVED BY A N UNDERTAKING OR AN ENTERPRISE FROM ANY BUSINESS REFE RRED TO IN SUB-SECTION (2).. FROM THE ABOVE WORKING IT IS EVIDENT THAT IN SECTIO N 80I, THE EMPHASIS IS ON THE PROFITS AND GAINS DERIVED FR OM AN INDUSTRIAL UNDERTAKING WHEREAS IN SECTION 80IB/80IC THE EMPHAS IS IS ON THE PROFITS AND GAINS DERIVED FROM THE BUSINESS OF THE UNDERTAKING. IN THE CASES CITED IN PARA (B) ABOVE, IT HAS BEEN HELD THAT AN RECEIPT FROM THE BUSINESS ACTIVITY OF THE UNDERTAKING IS EL IGIBLE FOR DEDUCTION U/S 80HHC, 80IA ETC. IT IS THEREFORE, SUB MITTED THAT THE DECISION OF ITAT IN THE ASSESSEE'S CASE FOR EARLIER YEARS, WHERE THE 28 INTERPRETATION OF SECTION 80I WAS INVOLVED, WILL NO T APPLY IN THE YEAR UNDER APPEAL. FURTHER THE QUESTION OF NETTING OF INTEREST RECEIPT AGAINST INTEREST PAID HAS NOT BEEN CONSIDERED BY THE ITAT I N THE ASSESSEES CASE FOR EARLIER YEARS. (D) THE ASSESSEE SUBMITS THAT SIMILAR QUESTION HAD ARISEN IN ASSESSMENT YEAR 2003-04 IN THE ASSESSEES CASE. THE CIT (A), UDAIPUR BY HIS ORDER DATED 26-06-2006 HAS DECIDED T HE ISSUE AGAINST THE ASSESSEE BY RELYING ON THE DECISION OF RAJASTHAN HIGH COURT IN 167 ITR 368 AND 211 ITR 597. IT IS SUBMITT ED THAT THIS DECISION REQUIRES RECONSIDERATION IN THE LIGHT OF T HE JUDICIAL PRONOUNCEMENTS STATED IN PARA (B) ABOVE. IT IS SUBM ITTED THAT THE QUESTION OF INTERPRETATION OF SECTION 80IB/80IC WAS NOT THERE BEFORE THE RAJASTHAN HIGH COURT. EVEN THE QUESTION OF NETTING OF THE INTEREST RECEIPT AGAINST INTEREST PAYMENT WAS N OT CONSIDERED IN THE ABOVE CASES. (E) THE IMPACT OF THE DIFFERENCE IN THE WORDINGS OF SECTION 80HH/80I AND 80IB/80IC IS EXPLAINED IN THE DECISION OF DELHI BENCH OF ITAT IN THE CASE OF DCIT VS. ELTEK SGS (P ) LTD. (2006), 10 SOT 168 (DEL.) AS UNDER:- FROM A CONSIDERATION OF THE VARIOUS DECISIONS OF THE HIGH COURTS AND THE TRIBUNAL RENDERED ON THE SIMILAR ISS UE, IT WAS SEEN THAT THE TERM INCOME DERIVED FROM THE BUS INESS OF THE INDUSTRIAL UNDERTAKING OF AN ASSESSEE IS A MUCH WIDER TERM THAN THE TERM INCOME DERIVED FROM THE INDUSTRIAL UNDERTAKING AND THE FORMER BRINGS WITHI N ITS FOLD INCOME FROM ALL THE BUSINESS TRANSACTIONS AND ACTIV ITIES CLOSELY CONNECTED TO THE INDUSTRIAL UNDERTAKING AND WOULD THEMSELVES CONSTITUTE THE SOURCE FOR THE INCOME CLA IMED AS DEDUCTION. THUS, THERE IS A CRUCIAL DIFFERENCE BETW EEN THE PHRASEOLOGY EMPLOYED IN SECTION 80IB AND PHRASEOLOG Y EMPLOYED IN SECTION 80HH AND 80I AND THE DECISIONS RENDERED IN RESPECT OF SECTION 80HH AND 80I, WHERE IN THE EXPRESSION CONSIDERED WAS INCOME DERIVED FROM AN INDUSTRIAL UNDERTAKING AND THE DECISIONS BASED ON THAT PHRASEOLOGY ARE DISTINGUISHABLE FOR DETERMINING THE AMOUNT DEDUCTIBLE U/S 80IB. 29 THIS VIEW IS TAKEN IN THE CASE OF BHARAT RASAYAN LT D. VS. JCIT (ITA NO. 463/4630 (DELHI), DLF POWER LTD. VS. ITO , ITA NO. 195 (DELHI), ITO VS. KIRAN ENTERPRISES 92 TTJ, 104 (CHAND), ACIT VS. MEXCARE LABORATORIES LTD. , 92 ITD 11 (CUT TACK) AND CIT VS. INDIA GOLANTINE & CHEMICALS LTD. , 194 CTR 492 (GUJ.) COPY OF THE ABOVE DECISION IN 10 SOT 178 IS AT PAGE S 137 TO 144. (F) FROM THE ABOVE JUDICIAL PRONOUNCEMENTS, IT IS E VIDENT THAT RECEIPTS WHICH ARE INTRINSICALLY RELATED TO ACTIVIT IES OF THE INDUSTRIAL UNIT HAVE TO BE TREATED AS INCOME DERIVED FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING. MOREOVER, THE PRINCIPLE OF NETTING OF THE RECEIPTS UNDER ONE HEAD AGAINST PAYMENTS UNDER THE SAME HEAD IS ALSO RECOGNIZED IN THE ABOVE DECISION. IT IS THEREF ORE, SUBMITTED THAT THE INTEREST RECEIPTS SHOULD BE FIRST NETTED O FF AND WHATEVER IS THE RESULTANT FIGURE SHOULD BE CONSIDERED AS EXPENS E OR INCOME RELATING TO THE BUSINESS OF INDUSTRIAL UNDERTAKING. ON THIS BASIS, THE ABOVE DEDUCTION OF INTEREST RECEIVED FROM PROFITS O F THE ELIGIBLE BUSINESS OF THE TWO UNITS IS NOT AT ALL JUSTIFIED. (V) EXCHANGE RATE DIFFERENCE RECEIVED (A) THE SAID AO HAS REDUCED RS. 2,46,050/- (BATED U NIT) AND RS. 6,44,129/- (BAROTIWALA UNIT) FROM THE PROFITS O F THE BUSINESS OF THE TWO UNITS ON THE GROUND THAT EXCHANGE RATE DIFF ERENCE RECEIVED WAS NOT PART OF THE PROFIT DERIVED FROM THE INDUSTR IAL UNDERTAKING. IT IS SUBMITTED THAT FOREIGN EXCHANGE FLUCTUATION RECE IPT/PAYMENTS ARE MAINLY ON ACCOUNT OF DIFFERENCE IN THE EXCHANGE RA TE AT THE TIME OF BOOKING TRANSACTIONS OF EXPORTS/IMPORTS AND EXCHANG E RATE AT THE TIME OF RECEIPT/PAYMENT. IT IS SUBMITTED THAT UNDER ACCOUNTING STANDARD (AS-11), WHICH WAS APPLICABLE TO THE ASSES SEE, THE EXCHANGE RATE PREVAILING ON THE DATE OF THE TRANSAC TION SHOULD BE APPLIED FOR RECORDING THE TRANSACTIONS. DURING THE YEAR UNDER APPEAL, THE DIFFERENCE BETWEEN THESE TWO UNITS RESU LTED IN SURPLUS WHICH HAS BEEN SHOWN AS FOREIGN EXCHANGE DIFFERENCE RECEIVED. IT IS SUBMITTED THAT THIS RECEIPT IS NOTHING BUT PART OF THE PURCHASE PAYMENTS AND THEREFORE, THE AMOUNT HAS BEEN RIGHTLY CONSIDERED BY THE ASSESSEE AS PART OF THE PROFITS DERIVED FROM TH E BUSINESS OF THE INDUSTRIAL UNDERTAKING. IT IS SUBMITTED THAT EXCHAN GE RATE DIFFERENCE IS A PART OF THE PURCHASE ACTIVITIES AND IS IN THE NATURE OF SAVING IN THE PURCHASE COST AND THEREFORE, THE ENTIRE AMOUNT SHOULD BE CONSIDERED AS SAVING IN PURCHASE COST AND THEREFORE , PART OF PROFITS DERIVED FROM THE BUSINESS OF TWO INDUSTRIAL UNDERTA KINGS. THIS PRINCIPLE HAS BEEN ACCEPTED IN VARIOUS JUDICIAL PRO NOUNCEMENTS WHICH ARE AS UNDER:- 30 (1) SMT. SUJATA GROWER VS. DCIT , 74 TTJ 347 (D EL.) IN THIS CASE, IT IS HELD THAT FOREIGN EXCHANGE FLUCTUATION GAIN PERTAINING TO EXPORTS EFFECTED IN THE EARLIER YEARS CANNOT BE SAID TO BE ANY OTHER RECEIPTS OF A SIMIL AR NATURE IN TERMS OF EXPLANATION (BAA) TO SECTION 80HHC FOR CAL CULATING PROFITS OF THE BUSINESS U/S 80HHC. IN COMING TO THI S CONCLUSION, THE TRIBUNAL HAS RELIED UPON THE DECISION OF ARAVIN DA PARAMILLA WORKS VS. CIT, 153 CTR 205 (SC) AND STONECRAFT ENTE RPRISES VS. CIT, 153 CTR 86 (SC). COPY OF THE ABOVE DECISION IS ENCLOSED AT PAGES 145 TO 156 (2) D KISHORE & CO.VS DCIT, 2 SOT 769 (MUM) IN THIS CASE, THE TRIBUNAL HAS HELD THAT CREDIT S HOWN IN THE PROFIT AND LOSS ACCOUNT AS PROFIT ON CANCE LLATION OF FORWARD CONTRACTS WAS AN INTEGRAL PART OF THE EXPORT BUSIN ESS AND THEREFORE, IT HAS TO BE CONSIDERED AS PART OF THE EXPORT BUSIN ESS PROFIT. COPY OF THIS DECISION IS ENCLOSED AT PAGES 157 TO 161. (3) PRIYANKA GEMS VS. ACIT 3 SOT 817 (AHD.) IN THIS CASE THE ASSESSEE WAS ENGAGED IN EXPORT BUS INESS AND IT ACCOUNTED FOR EXCHANGE RATE DIFFERENCE ON AC COUNT OF EXPORT MADE DURING THE YEAR AS WELL AS EARLIER YEAR. THE A O TREATED THE AMOUNT REALIZED ON ACCOUNT OF EXCHANGE RATE DIFFERE NCE AS INCOME FROM OTHER SOURCES AND DECLINED ASSESSEES CLAIM U/ S 80HHC FOR INCLUDING THE SAME IN EXPORT TURNOVER. THE AHMEDABA D TRIBUNAL IN A DETAILED ORDER HAS HELD AS UNDER:- THUS IT CANNOT BE SAID THAT EXCHANGE RATE DIFFEREN CE, I.E., AMOUNT RECEIVED BY ASSESSEE, IN RESPECT OF EXPORTS, ON ACCOUNT OF EXCHANGE RATE FLUCTUATIONS, PARTAKES THE CHARACTER OF INCOME ENUMERATED IN EXPLANATION (BAA) , 90 PER CENT OF WHICH IS REQUIRED TO BE EXCLUDED FROM T HE PRFITS OF THE BUSINESS, WHILE COMPUTING DEDUCTION U/S 80 HHC. HENCE, THE RECEIPTS IN QUESTION BY THE ASSESSE E ON ACCOUNT OF EXCHANGE RATE DIFFERENCE WERE DERIVED FR OM THE EXPORT SALES AND WERE PART AND PARCEL OF EXPORT PRO CEEDS ONLY, AND BY NO STRETCH OF IMAGINATION IT COULD BE GIVEN COLOUR OF INCOME FROM OTHER SOURCES TO BE EXCLUDED FROM PROFITS, TO THE BUSINESS IN TERMS OF EXPLANATION (B AA) BELOW SECTION 80HHC(4A). THEREFORE, THE ASSESSEE WAS ENTI TLED TO DEDUCTION UNDER SECTION 80 HHC WITH REFERENCE TO TH E 31 AMOUNT RECEIVED BY IT ON ACCOUNT OF EXCHANGE RATE O F FLUCTUATION. COPY OF THIS ORDER IS ENCLOSED AT PAGES 162 TO 177. 4. HINDUSTAN TRADING CORPORATION VS. CIT 160 ITR 15 (GUJ) IN THIS CASE AS A RESULT OF DEVALUATION THE ASSESSE E BECAME ENTITLED TO RECEIVE A LARGE AMOUNT FOR PRICE DIFFER ENCE IN TERMS OF RUPEE FOR GOODS SOLD. GUJARAT HIGH COURT HAS HELD T HAT THE INCOME WHICH THE ASSESSEE DERIVED AS A RESULT THEREBY DIRE CTLY AROSE IN THE COURSE OF THE BUSINESS AND CONSTITUTED A BUSINESS P ROFIT. IN THIS CASE ALSO THE ASSESSEE HAD RECEIVED SALE PROCEEDS IN US D AND DUE TO DEVALUATION THE ASSESSEE RECEIVED MORE THAN THE AM OUNT IN THE FORM OF RUPEE CURRENCY WHICH HAS BEEN CONSIDERED BY THE HIGH COURT AS PART OF THE SALE PROCEEDS AND TREATED AS P ART OF THE BUSINESS PROFIT. A COPY OF THIS DECISION IS ENCLOSE D AT PAGES 178 TO 187. 5. CIT VS. GOVINDA CHOUDHRY & SONS 203 ITR 881 ( SC) IN THIS CASE THERE WAS A DELAY IN RECEIVING THE CON TRACT PRICE AND THE ASSESSEE WAS PAID INTEREST ON THIS AMOUNT. THE QUESTION FOR CONSIDERATION WAS WHETHER INTEREST RECEIVED WAS INC OME FROM OTHER SOURCES OR INCOME FROM THE BUSINESS. THE SUPREME CO URT HAS HELD THAT IF THE AMOUNTS RECEIVABLE UNDER THE CONTRACT W ERE NOT PAID IN TIME AND INTEREST WAS AWARDED TO THE ASSESSEE FOR S UCH DELAY, THE INTEREST WAS ONLY ACCRETION TO THE ASSESSEES RECEI PTS FROM CONTRACT AND WAS THEREFORE INCIDENTAL TO THE BUSINESS CARRIE D BY IT. THEREFORE, IT WAS HELD THAT INTEREST PAYABLE TO THE ASSESSEE PARTOOK THE SAME CHARACTER AS A RECEIPT FOR THE PAYMENT OF WHICH IT WAS OTHERWISE ENTITLED UNDER THE CONTRACT AND WAS INCOM E FROM THE BUSINESS CARRIED ON BY THE ASSESSEE. COPY OF THIS D ECISION IS ENCLOSED AT PAGES 188 TO 192. 6. K.UTTAMLAL EXPORTS LTD., VS. DCIT 133 TAXMAN 190 6 (MUM) (ITA NO.38/39-MUM/96) IN THIS CASE THE ASSESSEE ENGAGED IN BUSINESS OF EX PORT OF GOODS CREDITED CERTAIN AMOUNT IN THE PROFIT AND LOS S ACCOUNT REPRESENTING INCOME ON ACCOUNT OF EXCHANGE RATE DIF FERENCE WHICH INCLUDED CERTAIN AMOUNTS RECEIVED AFTER THE END OF THE FINANCIAL YEAR. THE ASSESSEE CLAIMED THAT THIS RECEIPT WAS FR OM THE EXPORT BUSINESS. THE TRIBUNAL HAS HELD THAT THE RECEIPT OF MONEY ON ACCOUNT OF EXCHANGE RATE FLUCTUATION WAS ONLY CONSE QUENTIAL TO THE SALE OF GOODS EXPORTED. WHAT THE ASSESSEE HAD RECEI VED WAS THE 32 SALE CONSIDERATION IN TERMS OF FOREIGN EXCHANGE. TH OUGH THE AMOUNT WAS RECEIVED AFTER THE END OF THE FINANCIAL YEAR, THE ASSESSEE, WHILE FINALIZING THE ACCOUNT, CORRECTLY I NCLUDED THE AMOUNT AS BUSINESS INCOME AND CLAIMED DEDUCTION U/S 80HHC. THEREFORE THE AMOUNT HAD TO BE TREATED AS AMOUNT RE CEIVABLE ON EXPORT MADE BY THE COMPANY AND FORM PART OF THE INC OME FROM BUSINESS OF EXPORTS. COPY OF THIS DECISION IS ENCLO SED AT PAGES 193 TO 193. 7. SHARP CREDIT LIMITED VS. DCIT-83 TTJ 1058 (DE L) IN THIS CASE ALSO IT IS HELD THAT EXPORT SALES REAL IZATION ON ACCOUNT OF EXCHANGE RATE DIFFERENCE CONSTITUTES PAR T OF TOTAL TURN OVERT FOR THE PURPOSE OF SECTION 80HHC. COPY OF THI S DECISION IS AT PAGES 194 TO 198. (B) IN VIEW OF THE ABOVE FACTS OF THE APPELLANTS C ASE AND IN VIEW OF THE ABOVE JUDICIAL PRONOUNCEMENTS, IT IS SU BMITTED THAT THE SAID A.O. WAS NOT JUSTIFIED IN DEDUCTING THE ABOVE AMOUNT FROM THE AMOUNT ELIGIBLE FOR DEDUCTION U/S 80 IB/ 80 IC OF T HE IT ACT 1961. (VI) MISCELLANEOUS RECEIPTS THE SAID A.O. HAS REDUCED RS.14,13,991/- (BATED UNI T) AND RS.50,66,442/- (BAROTIWALA UNIT) FROM THE PROFITS O F THE BUSINESS OF THE TWO UNITS ON THE GROUND THAT THESE RECEIPTS DO NOT FORM PART OF THE PROFIT DERIVED FROM THE INDUSTRIAL UNDERTAKI NG. IT IS SUBMITTED THAT, AS STATED EARLIER, WHAT IS REQUIRED TO BE CON SIDERED U/S 80 IB/80 IC IS THE PROFIT DERIVED FROM THE BUSINESS OF THE UNDERTAKING. THE APPELLANT SUBMITS THAT THE FOLLOWI NG FACTS WILL ESTABLISH THAT THE VARIOUS RECEIPTS WERE DERIVED FR OM THE BUSINESS OF BATED UNIT/BAROTIWALA UNITS AND WERE ELIGIBLE FO R DEDUCTION U/S 80 IB / 80 IC. (A) THE BROAD DETAILS OF THE MISCELLANEOUS RECEIPTS ARE AS UNDER: PARTICULARS BATED BAROTIWALA -SCRAP SALES 117890 1346285 -LEASE RENT OF BUILDING 175000 - -LIQUIDATED DAMAGES 837174 - -SUNDRY CREDIT BALANCES WRITTEN OFF 1645 19075 -EXCISE DUTY PROVISION - 3572367 -PACKING & FORWARDING 237600 107896 -OTHER RECEIPTS 44682 20819 33 1413991 5066442 LESS : EXCISE DUTY ON CLOSING STOCK PROVIDED LAST YEAR - 3572367 14,13,991/- 1494075/- IT IS SUBMITTED THAT THE SAID A.O. HAS WRONGLY CONS IDERED RS.50,66,442/- FOR BAROTIWALA UNIT WHEN THECORRECT AMOUNT IS RS.14,94,075/- WHICH HAS BEEN INCLUDED IN THE PROFI T AND LOSS A/C. OF THE UNIT. (B) SCRAP SALES ( 117890 + 1346285 ) IN THE MANUFACTURING PROCESS AT THE TWO UNITS CERTA IN SCRAP IS GENERATED. THIS SCRAP IS SOLD AS THE SAME CANNOT BE USED BY REPROCESSING. BOTH THESE UNITS ARE HIGH TECH ELECTR ONIC UNITS ENGAGED IN MANUFACTURING ELECTRONIC ENERGY METERS. IN THE MANUFACTURING PROCESS HIGH PRECISION IS REQUIRED. T HEREFORE, SCRAP GENERATED IN THIS PROCESS CANNOT BE REPROCESSED AND THE SAME HAS TO BE DISPOSED OFF BY WAY OF SALE. IT IS SUBMITTED THAT THE SALE PROCEEDS OF SUCH SCRAP IS INCOME FROM THE BUSINESS TRANSACTIONS AND ACTIVITIES CLOSELY CONNECTED TO THE BUSINESS OF INDUSTRIAL UNDERTAKING. SCRAP SALES REALIZED GOES TO REDUCE TH E COST OF RAW MATERIALS/STORES ETC. CONSUMED IN MANUFACTURING PRO CESS. THIS VIEW IS SUPPORTED BY THE FOLLOWING CASES. 1. DCIT VS. HARJIVANDAS JUTHABHAI ZAVERI 258 ITR 78 5 (GUJ) AND CIT VS. RANE (MADRAS) LTD. 238 ITR 377 (MAD) IN THIS CASE IT IS HELD THAT AMOUNTS RECEIVED FOR J OB WORKS, EMPTY SODA ASH BARDAN, EMPTY BARREIS AND PLASTIC WA STE, QUALITY FOR DEDUCTION U/S 80 I. COPY OF THIS DECISION IS AT PAG ES 199 TO 202. 2. ACIT VS. MAXCARE LABORATORIES LTD. 92 ITD 11 (CUTTACK) IN THIS CASE IT IS HELD THAT INCOME HAVING CLOSE AN D DIRECT NEXUS WITH PROFITS AND GAINS OF THE BUSINESS OF THE UNDERTAKING SHOULD ALSO BE CONSIDERED FOR DEDUCTION FOR THE PUR POSE OF SECTION 80 IA. THEREFORE, INTEREST RECEIVED BY THE ASSESSEE FROM DEPOSITS PLACED WITH A COMPANY DUE TO BUSINESS COMPULSION AN D INCOME FROM SALE OF EMPTY DRUMS, USELESS MATERIALS ETC. HA VE DIRECT AND PROXIMATE CONNECTION WITH BUSINESS OF INDUSTRIAL UN DERTAKING AND SHOULD BE CONSIDERED FOR THE PURPOSE OF DEDUCTION U NDER SECTION 80 IA. COPY OF THIS DECISION IS AT PAGES 203 TO 209. 34 IT IS, THEREFORE, SUBMITTED THAT THE SAID A.O. WAS NOT JUSTIFIED IN DEDUCTING THE ABOVE AMOUNTS FROM PROFI TS OF THE TWO UNITS ELIGIBLE FOR DEDUCTION U/S 80 IB/ 80 IC. (C) LEASE RENT OF BUILDINGS (RS.1,75,000/-) (BAT ED) IT IS SUBMITTED THAT ONLY PART OF THE FACTORY BUILD ING IS GIVEN ON LEASE. FOR THE REASONS STATED IN (B) ABOVE, IT I S SUBMITTED THAT THIS INCOME SHOULD BE TREATED AS INCOME OF THE BUSI NESS OF BATED UNIT AND ALLOWED AS DEDUCTION U/S 80 IB. WITHOUT PREJUDICE TO THE ABOVE, ON THE BASIS OF NET TING OF INCOME PRINCIPLE AS SUBMITTED IN PARA 1.6 (IV) ABOV E, THE FOLLOWING EXPENDITURE RELATING TO THE PORTION OF THE FACTORY GIVEN ON LEASE SHOULD BE DEDUCTED FROM RS.1,75,000/- IF THE SAME I S HELD TO BE DEDUCTIBLE FROM THE PROFIT OF BATED UNIT FOR THE PU RPOSE OF DEDUCTION U/S 80 IB. REPAIRS, LOCAL TAXES ETC. RS. NIL PROPORTIONATE DEPRECIATION ON WDV RS.3,72,616/ - OF PART OF THE FACTORY BUILDING ------------- ---- RS.3,72,616/- (D) LIQUIDATED DAMAGES RS.8,37,174 (BATED) THIS AMOUNT REPRESENTS LEVY OF PENALTY ON THE SUPPL IER FOR THE LATE DELIVERY OF THE MATERIAL AND THEREFORE TER MED AS LIQUIDATED DAMAGES TIME IS THE ESSENCE OF THE SUPPLIES AND IN CASE OF DELAYS A PENALTY IS DEDUCTED FROM THE PAYMENT TO BE MADE TO THE SUPPLIERS. TO THE EXTENT OF THIS PENALTY THE COST OF PURCHASES HAVE GONE DOWN AND THEREFORE IT DIRECTLY RELATES TO THE BUSINESS O F THE UNIT. IT IS, SUBMITTED THAT, AS EXPLAINED EARLIER, THIS A MOUNT IS DIRECTLY CONNECTED WITH PROFIT OF THE BATED UNIT AN D THEREFORE THE SAID A.O. WAS NOT JUSTIFIED IN DEDUCTING THIS AMOUN T FROM THE PROFIT OF BATED UNIT ELIGIBLE FOR DEDUCTION U/S 80 IB/80 I C. (E) SUNDRY CREDIT BALANCES WRITTEN OFF : RS.1645/- (BATED) & RS. 17,075/- (BAROTIWALA . THE NATURE OF THIS CREDIT ENTRY IS THE SAME AS STAT ED IN (D) ABOVE. THE CREDIT BALANCE IN THESE ACCOUNTS HAVE AR ISEN WHEN RAW MATERIALS WERE PURCHASED OR EXPENSES WERE INCURRED. THE PARTIES HAVE EITHER NOT COLLECTED THE AMOUNTS OR GIVEN DISC OUNT AT THE TIME OF SETTLEMENT OF ACCOUNT. THEREFORE, AS EXPLAINED E ARLIER, THE CREDIT ENTRY IN PROFIT & LOSS ACCOUNT IS DIRECTLY CONNECTE D WITH THE BUSINESS OF BATED UNIT AND THE SAID A.O. WAS NOT JU STIFIED IN DEDUCTING THIS AMOUNT FROM PROFIT OF BATED UNIT AND BAROTIWALA UNIT FOR DEDUCTION U/S 80 IB/80 IC. 35 (F) EXCISE DUTY PROVISION WRITTEN BACK RS.35,72,3 67/- (BAROTIWALA) THIS AMOUNT REPRESENTS PROVISION OF EXCISE DUTY ON CLOSING STOCK MADE LAST YEAR. THIS EXCESS PROVISION OF EXCI SE DUTY IS REVERSED THIS YEAR AND AMOUNT WAS CREDITED TO THE O THER INCOME. THIS ENTRY IS ALSO OF THE SAME NATURE AS STATED IN (D) ABOVE. THEREFORE, THIS CREDIT TO PROFIT & LOSS ACCOUNT IS DIRECTLY CONNECTED WITH THE BUSINESS OF BAROTIWALA UNIT AND, THEREFORE, THE SAID A.O. IS NOT JUSTIFIED IN DEDUCTING THIS AMOUNT FROM PROFIT OF THIS UNIT FOR DEDUCTION U/S 80 IC. (G) PACKING AND FORWARDING RS.2,37,600/- (BATED) & RS.1,07896/- (BAROTIWALA). THE APPELLANT COMPANY HAS TO INCUR EXPENDITURE FOR PACKING AND FORWARDING OF GOODS TO CUSTOMERS. THE A PPELLANT RECOVERS THESE EXPENSES FROM CUSTOMERS. THERE IS SU RPLUS IN THIS ACCOUNT BECAUSE ONLY DIRECT EXPENSES ARE DEBITED TO PACKING AND FORWARDING ACCOUNT. THE INDIRECT EXPENSES SUCH AS M ANPOWER COST, SUPERVISION CHARGES ETC. ARE NOT DEBITED TO THIS AC COUNT. THEREFORE, THIS SURPLUS IS PART OF BUSINESS INCOME OF THESE TW O UNITS AND, FOR THE REASONS STATED EARLIER, THE SAID A.O. WAS NOT J USTIFIED IN DEDUCTING THIS AMOUNT FROM PROFIT OF TWO UNITS FOR ALLOWING DEDUCTION U/S 80 IB/80IC. (H) OTHER RECEIPTS RS.44,682/- (BATED) & RS.20,819/ - (BAROTIWALA) THESE ARE PETTY RECEIPTS DURING THE COURSE OF BUSIN ESS OF THE TWO UNITS. IT IS SUBMITTED THAT, FOR THE REASONS ST ATED EARLIER, THE SAID A.O. WAS NOT JUSTIFIED IN EXCLUDING THIS RECEI PTS FROM THE PROFITS OF THESE UNITS FOR DEDUCTION U/S 80 IB/ 80 IC. 1.7 INCOME TREATED AS FROM TRADING ACTIVITY NOT ELI GIBLE FOR DEDUCTION U/S 80 IB/80 IC (I) THE SAID A.O. HAS TREATED THE FOLLOWING INCOME AS INCOME FROM TRADING ACTIVITY AND NOT ALLOWED DEDUCTION U/S 80 IB/80 IC WHILE COMPUTING PROFITS AND GAINS OF THE TWO UNITS. BATED UNIT U/S 80 IB RS. 3,72,579/- BAROTIWALA UNIT U/S 80 IC RS.2,57,78,308/- 36 HE HAS DISCUSSED THIS ISSUE IN PARA 5 AT PAGE 11-14 OF THE ASSESSMENT ORDER. (II) IT IS SUBMITTED THAT, AS SUBMITTED EARLIER, U/ S 80 IB DEDUCTION IS ALLOWABLE ON PROFITS AND GAINS OF THE BUSINESS OF AN INDUSTRIAL UNDERTAKING. FURTHER, U/S 80 IC DEDUCT ION IS ALLOWABLE ON PROFITS AND GAINS OF THE BUSINESS OF AN UNDER TAKING. THE SECTIONS DO NOT DEFINE THE TERM INDUSTRIAL UNDERTA KING. THIS TERM IS ONLY DEFINED IN SECTION 33 B WHICH WAS EARLIER A DOPTED FOR THE PURPOSES OF SECTION 80 IA. EXPLANATION U/S 33 B REA DS AS UNDER. IN THIS SECTION INDUSTRIAL UNDERTAKING MEANS ANY UNDER TAKING WHICH IS MAINLY ENGAGED IN THE BUSINESS OF . MANUFACTURE OR PROCESSING OF GOODS OR IN MINING. FROM THE ABOVE, IT IS EVIDENT THAT DEDUCTION U/S 80 IB/ 80 IC IS NOT RESTRICTED TO ONLY INCOME FROM MANUFACTUR ING ACTIVITY. WHEN THE SECTION REFERS TO PROFIT FROM BUSINESS OF THE INDUSTRIAL UNDERTAKING OR BUSINESS OF THE UNDERTAKING, SUCH PROFIT WILL INCLUDE PROFIT FROM ALL ACTIVITIES CONNECTED WITH T HE SAID BUSINESS. WHAT THE SECTION REQUIRES IS THAT THE MAIN ACTIVITY OF THE UNDERTAKING SHOULD BE MANUFACTURING ACTIVITY. THIS ISSUE WAS EXAMINED BY CBDT IN CIRCULAR NO.103 OF 17.2.1973 IN THE CONTEXT OF DEFINITION OF INDUSTRIAL COMPANY (COPY ENCLOSED AT PAGES 222 TO 224) THE CBDT HAS TAKEN THE VIEW THAT IF MORE THAN 51% OF INCOME IS FROM MANUFACTURING ACTIVITY, THE COMPANY SHOULD BE CONSIDERED AS INDUSTRIAL COMPANY. (III) DURING THE YEAR UNDER APPEAL THE APPELLANT PU RCHASED CONTAIN FINISHED GOODS. WHICH ARE IN THE NATURE OF COMPONENTS FOR THE ELECTRONIC METERS MANUFACTURE BY THE APPELLANT. THESE PURCHASES ARE LESS THAN 5% OF THE TURNOVER AS WILL BE EVIDENT FROM THE FOLLOWING FIGURES:- UNIT TOTAL TURNOVER PURCHASES OF FINISHED GOODS PERCENTAGE BATED 6477.29 LACS 89.91 LACS 1.31% BAROTIWALA 5908.19 LACS 263.97 LACS 4.47% (IV) THE APPELLANT SELLS GOODS MAINLY TO STATE ELEC TRICITY BOARDS AND LARGE ELECTRICITY COMPANIES IN THE PRIVATE AND PUBLIC SECTOR. THESE CUSTOMERS FLOAT TENDERS FOR SUPPLY OF ELECTRO NIC METERS. THESE TENDERS INCLUDE SUPPLY OF CERTAIN COMPONENTS WHICH ARE NOT MANUFACTURED BY THE APPELLANT. LIST OF MAJOR COMPON ENTS INCLUDED IN THE TENDERS IS AS UNDER: 37 THE METER READING INSTRUMENTS ARE HAND HELD EQUIPME NT USED TO READ THE METERS. FOR EVERY 100 OR 200 METER S, ONE METER READING INSTRUMENT IS PROCURED BY THE CUSTOMER. WIT HOUT THESE METER READING INSTRUMENTS THE CUSTOMER WILL HAVE TO READ THE METER MANUALLY, WHICH WILL MAKE IT A DIFFICULT JOB, UNTIL AND UNLESS ADDITIONAL MANPOWER IS DEPLOYED FOR THIS PURPOSE. THE BOXES ARE NORMALLY USED TO HOUSE THE METER IN T HE FIELD TO PROTECT IT FROM RAIN, SHINE AND DUST. COMPUTERS ARE USED FOR ANALYZING DATA DOWN LOADED F ROM THE METERS. PRINTERS ARE USED FOR PRINTING THE REPORTS USING TH E METER READING INSTRUMENTS, COMPUTER ETC. IF THE APPELLANT DOES NOT AGREE TO SUPPLY THESE COM PONENTS, THE CUSTOMER WILL NOT GIVE THE ORDER. A SPECIMEN COPY O F SUCH ORDER IS ENCLOSED AT PAGES 26 TO 42. (V) SIMILAR ISSUE HAD ARISEN IN THE CASE OF DCIT VS . CHAMANLAL & SONS 93 TTJ 132 (ASR). COPY OF THIS DECISION IS AT PAGES 225 TO 230. RELEVANT EXTRACT OF THIS DECISION IS AS UNDER: WE HAVE HEARD THE RIVAL SUBMISSIONS IN THE LIGHT O F MATERIAL PLACED BEFORE US AND PRECEDENTS RELIED UPO N. THE ASSESSMENT YEAR UNDER CONSIDERATION IS 1994-95. THE RELEVANT PORTIO N OF SECTION 80-IA PROVIDES THAT WHERE THE GROSS TOTAL INCOME OF AN AS SESSEE INCLUDES ANY PROFITS AND GAINS DERIVED FROM ANY BUSINESS OF AN I NDUSTRIAL UNDERTAKING, THERE SHALL BE ALLOWED A DEDUCTION FROM SUCH PROFIT S IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THE SECTION. CLAUS E (B) OF SUB-SECTION (12) DEFINES INDUSTRIAL UNDERTAKING TO HAVE THE SAME MEA NING AS IS ASSIGNED TO IT IN THE EXPLANATION TO SECTION 33 B. RELEVANT POR TION OF THE LATTER EXPLANATION, IN TURN, STATES THAT THE INDUSTRIAL UN DERTAKING MEANS ANY UNDERTAKING WHICH IS MAINLY ENGAGED IN THE MANUFACT URE OR PROCESSING OF GOODS. ON A CLOSE READING OF SUB-SECTION (1) OF SEC TION 80-IA, IT BECOMES PALPABLE THAT THE DEDUCTION IS TO BE ALLOWED ON PRO FITS AND GAINS DERIVED FROM ANY BUSINESS OF AN INDUSTRIAL UNDERTAKING. THU S, IT BECOMES VIVID THAT, IF THE CONDITIONS OF INDUSTRIAL UNDERTAKING A RE SATISFIED, THEN THE ASSESSEE BECOMES ENTITLED TO DEDUCTION IN RESPECT O F PROFITS OF ANY BUSINESS OF SUCH INDUSTRIAL UNDERTAKING. ANY BUSINE SS MAY BY THAT OF MANUFACTURING OR PROCESSING OR OTHERWISE. AT THIS J UNCTURE IT IS PERTINENT TO NOTE THAT THE LEGISLATURE HAS SET THE SCOPE OF DEDU CTION UNDER SECTION 80 IA VIDE BY USING THE APPROPRIATE PHRASEOLOGY, WHEN SEE N IN CONTRAST WITH. 38 THAT USED IN SECTION 80-I. WHEREAS THE LATTER SECTI ON GRANTS DEDUCTION IN RESPECT OF PROFITS AND GAINS DERIVED F ROM AN INDUSTRIAL UNDERTAKING THE FORMER PROVIDES FOR DEDUCTION ON PR OFIT AND GAINS DERIVED FROM ANY BUSINESS OF AN INDUSTRIAL UNDERTAKING. AS LONG AS THE INCOME KEEPS ON EMANATING FROM ANY BUSINESS OF AN INDUSTRI AL UNDERTAKING. IT WOULD REMAIN TO QUALITY FOR DEDUCTION UNDER THIS SE CTION. WE WOULD NOW, THEREFORE, PROCEED TO DETERMINE AS TO WHETHER OR NOT THE CONDITIONS OF INDUSTRIAL UNDERTAKING ARE SA TISFIED IN THE INSTANT CASE. THE CBDT IN ITS CIRCULAR NO.103, DATED 17 TH FEBRUARY, 1973 HAS DEFINED AN INDUSTRIAL COMPANY AS UNDER: 2. THE QUESTION AS TO THE EXACT MEANING OF THE EXPL ANATION TO SUB- SECTION 7(B) OF SECTION 2 OF THE FINANCE ACT, 1996 CAME UP FOR CONSIDERATION AND THE BOARD ARE ADVISED THAT AN IN DUSTRIAL COMPANY WOULD MEAN- (I) A COMPANY WHICH IS MAINLY ENGAGED IN THE BUSINE SS OF GENERATION OR DISTRIBUTION OF ELECTRICITY OR ANY OT HER FORM OF POWER OR IN THE CONSTRUCTION OF SHIPS OR IN THE MANUFACTURE OR PROCESSING OF GOODS OR IN MINING, EVEN IF ITS INCOME FROM SUCH ACTIVITIES IS LESS THAN 51 PER CENT OF ITS TOTAL INCOME, AND (II) A COMPANY WHICH, EVEN THOUGH NOT MAINLY SO ENG AGED, DERIVES IN ANY YEAR , 51 PERCENT OR MORE OF ITS TOT AL INCOME FROM SUCH ACTIVITIES. THIS CIRCULAR WAS ISSUED IN THE CONTEXT OF INDUSTRI AL COMPANY WITHIN THE MEANING OF EXPLANATION TO SUB-SECTION 7 (B) OF SECTION 2 OF THE FINANCE ACT, 1966. THE DEFINITION OF AN INDUSTRIAL COMPANY AS CONTAINED IN THAT EXPLANATION IS SIMILAR TO THAT AS CONTAINED IN THE EXPLANATION TO SECTION 33 B. THE SUM AND SUBSTANCE OF THE WHOLE PO SITION IS THAT THE CONDITION OF MAINLY ENGAGED WOULD BE SATISFIED IF T HE VOLUME OF BUSINESS OF PROFITS OF UNDERTAKING ARE 51 PER CENT OR MORE F ROM THE MANUFACTURING AND PROCESSING OF GOODS. ADVERTING TO THE FACTS OF THE CASE, WE FIND THAT A CHART HAS BEEN PLACED ON RECORD SHOWING THAT THE ASSESSEE HAD MADE PURCHASES OF RICE AT RS.1,19,77,412/- IN THE YEAR UNDER CONSIDERATION AS AGAINST THE TOTAL SALES OF RS.7,00,88,963/- THEREBY SUGGESTING THAT THE PER CENTAGE OF PURCHASE TO TOTAL SALES COMES TO 17.08 PER CENT AND THE BALANCE D REPRESENTS: THE SALE OF THE GOODS MANUFACTURED BY THE ASSESSEE. THIS MAKES CLEAR THAT IT WAS MAINLY ENGAGED IN THE MANUFACTURING OF RICE THOUGH AROUND 17 PER CENT OF THE TOTAL VOLUME OF SALE REPRESENTED THE TRADING OP ERATIONS. IN SUCH CIRCUMSTANCES, WE FIND THAT THE CASE OF THE ASSESSE E GETS COVERED WITHIN THE EXPLANATION TO SECTION 33 B AND IT QUALITIES AS AN INDUSTRIAL 39 UNDERTAKING. AT THIS STAGE IT WILL NOT BE OUT OF CO NTEXT TO MENTION THAT IT IS NOT THE CASE OF REVENUE THAT THE ASSESSEE IS NOT AN INDUSTRIAL UNDERTAKING AND HENCE, INELIGIBLE FOR DEDUCTION UNDER SECTION 8 0-IA. RATHER, BY TREATING IT AS SUCH, THE DEDUCTION WAS GRANTED, THO UGH ON A LOWER SCALE. WHEN SECTION 80-IA(1) IS PERUSED, IT BECOMES EXPLIC ITLY CLEAR THAT THE DEDUCTION IS ELIGIBLE IN RESPECT OF PROFITS AND GAI NS WHICH ARE DERIVED FROM ANY BUSINESS OF AN INDUSTRIAL UNDERTAKING. AS THE C ONDITIONS OF THE INDUSTRIAL UNDERTAKING ARE SATISFIED AND THE TRANSA CTIONS OF SALE AND PURCHASE OF RICE ARE PART AND PARCEL OF THE BUSINES S OF INDUSTRIAL UNDERTAKING, WE, THEREFORE, HOLD THAT THE PROFITS I N RESPECT OF SUCH TRADING OPERATIONS WOULD ALSO QUALIFY FOR DEDUCTION. (VI) ON PAGE 11 OF THE ASSESSMENT ORDER, THE SAID A .O. HAS REFERRED TO THE DECISION OF ITAT (JODHPUR) FOR 94-95 TO 98-99. IT IS SUBMITTED THAT THIS DECISION IS NOT APPLICABLE IN THE YEAR UNDER APPEAL . AS STATED IN PARA 1.6 (IV)(C) THE ABOVE ITAT DECISION IS IN THE CONTEXT O F PROVISIONS OF SECTION 80 I. AS SUBMITTED ABOVE THE WORDING OF SECTION 80 I IS DIFFERENT FROM THE WORDING OF SECTION 80 IB / 80 IC AND THEREFORE THE DECISION OF ITAT IN EARLIER YEARS IS NOT APPLICABLE. FURTHER, THE DIFFE RENCE IN WORDING OF SECTION 80 I AND 80 IB/ 80 IC IS ALSO BROUGHT OUT IN PARA 1 .6 (IV)(C) (2006) 10 SOT 178 (DELHI) AND IN PARA (V) ABOVE IN 93 TTJ 132 (ASR). IT IS, THEREFORE, SUBMITTED THAT THE DECISION OF ITAT IN A PPELLANTS CASE FOR EARLIER YEAR NEED NOT BE FOLLOWED. (VII) IN VIEW OF THE ABOVE FACTS AND JUDICIAL PRONO UNCEMENTS THE APPELLANT SUBMITS THAT THE SAID A.O. WAS NOT JUSTIF IED IN DEDUCTING THE PROFIT OF RS.3,72,579/- (BATED UNIT) AND RS.2,57,78 ,308 (BAROTIWALA UNIT) WHILE COMPUTING DEDUCTION U/S 80 IB/80 IC. IT MAY P LEASE BE NOTED THAT PROFIT FROM SUPPLY OF FINISHED COMPONENTS IN BATED UNIT IS ONLY 0.06% OF TOTAL TURNOVER OF THAT UNIT AND IN BAROTIWALA UNIT IT IS ONLY 4.36% OF TOTAL TURNOVER OF THAT UNIT. (VIII) WITHOUT PREJUDICE TO THE ABOVE, THE PROFIT F ROM TRADING ACTIVITIES AS DETAILED ABOVE DIRECT NEXUS TO THE BUSINESS OF THE UNITS AND DEDUCTION U/S 80 IB/80 IC BE CONSIDERED AND ALLOWED. 3.4 THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION S AND PERUSING THE MATERIALS AVAILABLE ON RECORD FOUND THAT THE ASSESSEE DESERVE S TO SUCCEED IN PART. HE HAS CONSIDERED THE ITEMWISE RECEIPT AND EXPENDITURE AND THEN HE HA S GIVEN HIS FINDINGS RECORDED IN PARA 3.3 STARTING FROM PAGES 43 TO 48 OF HIS ORDER WHICH ARE AS UNDER:- 40 3.3 I HAVE CONSIDERED THE FACTS OF THE CASE AND S UBMISSIONS OF THE LD. AR. THE APPELLANT HAS SHOWN OTHER INCOME OF RS. 6,70,15,169/- IN BAROTIWALA UNIT AND RS. 40,92,662/- IN BATED UNIT. THE BREAK UP IS AS UNDER:- OTHER INCOME BAROTIWALA BATED INTEREST RECEIVED 61304598 2432623 EXCHANGE RATE DIFFERENCE 644129 246050 MISC. INCOME 5066442 1413991 TOTAL 67015169 4092662 GRAND TOTAL OF OTHER INCOME 71107831 AS PER THE AO THE DEDUCTION U/S 80IB/80IC IS AVAILA BLE ONLY IN RESPECT OF PROFIT DERIVED FROM THE INDUSTRIAL UNDE RTAKING. THE APPELLANT WAS THEREFORE, ASKED TO EXPLAIN WHY NOT OTHER INCOM E SHOULD BE EXCLUDED FOR ARRIVING TO THE ELIGIBLE DEDUCTION U/S 80IB/80I C. THE APPELLANT HAS SUBMITTED THAT PROFIT BAROTIWALA AND BATED UNIT INC LUDE OTHER INCOME OF RS. 6,70,15,169/- AND RS. 40,92,664/- WHICH RELATES TO INTEREST, FOREIGN EXCHANGE RATE DIFFERENCE AND MISC. INCOME ETC. WHIC H ARE PART AND PARCEL OF THE PROFITS OF THE NEW INDUSTRIAL UNDERTAKING. T HE AO HAS TAKEN THE DIFFERENT VIEW THAT THE WORD USED DERIVED MEANS INC OME SHOULD DIRECTLY ARISE FROM THE INDUSTRIAL UNDERTAKING SO FORM AS PE R PROVISION OF SECTION 80IB/80IC. THE AFORESAID OTHER INCOME CAN AT BEST B E TERMED AS INCOME ATTRIBUTABLE TO THE INDUSTRIAL UNDERTAKING. IT CANN OT BE SAID TO BE DIRECTLY DERIVED FROM THE INDUSTRIAL UNDERTAKING. FURTHER IN APPELLANTS OWN CASE THE HON'BLE ITAT JODHPUR BENCH IN ITA NO. 405/JDPR /1999 FOR THE ASSESSMENT YEAR 1996-97 HAS UPHELD THE EXCLUSION OF INTEREST FROM THE PROFIT ELIGIBLE FOR DEDUCTION U/S 80IB. THE ITAT HA S UPHELD THE SIMILAR DISALLOWANCE FOR ASSESSMENT YEARS 1994-95, 1995-96, 1997-98 AND 1998- 99 ALSO THE LD. AR HAS SUBMITTED THAT THE INTEREST RECEIVED IS MAINLY FROM INDUSTRIAL BALANCES. THERE IS A CURRENT ACCOUNT WIT H THE HO AS WELL AS WITH OTHER UNITS. THE INTEREST HAS EITHER BEEN RECEIVED OR PAID ON THESE BALANCES. IT CANNOT BE SAID THAT THE MONIES HAVE BEEN ADVANCE D TO ANY THIRD PARTY FOR THE PURPOSE OF EARNING INTEREST. THE RECEIPTS ARE D ERIVED FROM THE ACTIVITIES OF THE BUSINESS OF THE THREE UNITS. WHEN THE SOURCE OF THE RECEIPT IS FROM THE BUSINESS ACTIVITIES OF THE UNDERTAKING, IT CANN OT BE SAID THAT THE RECEIPTS IS NOT DERIVED FROM BUSINESS OF THE UNDERTAKING. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AR HAS SUBM ITTED THAT THERE ARE ITEMS OF INTEREST RECEIVED AS WELL AS INTEREST PAID AND THEREFORE, NET FIGURE OF INTEREST RECEIVED OR PAID HAS TO BE CONSI DERED. THE PRINCIPLES OF INTEREST PAID AGAINST INTEREST RECEIVED AS WELL AS NETTING OF EXPENSES AGAINST RECEIPT UNDER THE SAME HEAD HAS BEEN ACCEPT ED IN SEVERAL JUDICIAL PRONOUNCEMENTS. 41 IT HAS BEEN SUBMITTED THAT THE FOREIGN EXCHANGE FLU CTUATION RECEIPTS/ PAYMENTS ARE MAINLY ON ACCOUNT OF DIFFER ENCE IN THE EXCHANGE RATE AT THE TIME OF BOOKING TRANSFER OF EXPORT/ IMP ORT AND EXCHANGE RATE AT THE TIME OF RECEIPT RECEIPT/PAYMENT. UNDER THE ACCO UNTING STANDARD AS- 11, WHICH WAS APPLICABLE TO THE APPELLANT , THE EXC HANGE RATE PREVAILING ON THE DATE OF TRANSACTION SHOULD BE APPLIED FOR RECOR DING THE TRANSACTION. DURING THE YEAR UNDER APPEAL, THE DIFFERENCE BETWEE N THESE TWO RATES RESULTED IN SURPLUS WHICH HAS BEEN SHOWN AS FOREIGN EXCHANGE DIFFERENCE RECEIPT, THE EXCHANGE RATE DIFFERENCE IS PART OF TH E PURCHASE ACTIVITY AND IS IN THE NATURE OF SAVINGS IN THE PURCHASE COST AND T HEREFORE, THE ENTIRE AMOUNT SHOULD BE CONSIDERED AS SAVING IN PURCHASE C OST AND PART OF PROFITS DERIVED FROM THE BUSINESS OF TWO INDUSTRIAL UNDERTA KING. THIS PRINCIPLE HAS BEEN ACCEPTED IN VARIOUS JUDICIAL PRONOUNCEMENTS. THE BROAD DETAILS OF THE MISC. RECEIPTS ARE AS UNDE R:- PARTICULARS BATED BAROTIWALA SCRAP SALES 1,17,890 13,46,285 LEASE RENT OF BUILDING 1,75,000 - LIQUIDATED DAMAGES 8,37,174 - SUNDRY CREDIT BALANCE WRITTEN OFF 1,645 19,075 EXCISE DUTY PROVISION - 35,72,367 PACKING & FORWARDING 2,37,600 1,07,896 OTHER RECEIPTS 44,682 20,819 14,13,991 50,66,442 LESS: EXCISE DUTY ON CLOSING STOCK PROVIDED LAST YEAR - 35,72,367 14,13,991 14,94,075 SCRAP SALES : IN THE MANUFACTURING PROCESS AT THE TWO UNITS CONTA IN SCRAP IS GENERATED. THIS SCRAP IS SOLD AS THE SAME CANNOT BE USED FOR REPROCESSING. THE SALE PROCEED OF SUCH SCRAP IS INCOME FROM THE B USINESS TRANSACTION AND ACTIVITIES CLOSELY CONNECTED TO THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. THE SCRAP SALES REALIZED GOES TO REDUC E THE COST OF RAW MATERIAL / STORES CONSUMED IN MANUFACTURING PROCESS . IN SUCH CASE, THERE IS NO QUESTION OF TREATING THE SAME AS INCOME FROM OTH ER SOURCES. LEASE RENT OF BUILDING 42 IT HAS BEEN SUBMITTED THAT ONLY PART OF THE FACTORY BUILDING IS GIVEN ON LEASE. THIS INCOME SHOULD BE CONSIDERED AS INCOM E OF THE BUSINESS OF BATED UNIT AND ALLOWED AS DEDUCTION U/S 80IB. IT HA S FURTHER BEEN STATED THAT ON THE BAS OF NETTING OF INCOME PRINCIPLE THE FOLLOWING EXPENDITURE RELATING TO THE PORTION OF THE FACTORY GIVEN ON LEA SE SHOULD BE DEDUCTED FROM RS. 1,75,000/-. PROPORTIONATE DEPRECIATION ON WDV OF PART OF THE FACTORY BUILDING IS RS. 3,72,616/-, WHICH IS MORE T HAN THE INCOME. IN SUCH CASE THERE IS NO QUESTION OF TREATING THE SAME AS I NCOME FROM OTHER SOURCES. LIQUIDATED DAMAGES THIS AMOUNT REPRESENT LEVY OF PENALTY ON THE SUPPLI ER FOR THE LATE DELIVERY OF THE MATERIAL AND THEREFORE, TERMED AS L IQUIDATED DAMAGES. TO THE EXTENT OF THIS PENALTY, THE COST OF PURCHASE HA S GONE DOWN AND THEREFORE, DIRECTLY RELATING TO THE BUSINESS OF THE UNIT. SUNDRY CREDIT BALANCE WRITTEN OFF THE CREDIT BALANCES IN THESE ACCOUNTS HAVE ARISEN W HEN RAW MATERIALS WERE PURCHASED OR EXPENSES WERE INCURRED. THE PARTIES HAVE EITHER NOT COLLECTED THE AMOUNT OR GIVEN DISCOUNT A T THE TIME OF SETTLEMENT OF ACCOUNT. THEREFORE, THE CREDIT ENTRY IN THE PROF IT AND LOSS ACCOUNT IS DIRECTLY CONNECTED WITH THE BUSINESS OF BATED UNIT. EXCISE DUTY PROVISION WRITTEN BACK THIS AMOUNT REPRESENTS PROVISION OF EXCISE DUTY ON CLOSING STOCK MADE DURING LAST YEAR. THE EXCESS PROVISION OF EXCI SE DUTY IS REVERSED THIS YEAR AND THE AMOUNT CREDITED TO OTHER INCOME. THEREFORE, THE CREDIT TO PROFIT AND LOSS ACCOUNT IS DIRECTLY CONNECTED WITH THE BUSINESS OF BAROTIWALA UNIT. PACKING AND FORWARDING THE APPELLANT HAS TO INCUR EXPENDITURE FOR PACKING AND FORWARDING OF GOODS TO CUSTOMERS. THE APPELLANT RECOVERS THESE EXPENSES FROM CUSTOMERS. THERE IS SURPLUS IN THIS ACCOUNT BECAUS E ONLY DIRECT EXPENSES ARE DEBITED TO PACKING AND FORWARDING ACCOUNT. IND IRECT EXPENSES SUCH AS MANPOWER COST, SUPERVISION CHARGES ARE NOT DEBITED TO THIS ACCOUNT. THEREFORE, THIS SURPLUS IS PART OF BUSINESS ACTIVIT Y OF THESE TWO UNITS. I HAVE CONSIDERED THE FACTS OF THE CASE AND FOUND T HAT AS FAR AS INCOME FROM INTEREST IS CONCERNED THE DECISION OF H ON'BLE ITAT IS AGAINST 43 THE APPELLANT DECIDED IN ITS OWN CASE FOR ASSESSMEN T YEAR 1994-95, 1995- 96, 1997-98 AND 1998-99. THEREFORE, THE INTEREST IS TREATED AS INCOME FROM OTHER SOURCES. BUT THERE IS A RECEIPT AND PAYMENT O F INTEREST BOTH SIMULTANEOUSLY. THEREFORE, NETTING OFF OF THE INTER EST IS ALLOWED. THE AO IS DIRECTED TO WORK OUT THE ACTUAL DISALLOWANCE. AS FAR AS EXCHANGE RATE FLUCTUATION IS CONCERNED, T HIS HAPPENS BECAUSE OF THE TRANSACTION ENTERED INTO BY THE APPE LLANT WITH THE FOREIGN CUSTOMERS AT THE TIME OF BOOKING AND AT THE TIME OF REALIZATION OF THE SALE PROCEED. THE DIFFERENCE OF THE TWO IS SURPLUS OR DE FICIT WHICH IS REGULAR FEATURE OF THE BUSINESS AND IS DIRECTLY RELATED TO BUSINESS INCOME AND NOT INCOME FROM OTHER SOURCES. IN THE CASE OF SCRAP SALES ALSO, THE INCOME IS GENE RATED FROM THE SCRAP OUT OF THE VARIOUS PROCESS OF MANUFACTURING A ND UNUSABLE ITEMS ARE SOLD LATER3ON. THE INCOME SO GENERATED IS DIRECTLY DERIVED FROM THE MANUFACTURING ACTIVITY OF THE APPELLANT AND THEREFO RE, TREATED AS INCOME FROM BUSINESS AND NOT INCOME FROM OTHER SOURCES. LEASE RENT OF BUILDING IS DEFINITELY NOT DERIVED FO RM BUSINESS ACTIVITY BUT OF THE SALE FACTOR BUILDING GIVEN ON L EASE. BUT THE EXPENDITURE INCURRED FOR LEASING PURPOSE IS DEFINITELY ALLOWABL E. AS THERE IS EXPENDITURE OF RS. 3,72,616/- WHICH IS MORE THAN TH E INCOME, THERE IS NO QUESTION OF SURPLUS INCOME BUT LOSS OF RS. 1,97,616 /-. LIQUIDATED DAMAGES DIRECTLY DERIVED FROM THE BUSINE SS ACTIVITY AS IT HAS ARISEN ON ACCOUNT OF PURCHASE OF MATERIAL F OR NOT SUPPLYING THE MATERIAL WITHIN THE TIME PRESCRIBED. IT HAS THUS RE DUCED THE COST OF PURCHASE. THEREFORE, IT IS TREATED AS INCOME FROM B USINESS AND NOT FROM INCOME FROM OTHER SOURCES. AS REGARDS SUNDRY CREDIT BALANCE WRITTEN OFF, THERE IS SIMILAR POSITION IN THIS CASE ALSO. THE SUNDRY BALANCES ARI SING BECAUSE OF NON- CLAIM BY THE PURCHASING PARTIES AT THE TIME OF SETT LEMENT OF THE ACCOUNT AND IT HAS THUS BECOME SURPLUS IN THE SALE ACCOUNT BUT IT HAS BEEN CREDITED AS SUNDRY CREDIT BALANCE IN PROFIT AND LOSS ACCOUNT . THEREFORE, IT IS ALLOWED AS INCOME FROM BUSINESS. REGARDING EXCISE DUTY PROVISION, IT HAS ALREADY BEE N REVERSED IN THE SUBSEQUENT YEAR. THEREFORE, NO DECISION IS REQU IRED. AS REGARDS THE PACKING AND FORWARDING, IN VIEW OF T HE EXPLANATION THE SAME IS TREATED AS INCOME FROM BUSINESS AND NOT FROM INCOME FROM OTHER SOURCES. 44 THE AO IS DIRECTED ACCORDINGLY TO WORK OUT THE DEDU CTION U/S 80IB/80IC OF THE ACT. THIS GROUND OF APPEAL IS PART LY ALLOWED. 3.5 THE LD. DR PLACED RELIANCE ON THE ORDER OF THE AO AND ALSO FILED A BRIEF NOTE DURING HEARING. THE MAIN PLANK OF THE ARGUMENT OF T HE LD. DR WAS THAT INTEREST INCOME WAS EARNED ON SURPLUS FUND BY THE ASSESSEE AND THE REFORE, NETTING ALLOWED BY THE LD. CIT(A) IS NOT JUSTIFIED. SECONDLY, IT WAS SUBMITTED THAT AT BEST INTEREST INCOME CAN BE TERMED AS INCOME ATTRIBUTABLE TO THE INDUSTRIAL UND ERTAKING BUT IT CANNOT BE SAID TO BE DIRECTLY DERIVED FROM THE INDUSTRIAL UNDERTAKING. T HE RELIANCE HAS BEEN PLACED IN THE CASE OF PANDIAN CHEMIALS VS. CIT, 262 ITR 278 (SC) AND A LSO THE DECISION OF THE TRIBUNAL FOR THE ASSESSMENT YEARS 1994-95 TO 1998-99 IN THE CASE OF ASSESSEE ITSELF WHERE INTEREST INCOME IS HELD AS INCOME FROM OTHER SOURCES. THEREF ORE, THE LD. CIT(A) WAS NOT JUSTIFIED IN DIRECTING TO ALLOW NETTING OF THE INTEREST AND T HEN WORKING OUT THE ACTUAL DISALLOWANCE. 3.6 REGARDING OTHER DISALLOWANCES MADE BY THE AO, T HE LD. DR PLACED RELIANCE ON THE ORDER OF THE AO. 3.7 ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSE SSEE PLACED RELIANCE ON THE ORDER OF THE LD. CIT(A) AND ALSO PLACED WRITTEN SUBMISSION C ONTAINING 28 PAGES. 3.8 WE HAVE HEARD THE RIVAL CONTENTIONS AND CONSIDE RED THEM CAREFULLY. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE MATERI ALS AVAILABLE ON RECORD, WE FOUND THAT THE LD. CIT(A) HAS GIVEN THE FINDING OF FACTS. THE LD. CIT(A) HAS CONSIDERED EACH ITEMS SEPARATELY WHERE HE FOUND THAT INCOME IS FROM OTHER SOURCES. HE HAS TREATED THE INCOME FROM OTHER SOURCES LIKE LEASE AND INTEREST INCOME. THE LD. CIT(A) HAS FOLLOWED THE DECISION OF THE TRIBUNAL FOR THE EARLIER YEARS TREA TING THE INTEREST INCOME AS INCOME FROM OTHER SOURCES. HOWEVER, HE FOUND THAT IN EARLIER YE AR, THERE WAS NO EXPENDITURE ON 45 ACCOUNT OF INTEREST. THEREFORE, THE AO WAS DIRECTED TO ALLOW NETTING OF INTEREST. THIS IS A SETTLED POSITION IN LAW NOW THAT IF THERE IS AN IN EXPLICABLE LINK BETWEEN THE INTEREST INCOME AND EXPENDITURE THEN NETTING OF BOTH HAS TO BE ALLOWED. THEREFORE, WE FIND NO INFIRMITY IN THE ORDER OF THE LD. CIT(A) IN DIRECTI NG THE AO TO ALLOW THE NETTING IF THERE IS A NEXUS BETWEEN THE INTEREST EARNING AND EXPENDITUR E. AS REGARDS THE OTHER ITEMS I.E. SCRAP SALES, LIQUI DATED DAMAGES, SUNDRY CREDITORS AND PACKING AND FORWARDING, THE LD. CIT(A) HAS GIVE N REASONABLE REASONING THAT THEY ARE PART OF THE SAME BUSINESS. THEREFORE, RECEIPT ON TH IS ACCOUNTS CANNOT BE TREATED AS INCOME FROM OTHER SOURCES. THE FINDINGS OF THE LD. CIT(A) IS REPRODUCED SOMEWHERE ABOVE IN THIS ORDER. IN RESPECT OF LEASE RENT, THE LD. CIT(A) HA S TREATED IT AS INCOME FROM OTHER SOURCES. HOWEVER, THE EXPENDITURE ON ACCOUNT OF LEASE RENT WAS TO BE SET OFF I.E. IN OUR CONSIDERED VIEW IS CORRECT. AS STATED ABOVE, THE LD. CIT(A) HA S GIVEN REASONABLE FINDINGS WHICH HAS BEEN REPRODUCED ALSO AND THEREFORE, WE DO NOT WANT TO GO IN DETAIL FURTHER AND ACCORDINGLY THE FINDINGS OF THE LD. CIT(A) ON THIS ISSUE IS ALSO CONFIRMED. 4.1 THE THIRD GROUND OF THE REVENUE IS THAT THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF DEDUCTION U/S 80IB/80IC IN RESPECT OF BATED AND BAROTIWALA UNIT ON TRADING PROFIT. 4.2 THE BRIEF FACTS OF THE CASE ARE THAT THE AO DIS ALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE ON THE GROUND THAT THE TRADING ACTIVIT Y CONSTITUTED BY THE PURCHASE AND SALE OF FINISHED GOODS IS NOT ELIGIBLE NOTWITHSTANDING THE QUANTUM OF TRADING ACTIVITY CARRIED OUT. THERE IS NO NEXUS BETWEEN MANUFACTURING ACTIVITY AN D THE TRADING PROFIT. THE TRADING PROFIT CANNOT BE AID TO BE DERIVED FROM THE INDUSTR IAL UNDERTAKING ELIGIBLE FOR DEDUCTION U/S 80IB/80IC OF THE ACT. FURTHER IN ASSESSEE'S OWN CASE, THE EXCLUSION OF TRADING PROFIT 46 FROM DEDUCTION ELIGIBLE U/S 80IA HAS BEEN UPHELD BY THE ITAT, JODHPUR FOR ASSESSMENT YEARS 1994-95 TO 1998-99. IN VIEW OF THE ABOVE DISC USSION, THE AO HAS REDUCED THE TRADING PROFIT FROM THE PROFIT ELIGIBLE FOR DEDUCTI ON U/S 80IB/80IC OF THE ACT. THE AO HAS HOWEVER DISCUSSED THE PROVISIONS OF SECTION 80IB/80 IC SPEAKING OF ANY BUSINESS AND FURTHER ARGUED THAT IT IS QUALIFIED BY THE SENTENCE ANY BUSINESS REFERRED TO IN SUB-SECTION (3) TO (11). THESE SUB-SECTIONS DEFINE ANY BUSINES S. THE SUB-SECTION (3) IS UNAMBIGUOUSLY RESTRICTS THE DEDUCTION TO THE UNITS ENGAGED IN THE MANUFACTURING OR PRODUCTION PROVIDED OTHER CONDITIONS ARE FULFILLED 4.3 IT WAS SUBMITTED BEFORE THE LD. CIT(A) BY THE L D. AR AS UNDER:- THAT U/S 80IB DEDUCTION IS ALLOWABLE ON PROFIT AN D GAINS OF THE BUSINESS OF ANY INDUSTRIAL UNDERTAKING. FURT HER U/S 80IC, DEDUCTION IS ALLOWABLE ON PROFITS AND GAINS OF THE BUSINESS OF AN UNDERTAKING. THE SECTIONS DO NOT DEFINE THE TERM IN DUSTRIAL UNDERTAKING. THIS TERM IS ONLY DEFINED IN SECTION 3 3A WHICH WAS EARLIER ADOPTED FOR THE PURPOSE OF SECTION 80IA. EX PLANATION U/S 33B READS AS UNDER: IN THIS SECTION INDUSTRIAL UNDERTAKING MEANS ANY UNDERTAKING WHICH IS MAINLY ENGAGED IN TH E BUSINESS OF MANUFACTURING OR PROCESSING OF GOODS OR MINING. THE DEDUCTION U/S 80IB/80IC IS NOT RESTRICTED TO ON LY THE INCOME FROM MANUFACTURING ACTIVITY. WHEN THE SECTIO N REFERS TO PROFIT FROM BUSINESS OF THE INDUSTRIAL UNDERTAKING OR BUSINESS OF THE UNDERTAKING SUCH PROFIT WILL INCLUDE FROM ALL ACTIV ITIES CONNECTED WITH THE SAID BUSINESS. WHAT THE SECTIONS REQUIRES IS THAT THE MAIN ACTIVITY OF THE UNDERTAKING SHOULD BE MANUFACTURING ACTIVITY. THE A/R HAS ALSO REFERRED THE CBDT CIRCULAR NO. 103 OF 17-2-1972 IN THE DEFINITION OF INDUSTRIAL COMPANY. THE CBDT HAS TAKEN THE VIEW THAT IF MORE THAN 51% OF THE INCOME IS FROM MA NUFACTURING ACTIVITY, THE COMPANY SHOULD BE CONSIDERED AS INDUS TRIAL COMPANY. IN THE CASE OF THE APPELLANT, THE TOTAL TURNOVER A T BATED UNIT IS RS 64.77 CRORE AND AT BAROTIWALA UNIT AT RS. 59.08 CRO RES AND PURCHASE OF FINISHED GOODS WAS RS. 89.91 LACS AND RS. 2.63 CORER AND PERCENTAGE IS 1.31% AND 4.47% RESPECTIVELY. 47 THE A/R HAS FURTHER DIFFERENTIATED THE FACTS OF THE APPELLANT INVOLVED IN 1994-95 TO 1998-99 BEFORE THE HON'BLE ITAT JODHPUR ON THE DECISION GIVEN ON THIS ISSUE AND IN CASE OF THE CURRENT APPEAL BEFORE ME. THE ASSESSMENT YEARS 1994-95 TO 1998-99 THE ASSESSEE HAD PURCHASED AND SOLD THE GOODS AS IT IS. THERE WA S NO RELATION TO THE MANUFACTURING ACTIVITIES OF THE INDUSTRIAL UNDE RTAKING. THERE WAS NO DIRECT NEXUS OF THIS INCOME WITH THE INCOME OF THE INDUSTRIAL UNDERTAKING. NOW IN THE CURRENT YEAR AND ONWARDS THE APPELLANT HAS RECEIVED COMBINED ORDER FOR SUPPLY OF MANUFACTURED GOODS AND BROUGHT OUT COMPONENTS WHICH ARE NECESSAR Y TO BE SUPPLIED WITH THE MANUFACTURED GOODS TO FULFILL TH E ORDER. FAILURE TO AGREE TO BROUGHT OUT/TRADED GODS THE CUSTOMERS ORDE3R WAS UNACCEPTABLE AND WAS NOT ACCEPTING THE MANUFACTURED GOODS AND THE APPELLANT WILL GET DISQUALIFIED FROM THE TENDER ING PROCESS. THE A/R HAS ALSO SUBMITTED A COPY OF THE PURCHASE ORDER FROM BSES RAJASDHANI POWER LTD., NEW DELHI FOR SAMPLE PURPOSE . THIS PURCHASE ORDER CONTAINS THE ORDER NO. , DATE , SCOP E, APPLICABLE STANDARD TECHNICAL SPECIFICATIONS, CONSTRUCTION FEA TURES, INFLUENCE QUANTITIES, GENERAL REQUIREMENTS, CONTRACT PRICE, D ELIVERY SCHEDULE, STATUTORY OBLIGATIONS, TAX AND DUTIES, PRICE VARIAT ION CLAUSE, TERMS OF PAYMENT AND BILLING, ACCEPTANCE OF GOODS AND SO MANY THINGS NECESSARY FOR FULFILLMENT OF THE ORDER. 4.4 THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION S GAVE THE FOLLOWING FINDINGS 4.3 I HAVE CONSIDERED THE FACTS OF THE CASE AND T HE ARGUMENTS OF THE LD. A/R AND FOUND THAT THE FACTS OF THE TWO APP EALS FOR ASSESSMENT YEARS 1994-95 TO 1998-99 DECIDED BY THE HONBLE ITA T, JODHPUR AND CURRENT YEAR PENDING BEFORE THE UNDERSIGNED ARE TOT ALLY DIFFERENT. IN 1994- 95 TO 1998-99 THE APPELLANT USED TO PURCHASE METER READING INSTRUMENT AND SOLD IT AS IT IS TO THE CUSTOMERS. THERE WAS NO REL ATION TO THE MANUFACTURING ACTIVITY OF THE INDUSTRIAL UNDERTAKING AND NO DIREC T NEXUS OF THIS INCOME WITH THE INCOME OF THE INDUSTRIAL UNDERTAKING. IN T HE CURRENT YEARS APPEAL, THE APPELLANT RECEIVED COMBINED ORDER FOR SUPPLY OF MANUFACTURED GOODS AND BOUGHT OUT COMPONENTS WHICH IS NECESSARY TO FUL FILL THE ORDER OF THE CUSTOMER. IN CASE OF FAILURE TO FULFILL THE CONDITI ONS, THE CUSTOMER IS NOT WILLING TO ACCEPT THE MANUFACTURED GOODS AND THE AP PELLANT WILL BE BARRED FROM FILING THE TENDER TO SUPPLY THE MANUFACTURED G OODS. IT IS BECAUSE OF THE COMPULSION ALSO BY THE CUSTOMER THAT THE APPELL ANT RECEIVES A COMBINED ORDER FOR THE MANUFACTURED GOODS AND TRADE D GOODS. IN ASSESSMENT YEAR 1994-95 THE VALUE OF THE MANUFACTUR ED ELECTRONIC METER 48 WAS RS.4,81,43,716/- AND TRADING TURNOVER FOR SALE OF METER READING INSTRUMENT WAS TO THE TUNE OF RS.68,987/-. THIS YEAR TOTAL TURNOVER IN BATED UNIT IS 64 CRORE AND IN BAROTIWALA UNIT IS 59 CRORE. THE PURCHASE QUANTUM OF TRADED GO ODS IN 89 LACS IN BATED UNIT AND RS.2.63 CRORE IN BAROTIWALA UNIT. THE PERC ENTAGE OF TRADING GOODS IS 1.31% AND 4.47% RESPECTIVELY. FURTHER, THERE IS A COMPULSION ON THE PART OF THE APPELLANT TO SUPPLY THE ENERGY METERS A LONGWITH OTHER COMPONENTS TO THE CUSTOMERS, OTHERWISE IT WILL NOT BE ACCEPTABLE TO THEM. THUS THE APPELLANT HAS TO PURCHASE THE NECESSARY CO MPONENTS AND SUPPLY ALONGWITH THE ENERGY METER. IT IS MORE CLEAR FROM T HE TERMS AND CONDITIONS OF PURCHASE ORDER. AS PER SCOPE OF THE PURCHASE ORD ER SECURE METERS LTD SHALL SUPPLY COMMON METER READING INSTRUMENTS IN AC CORDANCE WITH THE TERMS AND CONDITIONS SET OUT HERE UNDER AND SUCH DI RECTIONS ISSUED BY THE BUYER FROM TIME TO TIME. THE METERS SHALL CONFIRM T O THE TECHNICAL SPECIFICATIONS INCLUDING BUT NOT LIMITED TO DESIGNI NG, ENGINEERING, MANUFACTURING AND ASSEMBLING SPECIFICATIONS PROVIDE D BY THE BUYER. THE SUPPLIER SHALL DELIVER THE GOODS AT THE IDENTIFIED SITES/STORES AND STORE THEM AT SUPPLIERS COST AS PER CUSTOMERS DIRECTION. THE GOODS WILL INCLUDE COMMON METER READING INSTRUMENT AND METER BOX (COLL ECTIVELY REFUSED TO AS GOODS) AS PROVIDED IN BID AND REVISED TECHNICAL SPECIFICATION FOR BCES RAJDHANI POWER LTD ON FOLLOWING TERMS AND CONDITION S:- RIGHT OF PURCHASER: SUPPLIER, SHALL STOCK SUFFICIENT SPARES AND ENSURE ITS AVAILABILITY TO THE BUYER FOR A MINIMUM TIME PERIOD OF 10 YEARS FRO M DATE OF COMMISSIONING OF THE GOODS. ANY CHANGE IN THE DESIG N, TECHNICAL SPECIFICATION IN ANY MANNER WHATSOEVER, SHALL NOT R ELIEVE THE SUPPLIER FROM ITS RESPONSIBILITY UNDER THIS PURCHASE ORDER FOR TH E SUPPLY OF ABOVE SPARES. ACCEPTANCE OF GOODS: GOODS DELIVERED IN ACCORDANCE WITH THE PURCHASE OR DER SHALL BECOME ACCEPTABLE UPON INSPECTION OF SUCH DELIVERED GOODS AT IDENTIFIED SITES/STORES AND THE GOODS BEING IN CONFORMITY WITH BUYERS DESIGN, DRAWING, TECHNICAL SPECIFICATION AND/OR APPROVED SA MPLE AS SPECIFIED. BUYER SHALL HAVE THE OPTION OF NOT ACCEPTING ANY EX CESS QUANTITY. IF GOODS ARE FOUND TO BE NOT IN ACCORDANCE WITH THE TECHNICA L SPECIFICATIONS AND/OR DO NOT FULFILL THE DESIRED PURPOSE(S). THE BUYER MA Y AT ITS DISCRETION EITHER REJECT/ACCEPT SUCH GOODS UNDER SUCH CONDITIONS (INC LUDING THE PRICE) AT INDICATED BY THE BUYER FURTHER, AS PER BOARDS CIRCULAR NO.103 DATED 17-2- 73 STATED AS UNDER:- 49 THE QUESTION AS TO THE EXACT MEANING OF THE EXPLAN ATION TO SUB SECTION (7)(D) OF SECTION 2 CAME UP FOR THE CONSIDE RATION AND THE BOARD ARE ADVISED THAT AN INDUSTRIAL COMPANY WOULD MEAN- (A) A COMPANY WHICH IS MAINLY ENGAGED IN THE BUSINE SS OF GENERATION OR DISTRIBUTION OF ELECTRICITY OR ANY OT HER FORM OF POWER OR IN THE CONSTRUCTION OF SHIPS OR IN THE MANUFACTURE OR PROCESSING OF GOODS OR IN MINING, EVEN IF ITS INCOME FROM SUCH ACTIVITIES IS LESS THAN 51% OF ITS TOTAL INCOME AND (B) A COMPANY WHICH, EVEN THOUGH NOT MAINLY SO ENGA GED, DERIVES IN ANY YEAR 51% OR MORE OF ITS TOTAL INCOME FROM SUCH ACTIVITIES. THE CBDT HAS RECOGNIZED THAT FOR BEING GIVEN THE B ENEFIT OF A LOWER TAX RATE AS AN INDUSTRIAL COMPANY, IT IS NOT NECESSARY FOR A COMPANY TO HAVE ITS INCOME FROM MANUFACTURING ACTIVITIES TO BE ACTUALLY 51% OR MORE OF ITS TOTAL INCOME IN ANY PARTICULAR YEAR PRO VIDED THE COMPANY BE FOUND TO BE MAINLY ENGAGED IN MANUFACTURING BUSINES S THE DECISION BY THE HONBLE ITAT, AMRITSAR IN CASE OF DCIT VS. CHAMANLAL & SONS 93 TTJ 132 (ASR) IS ALSO IN FAVOUR OF THE APPELLANT AS UNDER:- ANY BUSINESS MAY BE THAT OF MANUFACTURING OR PROCE SSING OR OTHERWISE. AT THIS JUNCTURE IT IS PERTINENT TO N OTE THAT THE LEGISLATURE HAS SET THE SCOPE OF DEDUCTION U/S 80IA VIDE BY USING THE APPROPRIATE PHRASEOLOGY WHEN SEEN IN CONTRAST W ITH THAT USED IN SECTION 80I. WHEREAS THE LATTER SECTION GRANTS DEDU CTION RESPECT OF PROFITS AND GAINS DERIVED FROM AN INDUSTRIAL UNDERT AKING THE FORMER PROVIDES FOR DEDUCTION ON PROFIT AND GAINS DERIVED FROM ANY BUSINESS OF AN INDUSTRIAL UNDERTAKING. AS LONG AS T HE INCOME KEEPS ON EMANATING FROM ANY BUSINESS OF AN INDUSTRIAL UND ERTAKING. IT WOULD REMAIN TO QUALITY FOR DEDUCTION UNDER THIS SE CTION. CONSIDERING THE ABOVE FACTS AND SUBMISSIONS, THE DE DUCTION CLAIMED BY THE APPELLANT U/S 80IB AND 80IC FROM THE PROFIT OUT OF TRADING ACTIVITIES IS ALLOWABLE. THE AO IS DIRECTED ACCORDI NGLY TO WORK OUT THE DEDUCTIBLE AMOUNT UNDER SECTION 80IB AND 80IC OF TH E ACT BY CONSIDERING THE TRADING PROFIT AS BUSINESS PROFIT. THE APPEAL I S ALLOWED ON THIS GROUND ALSO. 4.5 AFTER CONSIDERING THE ORDERS OF THE AO AND THE LD. CIT(A) ON WHICH RELIANCE HAS BEEN PLACED BY THE RESPECTIVE PARTIES, WE FOUND NO INFIRMITY IN THE ORDER OF THE LD. CIT(A). IT IS SEEN THAT IN EARLIER YEAR, THE FACTS WERE DIFFERENT FOR THE REASON THAT FROM THE 50 ASSESSMENT YEAR 1994-95 TO 1998-99, THE ASSESSEE US ED TO PURCHASE THE METER READING INSTRUMENT AND SOLD IT AS IT IS TO THE CUSTOMERS. T HERE WAS NO RELATION TO THE MANUFACTURING ACTIVITY OF THE INDUSTRIAL UNDERTAKIN G AND NO DIRECT NEXUS OF THIS INCOME WITH THE INCOME OF THE INDUSTRIAL UNDERTAKING. HOWE VER, IN THE YEAR UNDER CONSIDERATION, IT IS SEEN THAT THAT THE ASSESSEE RECEIVED THE COMB INED ORDER FOR SUPPLY OF MANUFACTURED GOODS AND BOUGHT OUT COMPONENTS WHICH IS NECESSARY TO FULFILL THE ORDER OF THE CUSTOMER. THE ASSESSEE IS MANUFACTURING THE METER AND THE SAM E IS PACKED IN THE BOXES AND THUS THE SALE OF BOXES CANNOT BE TREATED A SEPARATE TRADING RECEIPT THOUGH THE BOXES WERE PURCHASED FROM THE MARKET. THE ASSESSEE HAS SOLD ON E COMPONENT I.E. METER WHICH IS KEPT UNDER THE BOX. THEREFORE, SALE OF BOX CANNOT BE TRE ATED AS A SEPARATE SALE. THE TOTAL TURNOVER OF THE BATED UNIT IS RS. 64 CRORES AND BA ROTIWALA UNIT IS RS. 59 CRORES. THE QUANTUM OF THESE COMPONENTS WHICH WERE PURCHASED FR OM THE MARKET TO SUPPLY THE MATERIAL COMPRISES OF ONLY 1.31% AND 4.47%. IT IS F URTHER SEEN THAT THERE IS A COMPULSION ON THE PART OF THE ASSESSEE TO SUPPLY THE ENERGY ME TER ALONGWITH OTHER COMPONENTS TO THE CUSTOMERS OTHERWISE THEY WILL NOT BE ACCEPTABLE TO THE PARTIES AND THIS FACT HAS BEEN CONSIDERED BY THE LD. CIT(A) IN DETAIL IN HIS ORDER AND ONLY THEN HAS ALLOWED THE CLAIM OF THE ASSESSEE. THE LD. CIT(A) HAS FOLLOWED THE DECIS ION OF THE TRIBUNAL IN THE CASE OF DCIT VS. CHAMANLAL & SONS 93 TTJ 132 (AMRISTSAR) AN D THEREAFTER HAS ALLOWED THE CLAIM OF THE ASSESSEE. THE FINDINGS OF THE LD. CIT(A) IN OUR CONSIDERED VIEW ARE REASONABLE FINDINGS WHICH REMAINED UNCONTROVERTED ALSO. THEREF ORE, WE CONFIRM THE FINDINGS OF THE LD. CIT(A) ON THIS ISSUE ALSO. 5.1 THE GROUND NO. 4 OF THE REVENUE IS AS UNDER:- THE LD. CIT(A) HAS ERRED IN ALLOWING OF NETTING O F INTEREST INCOME FOR THE PURCHASE OF EXCLUSION AS OTHER INCOME F OR CALCULATING DEDUCTION 51 U/S 80HHC IN RESPECT OF BATED AND BAROTIWALA UNITS MORE SO IN THE LIGHT OF THE FACT THAT NO SUCH DISALLOWANCE WAS MADE IN T HE ASSESSMENT ORDER AND ALLOWING DEDUCTION U/S 80HHC ON SCRAP SALES, LI QUIDATED DAMAGES, SUNDRY CREDIT BALANCE W/BACK, PACKING AND FORWARDIN G SURPLUS. 5.2 IN THIS CASE, THE ASSESSEE HAS NOT CLAIMED ANY DEDUCTION U/S 80HHC BUT HAS APPENDED A NOTE WITH COMPUTATION OF INCOME THAT IF ANY HEAD OF THE INCOME IS CHANGED BY THE AO AND WHICH RESULTED THE POSITIVE INCOME TH EN DEDUCTION U/S 80HHC BE ALLOWED AS PER PROVISIONS OF LAW. THE AO HAS DISALLOWED VAR IOUS DEDUCTIONS CLAIMED BY THE ASSESSEE U/S 80IB/80IC OF THE ACT. THEREFORE, THE A SSESSEE WAS REQUIRED TO EXPLAIN WHY NOT 90% OF OTHER INCOME SHOULD NOT BE REDUCED FROM THE PROFIT ELIGIBLE FOR DEDUCTION U/S 80HHC OF THE ACT. 5.3 IT WAS SUBMITTED BY THE ASSESSEE BEFORE THE AO AS UNDER:- THAT WE EXPORT MANUFACTURED GOODS AND MERCHANDISE AMOUNTING TO RS.29,77,41,820/- DURING THE YEAR UNDER ASSESSME NT AND PROFIT OF BUSINESS IS COMPUTED IN ACCORDANCE WITH THE EXPLANA TION (BAA) OF SUB SECTION 4C OF SECTION 80 HHC OF THE ACT WHICH REPRO DUCE AS UNDER:- (BAA) PROFITS OF THE BUSINESS MEANS THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINE SS OR PROFESSION AS REDUCED BY- (1) NINETY PER CENT OF ANY SUM REFERRED TO IN CLAUS ES (IIIA), (IIIB), (IIIC), (IIID) AND (IIIE) OF SECTION 28 OF ANY RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARGES OR ANY OTHER RE CEIPT OF A SIMILAR NATURE INCLUDED IN SUCH PROFITS (2) THE PROFITS OF ANY BRANCH OFFICE, WAREHOUSE OR ANY OTHER ESTABLISHMENT OF THE ASSESSEE SITUATE OUTSIDE INDIA . ACCORDINGLY WE HAVE DEDUCTED THE FOLLOWING FROM THE PROFITS OF THE BUSINESS FOR COMPUTING DEDUCTION U/S 80HHC. THE COMPUTATION OF THE DEDUCTION HAS BEEN WORKED OUT AS UNDER: BUSINESS PROFIT AS PER COMPUTATION OF INCOME 694 17375/- LESS: 90% OF INTEREST INCOME RS.9839588 8855629 /- ---------------- 52 360561745/- LESS A) 100% OF PROFIT(LOSS) OF BAROTIWALA UNIT DISTT. SOLAN EXEMPT U/S 80IC(3)(III) OF THE ACT. 28 7520135/- (B) 100% OF PROFIT(LOSS) OF BATED UNIT DISTT. SOLAN EXEMPT U/S 80IB(3)(II) OF THE ACT 79 880615/- 367400750/- PROFIT OF THE BUSINESS FOR DEDUCTION U/S 80HHC ( 6839005)/- SINCE, PROFIT OF THE BUSINESS COMES TO NEGATIVE HEN CE DEDUCTION U/S 80HHC HAS NOT BEEN CLAIMED IN THE RETURN OF INCOME. THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, Y OUR GOODSELF HAVE ASKED WHY SHOULD NOT 90% OF OTHER INCOME BE EX CLUDED FOR ARRIVING DEDUCTION U/S 80HHC. IN THIS REGARD WE SUBMIT THE B REAK UP TO THE OTHER INCOME WHICH STANDS AS UNDER: S.NO. NATURE AMOUNT 1 DIVIDEND INCOME 12975 2 INTEREST RECEIVED 9839588 3 PROFIT ON SALE OF FIXED ASSETS 309603 4 MISC. INCOME 8144027 TOTAL 18306193 REGARDING DIVIDEND INCOME AMOUNTING TO RS.12,975/- ON PERUSAL OF THE COMPUTATION OF TOTAL INCOME, YOUR GOODSELF W OULD OBSERVE THAT WE HAVE ALREADY TREATED DIVIDEND INCOME AS INCOME FROM OTHE SOURCES AND REDUCED THE SAME FROM INCOME FROM BUSINESS AND PROF ESSION HENCE THE QUESTION OF REDUCING 90% OF DIVIDEND INCOME FROM TH E PROFIT OF THE BUSINESS DOES NOT ARISE. 1. REGARDING INCOME AMOUNTING TO RS.98,39,588/- ON PERUSAL OF THE WORKING OF DEDUCTION U/S 80HHC, YOUR GOODSELF WOULD FIND THAT WE HAVE ALREADY REDUCED 90% OF INTEREST INCOME AMOUNTING TO RS.88,55,629/- FROM PROFIT OF THE BUSINESS FOR COMPUTING DEDUCTION U/S 80HHC AS PROVIDED IN EXPLANATION (BAA) OF SECTION 80HHC (4C) OF THE ACT. 2. REGARDING PROFIT ON SALE OF FIXED ASSETS AMOUNTI NG TO RS.3,09,603/- WE SUBMIT THAT THE SAME HAS ALREADY BEEN ADDED BACK IN THE COMPUTATION OF TOTAL INCOME FOR THE YEAR UNDER ASSESSMENT. 3. REGARDING MISC. INCOME AMOUNTING TO RS.81,44,027 /- WE HAVE ALREADY FILED THE DETAILS OF MISC. INCOME VIDE OUR LETTER DATED 17.6.2006. HOWEVER, WE AGAIN ENCLOSE HEREWITH FOR YOUR READY REFERENCE. 53 ON PERUSAL OF THE SAME, YOUR GOODSELF WOULD FIND TH AT ABOVE MISC. INCOME INCLUDES CREDIT BALANCE OF COINS, DISCOUNT R ECEIVED ON AIR TICKET, DUTY DRAW BACK INCOME FROM MOBILE LAB, LEASE RENT O N FIXED ASSETS, SALE OF SCRAP, SUNDRY CREDIT BALANCE WRITTEN BACK, SALE OF OLD NEWS PAPER, PACKING AND FORWARDING SURPLUS AND RENTAL INCOME ETC. FURTHER ON THE ABOVE DETAILS, YOUR GOODSELF WOULD A PPRECIATE THAT THE AFORESAID MISC. INCOME (EXCLUDING RENTAL INCOME AMOUNTING TO RS.11,75,000/- IS PART AND PARCEL OF THE BUSINESS O F THE ASSESSEE COMPANY AND THEREFORE, DOES NOT FALL UNDER EXPLANATION (BAA ) OF SECTION 80HHC(4C) OF THE ACT. THE DETAILS OF MISC. INCOME FURNISHED BY THE ASS ESSEE ARE AS BELOW: PARTICULARS AMOUNT CREDIT BALANCE OF COINS 11 DISCOUNT RECEIVED ON AIR TICKET 317141 DUTY DRAW BACK ACCOUNTS (RECEIPT) 243273 INCOME FROM MOBILE LAB 34500 LEASE RENT ON FIXED ASSETS 1098500 MISC. INCOME 3687903 SUNDRY CREDIT BALANCES WRITTEN BACK 803569 MISC. RECEIPT 427502 PACKING AND FORWARDING SURPLUS 356628 RENTAL INCOME 1175000 TOTAL 8144027 AFTER CONSIDERING THE SUBMISSIONS OF THE AO, THE A O HELD AS UNDER:- I HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISS IONS OF THE ASSESSEE BUT I FIND NO MERIT IN THEM. THE EXPLANATI ON (BAA) OF SECTION 80HHC SPECIFIES THAT 90% OF RECEIPT BY WAY OF BROKE RAGE, COMMISSION, INTEREST RENT CHARGES OR OTHER RECEIPT OF SIMILAR N ATURE HAVE TO BE EXCLUDED FROM THE PROFIT OF THE BUSINESS. THEREFORE, THE 90% OF INTEREST AND MISC. INCOME OF RS. 179,83,615/- (9839588 + 8144027) AMOU NTING TO RS. 16185254/- IS REDUCED FROM THE PROFIT OF THE BUSINE SS FOR CALCULATION OF DEDUCTION U/S 80HHC. 5.4 DETAILED SUBMISSIONS WERE FILED BEFORE THE LD. CIT(A) WHICH HAS BEEN INCORPORATED IN THE ORDER OF THE LD. CIT(A) AT PAGE S 56 TO 62 OF HIS ORDER AND THE SAME IS REPRODUCED AS UNDER:- II. DEDUCTION U/S 80HHC 54 THE SAID AO HAS COMPUTED DEDUCTION U/S 80HHC AS PER ANNEXURE B OF THE ASSESSMENT ORDER AT RS. 1,57,757. IN THI S COMPUTATION, HE HAS MADE THE FOLLOWING DEDUCTIONS FROM THE PROFIT OF TH E BUSINESS. I. 90% OF INTEREST (90,39,588 AND OTHER INCOME (81,44,0271/-) I.E. 1,79,83,615 1,61,85,254 II PROFIT OF BATED UNIT 7,14,33,837 III PROFIT BAROTIWALA UNIT 27,98,15,482 HE HAS DISCUSSED THE ABOVE ISSUE IN PARA 6 AT PA GES 14-16 2.2 DEDUCTION OF 90% OF INTEREST INCOME OF RS. 98 ,39,588/- (I) THE SAID AO HAS TAKEN THE VIEW THAT 90% OF THE GROSS INTEREST RECEIVED IS REQUIRED TO BE DEDUCTION UNDER EXPLANAT ION (BAA) OF SECTION 80HHC. IT IS SUBMITTED THAT DETAILS OF INTEREST REC EIVED ARE GIVEN ON PAGE 58. THE APPELLANT SUBMITS THAT THE APPELLANT HAS PA ID INTEREST OF RS. 4,56,16,779/- AS PER DETAILS GIVEN ON PAGE 59. THE APPELLANT SUBMITS THAT IN THE FOLLOWING DECISIONS, WHICH ARE DISCUSSED IN PARA 1.6(IV) (B) ABOVE, IT HAS BEEN HELD FOR THE PURPOSE OF DEDUCTION @ 90% OF THE INCOME UNDER EXPLANATION (BAA) OF SECTION 80HHC, THE INTEREST RE CEIVED WHICH HAS NEXUS TO INTEREST PAID SHOULD BE NETTED OFF AND ONL Y THE NET INTEREST SHOULD BE CONSIDERED FOR THIS DEDUCTION (A) LALSONS ENTERPRISES VS. DCIT 89 ITD 25 (DEL) (SB) (B) PINKSTAR VS. DCIT 72 ITD 137 (MUMBAI) (C) CIT VS. BOKARO STEEL LTD. 236 ITR 314 (SC) (D) ACIT VS. MAXCARE LABORATORIES LTD. 92 ITD 11 (CUTT ACK) (II) IN THE CASE OF THE APPELLANT, INTEREST PAID IS MORE THAN INTEREST RECEIVED. THEREFORE, THE SAID AO WAS NOT JUSTIFIED IN MAKING THE DEDUCTION OF 90% OF 98,39,598 (GROSS INTEREST RECEIVED) FROM PROFITS OF THE BUSINESS WHILE COMPUTING AMOUNT ELIGIBLE FOR DEDUCTION U/S 8 0HHC. 2.3 DEDUCTION OF 90% OF OTHER INCOME OF RS. 81,44,027/- (I) THE SAID AO HAS DEDUCTED 90% OF 81,44,027/-BEI NG OTHER INCOME UNDER EXPLANATION (BAA) OF SECTION 80HHC. DETAILS O F THIS AMOUNT ARE AS UNDER:- 55 PARTICULARS UDAIPUR BAROTIWALA BATED TOTAL LEASE RENT ON FIXED ASSETS 1,098,550 - - 1,098,500 SCRAP SALES 1,228,644 1.346.285 117,890 2,692,819 RENTAL INCOME 1,000,000 - 175,000 1,175,000 LIQUIDATED DAMAGES - - 837,174 837,174 DISCOUNT RECEIVED ON AIR TICKET 317,141 - - 317,141 DUTY DRAWBACK 243,273 - - 243,273 SUNDRY CREDIT BALANCE W/BACK 782,849 19,075 1,645 803,569 EXCISE DUTY ON CLOSING STOCK 3,572,367 - 3,572,367 PACKING & FORWARDING SURPLUS 11,132 107,896 237,600 356,628 OTHER RECEIPT 554,422 20,819 44,682 619,923 TOTAL 5,235,961 5,066,442 1,413,991 11,716,394 LESS: EXCISE DUTY ON CLOSING STOCK NETTED OFF WITH DR.BALANCE 3,572,367 - 3,572,367 AMOUNT AS PER PROFIT AND LOSS ACCOUNT 8,144,027 (II) IT IS SUBMITTED THAT OTHER INCOME OF RS. 14,13 ,991/- (BATED UNIT) AND RS. 50,66,442/- (BAROTIWALA UNIT) HAVE BEEN DED UCTED FROM PROFITS OF THESE TWO UNITS WHILE CALCULATING 100% DEDUCTION U/ S 80IB/80IC (PARA 1.6 (VI) ABOVE. THE SAID AO HAS DENIED DEDUCTION FOR TH E ENTIRE AMOUNTS U/S 80IB/80IC IN PARA 4 OF THE ASSESSMENT ORDER. HE HAS AGAIN DEDUCTED 90% OF THE SAME AMOUNT FROM EXPORT PROFITS U/S 80HHC IN PARA 6 OF TH ASSESSMENT ORDER. THE APPELLANT FURTHER SUBMITS THA T 100% OF INCOME FROM THESE TWO UNITS HAS BEEN REDUCED FROM THE TOTAL PRO FITS WHILE WORKING OUT PROFIT U/S 80HHC. IT IS THEREFORE, SUBMITTED THAT T HERE IS DOUBLE DEDUCTION OF THE SAME AMOUNT ONCE FROM THE INCOME ELIGIBLE FO R DEDUCTION U/S 80IB/80IC AND AGAIN 90% FROM THE INCOME ELIGIBLE FO R DEDUCTION U/S 80HHC. IT IS THEREFORE, SUBMITTED THAT THE SAID AO SHOULD HAVE CONSIDERED ONLY RS. 52,35,961/- (UDAIPUR UNIT) FOR THE PURPOSE OF COMPUTING AMOUNT ELIGIBLE FOR DEDUCTION U/S 80HHC. (III) WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANT SUBMITS THAT 90% OF THE OTHER INCOME OF BATED UNIT AND BAROTIWALA UNIT SHOULD NOT HAVE BEEN DEDUCTED FROM EXPORT PROFIT U/S 80HHC FOR THE REASO NS STATED IN PARA 1.6 56 (VI). AS REGARDS SIMILAR INCOME IN UDIPAUR UNIT, TH E SUBMISSIONS ARE AS UNDER:- (IV) LEASE RENT ON FIXED ASSETS RS. 10,98,500/- THIS LEASE RENT IS RECEIVED IN RESPECT OF CERTAIN FIXED ASSETS SUCH AS LEASING AND CALIBRATION EQUIPMENTS ETC. GIVEN ON LEASE TO Y ADAV MEASUREMENTS (P) LTD.. IT IS SUBMITTED THESE ASSETS BEING PART OF TH E BUSINESS ASSETS, INCOME FROM LEASE RENT IS BUSINESS INCOME OF UDAIPUR UNIT. WITHOUT PREJUDICE TO THE ABOVE, ON THE BASIS OF NET TING OF INCOME PRINCIPLE AS SUBMITTED IN PARA 1.6 (IV) ABOVE, THE FOLLOWING EXPENDITURE RELATING TO THE FIXED ASSETS GIVEN ON LEASE SHOULD BE DEDUCTED FROM RS. 10,98,500/- IF THE 90% OF THE SAME IS HELD TO BE DEDUCTIBLE FROM T HE PROFIT OF UDAIPUR UNIT. - REPAIRS LOCAL TAXES ETC. RS. NIL - DEPRECIATION ON FIXED ASSETS RS. 9,73,109/- RS. 9,73,109/- (V) SCRAP SALES RS. 12,28,644/- IF THE MANUFACTURING PROCESS IN THE UDAIPUR UNIT C ERTAIN SCRAP IS GENERATED. THIS SCRAP IS SOLD AS THE SAME CANNOT BE USED BY REPROCESSING. THE UDAIPUR UNIT IS A HIGH-TECH ELECTRONIC UNIT EQU IPPED IN MANUFACTURING ELECTRONIC ENERGY METERS. IN THE MANUFACTURING PROC ESS HIGH PRECISION IS REQUIRED. THEREFORE, SCRAP GENERATED IN THIS PROCES S CANNOT BE REPROCESSED AND THE SAME HAS TO BE DISPOSED OF BY WAY OF SALE. IT IS SUBMITTED THAT THE SALE PROCEEDS OF SUCH SCRAP IS INCOME FROM THE BUSI NESS TRANSACTION AND ACTIVITIES CLOSELY CONNECTED TO THE BUSINESS OF IND USTRIAL UNDERTAKING. SCRAP SALES REALIZED GOES TO REDUCE THE COST OF RAW MATERIALS/ STORES ETC. CONSUMED IN MANUFACTURING PROCESS. THIS VIEW IS SUP PORTED BY THE FOLLOWING CASES. 1. DCIT VS. HARJIVANDAS JUTHABHAI ZAVERI 258 ITR 78 5 (GUJ) AND CIT VS. RANE (MADRAS ) LTD., 238 ITR 377 (MAD.) IN THIS CASE, IT IS HELD THAT AMOUNTS RECEIVED FOR JOB WORKS, SODA ASH BARDAN, EMPTY BARRELS AND PLASTIC, WASTE, QUALI TY FOR DEDUCTION U/S 80I. COPY OF THIS DECISION IS AT PAGES 199 TO20 2 57 2. ACIT VS. MAXCARE LABORATORIES LTD. 92 ITD 11 (CUTTACK) IN THIS CASE, IT IS HELD THAT INCOME HAVING CLOSE A ND DIRECT NEXUS WITH PROFITS AND GAINS OF THE BUSINESS OF THE UNDER TAKING SHOULD ALSO BE CONSIDERED FOR DEDUCTION FOR THE PURPOSE OF SECTION 80IA. THEREFORE, INTEREST RECEIVED BY THE ASSESSEE FROM D EPOSITS PLACED WITH A COMPANY DUE TO BUSINESS COMPUTATION AND INCO ME FROM SALE OF EMPTY DRUMS, USELESS MATERIALS ETC. HAVE DIRECT AND PROXIMATE CONNECTION WITH BUSINESS OF INDUSTRIAL UNDERTAKING AND SHOULD BE CONSIDERED FOR THE PURPOSE OF DEDUCTION U/S 80IA. C OPY OF THIS DECISION IS AT PAGES 210 TO 221. IT IS THEREFORE, SUBMITTED THAT THE SAID AO WAS NOT JUSTIFIED IN DEDUCTING THE ABOVE AMOUNT FROM PROFITS OF THE UDAIPUR UNIT E LIGIBLE FOR DEDUCTION U/S 80HHC (VI) LEASE RENT OF BUILDING (RS. 10,00,000/-) IT IS SUBMITTED THAT ONLY PART OF THE FACTORY BUILD ING IS GIVEN ON LEASE. FOR THE REASONS STATED ABOVE, IT IS SUBMITTED THAT THIS INCOME SHOULD BE TREATED AS INCOME OF THE BUSINESS OF UDAIPUR UNIT AND ALLOW ED AS DEDUCTION U/S 80HHC. WITHOUT PREJUDICE TO THE ABOVE, ON THE BASIS OF NET TING OF INCOME PRINCIPLE AS SUBMITTED IN PARA 1.6 (IV) ABOVE, THE EXPENDITUR E NAMELY REPAIRS, LOCAL TAXES, DEPRECIATION ETC. RELATING TO THE PORTION OF THE FACTORY GIVEN ON LEASE SHOULD BE DEDUCTED FROM RS. 10,00,000/- IF THE SAME IS HELD TO BE DEDUCTIBLE FROM THE PROFIT OF UDAIPUR UNIT FOR THE PURPOSE OF DEDUCTION U/S 80HHC. (VII) DISCOUNT RECEIVED ON AIR TICKET RS. 3,17,14 1/- THIS RECEIPT IS RELATING TO AIR TICKET PURCHASED AN D DEBITED TO PROFIT AND LOSS ACCOUNT . ON THIS BASIS OF PRINCIPLE OF NETTIN G OF EXPENSE AGAINST INCOME STATED IN PARA 1.6 (IV) ABOVE, THE APPELLANT SUBMITS THAT THIS AMOUNT SHOULD BE DEDUCTED FROM TRAVELING EXPENSES O F RS. 3,75,85,465/- DEBITED TO PROFIT AND LOSS ACCOUNT . THE APPELLANT THEREFORE, SUBMITS THAT THE SAID AO WAS NOT JUSTIFIED IN DEDUCTING 90% OF T HE ABOVE AMOUNT OF RS. 3,17,141/- FROM THE BUSINESS INCOME OF UDAIPUR UNIT. (VIII) DUTY DRAW BACK RS. 2,43,273/- 58 THE SAID AO HAS DEDUCTED 90% OF THE DUTY DRAW BACK OF RS. 2,43,273/- (I.E. 2,18,946/-) UNDER EXPLANATION (BAA) OF SECTIO N 80HHC. HOWEVER, HE HAS NOT CONSIDERED THIS AMOUNT AS EXPORT INCENTIVE UNDER THE FIRST PROVISO TO SECTION 80HHC (3) WHILE COMPUTING AMOUNT ALLOWAB LE AS DEDUCTION U/S 80HHC. THE APPELLANT SUBMITS THAT RS. 2,18,946/- (I N PROPORTION OF EXPORT TURNOVER TO TOTAL TURNOVER) SHOULD HAVE BEEN DEDUC TED U/S 80HHC . (IX) SUNDRY CREDIT BALANCES WRITTEN OFF RS. 7,82,8 49/- THE CREDIT BALANCE IN THESE ACCOUNTS HAVE ARISEN WH EN RAW MATERIALS WERE PURCHASED OR EXPENSES WERE INCURRED. THE PARTIES HA VE EITHER NOT COLLECTED THE AMOUNTS OR GIVEN DISCOUNT AT THE TIME OF SETTLE MENT OF ACCOUNT. THEREFORE, AS EXPLAINED EARLIER, THE CREDIT ENTRY I N PROFIT AND LOSS ACCOUNT IS DIRECTLY CONNECTED WITH THE BUSINESS OF UDAIPUR UNIT AND THE SAID AO WAS NOT JUSTIFIED IN DEDUCTING 90% OF THIS AMOUNT F ROM PROFIT OF BUSINESS FOR DEDUCTION U/S 80HHC. (X) PACKING AND FORWARDING RS. 1,132/- THE APPELLANT COMPANY HAS TO INCUR EXPENDITURE FOR PACKING AND FORWARDING OF GOODS TO CUSTOMERS. THE APPELLANT REC EIVES THESE EXPENSES FROM CUSTOMERS. THERE IS SURPLUS IN THIS ACCOUNT BE CAUSE ONLY DIRECT EXPENSES ARE DEBITED TO PACKING AND FORWARDING ACCO UNT. THE INDIRECT EXPENSES SUCH AS MANPOWER COST, SUPERVISION CHARGES ETC. ARE NOT DEBITED TO THIS ACCOUNT. THEREFORE, THIS SURPLUS IS PART OF BUSINESS INCOME OF UDAIPUR UNIT AND, FOR THE REASONS STATED EARLIER, T HE SAID AO WAS NOT JUSTIFIED IN DEDUCTING 90% OF THIS AMOUNT FROM PROF IT OF BUSINESS FOR ALLOWING DEDUCTION U/S 80HHC. (XI) OTHER RECEIPTS RS. 5,54,422/- THESE ARE PETTY RECEIPTS DURING THE COURSE OF BUSIN ESS OF THE UDAIPUR UNIT. IT IS SUBMITTED THAT FOR THE REASONS STATED EARLIER , THE SAID AO WAS NOT JUSTIFIED IN EXCLUDING 90% OF RECEIPTS FROM THE PRO FITS OF THE BUSINESS FOR DEDUCTION U/S 80HHC. 2.4 DEDUCTION OF 100% PROFIT OF BATED UNIT AND BA ROTIWALA UNIT (I) THE SAID AO HAS DEDUCTED 100% OF FOLLOWING PRO FIT OF BATED UNIT AND BAROTIWALA UNIT FROM TOTAL PROFITS OF THE BUSIN ESS FOR CALCULATING THE AMOUNT DEDUCTIBLE U/S 80HHC. 59 BATED UNIT RS. 7,14,33,837/- BAROTIWALA UNIT RS. 27,98,15,482/- (II) THE APPELLANT SUBMITS THAT WHILE COMPUTING DED UCTION ALLOWABLE U/S 80IB/80IC FOR THE ABOVE TWO UNITS, THE SAID AO HAS WORKED OUT THE ELIGIBLE PROFIT AS UNDER:- BATED UNIT RS. 6,69,68,594- BAROTIWALA UNIT RS.18,70,22,005/- (III) THE APPELLANT SUBMITS THAT THE SAID AO OUGHT TO HAVE DEDUCTED RS. 6,69,68,594/- (BATED) AND RS. 18,,70,22,005/- (BARO TIWALA) BEING 100% OF PROFIT SOF THE TWO UNITS AS COMPUTED BY THE SAID AO OR SUCH AMOUNT AS MAY BE COMPUTED AFTER DECISION OF GROUND NO. 1 IN T HIS APPEAL FROM THE TOTAL BUSINESS PROFIT FOR DEDUCTION U/S 80HHC. 5.5 THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION S AND PERUSING THE MATERIAL ON RECORD GAVE THE FOLLOWING FINDINGS RECORDED IN PAR A 5.3 AT PAGES 62 TO 65 OF HIS ORDER. 5.3 I HAVE CONSIDERED THE FACTS OF THE CASE A ND SUBMISSIONS OF THE LD. AR. THE AO EXCLUDED 90% OF THE TOTAL INTER EST IN VIEW OF THE PROVISION OF SECTION 80HHC(4C)(BAA) OF THE ACT. THE LD. AR SUBMITTED THAT THE APPELLANT HAS PAID INTEREST OF RS. 4,56,16 ,770/- AND SUBMITTED THAT THE INTEREST RECEIVED WHICH HAS NEXUS TO INTEREST P AID SHOULD BE NETTED OFF AND ONLY THE NET INTEREST SHOULD BE CONSIDERED FOR THIS DEDUCTION IN VIEW OF THE DECISION (I) LALSONS ENTERPRISES VS. DCIT 89 IT D 25 (DEL.), (II) PINKSTAR VS. DCIT, 72 ITD 137 (MUM.), (III) CIT VS. BOKARO STEEL LTD. , 236 ITR 314 (SC) AND ACIT VS. MAXCARE LABORATORIES LTD. , 92 ITD 11 (CUTTACK). IN THE CASE OF THE APPELLANT, THE INTERE ST PAID IS MORE THAN INTEREST RECEIVED, THEREFORE, THE AO WAS NOT JUSTIF IED IN DEDUCTING 90% OF RS. 98,39,598/-. NETTING OF INTEREST RECEIVED AND I NTEREST PAYMENT HAS ALREADY BEEN DISCUSSED WHILE DECIDING GROUND NO. 1 ABOVE. THE AO HAS ACCORDINGLY DIRECTED TO COMPUTE THE NET INTEREST AN D THEN EXCLUDES 90%, IF IN SURPLUS AND COMPUTE THE DEDUCTION U/S 80HHC ACCO RDINGLY. LEASE RENT : AS FAR AS RENT IS CONCERNED, WHICH IS CLEARLY COV ERED BY EXPLANATION (BAA) OF SECTION 80HHC OF THE ACT. THER EFORE, THE AO WAS JUSTIFIED IN EXCLUDING 90% FOR CALCULATING DEDUCTIO N U/S 80HHC OF THE ACT. THE DISALLOWANCE IS CONFIRMED. 60 SCRAP SALES : THIS POINT HAS ALREADY BEEN DISCUSSED WHILE DECID ING GROUND NO. 1 ABOVE AS UNDER:- IN THE MANUFACTURING PROCESS AT THE TWO UNITS CERT AIN SCRAP IS GENERATED. THIS SCRAP IS SOLD AS THE SAME CANNOT BE USED FOR REPROCESSING. THE SALE PROCEED OF SUCH SCRAP IS INCOME FROM THE B USINESS TRANSACTION AND ACTIVITIES CLOSELY CONNECTED TO THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. THE SCRAP SALES REALIZED GOES TO REDUC E THE COST OF RAW MATERIAL/ STORES CONSUMED IN MANUFACTURING PROCESS. IN SUCH CASES, THERE IS NO QUESTION OF TREATING THE SAME AS INCOME FROM OTHER SOURCES. THEREFORE, THE AO WAS NOT JUSTIFIED IN DEDUCTING 90 %. THE DISALLOWANCE IS DELETED. THE APPEAL IS ALLOWED ON THIS POINT. RENTAL INCOME : AS FAR AS RENTAL INCOME IS CONCERNED, WHICH IS C LEARLY COVERED BY EXPLANATION (BAA) OF SECTION 80HHC OF TH E ACT, THEREFORE, THE AO WAS JUSTIFIED IN EXCLUDING 90% FOR CALCULATING D EDUCTION U/S 80HHC OF THE ACT. THE DISALLOWANCE IS CONFIRMED. LIQUIDATED DAMAGES: THIS POINT HAS ALREADY BEEN DISCUSSED WHILE DECIDING GROUND NO. 1 AND HELD AS UNDER:- THIS AMOUNT REPRESENT LEVY OF PENALTY ON THE SUPPL ER FOR THE LATE DELIVERY OF THE MATERIAL, AND THEREFORE, T ERMED AS LIQUIDATED DAMAGES. TO THE EXTENT OF THIS PENALTY THE COST OF PURCHASE HAS GONE DOWN AND THEREFORE,, DIRECTLY RELATING TO THE BUSINESS OF THE UNIT. IN VIEW OF THE ABOVE, THE AO IS DIRECTED NOT TO EXC LUDE 90% OF THE LIQUIDATED DAMAGES. THE DISALLOWANCE MADE BY THE AO IS DELETE4D. THIS POINT IS ALSO ALLOWED. DISCOUNT RECEIVED ON AIR TICKET : THIS CANNOT BE TREATED AS BUSINESS INCOME BUT IN THE NATURE OF OTHER RECEIPTS OF SIMIL AR NATURE COVERED BY EXPLANATION (BAA) TO SECTION 80HHC. THEREFORE, THE AOS ACTION IS CONFIRMED. DUTY DRAW BACK : THIS CANNOT BE TREATED AS BUSINESS INCOME BUT IN THE NATURE OF OTHER RECEIPT OF SIMILAR NATURE COVERED B Y EXPLANATION (BAA) TO SECTION 80HHC. THEREFORE, THE AOS ACTION IS CONFIR MED. 61 SUNDRY CREDIT BALANCE WRITTEN BACK: THIS POINT HAS ALREADY DISCUSSED AND DECIDED WHILE DECIDING THE GROUND NO. 1 AS UNDE R:- AS REGARDS SUNDRY CREDIT BALANCE WRITTEN OFF, T HERE IS SIMILAR POSITION IN ITS CASE ALSO. THE SUNDRY BALAN CES ARISING BECAUSE OF NON-CLAIM BY THE PURCHASING PARTIES AT T HE TIME OF SETTLEMENT OF THE ACCOUNT AND IT HAS THUS BECOME SU RPLUS IN THE SALE ACCOUNT BUT IT HAS BEEN CREDITED AS SUNDRY CREDIT B ALANCE IN PROFIT AND LOSS ACCOUNT . THEREFORE, IT IS ALLOWED AS INCO ME FROM BUSINESS. THE AO IS DIRECTED NOT TO EXCLUDE 90% OF THE SAME FOR DEDUCTION U/S 80HHC PURPOSE. EXCISE DUTY ON CLOSING STOCK : THIS POINT HAS ALREADY BEEN DISCUSSED AND DECIDED WHILE DECIDING GROUND NO. 1 AS UNDER:- THIS AMOUNT REPRESENTS PROVISION OF EXCISE DUTY O N CLOSING STOCK MADE DURING LAST YEAR. THE EXCESS PRO VISION OF EXCISE DUTY IS REVERSED THIS YEAR AND THE AMOUNT C REDITED TO OTHER INCOME. THEREFORE, THE CREDIT TO PROFIT AND LOSS AC COUNT IS DIRECTLY CONNECTED WITH THE BUSINESS OF BAROTIWALA UNIT. T HEREFORE, THE AO WAS NOT JUSTIFIED IN EXCLUDING 90% OF THE SAME F OR ALLOWING DEDUCTION U/S 80HHC. THUS THE DISALLOWANCE MADE BY THE AO IS DELETED. THE APPEAL IS ALLOWED ON THIS POINT TOO. PACKING & FORWARDING SURPLUS : THIS POINT HAS ALREADY BEEN DISCUSSED AND DECIDED WHILE DECIDING GROUND NO. 1. AS REGARDS THE PACKING AND FORWARDING IN VIEW OF THE EXPLANATION THE SAME IS T REATED AS INCOME FROM BUSINESS AND NOT FROM INCOME FROM OTHER SOURCES. TH E AO IS DIRECTED ACCORDINGLY. OTHER RECEIPTS :- THE LD. AR HAS NOT FURNISHED ANY EXPLANATION IN RESPECT OF THE NATURE OF OTHER RECEIPT. THEREFORE, THE AO WAS JUSTIFIED IN EXCLUDING 90% OF OTHER RECEIPT FOR CALCULATING DEDUCTION U/S 80HHC OF THE ACT. THE ACTION OF THE AO ON THIS POINT IS CONFIRMED. AS FAR AS 100% EXCLUSION OF PROFIT OF BATED UNIT AN D BAROTIWALA UNIT, THE LD. AR CONTENDED THAT THE AO OUGHT TO HAVE DEDUCTED RS. 6,69,68,594/- AND RS. 18,70,22,005/- FOR BATED UNIT AND BAROTIWAL A UNIT BEING PROFIT OF THE TWO UNITS AS COMPUTED BY THE AO OR SUCH AMOUNT AS MAY BE COMPUTED AFTER DECISION OF GROUND NO. 1 IN THIS APPEAL FROM THE TOTAL BUSINESS PROFIT FOR DEDUCTION U/S 80HHC. THE CONTENTION OF THE LD. AR IS ACCEPTABLE. THEREFORE, THE AO IS DIRECTED TO ADOPT THE ELIGIBLE PROFIT AS COMPUTED IN GROUND NO. 1 OF THIS ORDER3 AND ALLOW RESULTANT REL IEF 62 5.6 AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE MATERIALS AVAILABLE ON RECORD, WE FOUND THAT AGAIN THE LD. CIT(A) WAS CORRECT IN G IVING THE ABOVE FINDINGS. IN FACT, THIS ISSUE HAS ALREADY BEEN EXAMINED BY US WHILE DISPOSI NG OFF THE GROUND OF THE DEPARTMENT IN RESPECT OF NETTING OF INTEREST AND DEDUCTION ON ACCOUNT OF OTHER INCOME. THESE ARE THE SIMILAR INCOME AND SIMILAR FINDINGS HAS BEEN GIVEN BY THE LD. CIT(A). ITEMWISE FINDING HAS BEEN GIVEN BY THE LD. CIT(A). THEREFORE, WE DO NOT WANT TO GO INTO DETAIL FURTHER AS SIMILAR FINDINGS HAS BEEN CONFIRMED BY US WHILE DIS POSING OFF THE GROUND NO. 2 OF THE DEPARTMENT. THUS THIS GROUND OF THE DEPARTMENT ALSO FAILS. 6.0 NOW WE TAKE UP THE APPEAL OF THE REVENUE IN ITA NO.349/JU/2009 FOR THE ASSESSMENT YEAR 2005-06 WHERE FOLLOWING GROUNDS HAV E BEEN TAKEN BY THE DEPARTMENT. ON THE FACTS AND IN THE PRESENT CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN:- 1) I. ALLOWING DEDUCTION U/S 80IB/IC ON RECEIPT INCOME OF RS. 7,37,28,235/-. II. ALLOWING DEDUCTION U/S 80IB/IC ON SCRAP SALE OF RS. 6,33,265/-. III. ALLOWING DEDUCTION U/S 80IB/IC ON SURPLUS ON PACKIN G AND FORWARDING OF RS. 8,994/- IV ALLOWING DEDUCTION U/S 80IB/IC ON RENTAL INCOME OF RS. 3.00LAC OF BATED UNIT. V DELETING THE ADDITION MADE ON ACCOUNT OF APPORTI ONMENT OF CAPITAL EXPENDITURE ON R&D AND DEPRECIATION ON ASSE TS OF UDAIPUR IN TURNOVER RATIO TO BATED AND BAROTIWALA UNIT (RS .57,20,110/- FOR BAROTIWALA UNIT AND RS. 1,04,15,695/- IN THE BATED UNIT) 63 VI DIRECTING THE AO TO TREAT THE TRADING INCOME AS BUSINESS PROFIT NOT AS INCOME FROM OTHER SOURCES AND ALLOWED DEDUCTION U/S 80IB/IC. 2. DIRECTING THE AO TO ALLOW DEDUCTION ON ACCOUNT O F DIVIDEND DISTRIBUTION TAX OF RS. 43,53,541/- WHILE CALCULATI NG THE BOOK PROFIT U/S 115JB OF THE INCOME TAX ACT, 1961. 6.1 REGARDING THE GROUND RELATING TO INTEREST INCOM E, SCRAP SALE, SURPLUS ON PACKING AND FORWARDING, RENTAL INCOME, DELETING THE ADDITIO N MADE ON ACCOUNT OF APPORTIONMENT OF CAPITAL EXPENDITURE ON R&D AND DEPRECIATION ON A SSETS OF TWO UNITS AND DIRECTING THE AO TO TREAT THE TRADING INCOME AS BUSINESS PROFIT N OT AS TAX INCOME FROM OTHER SOURCES, WE FIND THAT SIMILAR ISSUES WERE INVOLVED IN EARLIE R YEARS. WE HAVE ALREADY CONFIRMED THE ORDER OF THE LD. CIT(A) FOR EARLIER YEAR AS THE FAC TS ARE SIMILAR. THEREFORE, ON THE SAME REASONING, WE CONFIRM THE ORDER OF THE LD. CIT(A) F OR THE YEAR UNDER CONSIDERATION. ACCORDINGLY, THESE GROUNDS OF THE DEPARTMENT ARE RE JECTED. 7.1 THE GROUND NO. 2 OF THE DEPARTMENT WHICH IS AGA INST ALLOWING DEDUCTION ON ACCOUNT OF DIVIDEND DISTRIBUTION TAX OF RS. 43,53 ,541/- WHILE CALCULATING THE BOOK PROFIT U/S 115JB OF THE ACT. 7.2 THE AO NOTED THAT THE ASSESSEE DURING THE ASSES SMENT PROCEEDINGS FILED A REVISED COMPUTATION OF INCOME TAX LIABILITY U/S 115JB VIDE LETTER DATED 14-12-2007. IN THIS COMPUTATION, THE ASSESSEE HAS REDUCED THE BOOK PROF IT TO RS. 13,40,70,876/- FROM RS. 14,70,26,728/- DECLARED IN THE ORIGINAL RETURN OF I NCOME. THIS REDUCTION IN BOOK PROFIT HAS BEEN CLAIMED ON ACCOUNT OF RS. 43,53,541/-/- PERTA INING TO DIVIDEND DISTRIBUTION TAX AND RS. 86,02,311/- ON ACCOUNT OF DEFERRED TAX LIABILI TY. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE FOR REDUCING THE AMOUNT OF DIVIDEND DISTRI BUTION TAX AND DEFERRED TAX LIABILITY IS 64 NOT ALLOWABLE ITEM U/S 115JB. THESE TWO ITEMS DO NO T FIND PLACE IN THE LIST PROVIDED IN EXPLANATION TO SECTION 115JB SUB-SECTION (2). AS PE R SECTION 15JB THE BOOK PROFIT HAS TO BE CALCULATED IN ACCORDANCE WITH THE PROVISION OF P ART-2 AND PART-3 TO THE SCH. 6 OF THE COMPANIES ACT, 1956. IN THE INSTANT CASE, THE NET P ROFIT CALCULATED IN THE AUDITED LBS OF THE COMPANY IN ACCORDANCE WITH THE AFORESAID PROVIS IONS OF THE ACT WAS RS. 14,70,40,488/- AS DECLARED IN THE ORIGINAL RETURN. IN SO FAR AS DEFERRED TAX LIABILITY WAS CONCERNED IT WAS FURTHER TO BE MENTIONED HERE THAT BY FINANCE ACT 2008, THE REDUCTION ON ACCOUNT OF DEFERRED TAX LIABILITY WAS NOT ALLOWABL E WITH RETROSPECTIVE EFFECT FROM 1-04- 2001. HENCE, THERE SHALL BE NO ADJUSTMENT IN THE BO OK PROFIT OF THE ASSESSEE. 7.3 DETAILED SUBMISSIONS WERE FILED BEFORE THE LD. CIT(A) WHO AFTER CONSIDERING THE SUBMISSIONS FOUND THAT THE ASSESSEE DESERVES TO SUC CEED ON THIS ISSUE ALSO. ACCORDINGLY, HE ALLOWED THE ISSUE IN FAVOUR OF THE ASSESSEE. 7.4 THE LD. DR STATED THAT IN VIEW OF THE AMENDED P ROVISION, THE ISSUE WAS RIGHTLY DECIDED BY THE AO AGAINST THE ASSESSEE. 7.5 THE LD. AR FAIRLY STATED THAT IN VIEW OF THE AM ENDED PROVISIONS, THIS ISSUE CAN BE DECIDED AGAINST THE ASSESSEE. 7.6 AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIALS AVAILABLE ON RECORD, WE HOLD THAT THE AO WAS JUSTIFIED IN HOLDING THAT THER E WILL BE NO ADJUSTMENT IN THE BOOK PROFIT OF THE ASSESSEE AS THE AMENDMENT WAS NOT ALL OWABLE W.R.E.F. 01-04-2001. SINCE THE AMENDMENT IS PROSPECTIVE, THEREFORE, WE CONFIRM THE ORDER OF THE AO WHILE REVERSING THE ORDER OF THE LD. CIT(A) ON THIS ISSUE 65 8.0 IN THE RESULT, APPEAL OF THE DEPARTMENT FOR THE ASSESSMENT YEAR 2004-05 IS DISMISSED AND THE APPEAL FOR THE ASSESSMENT YEAR 20 05-06 IS ALLOWED IN PART. THE ORDER IS PRONOUNCED ON 28-08-2012 . SD/- SD/- ( N.K. SAINI ) ( R.K. GUPTA ) ACCOUNTANT MEMBER JUDICIAL MEMBER JODHPUR, *MISHRA COPY FORWARDED TO :- 1. THE ACIT, CIRCLE- 2, UDIAPUR. 2. M/S. SECURE METERS LTD. , UDIAPUR BY ORDER 3. THE LD CIT (A) 4. THE LD. CIT 5. THE D/R 6. GUARD FILE (ITA NOS.542/JU/2007 & 349/JU/2009) A R ITAT JODHPUR.