ACIT, New Delhi V. M/s Rashi Wears Pvt. Ltd., New Delhi

ITA 5802/DEL/2010

• Counselvise Citation: 580220114 RSA 2010
• Duration Of Justice: 1 year(s) 1 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 24-01-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 20-12-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B R R KUMARDR
• Keywords: Question of law; Cost of acquisition
• Section: 80IB; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI F BENC H BEFORE SMT. DIVA SINGH, JM & SHRI A.N. PAHUJA, AM ITA NO.5802/DEL/2010 ASSESSMENT YEAR:2007-08 A.C.I.T.CIRCLE 15(1), C.R. BUILDING, I.P. ESTATE, NEW DELHI V/S . M/S RASHI WEARS PVT. LTD., D-972, NEW FRIENDS COLONY,NEW DELHI [PAN : AAACR4887R] (APPELLANT) (RESPONDENT) ASSESSEE BY NONE REVENUE BY SHRI B.R.R. KUMAR,DR DATE OF HEARING 24-01-2012 DATE OF PRONOUNCEMENT 24-01-2012 O R D E R A.N.PAHUJA:- THIS APPEAL FILED ON 20 TH DECEMBER, 2010 BY THE REVENUE AGAINST AN ORDER DATED 15 TH SEPTEMBER, 2010 OF THE LEARNED CIT(A)-XVIII, NEW D ELHI, RAISES THE FOLLOWING GROUNDS:- 1) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN DELETING THE ADDITION O F ` ` 17,30,434/- MADE BY THE ASSESSING OFFICER U/S 80IB OF I.T. ACT TO THE ASSESSEES INCOME. 2) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN IGNORING THE FACT THAT THE DEDUCTION U/S 80IB SHALL BE AVAILABLE ONLY ON THE PROFIT WHICH WE RE DERIVED FROM THE INDUSTRIAL UNDERTAKING AND HAVING DIRECT N EXUS TO THE INDUSTRIAL ACTIVITIES. THE INCLUSION OF AMOUNT REC EIVED FOR DUTY DRAWBACK WITH PROFIT DERIVED FROM INDUSTRIAL UNDERT AKING IS NOT ELIGIBLE FOR CLAIMING DEDUCTION U/S 80IB. THIS VIE W IS ALSO SUPPORTED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. STERLING FOODS (237 ITR 539). ITA N O.5802 /DEL./2010 2 3) THE APPELLANT CRAVES TO BE ALLOWED TO ADD, DELE TE OR AMEND ANY OTHER GROUNDS OF APPEAL. 2. AT THE OUTSET, NONE APPEARED ON BEHALF OF THE ASSESSEE NOR ANY REQUEST FOR ADJOURNMENT WAS RECEIVED. CONSIDERING THE NATURE OF ISSUE INVOLVED, THE BENCH DECIDED TO DISPOSE OF THE APPEAL AFTER HE ARING THE LEARNED DR. 3. ADVERTING NOW TO GROUND NOS.1 & 2, FACTS, IN BRI EF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING AN INCOME OF ` ` 40,37,467/- FILED ON 31.10.2007 BY THE ASSESSEE, MANUFACTURING AND EXPORTING READYMADE GAR MENTS, WAS TAKEN UP FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143 (2) O F THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) ISSUED ON 19 TH SEPTEMBER, 2008. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER (A.O. IN SHORT) NOTICED THAT THE ASSESSEE CLAIMED DEDUCTION OF ` `17,30,343/- U/S 80IB OF THE ACT. INTER ALIA, THE AO NOTICED THAT THE ASSESSEE CLAIMED DE DUCTION U/S 80IB ON THE AMOUNT OF DUTY DRAW BACK RECEIVED ON EXPORT SALES. TO A QUERY BY THE AO, THE ASSESSEE RELIED UPON THE DECISION IN CIT VS. ELTEK SGS (P) LTD. (2008) 3 DTR (DELHI) 241. HOWEVER, THE AO DID NOT ACCEPT THE SU BMISSIONS OF THE ASSESSEE ON THE GROUND THAT THE REVENUE HAD PREFERRED APPEAL AG AINST THE SAID DECISION BEFORE THE HONBLE APEX COURT. ACCORDINGLY, WHILE RELYING UPON DECISIONS IN THE CASE OF M/S HINDUSTAN LEVER LTD. VS. CIT (1980) 121 ITR 951 (BOMBAY) AFFIRMED BY THE HONBLE SUPREME COURT IN THE CASE OF M/S HI NDUSTAN LEVER LTD. VS. CIT (1997) 239 ITR 297; CIT VS. M/S STERLING FOODS (199 9) 237 ITR 579(SC); CIT VS. MADRAS MOTORS LTD./M.M. FORGINGS (257 ITR 60) ( MADRAS); AND CIT VS. A.S. NASIR AHMED & CO. 259 ITR 244 (MADRAS), THE AO DENI ED THE CLAIM OF DEDUCTION U/S 80IB ON THE GROUND THAT DUTY DRAW BACK RECEIVED BY THE ASSESSEE ON EXPORT SALES WAS NOT DERIVED FROM THE ACTIVITIES OF THE IN DUSTRIAL UNDERTAKING. 3. ON APPEAL, THE LEARNED CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE IN THE FOLLOWING TERMS:- 5.1 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORD ER AND THE SUBMISSION MADE BY THE LEARNED AR. THIS ISSUE HAS BEEN DECIDED ITA N O.5802 /DEL./2010 3 IN FAVOUR OF THE APPELLANT BY THE UNDERSIGNED FOR A SSESSMENT YEAR 2002-03 VIDE ORDER DATED 21.1.2010 IN APPEAL NO.91/ 07-08 BASING ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN CIT VS. ELTEK SGS (P) LTD. (2008) 300 ITR 6 (DEL.) AND THE DECISI ON OF THE HONBLE ITAT DELHI C BENCH VIDE ORDER DATED 25.4. 2008 IN I.T.A. NO.4797/D/2007 FOR ASSESSMENT YEAR 2003-04 IN THE C ASE OF THE APPELLANT COMPANY AND ALSO THE FACT THAT THE HONBL E DELHI HIGH COURT HAS DISMISSED THE SECOND APPEAL FILED BY THE REVENUE AGAINST THE ABOVE ITAT ORDER DATED 13.4.2009 IN I.T .A. NO.189/2009 BY HOLDING THAT IN VIEW OF THE DECISION IN THE CASE OF CIT VS. ELTEK SGS (P) LTD. (SUPRA), NO SUBSTANTIAL QUESTION OF LAW ARISES FOR CONSIDERATION. CONSIDERING THE SAME, SI NCE THE ISSUES ARE IDENTICAL THIS YEAR, THE IMPUGNED ADDITION OF ` `17,30,343/- IS DELETED. 4 THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF LEARNED CIT(A). AT THE OUTSET, LEARNED DR SUBMITTED THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE IN VIEW OF THE DECISIO N OF THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA VS. CIT 317 ITR 218 (SC). 5. WE HAVE HEARD THE LD DR AND GONE THROUGH THE F ACTS OF THE CASE AS ALSO THE AFORESAID DECISION OF THE HON' BLE SUPREME COURT IN THE CASE OF LIBERTY INDIA (SUPRA). ON A S IMILAR ISSUE AS TO WHETHER THE PROFIT FROM DUTY ENTITLEMENT PASSBOOK SCHEME (DEPB) AND DUTY DRAWBACK SCHEME ARE DERIVED FROM THE BUSINESS OF T HE INDUSTRIAL UNDERTAKING AND CONSEQUENTLY ELIGIBLE FOR DEDUCTION U/S 80-IB O F THE ACT, THE HONBLE APEX COURT OBSERVED THAT THE ACT BROADLY PROVIDES FOR TW O TYPES OF TAX INCENTIVES, NAMELY, INVESTMENT LINKED INCENTIVES AND PROFIT LIN KED INCENTIVES. CHAPTER VI-A ESSENTIALLY BELONGS TO THE CATEGORY OF PROFIT LINK ED INCENTIVES WHILE SS. 80-IA/80- IB REFER TO PROFITS DERIVED FROM ELIGIBLE BUSINESS. IT IS NOT THE OWNERSHIP OF THAT BUSINESS WHICH ATTRACTS THE INCENTIVES BUT THE GENE RATION OF PROFITS (OPERATIONAL PROFITS) AND EACH OF THE ELIGIBLE BUSINESS IN SUB-S ECTIONS (3) TO (11A) CONSTITUTES A STAND-ALONE ITEM IN THE MATTER OF COMPUTATION OF PROFITS. IT WAS FURTHER HELD THAT SS. 80-IB/80-IA ARE A CODE BY THEMSELVES AS TH EY CONTAIN BOTH SUBSTANTIVE AS WELL AS PROCEDURAL PROVISIONS. S. 80-IB ALLOWS D EDUCTION OF PROFITS AND GAINS DERIVED FROM THE ELIGIBLE BUSINESS. THE WORDS DERI VED FROM IS NARROWER IN ITA N O.5802 /DEL./2010 4 CONNOTATION AS COMPARED TO THE WORDS ATTRIBUTABLE TO. BY USING THE EXPRESSION DERIVED FROM, PARLIAMENT INTENDED TO COVER SOURCE S NOT BEYOND THE FIRST DEGREE. THOUGH THE OBJECT BEHIND DEPB ETC IS TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY PAYMENT ON THE IMPORT CONTENT OF EXPORT PRODUC T DEPB CREDIT/DUTY DRAWBACK RECEIPT DO NOT COME WITHIN THE FIRST DEGREE SOURCE AS THE SAID INCENTIVES FLOW FROM INCENTIVE SCHEMES ENACTED BY THE GOVERNMENT OR FROM S. 75 OF THE CUSTOMS ACT. SUCH INCENTIVES PROFITS ARE NOT PROFIT S DERIVED FROM THE ELIGIBLE BUSINESS U/S 80-IB. THEY ARE ANCILLARY PROFITS OF SUCH UNDERTAKINGS AND EVEN AS PER AS-2 AND THE ICAI GUIDANCE NOTE, DUTY DRAWBACK, DEPB BENEFITS, REBATES ETC. CANNOT BE CREDITED AGAINST THE COST OF MANUFAC TURE OF GOODS BUT HAVE TO BE SHOWN AS AN INDEPENDENT SOURCE OF INCOME BEYOND THE FIRST DEGREE NEXUS BETWEEN PROFITS AND THE INDUSTRIAL UNDERTAKING. THE HONBLE APEX COURT CONCLUDED THAT 16. DEPB IS AN INCENTIVE. IT IS GIVEN UNDER DUTY E XEMPTION REMISSION SCHEME. ESSENTIALLY, IT IS AN EXPORT INCENTIVE. NO DOUBT, T HE OBJECT BEHIND DEPB IS TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY PAYMENT ON THE IMPORT CONTENT OF EXPORT PRODUCT. THIS NEUTRALIZATION IS PROVIDED FOR BY CRE DIT TOCUSTOMS DUTY AGAINST EXPORT PRODUCT. UNDER DEPB, AN EXPORTER MAY APPLY F OR CREDIT AS PERCENTAGE OF FOB VALUE OF EXPORTS MADE IN FREELY CONVERTIBLE CU RRENCY. CREDIT IS AVAILABLE ONLY AGAINST THE EXPORT PRODUCT AND AT RATES SPECIF IED BY DGFT FOR IMPORT OF RAW MATERIALS, COMPONENTS ETC.. DEPB CREDIT UNDER THE S CHEME HAS TO BE CALCULATED BY TAKING INTO ACCOUNT THE DEEMED IMPORT CONTENT OF THE EXPORT PRODUCT AS PER BASIC CUSTOMS DUTY AND SPECIAL ADDITIONAL DUTY PAYA BLE ON SUCH DEEMED IMPORTS. THEREFORE, IN OURVIEW, DEPB/DUTY DRAWBACK ARE INCEN TIVES WHICH FLOW FROM THE SCHEMES FRAMED BY CENTRAL GOVERNMENT OR FROM SECTIO N 75 OF THE CUSTOMS ACT,1962, HENCE, INCENTIVES PROFITS ARE NOT PROFITS DERIVED FROM THE ELIGIBLE BUSINESS UNDER SECTION 80-IB. THEY BELONG TO THE CA TEGORY OF ANCILLARYPROFITS OF SUCH UNDERTAKINGS. 17. THE NEXT QUESTION IS WHAT IS DUTY DRAWBACK? S ECTION 75 OF THE CUSTOMS ACT, 1962 AND SECTION 37 OF THE CENTRAL EXCISE ACT, 1944 EMPOWER GOVERNMENT OF INDIA TO PROVIDE FOR REPAYMENT OF CUSTOMS AND EX CISE DUTY PAID BY AN ASSESSEE. THE REFUND IS OF THE AVERAGE AMOUNT OF DU TY PAID ON MATERIALS OF ANY PARTICULAR CLASS OR DESCRIPTION OF GOODS USED IN TH E MANUFACTURE OF EXPORT GOODS OF SPECIFIED CLASS. THE RULES DO NOT ENVISAGE A REF UND OF AN AMOUNT ARITHMETICALLY EQUAL TO CUSTOMS DUTY OR CENTRAL EXC ISE DUTY ACTUALLY PAID BY AN INDIVIDUAL IMPORTER-CUM-MANUFACTURER. SUB-SECTION ( 2) OF SECTION 75 OF THE CUSTOMS ACT REQUIRES THE AMOUNT OF DRAWBACK TO BE D ETERMINED ON A ITA N O.5802 /DEL./2010 5 CONSIDERATION OF ALL THE CIRCUMSTANCES PREVALENT IN A PARTICULAR TRADE AND ALSO BASED ON THE FACTS SITUATION RELEVANT IN RESPECT OF EACH OF VARIOUS CLASSES OF GOODS IMPORTED. BASICALLY, THE SOURCE OF DUTY DRAWB ACK RECEIPT LIES IN SECTION 75 OF THE CUSTOMS ACT AND SECTION 37 OF THECENTRAL EXC ISE ACT. 18. ANALYSING THE CONCEPT OF REMISSION OF DUTY DR AWBACK AND DEPB, WE ARE SATISFIED THAT THE REMISSION OF DUTY IS ON ACCOUNT OF THE STATUTORY/POLICY PROVISIONS IN THE CUSTOMS ACT/SCHEME(S) FRAMED BY THE GOVERNME NT OF INDIA. IN THE CIRCUMSTANCES, WE HOLD THAT PROFITS DERIVED BY WAY OF SUCH INCENTIVES DO NOT FALL WITHIN THE EXPRESSION PROFITS DERIVED FROM INDUSTR IAL UNDERTAKING IN SECTION 80- IB. 19. SINCE RELIANCE WAS PLACED ON BEHALF OF THE ASSE SSEE(S) ON AS-2 WE NEED TO ANALYSE THE SAID STANDARD. 20. AS-2 DEALS WITH VALUATION OF INVENTORIES. INVEN TORIES ARE ASSETS HELD FOR SALE IN THE COURSE OF BUSINESS; IN THE PRODUCTION FOR SU CH SALE OR IN FORM OF MATERIALS OR SUPPLIES TO BE CONSUMED IN THE PRODUCTION. 21. INVENTORY SHOULD BE VALUED AT THE LOWER OF CO ST AND NET REALIZABLE VALUE (NRV). THE COST OF INVENTORY SHOULD COMPRISE ALL COSTS OF PURCHASE, COSTS OF CONVERSION AND OTHER COSTS INCLUDING COSTS INCURRED IN BRINGING THE INVENTORY TO THEIR PRESENT LOCATION AND CONDITION. 22. THE COST OF PURCHASE INCLUDES DUTIES AND TAXES (OTHER THAN THOSE SUBSEQUENTLY RECOVERABLE BY THE ENTERPRISE FROM TAX ING AUTHORITIES), FREIGHT INWARDS AND OTHER EXPENDITURE DIRECTLY ATTRIBUTABLE TO THE ACQUISITION. HENCE TRADE DISCOUNTS, REBATE, DUTY DRAWBACK, AND SUCH SIMILAR ITEMS ARE DEDUCTED IN DETERMINING THE COSTS OF PURCHASE. THEREFORE, DUTY DRAWBACK, REBATE ETC.SHOULD NOT BE TREATED AS ADJUSTMENT (CREDITED) TO COST OF PURCHASE OR MANUFACTURE OF GOODS. THEY SHOULD BE TREATED AS SEPARATE ITEMS OF REVENUE OR INCOME AND ACCOUNTED FOR ACCORDINGLY (SEE: PAGE 44 OF INDIAN A CCOUNTING STANDARDS & GAAP BY DOLPHY DSOUZA). THEREFORE, FOR THE PURPOSES OF AS-2, CENVAT CREDITS SHOULD NOT BE INCLUDED IN THE COST OF PURCHASE OF INVENTOR IES. EVEN INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) HAS ISSUED GUIDANCE NOT E ON ACCOUNTING TREATMENT FOR CENVAT/MODVAT UNDER WHICH THE INPUTS CONSUMED A ND THE INVENTORY OF INPUTS SHOULD BE VALUED ON THE BASIS OF PURCHASE COST NET OF SPECIFIED DUTY ON INPUTS (I.E. DUTY RECOVERABLE FROM THE DEPARTMENT AT LATER STAGE) ARISING ON ACCOUNT OF REBATES, DUTY DRAWBACK, DEPB BENEFIT ETC. PROFIT GE NERATION COULD BE ON ACCOUNT OF COST CUTTING, COST RATIONALIZATION, BUSINESS RES TRUCTURING, TAX PLANNING ON SUNDRY BALANCES BEING WRITTEN BACK, LIQUIDATION OF CURRENT ASSETS ETC. THEREFORE, WE ARE OF THE VIEW THAT DUTY DRAWBACK, DEPB BENEFITS,REBAT ES ETC. CANNOT BE CREDITED AGAINST THE COST OF MANUFACTURE OF GOODS DEBITED IN THE PROFIT & LOSS ACCOUNT FOR PURPOSES OF SECTIONS 80-IA/80-IB AS SUCH REMISSIONS (CREDITS) WOULD CONSTITUTE INDEPENDENT SOURCE OF INCOME BEYOND THE FIRST DEGRE E NEXUS BETWEEN PROFITS AND THE INDUSTRIAL UNDERTAKING. ITA N O.5802 /DEL./2010 6 24. IN THE CIRCUMSTANCES, WE HOLD THAT DUTY DRAWBAC K RECEIPT/DEPB BENEFITS DO NOT FORM PART OF THE NET PROFITS OF ELIGIBLE INDUST RIAL UNDERTAKING FOR THE PURPOSES OF SECTIONS 80I/80-IA/80-IB OF THE 1961 ACT . 5.1. IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID D ECISION OF THE HONBLE APEX COURT, WE HOLD THAT DUTY DRAW BACK BENEFITS DO NOT FORM PART OF THE NET PROFITS OF ELIGIBLE INDUSTRIAL UNDERTAKING FOR THE PURPOSES OF SECTIONS 80-IB OF THE ACT. THEREFORE, WE HAVE NO OPTION BUT TO REVERSE THE C ONCLUSION OF THE LD. CIT(A) AND ALLOW GROUND NOS.1& 2 IN THE APPEAL OF THE REVENUE. 6. NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE US IN TERMS OF RESIDUARY GROUND NO.3 IN THE APPEAL, ACCORDINGLY, T HIS GROUND IS DISMISSED. 7. IN THE RESULT, APPEAL IS ALLOWED. SD/- SD/- ( DIVA SINGH ) ( A.N. PAHUJA ) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NS COPY OF THE ORDER FORWARDED TO :- 1. A.C.I.T., CIRCLE 15(1), C.R. BUILDING, I.P. ESTA TE, NEW DELHI 2. M/S RASHI WEARS PVT. LTD., D-972, NEW FRIENDS CO LONY, NEW DELHI. 3. CIT CONCERNED. 4. DR, ITAT,F BENCH, NEW DELHI 5. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, DELHI ORDER PRONOUNCED IN OPEN COURT