M/S TUDOR KNITTING WORKS PVT. LTD. vs. CIT LUDHIANA

The assessee has preferred this appeal under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 16.9.2009 Annexure A.3 passed by the Income Tax Appellate Tribunal, 'A' Bench Chandigarh in ITA No.653(CHANDI) 2005 for the assessment year 2002-03, claiming following substantial questions of law:- “I. Whether, on the facts and circumstances of the case, the ITAT was justified in law in holding that appellant was not entitled to the deduction under Section 80IB on the surrendered amount though utilized for the business of the appellant without placing any evidence against the assessee on record and without rebutting the evidence Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh presented by the assessee on record and thereby reversing a well versed and reasoned orders by the CIT(A)? (II)Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in denying the claims of the appellant under Section 80IB of the Income Tax Act, 1961 by blindly relying upon the judgment of this Hon'ble Court in the case of National Legguard Works v. CIT and another, 288 ITR 18 (P&H) which is distinguishable on facts itself and rather favours the present appellants case? III. Whether, on the facts and circumstances of the case, the findings of ITAT are perverse and against the evidences on record thus unsustainable in law? IV.Whether the ITAT has misdirected itself in being influenced by irrelevant factors and applying erroneous criteria while deciding the issue for claiming deduction under Section 80IB of the Income Tax Act, 1961?”

Briefly, the facts necessary for adjudication of the controversy involved, as narrated in the appeal may be noticed. The assessee is a company engaged in the manufacture of hosiery goods at Ludhiana. It is a regular Income tax assessee. On 6.11.2001, a survey operation under Section 133A of the Act was conducted at the business premises of the assessee. During this operation, the assessee surrendered an amount of ` 1.20 crores stating that this amount was part and parcel of the business activities and was in addition to normal business income and that there was direct and proximate connection of this income with the business of the industrial undertaking. The assessee filed its income tax return for the assessment year 2002-03 on 28.10.2002 declaring Income of Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh `86,31,329/-. The case of the assessee was selected for scrutiny. The assessee attended the proceedings and filed the requisite information/documents. Its books of accounts were called for. The assessee was asked to explain as to why the deduction in respect of income of ` 1.20 crores under section 80IA/IB of the Act be not disallowed. Deduction was also claimed on the amount of ` 59,852/- representing income from bank interest as the same was also earned during normal course of business activities and was out of the surplus funds lying with it. The Assessing Officer vide order dated 27.10.2004, Annexure A.3 disallowed the deduction under Section 80IB of the Act by relying upon the judgment of the Apex Court in CIT v. Sterling Foods, (1999) 237 ITR 579 holding that according to Section 80IB, deduction is available on profits and gains derived from the business of an industrial undertaking. Aggrieved by the order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 28.1.2005, Annexure A.2, the CIT(A) allowed the appeal. Not satisfied with the order, the revenue filed appeal before the Tribunal relying upon the judgment of this Court in National Legguard Works v. CIT and another, (2007) 288 ITR 18 wherein it was held that in case of amount surrendered, the burden was on the assessee to prove that the amount represented profits on which deduction was permissible under Chapter VI-A. The Tribunal vide order dated 16.9.2009, Annexure A.3 allowed the appeal and set aside the order passed by the CIT(A). Hence the present appeal by the assessee. Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh

Learned counsel for the appellant-assessee submitted that the surrendered amount of ` 1.20 crores was part and parcel of business activities and was in addition to normal business income and there was direct and proximate connection of this income with the business of the industrial undertaking. According to the learned counsel, the finding recorded by the Tribunal that it was not derived from the industrial undertaking was erroneous. It was infact as a result of business income and, therefore, deduction under Section 80IB of the Act was admissible. It was also argued that the income was assessed by the Assessing Officer under the head “business or profession” and, therefore, the assessee was entitled for deduction under Section 80IB of the Act. Reliance was placed upon judgments in Broach District Cooperative Cotton Sales, Ginning and Pressing Society Limited v. CIT, (1989) 177 ITR 418 (SC), CIT v. Gwalior Rayon Silk Manufacturing Co. Limited, (1992) 196 ITR 149 (SC), Bajaj Tempo Limited v. CIT, (1992) 196 ITR 188 (SC), CIT v. Margaret's Hope Tea Co. Limited, (1993) 201 ITR 747 (Cal.), Gopal Stores v. CIT, (1995) 215 ITR 265 (Gau), Mysore Minerals Limited v. CIT, (1999) 239 ITR 775 (SC), CIT v. Rathore Brothers, (2002) 254 ITR 656 (Mad.), Padmasundara Rao (deceased) and others v. State of Tamil Nadu and others, (2002) 255 ITR 147 (SC), CIT v. Simplex (Indore) (P) Limited, (2005) 282 ITR 542 (MP) and CIT v. Allied Industries, (2010) 229 CTR (HP) 462, in support of the submissions.

Controverting the aforesaid submissions, learned counsel Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh for the revenue relied upon judgments in Sterling Foods and National Legguard Works's cases (supra). He submitted that there could be trading activity as well and the assessee had not produced anything to prove that it was on account of industrial undertaking and the onus upon the assessee was not discharged.

After hearing learned counsel for the parties and perusing the record, we do not find any merit in the appeal.

The Tribunal while declining the claim of the assessee had specifically recorded as under:- “5. We have considered the rival submissions carefully. The first and the foremost point which is required to be kept in mind is that for the purposes of computing deduction under Section 80IB, only the profits and gains which have a direct nexus with the industrial undertaking are alone liable to be considered. Section 80IB envisages deduction in respect of profits and gains derived from any business of industrial undertaking only as the expression 'derived from' finds a place in the Section. In order to appreciate the import of the expression 'derived from', a reference may be made to the judgment of the Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Limited v. CIT, 113 ITR 84 (SC) wherein the difference in the expressions 'attributable to' and 'derived from' was considered. The Hon'ble Supreme Court observed that the expression 'derived from' wherever used, intends to cover only the receipt from the actual conduct of the business of specified nature, whereas the expression 'attributable to' has a wider import and would cover receipts from sources other than the actual conduct of the business of the specified nature. Similar proposition has been upheld by the Hon'ble Supreme Court again in the case of Sterling Foods, 237 ITR 579 (SC). Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh To the similar effect is the judgment of the Hon'ble Jurisdictional High Court in the case of M/s Liberty India, 293 ITR 520 (P&H). From the aforesaid, it is safe to deduce that in order to entitle an assessee to deduction under section 80IB, there must be a direct nexus between the income in question and the industrial undertaking. In other words, even if a particular income is liable to be assessed as business income, but the nexus is indirect or incidental, such income, though assessable as business income, would not qualify for deduction under Section 80IB of the Act because it cannot be said to be derived from an industrial undertaking on account of it being devoid of any direct nexus.

With this discussion, we may now examine the facts of the present case. In this case, the assessee surrendcered an amount of Rs.1,20,00,000/- during the course of a survey operation under Section 133A of the Act on account of difference in stock, debtors receivable and on account of differnece in the amount invested in construction of building. The assessee claimed deduction under Section 80IB on such income declared in the return. Ostensibly, in order to hold such income eligible for deduction under Section 80IB, the nexus with the industrial undertaking is required to be established. The moot question is whether the same stands established in this case or not? Before we proceed on this aspect, it would also be of relevance to notice the judgment of the Hon'ble jurisdictional High Court in the case of National Legguard Works, 288 ITR 18 (P&H) wherein the following discussion is worthy of notice: 'We are unable to accept this submission. Deduction under section 80HHC of the Act is available only on showing fulfilment of the conditions specified therein and there could be no presumption that surrender made on account of unexplained stocks represented Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh export income. The assessee was unable to give any explanation. There could be no presumption that the additional amount surrendered represented income from exports. Deduction under section 80HHC of the Act can be claimed only on showing facts which make the assessee eligible for the deduction. The burden to prove these facts was on the assessee and not on the Revenue.'

In our view, the aforesaid observations, though made by the Hon'ble High Court in respect of Section 80HHC of the Act, is equally applicable to the computation of deduction under Section 80IB of the Act. In other words, there can be no presumption that the amount surrendered represented income eligible for Section 80IB benefits and that the onus was on the assessee to prove that the surrendered income was derived from the Industrial undertaking. In this case, the learned counsel for the assessee reiterated the submission made before the CIT(Appeals) that at the time of surrender, the assessee has clearly indicated that the amount surrendered is a part and parcel of the business activities and is in addition to the normal business income. In our view, the said stand of the assessee does not demonstrate that the burden cast on the assessee stands discharged. The learned counsel has further submitted that the assessee's industrial undertaking was the only source of income and there is no other manufacturing activity and therefore, there was nothing to establish that the income in question was not derived from the industrial undertaking.

We have considered the said plea of the assessee and find that the same only entails a presumption that the additional amount surrendered represented income derived from the industrial undertaking. As observed earlier, in terms of the decision of the Hon'ble Jurisdictional High Court, there cannot be a presumption that surrendered income is eligible Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh for Section 80IB benefits. On the contrary, the assessee has to demonstrate that the income in question is eligible for 80IB benefits. In this case, though the income surrendered is assessed by the Assessing Officer as business income, however, its nexus with the industrial undertaking is left to be established. There is nothing on record relied upon by the assessee to show that in the course of survey, any evidence of unaccounted turnover, inflation of expenses etc., was discovered, so as to say that the surrenderfed income was directly linked to the business of the industrial undertaking. There is no positive evidence led by the assessee to establish direct nexus with the industrial undertaking and therefor,e in our considered opinion, the burden cast on the assessee has not been discharged.

In this background, in our view, the CIT(Appeals) was wrong both on facts and in law to allow the claim of the assessee for deduction under section 80IB with respect to the surrendered amount. Firstly, the CIT(Appeals) is wrong in transferring the burden on the revenue to establish that the surrendered income was not entitled to section 80IB benefits. Secondly, even factually, there is no positive material or evidence to establish nexus between the surrendered amount and the industrial undertaking. Further, the CIT(Appeals) has also not considered the reliance placed by the Assessing Officer on the decision of the Amrtisar Bench of the Tribunal in the case of Shri Deepak Mittal, P/O M/s Sonalika Agriculture Industrial Corporation, Hoshiarpur dated 2.7.2004 for assessment year 1989-90, wherein similar issue has been dealt with in favour of the revenue. Moreover, the reliance placed by the CIT(Appeals) on the decision of the Amritsar Bench of the Tribunal in the case of Kashmir Steel Rolling Mills v. DCIT, 55 Taxman 424 (Amritsar) is also not appropriate. The learned DR quite fairly contended that the decision of the Amritsar Bench in Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh the case of Kashmir Steel Rolling Mills has been further explained by the Amritsar Bench in the case of Sadhu Singh Kirpal Singh v. ACIT, 97 TTJ 1 (Asr). Moreover, the decision of the Amritsar Bench of the Tribunal in the case of Kashmir Steel Rolling Mills (supra) is dated 16.5.1990 and judgment of the Hon'ble Supreme Court in the case of Sterling Foods (supra) is dated 15.4.1999 wherein it has been held that the nexus between the profit and the industrial undertaking has to be direct and not indirect or incidental or based on any circumstantial evidence. Moreover, in view of the authoritative pronouncement of the Hon'ble Jurisdictional High Court in the case of National Legguard Works (supra), the issue in question is required to be held against the assessee.”

The contention of the learned counsel for the appellant that the income was assessed under the head “business”, is not born out from the record. A perusal of the assessment order shows that it nowhere suggests that the Assessing Officer had taken surrendered Income under the head “business or profession”. Moreover, nothing had been produced by the assessee to show that the surrendered income was derived from the industrial undertaking. Onus was upon the assessee to show that the income on which deduction had been claimed under Section 80IB under Chapter VI-A of the Act, was infact derived from the industrial undertaking.

From the perusal of the findings as noticed above, the Tribunal had come to the conclusion that onus upon the assessee was not discharged. In such a situation, it could not be said that the Tribunal had erred in holding that deduction under Section 80IB of the Act was not admissible to the assessee. This Court in Home Tex v. Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh CIT, (2011) 59 DTR Judgments 165, considering similar issue had noticed as under:- “12. It is quite evident from the above letter submitted by assessee that Rs. 40 lakhs income was surrendered only on account of excess stock found as per physical verification. It was also stated in the letter that no adjustment will be made against the surrendered income and such surrendered income is over and above the regular income as per books of account. Advance tax on the additional income was also proposed to be deposited vide post dated cheques. Since in the letter itself the assessee has accepted that this additional income was over and above the regular income as per books of account, the regular income which is arising out of industrial undertaking can only be subject to deduction u/s 80 IB and no other income surrendered on account of additional stock found during the course of survey can be considered for deduction u/s 80 IB. More particularly, in view of the decision of Hon’ble Supreme Court in the case of Liberty India (supra) wherein even the income from DEPB and duty drawback which are received by the industrial undertaking as an incentive in the course of their business were held to be not eligible for claim of deduction u/s 80 IB, nothing is left for granting deduction in respect of such income surrendered during the course of survey which is attributable to the excess stock found during the survey. Nothing was brought on record by the learned Authorised Representative to show that amounts so invested in the excess stock was derived from industrial undertaking. It is not only the income of the business which can be claimed for deduction u/s 80 IB but it is only that income which is derived from industrial undertaking and comes within the first degree of nexus between profit and industrial undertaking as found by the Hon’ble Supreme Court in the Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh case of Liberty India (supra), that can be made available for allowing the deduction u/s 80 IB of the IT Act. We, therefore, do not find any infirmity in the orders of lower authorities for declining claim of deduction u/s 80 IB in respect of extra income surrendered during survey on account of excess stock physically found as compared to the stocks indicated in the regular books of account.”

The Tribunal had specifically recorded that the assessee had failed to show that the amount which was invested in the excess stock and was surrendered at the time of survey was derived from industrial undertaking. In the absence of any such finding or nexus established by the assessee, the Tribunal had rightly declined the claim of deduction under Section 80 IB of the Act in respect of excess income surrendered during survey on account of excess stock which was not reflected in the regular books of accounts. Learned counsel for the assessee was unable to show any perversity or illegality in the findings which may warrant interference by this Court.” Similar view was recorded in National Legguard Works's case (supra) :- “7. We are unable to accept this submission. Deduction under Section 80HHC of the Act is available only on showing fulfilment of conditions specified therein and there could be no presumption that surrender made on account of unexplained stocks represented export income. The assessee was unable to give any explanation. There could be no presumption that additional amount surrendered represented income from exports. Deduction under Section 80HHC of the Act can be claimed only on showing facts which made the assessee eligible for the deduction. The burden to prove these facts was on the assessee and not on the Revenue. Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh

The judgment relied upon is on its own facts and not in respect of claim for deduction under Section 80HHC of the Act. In any case, from the facts of the present case, the assessee cannot be held to be entitled to claim income surrendered as a result of unexplained stocks as Income from exports.”

Adverting to the judgments relied upon by the counsel for the assessee, it may be noticed that in those cases, either the Tribunal had recorded the finding that the surrendered income was derived from the industrial undertaking or they were based on individual fact situation involved therein. Thus, the assessee cannot derive any benefit from those judgments.

The findings recorded by the Tribunal have not been shown to be illegal or perverse in any manner. Consequently, the substantial questions of law are answered against the assessee and in favour of the revenue. The appeal is dismissed. (Ajay Kumar Mittal) Judge August 08, 2013 (Jaspal Singh) 'gs' Judge Singh Gurbax 2013.09.24 16:10 integrity of this document High Court Chandigarh