CHAMBAL FERTILIZERS AND CHEMICALS LTD vs. C I T KOTA

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 679 / 2011 Chambal Fertilizers And Chemicals Ltd ----Appellant Versus C I T Kota ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sanjay Jhanwar with Ms. Archana For Respondent(s) : Mrs. Parinitoo Jain _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 16/05/2017 1. By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal while considering the case of both the assessee and the Department, has partly allowed the appeal of the assessee and dismissed the appeal filed by the Department. 2. This Court while admitting the appeal on 16.11.2016 has framed the following substantial questions of law:- “(i) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the following items of income were not to be included whilst computing the profits derived from the business of the Gadepan I unit and were not eligible for a deduction under section 80IA of the Act. (a) Interest on long term investment Rs.4,57,250/- (b) Interest on deposits and others Rs.7,54,03,024/- (c) Compensation received on machinery

(2 of 10) [ITA-679/2011] breakdown Rs.3,53,33,667/- (d)

Expense

provision

written

back Rs.37,40,951/- (e) Recovery of rent Rs.6,00,583/- (f) Miscellaneous Income Rs.96,43,323/- (ii) Whether various types of incomes which though incidental but having direct nexus to the carrying on of the business of the undertaking, should not be considered as forming part of the profits & gains derived by such undertaking. (iii) Whether the words “profits and gains derived by an undertaking” has such a narrow meaning to excluse from the profits of an undertaking the incomes like compensation from machinery breakdown, interest, rent and miscellaneous incomes which are incidental to the main operational activities of the Undertaking.” 3. Counsel for the appellant Mr. Jhanwar has taken us to the order of the CIT(A) wherein it has been observed as under:- It was further submitted by the appellant that out of the total receipts of Rs.19,23,38,637/- disallowed by the Assessing officer, Rs.5,73,61,237/- relates to the units other than the Gadepan I project Gadepan-II, Food Processing unit, Gaziabad, Birla Textile Mill, Himachal Predesh & Trading & ISG, Chennal on which no claim of 80IA has been made. In respect of the disallowed incomes of Gadepan I unit, he further submitted the detail of the remaining expenses which are as follows:- 1 Interest on Long Term Investment Interest on Bonds of KSEB 457,250 Deposited in accordance with (@14.75% of Rs.31 lacs) Rule 3A of Companies Acceptance of Deposit Rules 1975 2 Interest on Deposits and Others Interest on Staff Vehicle Loans 426,232 Income directly derived from eligible business Interest on Staff Furniture Loans 168,885 Income directly derived from eligible business Interest on Staff Housing Loans 2,183,140 Income directly derived from eligible business Intt-dealers on delayed payts 12,272,442 Income directly derived from eligible business Interest on ICD’s/Other Interest 60,149,960 Directly covered by the decision of the High Court of Bombay in the Interest on Fds with Banks 202,365 case of CIT V/s United Carbon India Ltd. 190 ITR 622 75,403,024 3 Dividend Income 3,564,159 4 Rent Received

(3 of 10) [ITA-679/2011] House Rent recoveries 67,247 Income directly derived from eligible business Recoveries from Zuari etc. 533,336 Income directly derived from eligible business 600,583 5 Insurance Claims Short veightment of urea (24,954) Income directly derived from eligible business MBD Claims, Transit claims etc. 37,225,807 Income directly derived from eligible business 37,200,853 6 Excess provision written back 3,740,951 Income directly derived from eligible business 7 Miscellaneous Income Miscellaneous Income 9,643,323 Includes incomes such as railway claims, hirecharges, cash discs, Liquidated Damages, despatch money, GPA claims etc. Sale of CO2 1,000,579 Directly covered by the decision of CIT V/s Sundaram Clayton Ltd Sale of scrap 3,366,680 Directly covered by the decision of CIT v/s Sundaram Clayton Ltd. 14,010,582 Total:- 134,977,402 4. He submits that all the three questions are inter-linked, therefore, may be decided together. 5. Counsel for the appellant after taking into consideration the aforesaid pointed out that issue No.1(a) is squarely covered by the decision of the Supreme Court in ACG Associated Capsules Pvt. Ltd. Vs. Commissioner of Income Tax, (2012) 343 ITR 89 (SC) wherein it has been held as under: “12.If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under Section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with Sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head “Profits and Gains of Business or Profession”, ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 80HHC. In other words, ninety per cent of not

(4 of 10) [ITA-679/2011] the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head “Profits and Gains of Business or Profession”, is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business. 13. The view that we have taken of Explanation (baa) to Section 80HHC is also the view of the Delhi High Court in Commissioner of Income-Tax v. Shri Ram Honda Power Equip (supra) and the Tribunal in the present case has followed the judgment of the Delhi High Court. On appeal being filed by the Revenue against the order of the Tribunal, the High Court has set aside the order of the Tribunal and directed the Assessing Officer to dispose of the issue in accordance with the judgment of the Bombay High Court in Commissioner of Income-Tax v. Asian Star Co. Ltd. (supra). We must, thus, examine whether reasons given by the High Court in its judgment in Commissioner of Income-Tax v. Asian Star Co. Ltd. (supra) were correct in law. 14. On a perusal of the judgment of the High Court in Commissioner of Income-Tax v. Asian Star Co. Ltd. (supra), we find that the reason which weighed with the High Court for taking a different view, is that rent, commission, interest and brokerage do not possess any nexus with export turnover and, therefore, the inclusion of such items in the profits of the business would result in a distortion of the figure of export profits. The High Court has relied on a decision of this Court in Commissioner of Income-Tax v. K. Ravindranathan Nair [(2007) 295 ITR 228 (SC)] in which the issue raised before this Court was entirely different from the issue raised in this case. In that case, the assessee owned a factory in which he processed cashew nuts grown in his farm and he exported the cashew nuts as an exporter. At the same time, the assessee processed cashew nuts which were supplied to him by exporters on job work basis and he collected processing charges for the same. He, however, did not include such processing charges collected on job work basis in his total turnover for the purpose of computing the deduction under Section 80HHC (3) of the Act and as a result this turnover of collection charges was left out in the computation of profits and gains of business of the assessee and as a result ninety per cent of the profits of the assessee arising out of the receipt of processing charges was not deducted under clauses (1) of the Explanation (baa) to Section 80HHC. This Court held that the processing charges was included in the gross total income from cashew business and hence in terms of Explanation (baa), ninety per cent of the gross total income arising from processing charges had to be deducted under Explanation (baa) to arrive at the profits of the business. In this case, this Court held that

(5 of 10) [ITA-679/2011] the processing charges received by the assessee were part of the business turnover and accordingly the income arising therefrom should have been included in the profits and gains of business of the assessee and ninety per cent of this income also would have to be deducted under Explanation (baa) under Section 80HHC of the Act. In this case, this Court was not deciding the issue whether ninety per cent deduction is to be made from the gross or net income of any of the receipts mentioned in clause (1) of the Explanation (baa).” 6. Regarding issue No.1(b), interest on deposits and so on, he relied on decision in CIT Vs. Advance Detergents Ltd. (2010) 228 CTR (Del) 356 wherein while considering the provisions of 80IA, the Delhi High Court considered the issue and held in favour of the assessee against the revenue. He has specifically relied upon the following observations which reads as under: “7. As pointed out above, the Tribunal has referred to various judgments of the High Courts as well as other Benches of the Tribunal. We may, however, begin our discussions with the recent case decided by the Supreme Court in Liberty India v. CIT MANU/SC/1585/2009 : (2009) 225 CTR (SC) 233 : (2009) 28 DTK (SC) 73 : (2009) 317 ITR 218 (SC) in which it has discussed and explained the contents and scope of said provision in a very lucid manner. The interpretation of Section 80-IA and other sections in the said judgment would provide sufficient guidelines to decide the question of law which has arisen for consideration in the present case. 8. In that case, the assessee was engaged in the manufacturing of fabrics out of yarns and also various textile items purchased from the market. It had claimed deduction under Section 80-IB of the Act on the increased profits of Rs. 22,70,056 as profit of the industrial undertaking on account of DEPB and duty drawback credited to the P&L a/c. The question which fell for consideration before the Supreme Court was as to whether profits from the DEPB and duty drawback scheme could be said to be profits derived from the business of industrial undertaking. It was in this context that the apex Court discussed the meaning of the words 'derived from'. Even before discussing the implication of the aforesaid words, the Court pointed out that though focus was on the analysis of Section 80- IB, the basic scheme of Sections 80-I, 80-IA and 80-IB remains the same. The Court was of the view that the words 'derived from' are narrower in convocation as compared to the words 'attributable to'. Thus, by using the expression 'derived from', the Parliament intended to cover sources not beyond the first degree. Accordingly, only such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of the eligible business have got to be rejected in view of the overriding provisions of Sub-section (5) of Section 80-IA, which is required to be read into Section 80-IB because of common scheme of incentives in the form of deductions as contained in both the sections, which were linked to profits and not for investments. Giving this interpretation to the aforesaid provision the Court observed as under: 14. ...On analysis of Sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying Sub-section (2), would be entitled to deduction under Sub-section (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, Sub-section (1) purports to restrict the quantum of deduction to a

(6 of 10) [ITA-679/2011] specified percentage of profits. This is the importance of the words 'derived from industrial undertaking' as against 'profits attributable to industrial undertaking'. 6.1 He contended that the view taken by the Delhi High Court is required to be accepted in favour of assessee. 6.2. In support of contention regarding expenses returned back he relied on decision of Punjab & Haryana High Court in CIT vs. Metalman Auto (P.) Ltd. (2011) 336 ITR 434 wherein it has been held as under: 6. The Assessee admittedly did the job work qualifying as eligible business under Section 80-IB. On the said issue, view taken by the Tribunal earlier was upheld by this Court vide judgment dt. 5th Dec, 2008 in case of IT Appeal No. 543 of 2008 (CIT v. Impel Forge & Allied Industries Ltd.). The view taken by the Tribunal being consistent with the earlier view taken by this Court, the said question cannot be held to be substantial question of law. Miscellaneous receipts from rebate, discount and balances written off are incidental to the profits and gains derived from eligible business under Section 80-IB. The air conditioners though purchased in the name of the managing director and his wife are for the Assessee and were to be used for the business of the Assessee and not for personal use of the managing director or his wife. Depreciation was, thus, admissible thereon. Electrical installations were part of plant and machinery and even for the earlier years, the depreciations were allowed. Dividend income was statutorily exempt. Mere omission to claim the said exemption in the return could not debar the Assessee from claiming the same. Judgment of Hon'ble Supreme Court in Goetze (India) (supra) was not applicable to such exemption as rightly held by the Tribunal. Accordingly, no substantial question of law arises. 13. As held by the CIT (A) and the Tribunal tools and dies lost their utility after use and the Assessee was consistently writing off 80 percent of the costs. The view taken cannot be held to be erroneous. Amount spent on consultancy on tools and dies are obviously revenue expenditure as expenditure on tools and dies itself could not be treated as capital expenditure. On the issue of disallowance under Section 14A presumptive expenditure in absence of actual expenditure could not be taken into account. The finding of the Tribunal is consistent with the earlier view of this Court noted by the Tribunal. Thus, no interference is called for.” 6.3 He contended that this is against the income which was shown on debit side has been written off therefore that benefit is also required to be granted in favour of the assessee. 6.4 The issue 1(c), compensation received on the machinery break down in view of decision cited above, it is squarely covered and issue is decided in favour of assessee against the department. 6.5 Therefore, ground No. 1 (d) expenses should be written back

(7 of 10) [ITA-679/2011] 37,40,951/-, in our considered opinion, the issue is required to be answered in favour of Department and against the assessee in view of the fact that this will not form a part of income since it was written off deposit which was kept in separate account. This is not an income derived. The issue is decided in favour of Department and against the assessee. 6.6 For issue No. 1(e) recovery of rent of Rs. 6 lacs, he has relied upon decisions reported in Commissioner of Income Tax vs. Indo Swiss Jewels Ltd. and Anr. (2006) 205 CTR (Bom) 158 wherein it has been held as under: 6. Though the Assessing Officer did not accept the explanation of the assessee, the appellate authority in the facts of the case and in the light of the material placed by the assessee on record, was satisfied that the funds were kept by the assessee in the various companies for short-terms for payment for imported machinery. In this connection the appellate authority held that the balance-sheet for the next year also showed that all these deposits were withdrawn and paid for the machinery. The appellate authority was satisfied with the explanation put forth by the assessee. The Tribunal did not find any error in the approach of the appellate authority. That the machinery was in fact imported by the assessee is not in question. From the facts and circumstances of the present case it is clear that the inter-corporate deposits were made by the assessee from the surplus funds that were set apart for the payment of imported machinery. That the said deposits were withdrawn and payment was made towards import of the machinery is also not questioned by the Revenue. The interest earned on the short-term deposits of the money kept apart for the purpose of business has to be treated as income earned on business and cannot be treated as income from other sources. 7. We, accordingly, answer the question in favour of the assessee and against the Revenue. The tax appeal is dismissed. Since the assessee has chosen not to appear, no order as to costs.” 6.7 In Commissioner of Income Tax vs. Eastern Tar P. Ltd. (2008) 218 CTR (Jharkhand) 506, it has been held as under: “In the instant case, as noticed above, against the order passed by the appellate authority under Section 263 of the Act, the assessee preferred appeal and the appellate authority after considering the law laid down by the Supreme Court and different High Courts, held that FDR of the bank and deposits in the investment account of IDBI have a close nexus with the business of the assessee-company which is an industrial undertaking and, therefore, the Assessing Officer had rightly allowed the deduction under Section 80I after having taken the interest income as profits and gains of the assessee-company. We fully affirm the view taken by the appellate authority in the light of the principle of law laid down by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd.'s case MANU/SC/0201/1978 : [1978]113ITR84(SC) and also the decision of the Bombay High Court.”

(8 of 10) [ITA-679/2011] 6.8 Taking into consideration the above judgments, he contended that the recovery of rent is also to be added in the business income and not misc. income. 6.8 For issue No. 1(f), he has relied upon the judgment of Punjab and Haryana High Court in CIT vs. Metalman Auto (P.) Ltd. (2011) 336 ITR 434 (supra) and contended that in view of the decision of Liberty India, the issue is required to be answered in favour of the assessee. 6.9. Regarding issue No.2, the compensation received, he relied on the decision of Delhi High Court in CIT Vs. Sportking India Ltd., (2010) 324 ITR 283 (Del.) and contended that the amount which has been deposited against the business expenses is required to be calculated in view of the decision of the Delhi High Court and drew our attention to the following observations: 5. At the outset, while determining the meaning to be attributed to this expression, one must keep in mind that Section 80-IA is a part of fascicules of provisions whereby benefits are granted to certain industrial undertakings, businesses etc. including those which are located in certain special locations/areas. The object is generation of new investment and employment with respect to particular industries in certain areas and in certain locations besides generation of revenue for the government and industries from whom plant etc. will be purchased by the new industrial undertaking. The object of the provision is further made clear from Sub- section (2) of Section 80-IA whereby such businesses are not considered for taking advantage of the deduction under Section 80-IA if either it is formed from splitting up of an existing business or by use of machinery or plant previously used and so on. The object is clearly to give fillip to the economy and to investment. This object will have to be kept in view while interpreting the provisions of Section 80-IA. 9. At this stage, it may be stated that the fact that there was a fire in the unit of the assessee company is an undisputed fact. It is not as if the event is questionable. If that be so, there is no reason why keeping in account the intent of the provision of Section 80-IA and the fact that an industrial undertaking has already been established and is running, (i.e. investment done, machinery purchased, employment and revenue generated etc.) a restricted interpretation be given to the expression "derived from any business of an industrial undertaking". As held by the Supreme Court in the case of Raghuvanshi Mills Ltd. definitely a nexus to the business is there in case the goods of a business are destroyed and for which an insurance amount is claimed.

(9 of 10) [ITA-679/2011] 10. We also note with approval the following passage in the judgement of the ITAT which shows that the net effect of the profit and loss account is nil in the facts and circumstances of the present case: Moreover, the said receipts on account of insurance claim, in our opinion, are in the nature of reimbursement of loss actually incurred by the assessee as a result of goods damaged by fire and there being no element of profit involved therein, the same cannot be treated as any income separately earned by the assessee so as to exclude them for the purpose of computing deduction Under Section 80IA. As rightly contended by the learned Counsel for the assessee, although the expenditure incurred on the cost of goods damaged by fire is debited in the profit & loss account by the assessee and the insurance claim received on account of such goods lost in fire is credited in the profit & loss account as per the guideline for proper presentation and disclosure, the net effect is that both these transactions get nullified having no bearing ultimately on the profit shown in the profit & loss account. In our opinion, the exclusion of the amount of insurance claim received by the assessee and credited in the profit & loss account for computing deduction Under Section 80IA thus is not justifiable from this angle also. Therefore, there is no reason why amount received from the insurance company by the assessee company should not be taken into account in determining the profits and gains of an industrial undertaking of the types specified under Section 80-IA.” 7. Counsel for the respondent has strongly relied on definition of 80-IA and contended that in view of definition in Liberty India the appellant is not entitled for the benefit as claimed. She has also relied upon 80HHC (bba) and contended that the provisions of (b) is not attracted, therefore, the view taken by the Tribunal is required to be accepted and no interference is required in this appeal. 8. We have heard the learned counsel for the parties. 8.1 Taking into consideration the decision of the Supreme Court in ACG Associated Capsules Pvt. Ltd. (supra), issue No.1 is answered in favour of assessee inasmuch as deposit which he has clubbed was statutory mandatory requirements against the Fixed Deposit receipt. In that view of the matter, if there is a breach of condition of 10% will invite action. In that view of the matter, it was mandatory requirement under the Act. Other issues are decided as indicated above.

(10 of 10) [ITA-679/2011] The appeal is accordingly disposed of. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. /bm gandhi 265