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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: VIKAS AWASTHY & SHRI S.RIFAUR RAHMAN
ORDER
PER VIKAS AWASTHY,JM:
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-41, Mumbai ( in short ‘the CIT(A)’) dated 07/09/2017 for the assessment year 2012-13.
Shri Nitin Furia appearing on behalf of the assessee submitted that the assessee is engaged in manufacturing and trading of electrical,electronic goods and house wires. The manufacturing unit of the assessee is situated at Daman,
2 आअसं. 6929/मुं/2017 (�न.व. 2012-13) ) an industrially backward area specified in 8th Schedule and hence, the said unit is eligible for deduction under section 80IB of the Income Tax Act, 1961 ( in short ‘the Act’). This is the only business of the assessee and there is no other business activity carried out by the assessee, hence, the income declared by the assessee is from business of manufacturing house wire, electric and electronic goods eligible for deduction under section 80 IB of the Act.
2.1 The ld.Authorized Representative of the assessee submitted that the assessee had taken Employees Retention Policy ( in short ‘ERP’) from ICICI Prudential Life Insurance in the name of two employees i.e. Mr.Sameer Gala and Mr. Vijay Gala. The aforesaid policy was taken to safeguard any probable losses at the time of exit of the aforesaid employees before the period as specified in the policy. The retention benefits/incentives were given to above mentioned key personnel to stay for a longer duration with the assessee. During the period relevant to the assessment year under appeal both the above said persons left the assessee company during the currency of ERP. After the exit of above said employees from employment of assessee, the assessee received compensation of Rs.39,74,925/- on the redemption of policy. The ld.Authorized Representative of the assessee pointed that Mr.Sameer Gala and Mr. Vijay Gala were key employees in handling manufacturing, distribution and marketing of the products. Mr.Sameer Gala was instrumental in sourcing of new products, marketing strategy and also contributed in maintaining accounts of customers. Mr. Vijay Gala handled material procurement and played vital role in supply and distribution chain.
2.2 The assessee claimed deduction under section 80 IB of the Act on the amount received on redemption of ERP. The Assessing Officer in scrutiny
3 आअसं. 6929/मुं/2017 (�न.व. 2012-13) ) assessment proceedings rejected assessee’s claim of deduction under section 80 IB of the Act, inter-alia on the amount received by assessee on redemption of ERP. Aggrieved against the assessment order dated 26/02/2015, the assessee filed appeal before the CIT(A). The CIT(A) without appreciating the facts rejected assessee’s claim on the premise that ERP though labelled as insurance policy but in strict sense does not qualify as insurance policy as it is not governed by the Insurance Regulatory Authority of India. The CIT(A) further held that the redemption amount received has no direct nexus with activities of the industrial undertaking eligible for benefit under section 80 IB of the Act. The ld.Authorized Representative of the assessee asserted that the assessee has made payment of the policy premium on the aforesaid polices from 31/03/2008 to 31/03/2010. The same was allowed as expenses, consequently, the assessee’s claim of deduction under section 80 IB of the Act to the extent of expenditure allowed was reduced. To support his contentions, the assessee placed on record P&L Account for the Financial Year ending on 31/03/2008, 31/03/2009 and 31/03/2010. The ld.Authorized Representative of the assessee vehemently argued that there a direct nexus between the proceeds received from redemption of ERP and the profits from the industrial undertaking. The ld. Authorized Representative for the assessee pointed that section 28(vi) specifically provides that sum received under Keymen Insurance policy is chargeable to income tax as business income. In any case, this is the only business of the assessee, therefore, the assessee should be granted the benefit of deduction under section 80 IB of the Act on the amount received on redemption of ERP. In support of his contentions, the ld.Authorized Representative of the assessee placed reliance on the following decisions:
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(i) CIT vs. Sportking India Ltd., 324 ITR 283(Del) (ii) Snam Progetti SPA vs. Addl.CIT, 132 ITR 70(Del) (iii) ITO vs. Electro Ferro Alloys Ltd. 13 ITR (Trib) 594(Ahd)
The ld.Authorized Representative of the assessee submitted that in ground No.2 of appeal, the assessee has raised an alternate contention without prejudice to the first contention that if, the redemption amount is not held to be eligible for deduction under section 80 IB of the Act, then the expenses not having direct nexus to industrial undertaking should be excluded for calculating deduction under section 80 IB of the Act. The ld.Authorized Representative of the assessee pointed that the Assessing Officer in assessment proceedings has disallowed interest income on fixed deposits as not eligible for deduction under section 80 IB of the Act, in appeal the CIT(A) has granted the benefit of deduction on the said interest amount. The ld.Authorized Representative of the assessee further submitted that the assessee had incurred several indirect expenses aggregating to Rs.2,97,98,713/-. These expenditure are not directly related to manufacturing activity of the business and hence, should be excluded while determining profit for the purpose of deduction under section 80 IB of the Act.
4. On the contrary, Shri Vijayn Kumar G Subramaniyan representing the Department vehemently defended the impugned order and prayed for dismissing the appeal of assessee. The ld.Departmental Representative submitted that the assessee has failed to show first degree nexus between the profit and gains derived from the eligible unit and redemption amount of the ERP.
5 आअसं. 6929/मुं/2017 (�न.व. 2012-13) )
We have heard the submissions made by rival sides, examined orders of authorities below and have considered the decisions on which reliance has been placed by the assessee. The primary issue before us in appeal is whether the assessee is eligible for deduction under section 80 IB of the Act on sum received by assessee on redemption of ERP. In so far facts of the case are concerned, they are not in dispute.
6. A bare perusal of section 80 IB of the Act would show that it is the profit and gains derived from any business specified in sub-section (3) to (11), (11A) and (11B) shall be eligible for deduction subject to fulfilment of conditions specified in sub-section(2). The expression ‘derived from’ used in section is of paramount significance. The Hon'ble Supreme Court of India in the case of Liberty India Vs. CIT , 317 ITR 218 has held that the words ‘derived from’ used in section 80IA/80IB of the Act intend to cover sources not beyond the first degree. It is not in dispute that the industrial undertaking of the assessee qualifies for deduction under section 80 IB of the Act. The issue before us is in narrow compass i.e. whether amount received on redemption of ERP has direct nexus with profits & gains of undertaking and hence, eligible for deduction under section 80 IB of the Act.
In the present case we find that apart from the business of manufacturing of electrical and electronic goods and wires there is no other business of the assessee. Thus, the policy premium paid by the assessee under Employee Retention Scheme was in respect of employees working in the industrial undertaking eligible for deduction under section 80 IB of the Act. The premium amount paid by the assessee over the years i.e. from financial year 2007-08 to 2009-10 aggregating to Rs.33,00,000/- was allowed as 6 आअसं. 6929/मुं/2017 (�न.व. 2012-13) ) expenditure by the Department in the corresponding assessment years. This resulted in reduction in the profits and the assessee’s claim of deduction under section 80 IB of the Act. The retention of the employees viz. Mr. Sameer Gala and Mr. Vijay Gala in the opinion of assessee was critical for profitable working of the industrial undertaking. Thus, there was live connection between the operations of industrial undertaking and the services rendered by the said key employees in the undertaking. The departure of both said employees from the employment of assessee during the period relevant to the assessment year under appeal resulted in culmination of ERP. The loss suffered by the assessee on exit of the aforesaid employees was compensated to the extent covered by the policy.
The Hon'ble Delhi High Court in the case of Sportking India Ltd. (supra) while dealing with the issue of eligibility of deduction under section 80IA on the amount received as insurance compensation on goods destroyed held that there is a nexus between business and the goods of the business that are destroyed and for which an insurance amount is claimed. In other words the Hon’ble High Court held that there was nexus between the profit derived from the business of eligible industrial undertaking and the amount of insurance claimed. While holding so, the Hon’ble High Court considered various decisions. For the sake of completeness relevant extract of the finding of Hon’ble High Court on the issue are reproduced herein below:
The issue, therefore, which falls for consideration is, whether the insurance claim which has been received cannot be considered while making deductions in respect of the profits and gains from an industrial undertaking under section 80-IA. The matter boils down to the meaning of the expression "derived from any business of an industrial undertaking" as appearing in section 80-IA.
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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 fasciculus 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 subsection (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. [
We find that for a similar provision of section 80-IB, two decisions have been rendered by two Division Benches of this Court in the judgments reported as CIT v. Eltek SGS (P.) Ltd.[2008] 300 ITR 6 and CIT v. Dharam Pal Prem Chand Ltd. [2009] 221 CTR (Delhi)133 . In the Eltek SGS (P.) Ltd.'s case (supra] duty drawback was held to be profits/gains derived from an industrial undertaking and hence eligible for deductions under section 80-IB. In the case of Dharam Pal Prem Chand Ltd. (supra] refund of excise duty was held to be profits and gains derived from an industrial undertaking within the meaning of an expression under section 80-IB
7.In fact, the Supreme Court, way back in 1952 in the judgment reported as Raghuvanshi Mills Ltd. v. CIT[1952] 22 ITR 484 held that where the assessee had taken policy known as "consequential loss policy" against loss of profit and its mills were completely destroyed by fire the amount received under the policy was held to be inseparably connected with the conduct of the business and, hence, was held to be a:Revenue receipt.'Para 18 is relevant and is re-produced herein:- "18. The assessee is a business company. Its aim is to make profits and to insure against loss. In the ordinary way it does this by buying raw material, manufacturing goods out of them and selling them so that on balance there is a profit or gain to itself. But it also has other ways of acquiring gain, as do all prudent businesses, namely by insuring against loss of profits. It is indubitable that the money paid in such circumstances is a receipt and insofar as it represents loss of profits, as opposed to loss of capital and so forth, it is an item of income in any normal sense of the term. It is equally clear that the receipt is inseparably connected with the ownership and conduct of the business and arises from it. Accordingly, it is not exempt," (p. 488) ,
8. Similarly, in the case of CIT v. Needle Industries (India) Lid. [2006] 245 ITR 556 a Division Bench of the Madras High Court held that the amount received from an insurer on account of loss of raw materials etc. in the fire, was held to be a trading receipt to the extent the amount received exceeded the book value of the goods and the same constituted taxable income.
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 80-1A and the fact that an industrial undertaking has already been established and is running, (i.e.
8 आअसं. 6929/मुं/2017 (�न.व. 2012-13) ) 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. (supra) 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.
We also note with the approval of the following passage in the judgment of the 1TAT 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 80-IA. 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 and loss account by the assessee and the insurance claim received on account of such goods lost in fire is credited in the profit and 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 and loss account. In our opinion, the exclusion of the amount of insurance claim received by the assessee and credited in the profit and loss account for computing deduction under section 80-IA 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.
Similar view was expressed by Hon’ble Gujarat High Court in the case of CIT vs. Shree Ram Multi Tech Ltd., 215 Taxman 90 holding insurance claim for loss of raw material/finished products eligible for deduction under section 80IA of the Act.
In the present case, the assessee has received compensation on redemption of ERP. Man, material, machines and money are the key element of manufacturing operation. Qualified and specialized work force at whatever level of an organization is equally important as material for profitable running of an undertaking. As pointed earlier that this is the only business of assessee and the assessee had taken policy for the retention of its two key employees
9 आअसं. 6929/मुं/2017 (�न.व. 2012-13) ) i.e. Mr. Sameer Gala and Mr. Vijay Gala, who had specialisation in their respective fields in handling manufacturing, marketing, procurement of material etc. i.e. the element necessary for efficient working of an industrial undertaking. The assessee has been debiting premium paid on ERP to P&L Account and the same was allowed to the assessee. This clearly indicate that the Department had accepted the fact that ERP taken by assessee in the name of Mr. Sameer Gala and Mr. Vijay Gala had direct nexus with the business of the assessee eligible for deduction under section 80 IB of the Act. Now, the Revenue cannot be allowed to take a contrary stand when the assessee has received sum on redemption of ERP after both the employees in whose name ERP was taken left the employment of assessee. Drawing analogy and support on eligibility of insurance claim on loss of goods being eligible for deduction under section 80 IB, we hold that the amount received by the assessee on redemption of ERP, there is first degree nexus with the profits and gains derived from business eligible for deduction under section 80 IB of the Act .
9. We find merit in Ground No.1 of the appeal by assessee. The findings of the CIT(A) on this issue are reversed and ground No.1 of the appeal is allowed.
10. Ground No.2 of the appeal is an alternate prayer to assessee’s eligibility to claim deduction under section 80 IB of the Act on redemption on ERP. Since, we have allowed ground No.1 of the appeal, the contentions raised in ground No.2 have become academic and thus, are not deliberated upon.
In ground No.3 of the appeal, the assessee has assailed initiation of penalty proceedings under section 271(1)(c) of the Act. The ground raised by the assessee is premature at this stage, hence, the same is dismissed as such.
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In the last ground of appeal, the assessee has assailed charging of interest under section 234B and 234C of the Act. Charging of interest under section 234B & 234C of the Act is mandatory and consequential, hence , this ground of appeal is dismissed.
In the result, appeal by assessee is partly allowed.
Order pronounced in the open court on Tuesday, the 23rd day of February, 2021.