Commissioner of Income Tax vs. Jackson Engineers Ltd.

IN THE HIGH COURT OF DELHI AT NEW DELHI ITA No. 251 of 2008 Reserved on: 25th November, 2009 %

Pronounced on : 23rd December, 2009

Commissioner of Income Tax

. . . Appellant

through : Mr. N.P. Sahini, Advocate.

VERSUS

Jackson Engineers Ltd.

. . .Respondent

through: Mr. Kanan Kapoor, Advocate.

CORAM :-

THE HON’BLE MR. JUSTICE A.K. SIKRI

THE HON’BLE MR. JUSTICE SIDDHARTH MRIDUL

A.K. SIKRI, J.

“i) Whether on the facts of the present case, the

Tribunal was justified in law in allowing deduction

under Section 80IA of the Act in disregard of the

fact that the activity carried on by the assessee did

not qualify as “manufacturing activity” for the

purpose of under Section 80IA?”

ii) Whether on the facts and in the circumstances of the

case, the Tribunal was justified in law in holding

that the incidental business income derived by the

assessee in the shape of interest income and

advances from customers amounting to

Rs.21,39,626/- and Rs.44,45,508/- respectively was

eligible for deduction under Section 80IA of the

Act?” 2009:DHC:5672-DB

Sans unnecessary details, symptomatic facts for deciding the questions of law are recapitulated are as under:

The assessee carries on business of assembling diesel generating sets at its various units, including the unit under reference located at Daman. For the assessment year under consideration, as in the earlier assessment year, it claimed deduction under Section 80IA of the Income Tax Act (hereinafter referred to as „the Act‟) in the sum of Rs.1,80,57,561/- in respect of profit derived from the Daman Unit. The Assessing Officer disallowed the deduction on the ground that the activity of assembling gensets from various components did not amount to manufacture or production of any articles or thing. For taking this view, the AO placed reliance on the detailed discussion as contained in the assessment order for the assessment year 1995-96 passed in the assessee‟s own case.

silencer and other components. The assessee company procures the engine and the alternator as per the requirement and choice of the customer. Engines are procured from the leading manufactures of the same, viz., M/s Kirloskar Oil Engines Ltd., M/s. Ashok Leyland, M/s Jyoti Ltd. and M/s NGEF. The alternators are procured from M/s Kirloskar Oil Engines and other manufactures. Batteries, control panel, fuel tanks, base frames, leads, silencer, etc. are similarly procured from the outside vendors; in the case of base frames, control panel, fuel tanks, silencers and other components. The assessee gets them manufactured as per its designs and specification, specifying the type of materia to be used. The assessee company has now sets up its own independent manufacturing unit at Noida to manufacture control panels required by its Daman Unit.

It is contended that the assembly of components involves coupling and aligning with the engine and alternator. This is a matter of great skill and technical expertise. It is carried out manually. The assessee has on its rolls qualified engineers, technician and electricians to perform this job. If the engine and alternator are not coupled properly, there could be server vibration when the generating set is run, and this can damage the engine, the alternator and other components that are fitter in the DG set Chain pulley blocks are used to lift the engine and 2009:DHC:5672-DB

components. After the coupling is done, the engine and the alternator are mounted on a base framed. The base frame is a solid iron channel, designed and cut to suit the type of DG set to be assembled. It has to be strong not only to support the weight of the DG set mounted on it, but also to withstand the pressure when the DG set is run. Grooves are made in the base frame. The engine and the alternator are affixed to the base frame by means of nut and bolts fitted in the grooves. Other components are fitted to complete the DG set. The function of the control panel is to indicate the voltage and the current that is generated. It is fitted with switches and instrument to regulate and control the power supply. Diesel is stored in the fuel tank. The function of the battery is to provide the initial current required to start the engine. The function of the silencer is to diminish the sound of the DG set when it runs. The function of the radiator is to maintain the temperature of the DG set. The above components constitute the inputs in the manufacture of a diesel generating set. The DG set is the final product which has a distinctive name, character and function different from each of the computation.

On the aforesaid, the CIT(A) held that the activity of the assessee amounts to manufacture. For this purpose, the CIT(A) also relied upon earlier orders passed by the Income Tax 2009:DHC:5672-DB

respect of the assessee itself. The Tribunal has affirmed this finding.

“6. Submissions before us remain the same. We are of the opinion that the case is directly covered by the judgment of the Apex Court in Aspinwall & Co. Ltd. v. Commissioner of Income Tax, Ernakulam, (2001) 7 SCC 525. In that case the assessee was engaged, inter alia, in curing of coffee for which it had installed coffee- curing plants. It had claimed investment allowance under Section 32-A of the Income-Tax Act which depended upon the issue as to whether the process of curing the coffee would amount to manufacturing or production activity. Answering the question in the affirmative, in favour of the assessee, the Court explained the expression “manufacture” as under:-

“13. The word “manufacture” has not been defined in the Act. In the absence of a definition of the word 2009:DHC:5672-DB

forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to a manufacturing activity.

“Commonly manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place.”

after plucking or receiving the raw coffee berries makes

it undergo nine processes to give it the shape of coffee

beans. The net product is absolutely different and

separate from the input. The change made in the article

results in a new and different article which is recognized

in the trade as a new and distinct commodity. The

coffee beans have an independent identity distinct from

raw material from which it was manufactured. A

distinct change comes about in the finished product.”

The assessee had shown income of Rs.95,34,188/- from its Daman Unit as other income. Major receipt was on account of interest of Rs.85,76,063/-,which is earned mainly from fixed deposits made with banks. The assessee had claimed deduction of this income under Section 80IA. This income is in three forms: a) Interest earned from FDRs kept with the Bank; b) Interest income from customers; and c) Advances from the customers received which were forfeited. The AO held that the assessee would not be entitled to this benefit, as this income was not “derived from” the industrial undertaking. The Tribunal has remitted the case back to the AO to consider the matter afresh in respect of interest earned from FDRs kept with the Bank to find out as to whether the Bank had insisted for FDR as collateral security or not and then decide the issue. We are not concerned with this aspect in this appeal. The question as

formulated clearly shows that we have to deal with other two

aspects of income to find out as to whether those would be

eligible for deduction under Section 80IA of the Act.

from the income “derived from” and income “attributable to” the industrial undertaking.

eligible undertaking and consequently the reimbursement of the said amount cannot be treated as income of the assessee(s) dehors the expense originally incurred by way of payment of duty. Consequently, according to the appellant(s), receipt of duty drawback/DEPB stood linked directly to the manufacture/production of goods and therefore had to be regarded as profits derived from eligible undertaking qualifying for deduction under Section 80IB of the 1961 Act. On behalf of the appellant(s) it was further submitted that this Court's decision in Sterling Food (supra) dealt with availability of deduction under Section 80HH with respect to profit on sale of import entitlements. The said decision, according to the appellant, had no applicability to the issue under consideration for the reason that import entitlement/REP licence was granted by the Government on the basis of exports made; the same were granted gratuitously without antecedent cost having being incurred by the industrial undertaking, unlike duty drawback and DEPB, which had direct link to the costs incurred by such industrial undertaking by way of payment of customs/excise duty in respect of duty paid inputs used in the manufacture of goods meant for export and in such circumstances, profit from sale of import entitlements/REP licence was in the nature of windfall and it was in those circumstances, that the apex Court held that source of profit on sale of import entitlements was not the industrial undertaking but the source was the Export Promotion Scheme. According to the appellant(s), in the case of sale of import entitlements/REP licence, the source was the Scheme framed by Government of India whereas in the case of DEPB/duty drawback, the source was the fact of payment of duty in respect of inputs consumed/utilized in the manufacture of goods meant for export. That, but for such payments of duty on inputs used in the manufacture of goods meant for exports, industrial undertaking(s) would not be entitled to the benefit of duty drawback/DEPB, notwithstanding, the Export Promotion Scheme of the Government and, therefore, there was a direct and immediate nexus between payment of duty on such inputs and receipt of duty drawback/DEPB. In this connection reliance was placed on the judgment of the Gujarat High Court in the case of CIT v. India Gelatine and Chemicals Ltd. reported in 275 ITR 284. Lastly, it was submitted on behalf of the appellant(s) that there was no difference between Advance Licence Scheme and duty 2009:DHC:5672-DB

inputs and thereafter seek reimbursement on profit of goods manufactured using such duty paid inputs, having been exported. The industrial undertaking alternatively could avail of Advance Licence Scheme whereunder the industrial undertaking could import inputs to be used for manufacture of goods meant for export without payment of duty. In the case where the industrial undertaking enjoyed the benefit of Advance Licence Scheme, the profit as shown in Profit & Loss account was regarded as income derived from industrial undertaking entitled to deduction under Section 80IB of the 1961 Act without any adjustment whereas when the same industrial undertaking when it opts for duty drawback is denied the benefit of deduction under Section 80IB on the duty remitted. 9. On behalf of the appellant(s) it was submitted that Section 80IB was different from Section 80I in the sense that under Section 80IB, income derived from business of an industrial undertaking was admissible for deduction whereas under Section 80I deduction was allowable to income derived from industrial undertaking. Hence, according to the appellant(s) provision of Section 80IB was much wider in scope than Section 80I. According to the appellant(s) Section 80IB was wider than Section 80I as the Legislature intended to give benefit of deduction not only to profits derived from the undertaking but also to give benefit of deduction in respect of incomes having direct nexus with the profits of the undertaking, hence, all incomes that arose during the course of running of the eligible business would be eligible for deduction under Section 80IB, which would include income arising on sale of DEPB at premium.”

“12. Precisely, this very issue came up for consideration before the Gujarat High Court in the case of Nirma Industries Ltd. v. Deputy Commissioner of Income Tax, (2006) 283 ITR 402 (Guj). That was also a case where interest was received by the assessee from the debtors for late payment of the sale proceeds and the question was as to whether this interest can be treated as the income derived from the business for the purpose of Section 80-I of the Act. Answering the question in favour of the assessee, the Gujarat High Court relied upon the 2009:DHC:5672-DB

case the Supreme Court had held that interest was of the same nature as other trading receipts in the following manner :-

“The assessee is a contractor. His business is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. If the amounts are not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee's receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. It would not be correct, as the Tribunal has held, to say that this interest is totally de hors the contract business carried on by the assessee. It is well settled that interest can be assessed under the head 'Income from other sources' only if it cannot be brought within one or the other of the specific heads of charge. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the awards and treated as 'income from other sources”.

sale price if it delays payment of sale proceeds. In other words, this is a converse situation to offering of cash discount. Thus, in principle, in reality, the transaction remains the same and there is no distinction as to the source. It is incorrect to state that the source for interest is the outstanding sale proceeds.

(i) Phatela Cotgin Industries (P) Ltd. v. Commissioner of Income Taxm 303 ITR 411 (P&H) (ii) Commissioner of Income Tax v. Flender Macneil Gears Ltd.,150 ITR 83 (Cal) (iii) Tata Sponge Iron Ltd. v. Commissioner of Income Tax

292 ITR 175 (Orissa) (iv) Commissioner of Income Tax v. Indo Matsushita Carbon Co. Ltd., 286 ITR 201 (Mad)

Court in Liberty India (supra) as well as the judgment of this Court cited above.

h AO f h i i h b f h di i 2009:DHC:5672-DB

become definite surplus. Thus, though the advances were initially not taxable, their forfeiture rendered them to be treated as trading receipt and the amount had become a trade surplus. He thus included the said amount for the purpose of tax.

“4.2 I have considered the matter. As per the facts stated on behalf of the assessee, it is not a case of unclaimed balances remaining outstanding for a long period of time and appropriated for want of claim by the creditors. It is on the contrary as case where advances have been expressly forfeited by the assessee on account of alleged breach of contract on the part of the intending purchasers. The intending purchasers have been demanding the refund of their money, and some of them have also filed suits for recovery against the assessee. However, the assessee has taken the stand that the concerned parties were themselves in default of contracts for sale, and were therefore not entitled to the refunds. The assessee has written off and appropriated their advances with the express intention of not refunding the same. The argument take by the assessee before the Department – namely that it had no right under the contracts of sale to effect the forfeiture- is contrary to its own stand visa vis (vis-à-vis sic.) the concerned parties. Once the repudiated the obligation to refund an advance, appropriates it by writing it off in its books, and informs the claimant accordingly, no accrued liability can be said exist thereafter. What remains at best is a contingent which may accrue in the event of an adverse court decree in a suit brought by the claimant. Till then, no liability can be said to subsist from the pint of view of the assessee. In the matter of a statutory debt, the debt subsists till the relevant stature recognizes it as such, regardless of the objections of the debtor. However, a liability under a contract accrues and subsists only if and to the extent it is admitted by the parties thereto. In the event of a dispute, what subsists is merely a claim, which can crystallize into a liability either by agreement or through a court decree. 2009:DHC:5672-DB

accrued contractual liability in respect of them existed. The facts that the parties had made claims and had filed suits does not alter that position. Therefore, the only issue that remains to consider is whether advances written off and appropriated by the assessee constituted its business income.”

The CIT (A) for this purpose took support from the judgment of the Supreme Court in the case of Commissioner of Income Tax, Madurai vs. T.V. Sundaram Iyengar & Sons Ltd. [222 ITR 344].

“3.3.2 We have heard both the parties, perusal the records and considered the matter carefully. We have already held following decisions of Delhi Bench of Tribunal in para 3.1.3 of this order earlier that business income closely connected to the business of undertaking has to be considered for deduction u/s 80IA even if it is not directly derived from the undertaking. In this case, CIT(A) has himself held that sum of Rs.4445508/- is asseassable as business income. This income is no doubt is directly connected to the business of undertaking. We, therefore, hold that the assessee will be entitled to deduction u/s 80IA in respect of the said income. Order of CIT(A) is reversed and the claim of the assessee is allowed.”

the Revenue justifying the order of the CIT (A) on the basis of judgment of the Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra).

“…If a common sense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally was not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time-barred and the amount attained a totally different quality. It became a definite trade surplus. In Jay‟s case it was pointed out that in Tattersall‟s case (1939) 7 ITR 316 (CA) no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into being automatically by operation of law, common sense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of 2009:DHC:5672-DB

(A.K. SIKRI) JUDGE

(SIDDHARTH MRIDUL) JUDGE December 23, 2009. pmc

2009:DHC:5672-DB