M/S HUBLI ELECTRICITY SUPPLY CO. vs. DCIT,

On the facts and circumstances of the case, the condition precedent for invoking section 263 of the Act being absent, the proceedings initiated under the said section was opposed to law and order passed u/s. 263 is liable to be cancelled.

At the very outset, the Bench wanted to know as to what happened in the proceedings u/s. 263 of the I.T. Act. In reply, it was submitted by the ld. AR of assessee that against the order passed u/s. 263 of the Act, an appeal was filed by the assessee before the Tribunal, but this appeal was filed late and therefore the same was dismissed by the Tribunal in dated 12.08.2016 without condoning the delay. Then it was observed by the Bench that in that circumstances, the order of CIT passed u/s. 263 of the Act for AY 2006-07 has attained finality and since the AO has simply followed this order of ld. CIT u/s. 263, how the assessee can claim relief in this year. In reply, the ld. AR of assessee had nothing to say.

The ld. DR of revenue supported the orders of authorities below.

We have considered the rival submissions. We find that the Statement of Facts filed by the assessee before the ld. CIT(Appeals) along with Form 35 are relevant to consider the facts and hence, the same are reproduced hereinbelow:-

From the above Statement of Facts, it is seen that it is admitted by the assessee also in this Statement of Facts that based on the directions issued by the CIT in his order u/s. 263 of the Act, the AO disallowed the claim u/s. 80IA(4)(iv)(c) on the miscellaneous income of Rs.15,53,99,921. In this view of the fact that this order of CIT u/s. 263 has attained finality, we hold that no interference is called for in the order of CIT (Appeals) in this year.

In the result, the appeal of assessee for AY 2006-07 is dismissed.

Now we take up the appeal of assessee for AY 2007-08 in . The grounds raised by the assessee in this year are as under:-

It is submitted by the ld. AR of assessee that details of miscellaneous income of Rs.10,09,39,888 is available on pages 3 & 4 of the ld. CIT(Appeals)’s order. Thereafter, he submitted that the stand of ld. CIT(A) and of the AO is in line with the judgment of Hon’ble Apex Court rendered in the case of Liberty India v. CIT as reported in 317 ITR 218 (SC). But subsequent to that, in the case of CIT v. M/s. Meghalaya Steels Ltd. as per judgment reported in 383 ITR 217 (SC) (copy available on pages 263 to 295 of PB), the earlier judgment of Hon’ble Apex Court rendered in the case of Liberty India (supra) was considered and thereafter it was held that if any subsidy is received from Government of India in order to reimburse, wholly or partly, costs actually incurred by the assessee in the manufacturing and selling of its products. The “profits and gains” for the purpose of section 80-IB and 80-IC will be after considering such subsidies, because those subsidies only reduce the cost and the net profit of the industrial undertaking is to be arrived at after deducting the manufacturing cost and selling costs actually incurred by the assessee after reducing the reimbursement of such cost received by the assessee from the Government.

He submitted that in the present case, the miscellaneous income of the assessee are of the same nature for which relief was allowed by the Hon’ble Apex Court in the case of CIT v. M/s. Meghalaya Steels Ltd. (supra) and therefore, this judgment of Hon’ble Apex Court has to be considered and relief should be allowed to the assessee.

Thereafter, he placed reliance on the judgment of Hon’ble Apex Court rendered in the case of Cambay Electric Supply Industrial Co. Ltd. v.

As against this, the ld. DR of revenue supported the orders of authorities below. She placed reliance on the judgment of Hon’ble High Court of Himachal Pradesh rendered in the case of Himachal Futuristic Communication Ltd. v. CIT as reported in 42 taxmann.com 179 (HP). She made available a copy of this judgment. She also placed reliance on the judgment of Hon’ble Apex Court rendered in the case of Liberty India (supra).

We have considered the rival submissions. First of all, we reproduce the details of miscellaneous income of Rs.10,09,39,888 which is in dispute. These details are available on pages 3 & 4 of the CIT(A)’s order. The same is reproduced hereunder:-

From the above details of miscellaneous income, it is seen that the income in dispute is interest income, profit on sale of stores, sale of scrap, misc. receipts from trading, rental from staff qtrs., rental from others, excess found on physical verification of material stock, commission for collection of electric duty and miscellaneous recovery of Rs.7,51,86,012. As per the details of miscellaneous recovery, we find that the items included are penalty recovered from suppliers/contractor, unclaimed balance o/s, Dept .Exams fees, sale of dept. books, sale of forms, miscellaneous recovery from employees, sale of scrap/stock excess found, meter reading testing charges, BBC theft ca collected and difference between WDV/book value of released asset.

Now, we examine the ratio laid down by Hon’ble apex court in the case of CIT v. M/s. Meghalaya Steels Ltd. (supra). As per this judgment, in our considered opinion, the ratio laid down by Hon’ble apex court is this that if a receipt is towards reimbursement of manufacturing or selling cost then such receipt is not an independent income but it will reduce the cost of manufacturing or selling and resultant increase in profit is profit from industrial undertaking. As per the judgment of Hon’ble apex court in the case of Liberty India (supra), the dispute was about DEPF and Duty draw back and it was held that it is an independent income and not an income derived from an industrial undertaking. Hence, there is no contradiction in these two judgments. In our humble opinion, if a receipt is in the nature of independent income, it has to be reduced from the profit as per P/L account but if a receipt is towards reimbursement of manufacturing or selling cost, it is not an independent income but it goes to reduce cost of manufacturing/selling and resultant increase in profit is profit from industrial undertaking.

Now we examine these details of other income to find out as to whether these are independent income or a receipt towards reimbursement of manufacturing or selling cost. In our considered opinion, it comes out from the details noted above that interest income is independent income and it is not reimbursement of manufacturing or selling expenses and hence, it cannot be said to be income derived from an industrial undertaking. Similarly profit on sale of stores also is an independent income and it also cannot be accepted as reimbursement of manufacturing or selling expenses and as a consequence, it is also not an income derived from an industrial undertaking. Misc. receipts from trading also is an independent income and it also cannot be accepted as reimbursement of manufacturing or selling expenses and as a consequence, it is also not an income derived from an industrial undertaking. Rental income also is an independent income and it also cannot be accepted as reimbursement of manufacturing or selling expenses in the absence of this fact that assessee was paying rent of staff quarters which was debited to Profit & Loss account and as such recovery of rental income from staff quarters is going to reduce the expenses of the assessee incurred on rent. As a consequence, it is also not an income derived from an industrial undertaking. Commission for collection of electric duty also is an independent income and it also cannot be accepted as reimbursement of manufacturing or selling expenses and as a consequence, it is also not an income derived from an industrial undertaking. Apart from the miscellaneous recovery of Rs.7,51,86,012, we are left with two items i.e., sale of scrap of Rs.24,10,221 and excess found on physical verification of material stock of Rs.4,03,364. Regarding these two items, we are satisfied that this will go to reduce the cost incurred by the assessee and debited to Profit & Loss account and to this extent, these receipts should be reduced from the cost and therefore, these two items should not be reduced from the profit shown by the assessee in the Profit & Loss account for the purpose of computing deduction allowed to the assessee u/s. 80IA(4)(iv)(c). We hold accordingly.

Now we examine the issue regarding miscellaneous recovery of Rs.7,51,86,012. The items included herein are penalty recovered from suppliers/contractor of Rs.431.07 lakhs, unclaimed balance o/s of Rs.264.25 lakhs and difference between the WDV and books value of released asset of Rs.96.77 lakhs. These 3 items are neither any income derived from an industrial undertaking nor a realization to reduce the cost of manufacturing/cost of sale of assessee and therefore, these 3 items are rightly reduced from the profit of the assessee for the purpose of computing deduction allowable u/s. 80IA(4)(iv)(c).

Regarding the balance items such as dept. exam fees, sale of dept. books and sale of forms, sale of scrap/stock excess found, meter reading testing charges and BBC theft ca collected etc., in our considered opinion, these receipts reduce the cost of assessee which are debited to Profit & Loss account and therefore, these items should not be reduced from the profit of assessee as per Profit & Loss account for the purpose of computing deduction allowable to the assessee u/s. 80IA(4)(iv)(c).

Now we are left with only one item i.e., misc. recovery from employees of Rs.8,45,452. Regarding this item, nothing has been shown that these are on account of recovery of certain expenses incurred by the assessee and debited to Profit & Loss account and therefore, regarding reduction of this item from the profit of the assessee, we find no infirmity in the order of ld. CIT (Appeals).

Our above decision in respect of various items of misc. income is by respectfully following both the judgments of Hon’ble Apex Court rendered in the case of Liberty India (Supra) wherein it was held by the Hon’ble Apex Court that if an income is in the nature of independent income, it is not an i9ncome derived from industrial undertaking and therefore, not eligible for deduction u/s 80IB and also in case of CIT v. M/s. Meghalaya Steels Ltd. (supra) wherein it was held by the Hon’ble Apex Court that if a subsidy is received as reimbursement of cost actually incurred by assessee in manufacturing and selling of its products, then such subsidy should not be excluded from business profit. In our humble opinion, the ratio laid down by the Hon’ble Apex Court in this judgment is this that if a receipt is reducing the cost incurred by the assessee in the manufacturing/selling of its products, then such receipts should be considered as reduction in cost which will result into increase in profit derived from industrial undertaking and therefore, such receipts should not be reduced from the profit of the assessee. In this view of the matter, we have held in the above para that certain receipts should not be reduced from business profit of the assessee but other receipts are to be so reduced.

Regarding applicability of various judgments cited by ld. DR of revenue, we hold that we have followed two judgments of Hon’ble apex court as noted above and hence, other judgments are not relevant.

In the result, the appeal of the assessee stands partly allowed.

Now we take up the appeal of assessee for AY 2008-09 in ITA No.539/Bang/2013. The grounds raised by the assessee in this year are as under:-

Both the sides agreed that the facts and arguments in the present year regarding other income of Rs.7,16,67,413 in dispute are also similar to the facts in the AY 2007-08. It was also pointed out by the ld. AR of assessee that details of this income are available in page 2 of the assessment order.

We have considered the rival submissions. First of all, we reproduce the details of other income of Rs.7,16,67,413 from page 2 of the assessment order. The same is as under:-

In line with our decision in AY 2007-08, we hold that sale of scrap of Rs.40,22,860 should not be reduced from the profit of the assessee for the purpose of computing deduction allowable to the assessee u/s. 80IA(4)(iv)(c) but the other receipts were rightly reduced from the profit of the assessee because these other receipts are neither income derived from industrial undertaking nor a receipt in the nature of reimbursement of expenses incurred by the assessee for manufacturing and selling of goods. The assessee gets relief to the extent of Rs.40,22,860/- which should not be reduced from profit of the assessee for computing deduction allowable to the assessee u/s. 80IA(4)(iv)(c).

In the result, this appeal of assessee is partly allowed.

In the combined result, appeal of the assessee for AY 2006-07 is dismissed and the remaining two appeals of the assessee for AYs 2007-08 & 2008-09 are partly allowed.