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Before: SHRI R. K. PANDA & MS SUCHITRA KAMBLE
These three appeals are filed by the assessee and the Revenue against the order dated 19/3/2009 passed by CIT(A)’s III, Delhi for Assessment Year 2006-07.
The grounds of appeal are as under:-
“1) The CIT (Appeals) has erred in holding that depreciation of Rs.11,25,000/- on technical know-how is to be allocated to the three sources of income (namely, Baddi Unit, Jammu Unit and Corporate Office) in proportion to their turnover. Such conclusions are opposed to evidences to record. 2) It is contended that the depreciation of Rs. 11,25,000/- on technical know- how is referable to Corporate Unit only and merits adjustment against sub- licensing income of Rs. 7.18 crores. 3) The lower authorities have erred in holding that administrative expenses of Rs. 10,90,670/- have no bearing/connection to the sub-licensing income of Rs. 7.18 crores. Such conclusions are opposed to evidences on record. 4) The above grounds of appeal are independent and without prejudice to one other. Your Appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing.”
Additional Ground “A. It is contended that out of the total royalty paid for Rs. 5,05,21,837/-, Rs. 3 crore being the minimum royalty payable for obtaining the right to sub- license the know-how should be allowed against the sub-licensing income of Rs. 7,18,92,000/-. B. It is contended that the common expenses of Rs. 39,52,063/- should have been allocated to all the three sources of income, i.e. the eligible profit of Baddi unit, eligible profit of Jammu unit and income from sub-licensing on the basis of sales of respective units and gross receipts of sub-licensing income.”
Additional Ground dated 12.03.2018
“That the Assessing Officer, while computing the deduction u/s 80-IB/80-IC of the Income-tax Act, 1961, ought to have excluded the income from licensing of technical know-how, i.e. royalty not on the gross basis but on net basis after adjusting the royalty paid for that also.”
(Assessee’s appeal A.Y. 2006-07)
“1. The lower authorities have erred in holding that minimum royalty of Rs.3,00,00,000/- (Rupees three crores only) being a part of the total royalty paid of Rs.6,32,32,443/- is to be allocated to Jammu and Baddi manufacturing units.
2. The lower authorities have erred in holding that the minimum royalty payment of Rs.3,00,00,000/- (Rupees three crores) is not allocable to the sub- licensing fees income of Rs.6,02,4 1,250/-.
It is contended that the minimum royalty payment of Rs.3,00,00,000/- (Rupees three crores) is expended/incurred in connection with the earning of the sub-licensing fees income of Rs.6,02,41,250/-.
The lower authorities have erred in holding that the loss of the Jammu unit for the Assessment Year 2005-06, which has already been set off against exempted income U/s 80IC of the Baddi Unit in the determination of total income for the Assessment Year 2005-06, should again be set off for determining the eligible profits of the Jarnrnu unit for the captioned Assessment Year.
It is contended that the Jammu unit’s loss of Assessment Year 2005-06, which has already been set off in that Assessment Year, has been erroneously found by both the lower authorities to enter into the computation of relief u/s 80-IC of the IT Act of the Jammu unit for the captioned Assessment Year.
6. The above grounds of appeal are independent and without prejudice to one another.”
ADDITIONAL GROUNDS OF APPEAL
“A. It is contended that on the facts and circumstances of the case and in law, refund of Excise duty (Self Cenvat Credit) amounting to Rs.99,11,460/- is a Capital Receipt / Subsidy not liable to tax under the provisions of Income Tax Act, 1961.
B. It is contended that on the facts and circumstances of the case and in law, refund of Excise duty (Self Cenvat Credit) amounting to Rs.99,11,460/- is a Capital Receipt / Subsidy not includible in the determination of total income u/s 115JB of Income Tax Act, 1961.”
ADDITIONAL GROUNDS (DATED 12.03.2018)
“That the Assessing Officer, while computing the deduction u/s 80-IB/80-IC of the Income-tax Act, 1961, ought to have excluded the income from licensing of technical know-how, i.e. royalty not on the gross basis but on net basis after adjusting the royalty paid for that also.”
(Revenue’s Appeal A.Y. 2006-07)
REVISED GROUNDS OF APPEAL “1. Whether on the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in directing the AO to allow deduction u/s 80-IB as claimed by the assessee as against various disallowances made by the AO in calculation of deduction u/s 80-IB of the I. T. Act. 2.Whether on the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in directing the AO to reduce foreign exchange fluctuation loss of Rs. 3,87,000/- out of the income from sub licensing in respect of Jammu unit. 3.Whether on the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in directing the AO to reduce the head office expenses by an amount of Rs. 4,71,302/- before allocating to Jammu and Baddi units. 4.Whether on the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in directing the AO to allow deduction u/s 80-IB from the cenvat credit of Rs. 99,11,460/- which was earlier disallowed by the AO. 5.Whether on the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in giving relief of Rs. 58,598/- out of the addition of Rs. 59,560/- made by the AO reducing the miscellaneous income from eligible deduction u/s 80-IB treating it as income not derived from industrial undertaking.
6. Whether on the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in directing the AO not to exclude miscellaneous income of Rs. 6,819/- for computation of deduction u/s 80-IB of Baddi unit.
7. Whether on the facts and in the circumstances of the case, the IT(A) has erred in law on facts in directing the AO not to reduce the amount of Rs. 4,44,684/- of excess depreciation credited while computing the deduction u/s 80-OB of Baddi unit.”
A.Y. 2005-06 3. The assessee company is engaged in the business of manufacturing of plastic film used in packaging industry, printing articles in pouch form and zipper diaphragm having two units at Baddi and Jammu. The assessee filed its original return u/s 139 for assessment year 2005-06 on 31.10.2005 declaring an income of Rs. 1,87,957/- after claiming deduction of 80IC amounting to Rs. 9,93,00,894/-. However, the book profit u/s 115JB was declared at Rs. 12,87,62,894/- and tax was paid thereon. Subsequently, search and seizure operations were conducted in the Flex group of companies on 23.02.2006. The assessee company declared Rs. 582 lacs as estimated undisclosed income on account of reduced claim of deduction u/s 80IC in A.Y. 2005-06 vide letter dated 08.04.2006. In response to the notice u/s 153A, the assessee company filed return of income on 06.10.2006 declaring income at Rs.5,39,68,651/- after claiming deduction u/s 80IC amounting to Rs. 4,55,20,089/-. Thus, the assessee reduced the amount of deduction claimed u/s 80IC over the earlier figure by Rs. 5,37,80,694/- (Rs. 9,93,00783 – Rs. 4,55,20,089). The Assessing Officer noticed that the assessee had declared profit of Rs. 12,35,30,913/- at Baddi Unit and Rs. 78,91,536/- at Jammu Unit and a loss of Rs. 26,59,555/- at corporate unit. The Assessing Officer further observed that after making adjustment in respect of expenses claimed the loss has been shown at corporate and Jammu Unit while the income of Rs. 11,51,96,419/- was shown at Baddi Unit. No separate profit and loss account for these three units was furnished during the course of assessment proceedings in which the net profit and net loss of Baddi, Jammu and corporate unit respectively can be exactly tallied as per the observations of the Assessing Officer. The Assessing Officer concluded that computation made by the assessee company was unreliable and unverifiable. Therefore, after examining the details filed by the assessee company, the Assessing Officer has allowed deduction u/s 80IC to the extent of Rs. 4,03,32,298/- . The assessment was completed on 31.12.2007 at total income of Rs. 6,55,44,130/- by making various additions.
4. Being aggrieved by the Assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
5. The Ld. AR submitted that as regards the additional ground, the assessee had acquired technical know-how for the manufacture of Slider Zipper assembly and a Zipper Slider assembly with diaphragm for flexible packages products from Mr. Ashok Chaturvedi vide Agreement dated 21.07.2003. As per clause no. 2.2 of the Agreement, the assessee was permitted sub-license know-how and technical knowledge to other parties in India or abroad as per prior consent and consideration for this right to license. Later on, vide Supplementary Agreement dated 25.07.2003, Mr. Ashok Chaturvedi permitted the assessee to sub-license such technical know-how to other parties subject to a minimum payment of Rs. 25 lakhs per month. The Ld. AR further submitted that thereafter the assessee shared such technical know-how with other parties, i.e. M/s Flex Industries Ltd., Noida and M/s Golden Dirham, UAE. During the year under consideration, the Assessing Officer, while computing the deduction u/s 80IB/80IC of the Income Tax Act, 1961 observed that the sub-licensing fee received by the assessee company from M/s Flex Industries Ltd. and M/s Golden Dirham, UAE is not an income derived from the manufacturing activity of the industrial undertaking set up at Baddi and Jammu. Hence not eligible for deduction u/s 80IB/80IC of the Income Tax Act. But the royalty paid by the assessee to Mr. Ashok Chaturvedi is directly linked with the manufacturing activity undertaken at Baddi and/or Jammu units and then allocated payment of royalty under the Agreement to the Baddi and Jammu units in proportion to their respective turnover. In other words, while computing the eligible profits for the purpose of Section 80IB and 80IC of the Act, the Assessing Officer excluded the income as received by the assessee on account of sharing of the technical know-how by way of sub- licensing has been excluded on a gross income though under the law it is only the net income which is required to be excluded. In other words, the Assessing Officer ought to have excluded the royalty income on net basis, i.e. after reducing the amount received on account of sharing of such technical know- how from the gross payment and then the residual figure should be allocated to the respective units in proportion to their turnover. For this purpose, the Ld. AR relied upon the decision of Hon’ble Gujarat High Court in case of CIT vs. Nirma Ltd. 367 ITR 12. The Ld. AR further submitted that the receipt of sub- licensing of Rs. 7.18 core was mentioned in the Assessment Order of A.Y. 2004-05. Similarly the claim of expenses was also before Assessing Officer and the same was discussed in the assessment order.
As regards the additional ground raised
on 12.03.2018, the Ld. AR submitted that the same also relates to the determination of proper quantum of deduction available u/s 80IC of the Act. The Ld. AR further submitted that for the purpose of deduction u/s 80IC of the Act, the income of the eligible undertaking has to be computed on standalone basis and any device adopted for reduction/inflation is not permissible as held by the Hon’ble Supreme Court in case of Liberty India vs. CIT 317 ITR 218 (para 15). The Ld. AR further submitted that in the following cases, it has been consistently held that for the purpose of deduction under Chapter VI-A of the Act, while computing the income derived of the eligible undertaking, it is only those very income which has the direct nexus to the manufacturing activity, has to be taken into account and the income which has no direct nexus with the manufacturing undertaking has to be excluded. Similarly, the expenses which have no direct nexus with the manufacturing activity of the undertaking would also be excluded. In other words, only income and expenses which have a direct nexus with the manufacturing activity of the undertaking have to be considered and taken into account: i) Zandu Pharmaceutical Works Ltd. vs. CIT 350 ITR 166 (Bom) ii) Bush Boake Allen (India) Ltd. vs. ACIT 273 ITR 152 (Mad) iii) CIT vs. Hindustan Unilever Ltd. 394 ITR
73. (Bom) iv) Liberty India vs. CIT 317 ITR 218 (SC)
The Ld. AR submitted that such technical know-how which has been acquired by the assessee from Mr. Ashok Chaturvedi has been shared by the assessee not only for the manufacture of products in Baddi and Jammu units but has shared it with others and earned sub-licensing fee amounting to Rs. 7.18 crore which was credited to the profit and loss account. The Assessing Officer, while computing the deduction u/s 80IC of the Act has excluded the sub-licensing fee credited to the profit and loss account of the Baddi unit amounting to Rs. 7.18 crore, but as far as the royalty payment is concerned, treated the same as expenses of the industrial undertaking. The Ld. AR submitted that in this way the sub-licensing income has been excluded by the Assessing Officer for the purpose of computation of deduction u/s 80IC of the Act on gross basis without adjusting the royalty paid and this action of the Assessing Officer is against the law and the sub-licensing fee, if any, ought to have been excluded on net basis after adjusting the royalty paid against income of sub-licensing because the sub-licensing income and royalty payment both have direct nexus with the know-how agreement. For this purpose, the Ld. AR relied upon the following judgments wherein the principle of netting has been approved: i) CIT vs. Nirma Ltd. 367 ITR 12 (Guj) ii) ACG Associated Capsules Pvt. Ltd. vs. CIT 343 ITR 89 (SC) iii) CIT vs. Sri Ram Honda Power Equip 289 ITR 475 (Del) iv) Keshavji Ravji and Co. vs. CIT 183 ITR 1 (SC)
The Ld. AR further submitted that identical additional grounds were also raised before the Tribunal in A.Y. 2004-05 and the principle of netting has been accepted by the Tribunal vide its order dated 12.07.2018 in ITA No. 795/Del/2003.
As regards to the merit of the case i.e. Ground No. 1 and 2 relating to depreciation amounting to Rs. 11,25,000/-, the Ld. AR submitted that though the CIT(A) accepted in principle, that depreciation of technical know-how has to be allowed but observed that this technical know-how has been used by the assessee to enjoy three sources of income: (i) manufacturing in Baddi unit, (ii) manufacturing in Jammu unit, and (iii) earning of sub-license fee amounting to Rs. 7.18 crore shown by the assessee in the computation of income of corporate unit and accordingly the depreciation of Rs. 11,25,000/- claimed on technical know-how allocated between three sources in proportion to turnover. The Ld. AR submitted that basically the technical know-how as acquired by the assessee on payment of Rs. 60 lakhs has been used for earning the sub-license fee and accordingly the depreciation should be adjusted against the income of sub-licensing only and so the expenses also.
As regards to Ground No. 3 relating to expenses amounting to Rs. 10,90,670/-, the Ld. AR submitted that the said expenses were related to sub- licensing activities at corporate unit and should not be considered in Baddi unit.
The Ld. DR objected to the admission of additional grounds on the ground that no such issue had been raised by the assessee before the lower authorities and it is too late to raise such grounds before the Tribunal and for this purpose relied upon the judgment of Hon’ble Bombay High Court in case of Ultra Tech Cement Ltd. of 2014 order dated 18.04.2017. As regards second additional ground, the Ld. DR submitted that common expenses of Rs. 39,52,063/-, was not pressed before the CIT(A).
We have heard both the parties and perused all the relevant material available on record. The additional grounds taken by the Ld. AR at the time of hearing, are legal grounds and has to be admitted in light of the decision of the Apex Court in case of NTPC vs. CIT 229 ITR 383. The same also relates to the determination of proper quantum of deduction available u/s 80IC of the Act. Thus, we admit the additional grounds of the assessee. The Ld. AR further submitted that for the purpose of deduction u/s 80IC of the Act, the income of the eligible undertaking has to be computed on standalone basis and any device adopted for reduction/inflation is not permissible as held by the Hon’ble Supreme Court in case of Liberty India vs. CIT 317 ITR 218 (para 15). The Ld. AR further submitted that in the following cases, it has been consistently held that for the purpose of deduction under Chapter VI-A of the Act, while computing the income derived of the eligible undertaking, it is only those very income which has the direct nexus to the manufacturing activity, has to be taken into account and the income which has no direct nexus with the manufacturing undertaking has to be excluded. Similarly, the expenses which have no direct nexus with the manufacturing activity of the undertaking would also be excluded. In other words, only income and expenses which have a direct nexus with the manufacturing activity of the undertaking have to be considered and taken into account: i) Zandu Pharmaceutical Works Ltd. vs. CIT 350 ITR 166 (Bom) ii) Bush Boake Allen (India) Ltd. vs. ACIT 273 ITR 152 (Mad) iii) CIT vs. Hindustan Unilever Ltd. 394 ITR 73 (Bom) iv) Liberty India vs. CIT 317 ITR 218 (SC) Thus, the Ld. AR admits that for the purpose of deduction u/s 80IC of the Act, the income of the eligible undertaking has to be computed on standalone basis and any device adopted for reduction/inflation is not permissible as held by the Hon’ble Supreme Court in case of Liberty India vs. CIT 317 ITR 218 (para 15). In this particular case, technical know-how was acquired by the assessee from Mr. Ashok Chaturvedi and shared by the assessee not only for the manufacture of products in Baddi and Jammu units but also shared it with others and earned sub-licensing fee amounting to Rs. 7.18 crore which was credited to the profit and loss account by the Assessee company. But the sub-licensing fee is not earned through manufacturing activity. There is no direct nexus between the manufacturing activity, instead it is given after acquiring rights from Mr. Ashok Chaturvedi to sub-license it with any other third party. The Assessing Officer, while computing the deduction u/s 80IC of the Act has excluded the sub-licensing fee credited to the profit and loss account of the Baddi unit amounting to Rs. 7.18 crore, but as far as the royalty payment is concerned, treated the same as expenses of the industrial undertaking. Thus, the Assessing Officer has rightly excluded the sub-licensing income for the purpose of computation of deduction u/s 80IC of the Act, but it cannot be on gross basis without adjusting the royalty paid and which is not as per the provision of law. Thus, the proposition of the Ld. AR that the sub-licensing fee, if any, ought to have been excluded on net basis after adjusting the royalty paid against income of sub-licensing because the sub-licensing income and royalty payment both have direct nexus with the know-how agreement, but excluding the direct nexus of sub-licensing to the manufacturing activity of the assessee. The reliance of the Tribunal decision for A.Y. 2004-05 will not be applicable in the present case as the same has not discussed the case on merit. The principle of netting though accepted in A.Y. 2004-05, it will not help the assessee company in the present assessment year as from the beginning the sub-licensing fee is not directly connected with the manufacturing activity but is independent transaction itself. Thus, we direct the Assessing Officer to compute the sub-licensing fee by way of excluding on net basis after adjusting the royalty paid against income of sub-licensing. The assessee must provide all the information and the clauses to bifurcate the said sub-license fee from the original royalty payment. Thus, we remand back this issue to the file of the Assessing Officer. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Additional grounds are partly allowed for statistical purpose.
As regards to Ground No. 1 and 2 relating to depreciation amounting to Rs. 11,25,000/-, though the CIT(A) accepted in principle that depreciation of technical know-how has to be allowed but observed that this technical know- how has been used by the assessee to enjoy three sources of income: (i) manufacturing in Baddi unit, (ii) manufacturing in Jammu unit, and (iii) earning of sub-license fee amounting to Rs. 7.18 crore shown by the assessee in the computation of income of corporate unit and accordingly the depreciation of Rs. 11,25,000/- claimed on technical know-how allocated between three sources in proportion to turnover. The Ld. AR pointed out that the technical know-how as acquired by the assessee on payment of Rs. 60 lakhs has been used for earning the sub-license fee and accordingly the depreciation has to be adjusted against the income of sub-licensing only and so the expenses also. This preposition is as per the provisions of law and therefore, the Assessing Officer as well as the CIT(A) should have allowed this claim of depreciation. Thus, Ground No. 1 and 2 on merit are allowed.
As regards to Ground No. 3, expenses amounting to Rs. 10,90,670/-, the said expenses were related to sub-licensing activities at corporate unit and should not be considered in Baddi unit. This issue needs to be verified by the Assessing Officer, therefore, we are remanding back this issue to the file of the Assessing Officer. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 3 is partly allowed for statistical purpose.
In result, (A.Y. 2005-06) is partly allowed for statistical purpose. and 2782/DEL/2009 (A.Y. 2006-07)
The is a company having its Registered office at 305, 3rd Floor, Bhanot Corner, Pamposh Enclave, Greater Kailash-I, New Delhi. The company is engaged in the business of manufacturing of plastic films used in packaging industries, printed articles in pouch form and zipper diaphragm having two manufacturing units at Jammu and Baddi. The assessee filed its return of income for A.Y. 2006-07 declaring an income of Rs. 23,25,099/- on 29.11.2006 after claiming deductions u/s 80IB on Jammu Unit and 80IC on Baddi unit. The assessment was completed u/s 143(3) at a total income of Rs. 3,60,90,350/- vide order dated 31.12.2007. The assessee has claimed deduction u/s 80IB on Jammu unit amounting to Rs. 6,33,54,176/- in the return of income. At the outset, it may be noted that this figure of Rs. 6,33,54,176/- has been wrongly computed because as per the ’s own calculation, there was a profit at head office of Rs. 2,15,08,285/- which has been distributed to both the units i.e. Baddi and Jammu unit in proportion to their turnover and accordingly, a profit of Rs. 1,54,27,895/- was added back to the net profit of Jammu unit as worked out by the at Rs. 4,79,26,281/- and deduction was claimed on income of Jammu unit at Rs. 6,33,54,176/-. Thus, even as per ’s working, net income of Jammu unit should have been Rs. 4,79,26,281/- only. However, it is noticed that the A.O. has computed the deduction u/s 80IB on Jammu unit taking a figure of Rs. 4,79,26,281/- as the base for calculation. The A.O. noted from-the unit wise workings that the has shown income in the corporate office at Rs. 6,39,97,098/- against which the expenses of Rs. 4,03,23,229/- were claimed resulting into net profit at Rs. 2,36,73,869/-. The total receipt of corporate office includes sub licensing fee of Rs. 6,02,41,250/-. The A.O. held that the sub licensing fee has eminated from the technical know-how taken for the Baddi unit. But the income from sub- license fee is not income derived from industrial undertaking. The assessee has production activities in two units and there is no independent source of income at corporate office. Therefore, the expenses debited in the corporate office were all expenses which were relating to the production activities undertaken at both the units i.e. Baddi and Jammu units. Therefore, as per the Assessing Officer, the total expenses debited in the corporate office had to be allocated to both the units in proportion to their turnover. Accordingly, the A.O. has allocated the expenses of Rs. 4,03,23,229/- debited in corporate office to the both units i.e. Rs. 2,89,23,859/- to Jammu unit and Rs. 1,13,99,369/- to Baddi unit.
Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
As regards additional ground relating to the determination of proper quantum of deduction available u/s 80IC of the Act, the same is identical with the additional ground to A.Y. 2005-06 which we have decided hereinabove. Therefore, the same direction will be followed to this year as well. This additional ground is partly allowed for statistical purpose.
As regards to other additional grounds relating to whether the refund of excise duty is a capital receipt/subsidy or not and is not includible in the determination of total income u/s 115JB of the Income Tax Act, the Ld. AR submitted that the assessee has established a manufacturing unit in Jammu within the State of Jammu & Kashmir and as per the incentive scheme provided by the Excise authorities, the assessee was eligible for the refund of the excise duty amounting to Rs. 99,11,468/-. The nature of such refund of Excise duty was examined in detail by the Jammu & Kashmir High Court in the case of Balaji Steel Alloys 333 ITR 353 wherein the Hon’ble J&K High Court, after considering the entire scheme in detail, held that the eligibility of excise duty refund was on account of establishment of new industrial undertaking in the State of Jammu & Kashmir as an incentive to promote industrial activity in the State of Jammu & Kashmir and is in the nature of capital subsidy not liable to tax. The judgment of J&K High Court in the case of Shree Balaji Steel Alloys has also been confirmed by the Hon’ble Supreme Court. In the case of associate concern M/s First Flexipack Corporation in such issue was also raised by way of additional ground and the same was also adjudicated by the Tribunal vide its order dated 24.01.2017 in favour of the assessee. Similar issue has also been decided by the Tribunal, in case of Montage Enterprise vide order dated 29.06.2018 in ITA No. 5124/Del/2011. The fact of excise duty refund of Rs. 99,11,460/- is very much available on record because the Assessing Officer himself has disallowed the exemption in respect of amount of Rs. 99,11,460/- u/s 80IB of the Income Tax Act, 1961, which is very much clear from the assessment order itself. As relates to exclusion of subsidy which is capital receipt is permissible as per provision of Section 4 of the Act while computing the income u/s 115JB of the Act. This view is also taken in the order of the Tribunal in case of Montage Enterprise (supra).
The Ld. DR relied upon the Assessment Order and the order of the CIT(A) and submitted that it is revenue receipt.
We have heard both the parties and perused all the relevant records available. It is pertinent to note here that similar issue has come up before the Tribunal in case of Montage Enterprises and the Tribunal decided this issue in fvaour of the assessee therein. The issue is identical in the present case. The eligibility of excise duty refund was on account of establishment of new industrial undertaking in the State of Jammu & Kashmir as an incentive to promote industrial activity in the State of Jammu & Kashmir and is in the nature of capital subsidy not liable to tax. Thus, the said excise duty refund has to be excluded from the computation of Section 115JB of the Act as well as it is a capital receipt. These two additional grounds are admitted and allowed.
As regards the merit of the assessee’s appeal for A.Y. 2006-07 is concerned the issues are identical to that of A.Y. 2005-06 which we have decided hereinabove. Therefore, Ground No. 1 to 3 are partly allowed for statistical purpose. As regards to Ground Nos. 4 and 5 are concerned the Assessing Officer is directed to determine the total income of the assessee for A.Y. 2005-06 as per the directions given hereinabove and then if there is any loss of the Jammu Unit for A.Y. 2005-06 which has already been set off against the exempt income u/s 80IC of the Baddi Unit in the determination of total income of the assessee for A.Y. 2005-06, should be accordingly set off for determining eligible profits of the Jammu unit for the present Assessment Year 2006-07. This issue is remanded back to the file of the Assessing Officer for fresh adjudication. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 4 and 5 are partly allowed for statistical purpose.
In result, assessee’s appeal being A.Y. 2006-07 is partly allowed for statistical purpose.
As regards to the Revenue’s appeal is concerned, the Revenue filed revised Ground of appeal vide letter dated 23.11.2010. Ground No 1, 8 & 9 are of general nature, hence dismissed.
24. As regards Ground No. 2 of the Revenue’s appeal relating to reduction of foreign exchange fluctuation loss of Rs. 3,87,000/- out of the income from sub- licensing in respect of Jammu & Baddi Units has been rightly allowed by the CIT(A). Thus, Ground No. 2 is dismissed.
As regards to Ground No. 3 relating to office expenses, the Ld. DR relied upon the Assessment Order. The CIT(A) held as under : “6. Further, the contention of the appellant that the disallowance made by the appellant in the computation of income in respect to items debited in the head office should have been considered while computing the deduction u/s 80IB in Jammu unit and 80IC in Baddi unit is also found to be acceptable. The appellant has added back the depreciation and disallowance u/s 43B and reduced the depreciation as per Income Tax Act and deduction u/s 35D. Thus, the appellant has infact claimed lesser deduction by an amount of Rs. 4,71,302/- of the expenses debited in profit and loss account, which should not have been allocated to both the units i.e. Jammu and Baddi unit. The A.O. is, accordingly, directed to reduce the head office expenses by an amount of Rs. 4,71,302/- on this account before allocating to Jammu and Baddi Unit. It may be noted here that the appellant company had production activities at Jammu unit and Baddi unit and there is no other business activities undertaken by the appellant at corporate office. Thus, the expenses debited to corporate office were infact incurred for businesses of these two units at Jammu and Baddi. Therefore, the A.O. was justified in allocating to two units the other expenses debited in the corporate office which were actually incurred for the purposes of business of the industrial units at Baddi and Jammu unit. Accordingly, this ground of appeal is partly allowed. …….. 13.4 For the sake of brevity, it may be mentioned that the identical issue
was dealt with in ground no. 2(a). Therefore, the A.O. is directed to reduce foreign exchange fluctuation loss of Rs. 3,87,000/- which was directly related to the income from sub-licensing fees and the difference of Rs. 4,71,302/- in respect of difference in book depreciation and depreciation as per Income Tax Act and disallowance u/s 43B made by the appellant itself before allocating the head office expenses to the Baddi unit on turnover basis.”
The assessee has added back the depreciation and disallowance u/s 43B and reduced the depreciation as per Income Tax Act and deduction u/s 35D. In fact, the assessee has claimed lesser deduction by an amount of Rs. 4,71,302/- of the expenses debited in profit and loss account, which should not have been allocated to both the units i.e. Jammu and Baddi unit. After going through the order of the CIT(A) we found that the CIT(A) has rightly allowed this expenses. There is no need to interfere with the findings of the CIT(A). Ground No. 3 is dismissed.
As regards to Ground No. 4, relating to Cenvat Credit amounting to Rs 99,11,460, the Ld. DR relied upon the Assessment Order and the decision in the case of Liberty India (317 ITR 218-SC). The decision is not applicable in the present case. Therefore, Ground No. 4 is dismissed.
As regards to Ground Nos. 5 and 6 relating to Miscellaneous income, the Ld. DR relied upon the Assessment Order. The CIT(A) held as under: “11.4 I have considered the submission of the appellant and perused the facts of the case. From the above details of misc. income, it may be noted that an amount of Rs. 962/- pertains to interest on vehicle loan which cannot be said to be income derived from industrial undertaking. However, the other items of income pertaining to cenvat claim on raw material or spare parts and credit against late delivery are parts of income directly derived from industrial
undertaking. Accordingly, the A.O. is directed to reduce only Rs. 962/- for computation of deduction u/s 80IB. Thus, the appellant gets relief of Rs. 58,598/-. ………. 12.3 I have considered the submission of the appellant and also perused the computation of unit wise income furnished by the appellant and noticed that while working out the profit of Jammu unit, the appellant itself has reduced interest income of Rs.85,254/- for calculating profit derived from industrial at Jammu. Thus, further disallowance of this amount of Rs. 85,254/- of interest amounts to double disallowance. Accordingly, the A.O. is directed to delete the disallowance of Rs. 85,254/- while computing the deduction u/s 80IB.” After going through the order of the CIT(A) we found that the CIT(A) has rightly allowed these expenses with the correcting reasoning and facts available on record. There is no need to interfere with the findings of the CIT(A). Ground Nos. 5 and 6 are dismissed.
As regards to Ground No. 7 relating to depreciation credit amounting to Rs. 4,44,684/-, the Ld. DR relied upon the order of the Assessing Officer. The CIT(A) held as under: “14.3 I have carefully considered the submission of the appellant and found force in the submission. It may be noted that while computing the gross taxable income, the book depreciation charged to profit and loss account is not considered and only depreciation as per Income tax Act is allowed as deduction. Similarly, if any depreciation is written back in the books of account, the same is required to be reduced from the income, as in earlier years depreciation was allowed as per Income tax Act only and not as per books of account. Therefore, the A.O. is directed not to reduce the amount of Rs. 4,44,684/- of excess depreciation credited while computing the deduction
u/s 80IC for Baddi unit.” After going through the order of the CIT(A) we found that the CIT(A) has rightly allowed this claim of assessee. It is rightly held by the CIT(A) that if any depreciation is written back in the books of account, the same is required to be reduced from the income, as in earlier years depreciation was allowed as per Income tax Act only and not as per books of account. Thus, there is no need to interfere with the findings of the CIT(A). Ground No. 7 is dismissed.
In result, appeal of the Revenue being A.Y. 2006-07 is dismissed.