M/S. Harsh Paints Manufacturers Co. Pvt. Ltd v. The Commissioner Of Income Tax-Iii, Jaipur

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANBENCH AT JAIPUR. D.B. Income Tax Appeal No.203/2009 M/s. Harsh Paints Manufacturers Co. Pvt. Ltd.Vs. The Commissioner of Income Tax-III, Jaipur. DATE OF ORDER ::: 27.9.2016 HON'BLE MR. JUSTICE K.S. JHAVERIHON'BLE MR. JUSTICE BANWARI LAL SHARMA None present for the appellant.Mr. Sameer Jain, for the respondent. ***** 1.By way of this appeal, original assessee has challengedthe judgment and order of the Tribunal whereby the Tribunalhas confirmed the order of the CIT (A), which has confirmedthe order of the AO. 2.This court while admitting the matter has framed following substantial question of law:- “(ii) Whether on facts and in the circumstances ofthe case and in law and on a proper and correctinterpretation of Sec.801B, the Id. ITAT wasjustified in confirming the part disallowance ofthe deduction claimed u/s 801B relating to thesubjected incomes, which are the incomesderived from the business of the industrialundertaking and when the same have beenassessed by the respondent itself as businessincome?” 3.The facts of the case are that the appellant company failed its return of income on 1.11.2004 declaring a totalincome of Rs.10,32,282/-. The case selected for scrutiny. Inview of the increases in turnover and nominal fall in G.P. Rate, the trading results were accepted by the AssessingOfficer. The appellant company declared Net Profit ofRs.1,01,20,613/- based on the audited balance sheet and P& L account, derived from the industrial undertaking. Thesaid net profit also included net payment of interest ofRs.11,72,747/-, which inter-alia also included interest paidon working capital Rs.8,79,303/-. At the same time, theappellant company also earned interest on FDR's ofRs.2,22,830/-. There apart, the appellant company alsodeclared interest on deposits with the GovernmentDepartment and some miscellaneous income being the Bankcharges recovered from the suppliers under this head.Accordingly, the appelllant company made a claim ofdeduction on the entire net profit including the about incomealso, u/s 80IB of the Income Tax Act,1961. 4.Counsel for the respondent contended that the issue issquarely covered by the decision of the Hon'ble SupremeCourt in the case ofM/s. Liberty India Vs.Commissioner of Income Tax, Karnal reported in 317ITR 218 held as under:- 13. Before analyzing Section 80-IB, as a prefatorynote, it needs to be mentioned that the 1961 Actbroadly provides for two types of tax incentives,namely, investment linked incentives and profit linkedincentives. Chapter VI-A which provides for incentivesin the form of tax deductions essentially belong to thecategory of "profit linked incentives". Therefore,when Section 80-IA/80-IB refers to profits derivedfrom eligible business, it is not the ownership of thatbusiness which attracts the incentives. What attractsthe incentives under Section 80-IA/80-IB is the 13. Before analyzing Section 80-IB, as a prefatorynote, it needs to be mentioned that the 1961 Actbroadly provides for two types of tax incentives,namely, investment linked incentives and profit linkedincentives. Chapter VI-A which provides for incentivesin the form of tax deductions essentially belong to thecategory of "profit linked incentives". Therefore,when Section 80-IA/80-IB refers to profits derivedfrom eligible business, it is not the ownership of thatbusiness which attracts the incentives. What attractsthe incentives under Section 80-IA/80-IB is the generation of profits (operational profits). Forexample, an assessee company located in Mumbaimay have a business of building housing projects or aship in Nava Sheva. Ownership of a ship per se willnot attract Section 80-IB(6). It is the profits arisingfrom the business of a ship which attracts sub-section(6). In other words, deduction under sub-section (6)at the specified rate has linkage to the profits derivedfrom the shipping operations. This is what we mean indrawing the distinction between profit linked taxincentives and investment linked tax incentives. It isfor this reason that Parliament has confined deductionto profits derived from eligible businesses mentionedin sub-sections (3) to (11A) [as they stood at therelevant time]. One more aspect needs to behighlighted. Each of the eligible business in sub-sections (3) to (11A) constitutes a stand-alone item inthe matter of computation of profits. That is thereason why the concept of "Segment Reporting"stands introduced in the Indian Accounting Standards(IAS) by the Institute of Chartered Accountants ofIndia (ICAI). Analysing Chapter VI-A, we find that Sections 80-IB/80-IA are the Code by themselves as they containboth substantive as well as procedural provisions.Therefore, we need to examine what these provisionsprescribe for "computation of profits of the eligiblebusiness". It is evident that Section 80-IB provides forallowing of deduction in respect of profits and gainsderived from the eligible business. The words "derivedfrom" is narrower in connotation as compared to thewords "attributable to". In other words, by using theexpression "derived from", Parliament intended tocover sources not beyond the first degree. In thepresent batch of cases, the controversy which arisesfor determination is: whether the DEPB credit/ Dutydrawback receipt comes within the first degreesources? According to the assessee(s), DEPBcredit/duty drawback receipt reduces the value ofpurchases (cost neutralization), hence, it comeswithin first degree source as it increases the net profitproportionately. On the other hand, according to theDepartment, DEPB credit/duty drawback receipt donot come within first degree source as the saidincentives flow from Incentive Schemes enacted bythe Government of India or from Section 75 of theCustoms Act, 1962. Hence, according to theDepartment, in the present cases, the first degreesource is the incentive scheme/provisions ofthe Customs Act. In this connection, Departmentplaces heavy reliance on the judgment of this Court inSterling Food (supra). Therefore, in the present cases,in which we are required to examine the eligiblebusiness of an industrial undertaking, we need totrace the source of the profits to manufacture. (see CIT v. Kirloskar Oil Engines Ltd. reported in[1986] 157 ITR 762) (see CIT v. Kirloskar Oil Engines Ltd. reported in[1986] 157 ITR 762) 15. Continuing our analysis of Sections 80-IA/80-IB itmay be mentioned that sub-section (13) ofSection80-IB provides for applicability of the provisions ofsub-section (5) and sub-sections (7) to (12)of Section 80-IA, so far as may be, applicable to theeligible business under Section 80-IB. Therefore, atthe outset, we stated that one needs to read Sections80I, 80-IA and 80-IB as having a common Scheme.On perusal of sub-section(5) of Section 80-IA, it isnoticed that it provides for manner of computation ofprofits of an eligible business. Accordingly, suchprofits are to be computed as if such eligible businessis the only source of income of the assessee.Therefore, the devices adopted to reduce or inflatethe profits of eligible business has got to be rejectedin view of the overriding provisions of sub- section (5)of Section 80-IA, which are also required to be readinto Section 80-IB. [see Section 80-IB(13)]. We mayreiterate that Sections 80I, 80-IA and80-IB have acommon scheme and if so read it is clear that the saidsections provide for incentives in the form ofdeduction(s) which are linked to profits and not toinvestment. 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 suchindustrial undertaking after specified date(s). Hence,apart from eligibility, sub-section(1) purports torestrict the quantum of deduction to a specifiedpercentage of profits. This is the importance of thewords "derived from industrial undertaking" asagainst "profits attributable to industrial undertaking". 5. In that view of the matter, the issue is answered in favourof the Department against the assessee.of the Department against the assessee. 6.The appeal stands dismissed. (Banwari Lal Sharma), J. (K.S. Jhaveri), J. Ashutosh167.