1. This appeal by the Revenue against the order dt. 2nd May, 2003 of learned CIT(A)-XIII, New Delhi raises the following grounds: On the facts and in the circumstances of the case, the learned CIT(A) erred in: (1) deleting addition of Rs. 2,12,12,644 on account of sale of silver outside the books of account.
(2) directing the AO to allow deduction under Section 80-IB on account of income from Agartala unit which arose because there was a refund of excise duty amounting to Rs. 2,61,92,386 without appreciating that refund of excise duty cannot form part of income for the purpose of deduction under Section 80-IB as it is not a profit and gain "derived" from the undertaking.
In the first ground, the Department has challenged the deletion of addition of Rs. 2,12,12,644 on account of silver deemed to have been sold outside the books of account.
2. Briefly the facts are that on the basis of assessment order of earlier years and relying on the test report of a sample of a product by Shri Ram Institute of Industrial Research, the AO drew an inference that the total consumption of silver in manufacture of its products should have been 8,460.089 kg. as against the actual consumption of 11,179 kg. shown by the assessee. The AO presumed that excess consumption of 2,718.91 kg., is a sale outside the books. Taking its value @ Rs. 7801.89 per kg. the value of silver deemed to have been sold outside the books at Rs. 2,12,12,644 was treated as income received outside the books and added the same to the income of the assessee.
The learned CIT(A), however, following the order of earlier years and for the reasons contained therein deleted the addition.
3. Before us the learned Counsel for the assessee contends that an identical issue on similar facts has come for consideration of the Tribunal in various years and its decision to delete the addition has been upheld. While the Revenue contends that in case the AO failed to take larger sample and did not carry out the assessee's request this at best could be termed as a denial of opportunity and would constitute an irregularity. If there was violation to follow a particular procedure or a violation of principle of natural justice, the matter needs to be set aside to the AO so that it is open to him to take up the matter at the point at which the irregularity supervened and correct his proceedings. An error committed by the AO therefore should not be allowed to perpetuate and the Revenue shall not be precluded from raising this contention at this stage. If the assessee sought opportunity by way of re-sampling such a compliance can be made now so as to conform to the rules of natural justice. In that view of the matter it is contended that the learned CIT(A) was not justified in deleting the addition.
4. We have heard the parties and perused the material on record. An identical issue on similar facts came for consideration of this Tribunal in assessee's own case for asst. yr. 1997-98 in ITA No.3919/Del/2000 in which order was passed on 31st Oct., 2005. The Tribunal took the decision in the matter as under: We have heard the parties with reference to the material on record.
We have also perused the Tribunal's order for asst. yr. 1994-95 sought to be relied upon by the assessee in support of decision taken by the learned CIT(A) in the year under consideration. In that year, the AO sent a sample of its product to Shriram Institute for testing. From the test report it was not clear how much quantity was used for testing. The assessee contended that from a pack of smaller quantity the result would not be proper. He, therefore, requested the AO to send sample of higher quantity for testing. The AO also did not allow the cross-examination of the analysit. The Tribunal, therefore, came to the conclusion that the AO has not followed the basic principles of natural justice and has made the additions on the basis of conjectures and surmises whereas the CIT(A) is found to have examined the impugned issue minutely and after having examined all the aspects of the matter, the Tribunal found no infirmity in his decision to delete the addition. That being so, and for the sake of consistency we are not inclined to interfere with the decision reached by the learned CIT(A) particularly when no new facts or material were brought on record by the assessing authority except placing reliance on the test report for asst. yr. 1994-95. We, therefore, reject this ground in appeal by the Revenue.
5. In the year under appeal, the AO based her conclusion on the same test report which was taken as a basis of addition for deeming such silver as sales outside the books. Since no new material or facts have been brought on record, for parity of reasons and for sake of consistency we are not inclined to interfere with the decision reached by the learned CIT(A) in this year as well. We, therefore, reject this ground in appeal by the Revenue.
6. The next ground in appeal relates to the deduction under Section 80-IB on account of income from Agartala unit on the amount of refund of excise duty amounting to Rs. 2,61,92,386 as under : 7. Briefly the facts are that the appellant company has a unit at Agartala and this unit has exemption of excise duty for the year under consideration. The Ministry of Finance issued three Notification Nos.
32/99-CE, 33/99-CE and 48/99-CE (NT) all dt. 8th July, 1999. These notifications were forwarded to the appellant company by the FICCI vide ref. No. F.680/CE-N-8 dt. 22nd July, 1999. In terms of these notifications, the appellant company was absolved from paying any excise duty in respect of Agartala unit. The appellant company has explained that under the procedure evolved in this regard by the Central Excise Authority, the appellant company has to clear the goods from the bonded warehouse by paying the applicable excise duty. As a matter of practice the excise authority continued to clear the goods from the bonded warehouse only after payment of excise duty and directed the appellant to ask for the refund of excise duty thus paid every month. Since no excise duty was payable the excise duty paid by the appellant company in the previous month was refunded by the excise authority in the next month and excise duty refund was credited in the P&L a/c.
8. The AO, however, noticed that the assessee has claimed deduction under Section 80-IB on the income of Rs. 2,56,45,785 from Agartala unit which has been arrived at by the assessee company because of profit worked out on refund of Rs. 2,61,92,386 from excise duty. If this refund is excluded then there shall be a resultant loss from Agartala unit and the assessee shall not be eligible for any deduction thereof.
The learned CIT(A), however, recorded a finding of fact that the assessee company has debited the excise duty and also credited the excise duty refund in the P&L a/c of Agartala unit. The net effect thereof is nil. There is thus no justification in excluding the excise duty refund from the income of Agartala unit for the purpose of deduction under Section 80-IB of the Act and as such the deduction claimed stood allowed.
9. The learned Departmental Representative contends that purpose of notification is to administer the Central Excise Law. That law, however, mandates payment of excise duty. If the assessee was exempted from payment of duty under that Act, he is not exempted from payment of income-tax on refund of such duty which has taken part of its income.
However, the settled law is that refund of excise duty is not an income derived from industrial undertaking. Reliance was placed on the decision of the Supreme Court in CIT v. Sterling Foods and also the judgment of jurisdictional High Court in the case of CIT v. Ritesh Industries Ltd. .
10. On the other hand, the assessee's counsel while relying on the decision of learned CIT(A) contends that : at best it may be a case of bad accounting but as held by the Madras High Court in the case of K.S.Narayanaswami Iyer v. CIT bad accounting cannot nullify the general principles concerning the computation of the profits and gains which are part of the substantive law. Reference was also made in this connection to the Bombay High Court decision in the case of CIT v. Nagri Mills Co. Ltd. . The Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. , for the purpose of IT Act, held that a mere book keeping entry cannot decide the question whether a particular claim is allowable as a deduction, whatever may be the method of accounting adopted. Therefore, the objection of the learned Departmental Representative that since the liability represented a contractual liability the absence of book entries is fatal to the claim cannot be accepted.
11. As far as the payment of excise duty is concerned, the appellant is governed by the Department of Revenue's Notification No. 32/99-CE dt.
8th July, 1999. A perusal of the said notification shows that the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the goods specified in the First Schedule and the Second Schedule to the Central Tarriff Act, 1985 (1 to 1986) and cleared from a unit located in the Growth Centre or Export Promotion Industrial Park or Industrial Estate, as the case may be, specified in annexure appended to this notification, from so much of the duty of excise or additional duty of excise as the case may be, leviable thereon under any of the said Acts as is equivalent to the amount of duty paid by the manufacturer of goods from the account current maintained under Rule 9 r/w Rule 173C of the Central Excise Rules, 1944, 12. Vide para 2 of the said notification certain modalities of giving effect to the said exemption were provided for. Basically it was provided that the manufacturer shall first pay the duty at the time of clearance of the goods from the bonded warehouses and thereafter by the 7th of next month the manufacturer shall submit a statement of duty paid, which will be refunded by the excise authorities after verification. It was, therefore, submitted that basically no excise duty is payable in the case of manufacturing of goods cleared from a unit located in specified area. The appellant had debited the excise duty paid under said notification in debit side of its P&L a/c and credited the refund received in pursuance of the said notification on the credit side of the P&L a/c. It is well recognized principle of accounting that only the excess of expenditure under any head over the receipts under that head can be claimed as expenditure. Had the assessee followed this well recognized principle of accountancy, it would have neither debited the P&L a/c by the said excise duty paid nor would it have credited the P&L a/c by the excise duty received by him in respect of excise duty paid. Accordingly, the debit entry in respect of excise duty paid and the credit entry in respect of excise duty refunds received cancel each other and should (sic-not) have found any place in the P&L a/c.
13. It was further submitted that the issue before the Tribunal is whether, the excise duty refund was derived from the Agartala manufacturing business within the meaning of Section 80-IB(1) of the IT Act, 1961 (hereafter called the Act, for short). It was submitted that the income-tax (sic-excise duty) refund was not only attributable to the Agartala business but was also derived from the Agartala manufacturing business. In this connection, reliance was firstly placed on the decision of Hon'ble Madras High Court in CAT v. Eastern Seafoods Exports (P) Ltd. (copy of which is enclosed in the compilation at pp. 7 to 13). It was held by the Hon'ble Madras High Court that the word "derived" in Section 80-1 of the Act, 1961 [which in this regard is pari materia with the provisions of Section 80-IB(1) of the Act] is not term of art. Its use in the definition indeed demands enquiry into the geneology of the product. But the enquiry should stop as soon as the effective source is discovered. In the case of the appellant, the effective source of the excise duty refund is the Notification No. 32/99-CE dt. 8th July, 1999 which basically provides the exemption of excise duty in the case of a manufacturer from a unit in specified areas but the modalities of giving effect to the notification are that the excise duty paid will be refunded. It is submitted that the effective source of both the excise duty payment as well as the excise duty refund lies in the said Notification dt. 8th July, 1999 and, therefore, no further enquiry is called for.
14. Secondly, he relies on the decision of Madras High Court in CIT v.Sundaram Industries Ltd. . In this case, the issue was whether the assessee from the sale of scrap material was eligible for deduction under Section 80HH of the Act. The Madras High Court stated that the third question referred to us is as to whether the Tribunal was right in law in holding that the assessee was entitled to deduction under Section 80HH of the Act in respect of miscellaneous income and interest on deposits treating them as receipts derived from industrial undertaking. This Court in the case of Fenner (India) Ltd. v. CIT , has held that scrap materials, which had a saleable value and which were a by-product of the manufacture of other rubber articles, when sold and resulted in an income to the assessee had direct nexus with the industrial undertaking and that the profit from the sale of scrap materials was eligible for deduction under Section 80HH of the Act. In the light of that judgement, we must hold that in respect of the miscellaneous income earned from the sale of scrap, the assessee was entitled to the benefit of Section 80HH of the Act. It was, therefore, submitted that the excise duty refund not only has a direct nexus with the appellant but has direct nexus with the manufacturing activities carried out by him inasmuch as it is trite law that the excise duty forms part of the manufacturing costs.
15. Thirdly reliance was placed on the decision of Hon'ble Tribunal, Pune Bench in the case of Asstt. CIT v. Kripa Chemicals (P) Ltd. (2002) 76 TTJ (Pune) 889 : (2002) 82 ITD 449 (Pune). In this case, the issue was if the assessee is found to have purchased FDRs with a view to maintain overdraft facility with bank, then such interest income would be considered by him as business income eligible for deduction under Sections 80HHA and 80-I of the Act. The Hon'ble Tribunal answered this query in the affirmative and restored the issue to the file of the AO with the following remarks: After considering the rival submissions, we find that the issue is covered by the decision of this Bench in the case of Jagdish Electronics Ltd., wherein it has been held that if the fixed deposits are made as a commercial expediency , then the interest earned on such FDRs would be business income on which deduction under Section 80-I would be allowable. Following the said decision, we set aside the orders of the CIT(A) on this issue and restore the matter to the file of the AO, who shall, after giving reasonable opportunity of being heard to the assessee, determine the factual aspect whether the FDRs, were purchased by way of commercial expediency or not. If the assessee is found to have purchased the FDRs with view to maintain the overdraft facility with the bank, then such interest income would be considered by him as business income allowable for deduction under Sections 80HHA and 80-I.Now in the case of this appellant, it cannot be gainsaid that both the payment of excise duty as well as the refund of excise duty under Central excise Notification dt. the 8th July, 1999 are part and parcel of assessee's manufacturing activities.
16. To the same effect is the decision of Hon'ble Tribunal, Delhi in the case of Media Video Ltd. v. Jt CIT (2002) 122 Taxman 28 (Delhi)(Mag). This case has been digested in case No. 490 of Yearly Taxman Digest of Tribunal Orders, Vol. 2, 2003. It has been held in that case that the interest earned by the assessee on short-term deposit even of subscription on moneys would qualify for deduction under Section 80-I of the Act.
17. Reliance was also placed on the ratio of decision of Hon'ble Tribunal, Delhi in Bio Foods (P) Ltd. v. Asstt CIT Taxman 327 (Del)(Mag) (sic). In this case, the issue was whether packing in question was necessitated since the item yeast manufactured, had to be transported to a long distance, failing which, it was likely to deteriorate and perish; amount earned by assessee on account of special packing was required to be included for the purpose of allowing deduction under Section 80-I/80HH. The issue was decided in favour of the appellant. To the same effect is the decision of Tribunal Gauhati Bench in the case of Dy. CIT v. Transpower (P) Ltd. (2001) 72 TTJ (Gau) 867 : (2002) 80 ITD 1 (Gau). In this case, part of advance payment received for execution of its order was deposited in bank as fixed deposit for procuring bank guarantees against the same. Assessee also obtained overdraft facilities against such deposit. The issue before the Hon'ble Tribunal was, whether the net interest income earned by the assessee on such deposit was inextricably linked with operations of industrial undertaking. This issue was answered in favour of Transpower Ltd. 18. He also relied on the decision of Hon'ble Madras High Court in CIT v. The Madras Motors Ltd./M.M. Forgings Ltd. . In this case, the issue was whether in respect of the amount received by an assessee from Modavat credits would be entitled to be held as allowable deduction under Section 80HH of the Act. The Hon'ble Madras High Court held that in respect of both the amounts received by the assessee under Modavat credits and international price rationalisation, it will have to be found that they are directly relatable to the industrial undertaking alone and to no other activity other than the business activity of the assessee as regards the forgings. Truly speaking, the amount received by way of Modavat credits could not have been received by the assessee had the assessee not purchased the raw materials for running its industry of manufacturing the forgings. It is only on account of the purchase of the raw materials that it was required to pay the excise duty thereupon in respect of which the assessee has earned Modavat credits. Therefore, that credit will have to be held as directly relatable to the industrial undertaking and the activity of the assessee company and that would have to be held in favour of the assessee. Thus, the income from the Modavit credits would be entitled to be held as allowable deduction under Section 80HH of the Act. It is submitted that this decision squarely applies to the excise duty refunds obtained by the respondent.
19. He also relied on the decision of Hon'ble Gujarat High Court in the case of CIT v. India Gelatine & Chemicals Ltd. , wherein the Gujarat High Court expressly dissented from the decision of CIT v. Jameel Leathers & Uppers and held that as duty drawback is intended to reduce the cost of production, it is an integral part of the pricing of the goods and, therefore, duty drawback has to be treated as "derived from the industrial undertaking." Furthermore the Hon'ble High Court has also followed the decision of Madras High Court in the case of CIT v. Ritesh Industries Ltd. (supra) and has held that duty drawback is not entitled to special deduction under Section 80-I of the Act. In this connection, it was submitted that the facts in the case of the CIT v. Ritesh Industries Ltd. (supra) are not on all fours with the case of the appellant and, therefore, the decision of Hon'ble Delhi High Court in the case of CIT v. Ritesh Industries Ltd. (supra) was not applicable. In the case of CIT v.Ritesh Industries Ltd. (supra) the duty drawback is received only in view of the export of garments. In the case of the appellant both the payment of excise duty as well as the excise duty refunds are governed by the Central Excise Notification No. 32/99-CE dt. the 8th July, 1999, and if the excise duty is allowable as business expenditure and it has a direct nexus with the manufacturing operations carried on by the appellant, there is no rationale for the Revenue to contend that the duty refund is de hors of the manufacturing activities carried on by the appellant. It was also mentioned that after noticing the decision of Delhi High Court in CIT v. Ritesh Industries Ltd. (supra) the Hon'ble Tribunal, Delhi Bench "G" in Asstt. CIT v. Vipin Sardana (2005) 148 Taxman (Del)(Mag) 41 has held that the amount of duty drawback has a direct link with the business activity of the industrial undertaking and, therefore, deduction is allowable of an amount of duty drawback under Section 80-IB of the Act. A copy of the report in the case of Asstt. CIT v. Vipin Sardana (supra) is placed at APB-50.
It was, therefore, contended that there is no error in the decision reached by the learned CIT(A) and a prayer was made to reject the ground in appeal by the Revenue.
We have heard the parties with reference to precedents referred and material available on record. The Government by its Notification No.32/99-CE dt. 8th July, 1999 exempted the goods manufactured by the appellant at its unit at Agartala from so much of the duty of excise leviable under the Central Excise Act as is equivalent to the amount of duty paid by the manufacturer of goods from the account maintained under Central Excise Rules, 1944. In order to give effect to the said notification, certain modalities were provided. Accordingly, the respondent paid duty at the time of clearance of goods and claimed refund thereof by the 7th day of next month. The amount so paid at Rs. 2,61,92,386 during the year was debited to the excise duty paid account and refund thereof received was credited under the head of account 'Excise refund account'. These amounts were correspondingly transferred to the P&L a/c for the year under consideration. The learned CIT(A) thus found that net effect of such accounting on the income is nil.
This in other words means that the respondent assessee did not get any refund of excise duty. What was refunded to it is the same amount which he paid under the modalities provided for giving effect to the notification of the Revenue Department. Had the assessee maintained a single account of excise duty in its books of account in that case, there will be no such amount that can remain surplus as refund of excise duty. A mere book entry, therefore, could not be decisive to hold that there was a refund of duty forming part of assessee's income.
In fact what respondent received as refund is its own money which it paid under the scheme. The amount of Rs. 2,61,92,386 credited as refund of excise duty, therefore, could not be excluded from the profits and gains of business for the purpose of computing total income under Section 80TB of the Act. Finding reached by the learned CIT(A) that the net effect of book entries is nil is not shown as perverse on facts. We therefore do not find any reason to interfere in the decision reached by him in directing to allow deduction without reduction of the aforesaid amount of Rs. 2,61,92,386 from the income of the respondent assessee. Finding no merit in this ground also raised by Revenue in this appeal, the same stands rejected.