1. Both the appeals have been filed by the Department against the orders of the CIT(A), dt. 23rd December, 1999, and 28th May, 1992, for the asst. yrs. 1988-89 and 1989-90, respectively. The assessee has also filed cross-objections for both the assessment years just as a matter of precaution. As there are common points in both the appeals and the cross-objections, so they are disposed of together by this consolidated order for the sake of convenience. We have heard both the parties at length and gone through the materials available on record and discuss the issue involved as under : 3. It relates to the deletion of addition of Rs. 30,40,000 on account of incentive wages. The AO has disallowed the amount by following his order for the earlier assessment years. The CIT(A) has deleted the disallowance by following his order for the earlier assessment years.
The AO observed in the order that the incentive wages was nothing but bonus and, therefore, its allowability was subject to the provisions of Bonus Act. So he has estimated the amount of disallowance at Rs. 30,40,000 as against Rs. 28,40,880 of the last year. The CIT(A) has followed his earlier decision and also discussed case laws mentioned in his order at p. 4 and finally observed that the AO has failed to bring any material on record for not accepting the order in the assessee's case for the earlier assessment year.
4. We have heard both the parties and gone through the materials available on record, from which it appears that since asst. yr. 1982-83 similar disallowance had consistently been deleted and also the same was followed in the subsequent assessment years. But during the assessment year under consideration the AO made the addition without bringing any material on record. The matter was also discussed by the Tribunal for the asst. yrs. 1985-86 to 1987-88. In the just previous asst. yr. 1987-88, the Tribunal [ITA No. 1564 (Cal) of 1991] has deleted the addition pertaining to the incentive wages (copy on record at pp. 1 and 2 of the paper book). By respectfully following the earlier order of the Tribunal and in the absence of any additional material/evidence, we find no reason to interfere with the order of the CIT(A) who has rightly deleted the said addition. The same is hereby upheld.5. Ground No. 2 for the asst. yr. 1988-89 and ground No. 1 for the asst. yr. 1989-90 : 6. Both the grounds are pertaining to the valuation of closing stock of raw material eligible to the account of modvat. During the assessment years under consideration, the AO made additions of Rs. 98.11 lacs; and Rs. 6.6 lacs, respectively. In brief, the AO observed that even for the purpose of excise laws the modvat benefit does not directly affect or reduce the assessable value automatically which is to be determined in accordance with s. 4 of the Central Excise Rules, 1944. He observed that no input and output co-relation is required for availing of modvat as it is a system of instant credit so he observed that due to under valuation of the closing stock of raw material and semi-finished goods, the assessee is not entitled for the benefit of modvat and made the additions accordingly. The CIT(A) has discussed at length about the modvat system. In brief, the modvat is a procedure whereby manufacturer can utilise credit for input duty against duty payable on final products. Duty credit taken on input is of the nature of set off available against the payment of excise duty on the final products. He mentioned that under the modvat scheme, the excise duty liability of the assessee-company in respect of its final products is reduced by the excise duty paid by the supplier of the components to the assessee-company to claim the benefit of modvat. The assessee has to maintain a register which is known as Form RG 23A. The CIT(A) further observed that after examining the record, the gross excise duty was being debited in the accounts the input cost was being debited not of modvat credit. The result was that when the aggregate debits to P&L a/c on account of cost of raw material consumed and excise duty paid was same. But the CIT(A) has not agreed with the observation of the AO that profits were being reduced due to artificial undervaluation of the closing stocks. The CIT(A) has followed the guidelines issued by the Institute of Chartered Accountants of India pertaining to the method of debiting input cost at net of modvat price. So he has deleted the said additions.
7. After hearing both the parties at length and on perusal of the record, it appears that the modvat Scheme was introduced by the Finance Minister w.e.f. 1st March, 1986. The nature of the modvat scheme is intended to be a revenue neutral. It was not the purpose to use the modvat to give substantial relief of excise. The shifting the effective burden of excise taxation away from inputs and on the final products is the heart of the said scheme. In short, the modvat scheme allows the manufacturer to obtain instant and complete reimbursement of the excise duty paid on the components and raw materials which will result in considerable reduction in the cost of final product. The CIT(A) has already discussed this issue at length in his order and without repetition it may be mentioned that the benefit of modvat is available only in respect of such raw material/components actually consumed in production of final goods actually sold. In the instant case, as appears from the material that since only 50 per cent of inputs covered by modvat scheme was consumed in respect of which gate passes were obtained, modvat benefit available was only 50 per cent.
8. Moreover, the issue has come up before the Tribunal in the assessee's case for the asst. yr. 1987-88 where the Tribunal has discussed a number of orders by different Benches (supra). Finally the Tribunal upheld the deletion made by CIT(A).
9. In the light of our discussion and in the absence of additional material/evidence, we agree with the order of the CIT(A) who has shown in his order that there is no impact on the profit whether cost of raw material is debited at gross or at net of modvat. Therefore, we uphold the order of the CIT(A), who has rightly deleted the said additions pertaining to the modvat and the same is hereby upheld.10. Ground No. 3 for the asst. yr. 1988-89 and ground No. 2 for the asst. yr. 1989-90 : 11. Both the grounds relate to the disallowance under s. 80HHC for the profit for Haldia Export Factory. The assessee-company is manufacturing and selling batteries in domestic market. The company is also exporting batteries to foreign countries. This is the only business of the assessee-company as reflected in the printed balance sheet and P&L a/c of the company. From the Haldia Factory, 100 per cent production is exported. So the AO treated the Haldia Export Factory as a separate business of the assessee-company, Therefore, he computed the deduction by applying provision of s. 80HHC(3)(a) in respect of export made from Haldia Export Factory. He applied the provision of s. 80HHC(3)(b) in respect of export sales made from the other factory of the company.
After computing he made the necessary addition which was deleted by the CIT(A) in his order by following his earlier order for the previous assessment years. The CIT(A) has observed in his order that the Haldia Export Factory could not be held to be a separate business of the assessee and considered the common business of the assessee since a long time and accordingly the computation of the quantum of deduction under s. 80HHC may be made in accordance with s. 80HHC(3)(b) only and not partly under cl. (a) and partly under cl. (b) or s. 80HHC.12. The learned Departmental Representative relied on the orders of AO, and mentioned that the 100 per cent export unit at Haldia is identifiable separate business for which books of account are maintained separately. He also mentioned that under s. 80HH if the gross total income of the assessee includes any profit and gains derived from an industrial undertaking, a relief of 20 per cent of the total profit and gains from such undertaking is allowed by way of deduction. Hence, for determining the quantum of relief under s. 80HH from the consolidated accounts which reproduce the aggregate position of the business comprises several industrial undertakings of which Haldia Export Unit is a part, the profit from Haldia Export Unit was computed for the purpose of relief under s. 80HH. He was fair enough to accept that the assessee-company is not maintaining any separate account in respect of 100 per cent Haldia Export Unit nor it was statutory required except for the purpose of s. 80HH(5) as mentioned by CIT(A) in his order at p. 21. On query from the Bench, he accepted that s. 80HHC and s. 80HH are neither interlinked nor interdependent. They are separate and distinct provision inserted in the Act fulfilling different objects and purposes. In other words, he accepted that the conditions which have to be satisfied for obtaining the benefits are also different under these two sections. The deduction under s. 80HH is available with reference to the profits of the new industrial undertaking in a backward area and the computation of profit of such new undertaking is relevant for the purpose of that section only. On the other hand, the benefit under s. 80HHC is related to the profit earned by the export.
13. On the other hand, the learned authorised representative from Price Waterhouse relied on the order of the CIT(A) and mentioned that the AO has confused about the business and production of the assessee-company.
There is no separate business of the assessee from the said unit. The Haldia Export Unit comprises the same business of manufacturing of batteries carried on by the assessee since long time. He mentioned the ratio laid down by the Hon'ble Supreme Court in B.R. Ltd. vs. CIT (1978) 113 ITR 647 (SC) where it was laid down certain parameters for deciding whether two activities constitute same business or different business, namely - (a) presence of common management, (b) interlacing of funds, (c) unity of control, (d) embracing of results in common accounts. He repeated that both Haldia Export Factory and the other factories of the assessee manufacture only one product, namely, battery in different shapes. He also mentioned that the assessee does not maintain separate books of account for Haldia Export Factory and though not accepting but presuming that the assessee maintains separate books of account with respect to a particular unit, even then the unit does not automatically become a separate business of the assessee because the assessee has only one composite business in accordance to the parameters laid down by Hon'ble Supreme Court (supra) [See also Produce Exchange Corpn. Ltd. vs. CIT 14. We have heard the both sides and gone through the material available on record. It may be mentioned that the Tribunal, Delhi Bench, in the case International Research Park Laboratories Ltd. vs.
Asstt. CIT (1994) 50 TTJ (Del) (SB) 661 : (1994) ITD 37 (Del) (SB) observed that even if an assessee had various businesses, one of which exclusively consisted of the export of goods outside India, all the businesses taken together shall comprise one composite business and the provisions of cl. (b) of sub-s. (3) of s. 80HHC of the Act shall only apply and not partly clause (a) and partly cl. (b). The cl. (a) relates to the business consisting exclusively of the export of goods outside India and cl. (b) relates for the other businesses.
15. In the light of our discussion and by keeping in mind the CBDT Circular No. 564, dt. 5th July, 1990 we are of the view that the assessee has only one composite business. Therefore, the assessee is entitled for computation of export profit of all the units as per s.
80HH(3)(b). In the absence of any additional material/evidence we find no infirmity in the order of CIT(A) who has observed that though the assessee has claimed deduction under ss. 80HH and 80-I of the Act, nonetheless the Haldia Export Factory does not constitute a separate business. In the light of our discussion and by keeping in mind the ratio laid down by the Supreme Court in Textile Machinery Corpn. Ltd. vs. CIT (1977) 107 ITR 195 (SC), we confirm the order of CIT(A) who has rightly directed the AO to give the benefit under s. 80HHC for both the assessment years under consideration by computing the deduction in accordance with s. 80HHC(3)(b) only and not partly under cl. (a) and partly under cl. (b) of s. 80HHC.16. Ground No. 4 for the asst. yr. 1988-89 and ground No. 3 for the asst. yr. 1989-90 : 17. Both the grounds relate to the claim of the assessee under s. 32AB to the tune of Rs. 3,02,04,347 and Rs. 5,34,62,826 for the asst. yrs.
1988-89 and 1989-90, respectively. The said claim was properly certified by auditors as required under s. 32AB(5). Further, details of the deposits and utilisation in respect of which deduction was claimed under s. 32AB were as under : 29th February, 1988 (within six months from 30th August, 1987) : Rs. 1,70,00,000 machinery : Rs. 1,33,14,041 1989 : Rs. 3,20,00,000 machinery : Rs. 2,20,13,788 18. Since the maximum deduction permissible under s. 32AB is 20 per cent of the eligible profit computed under s. 32AB(3); the AO restricted the claim to 20 per cent of the business income as worked out by the auditors. The AO had issued notices under s. 142(1) to identify the sources out of which the deposit was made with IDBI so that it could be appreciated that the deposit made satisfied the required condition of having been made out of the income of the previous year chargeable to tax under the head "Profit and gains from business or profession". In respect of the amount utilised during the assessment year under consideration for the purpose of new plant and machinery similar identification of source was insisted upon. For the purpose of such identification the assessee was asked to produce bank statement with necessary narration, debtors' accounts and also to identify the amount out of which the deposit was made. In response, the assessee filed a certificate in respect of deposit with IDBI and also furnished the names of banks from which payments were made for the said deposit. Despite the auditor's report the AO observed in his order that the assessee-company could not directly relate to the source of the deposit and investment with the business income of the relevant previous year so he has disallowed the claim for deduction in its entirety.
19. In the first appeal the CIT(A) has deleted the said addition by observing that the deposit was made with IDBI within six months before the end of the previous year. He further observed that in order to be the eligible for the benefit under s. 32AB, the assessee has to have income which is chargeable to tax under the head 'profit and gains of business or profession'. This is because both the deposits as well as utilisation through purchases of plant and machinery has to be out of the income chargeable to tax under the profit and gains of business or profession. Further, the CIT(A) has observed in his order that the AO himself computed the business profit at 15.18 crores. The investment and deposit was for an aggregate amount of Rs. 3.03 crores and Rs. 5.34 crores, respectively. In other words, the CIT(A) observed that the AO did not dispute the sanctity of the audit report but ironically the AO was not prepared to accept the certificate of the auditor that the new plant and machinery has been acquired out of the income chargeable to tax under the head 'profit and gains of the business'. Similar position was stated about the IDBI deposits. Finally he has deleted the said additions. The learned Departmental Representative during the course of arguments relied on the orders of the AO and mentioned that the claim for deduction was restricted to 20 per cent as per statutory provisions. He mentioned that as per CBDT Circular No. 461, dt. 9th July, 1986 the income is to be determined in real sense until the end of the previous year. Further, he mentioned that the new plant and machinery and investment will have to be made from profit and gains of the business. He further proceeded to submit that the conditions requisite for attracting s. 32AB, are relating to investment deposit accounts to the extent necessary for the purpose. So the assessee is entitled to obtain reduction of an amount equal to the amount or the aggregate of the amounts, deposited under s. 32AB(1)(a) and any amount utilised under s. 32AB(a)(b) or a sum equal to 20 per cent of the profits as computed in the accounts of the assessee audited in accordance with s. 32AB(5), whichever is less. So he justified the disallowance made by AO.20. On the other hand, the learned authorised representative Shri R. K.Mitra from Price Waterhouse, mentioned that the said circular was issued by way of extent, scope and effect of the newly inserted s.
32AB. In cl. (b) of para 17.3 of the circular, it has been made clear that investment deposit scheme will be available if there are profits in the eligible business or profession unlike investment allowance where the deduction is available even if there is no such profit because the deduction under s. 32A was linked merely to the cost of plant and machinery whereas in s. 32AB it is linked with the income under the head 'profit and gains of business or profession'. He has drawn our attention to the computation made by AO where he has shown the business profit of more than investment/deposit.
21. He also submitted that Investment Deposit Account Scheme was introduced through the Finance Act, 1986, with a view to substitute the existing provision of investment allowance contained in s. 32A of the Act. He submitted that the object of s. 32AB was actually earning profits in order to be eligible for deduction. He mentioned that the Hon'ble Supreme Court in the case of K. P. Varghese vs. ITO (1980) 131 ITR 597 (SC) observed that a statute has to be interpreted in a manner so as to achieve the object or intention of the legislature in enacting the same. It is submitted that if one were to interpret the provisions of s. 32AB(1) with a view to achieve the object for which it had been enacted, then the conclusion which would follow is that by using the term "out of such income", the legislature intended that the income chargeable under the head "profit and gains of business or profession" for a previous year should be sufficient to cover the aggregate of the amounts of utilisation and deposits. It is further submitted that the said term "out of such income" cannot be construed in a manner so as to connote the insistence on the part of the Revenue of demonstrative proof that the utilisation and deposits had their origin in the profits embedded in the bank accounts on which the cheques were drawn, by matching receipts and payments in bank statements on a "one to one".
Further Mr. R. K. Mitra submitted that the Revenue has neither denied nor disputed that the bank accounts on which the cheques in connection with the utilisation and deposits, were drawn were all overdraft accounts. However, the collections and realisations from the customers and other receipts related to the business of the assessee were also deposited into the same overdraft accounts. He further explained that the profit generated by the assessee during each of the previous years relevant to the assessment years under consideration were also embedded in the said overdraft accounts. It is not possible in such a situation to segregate and relate on a one to one basis, a particular payment from a common pool of funds, which included inter alia the collections and realisations from the customers and other receipts related to the business of the assessee. Lastly, he justified the orders of the CIT(A) by mentioning the ratio laid down by the jurisdictional High Court in the following cases :Alkali & Chemical Corpn. of India Ltd. vs. CIT (1987) 161 ITR 820 (Cal); and 22. We have heard at length the arguments of both the parties and gone through the materials available on record along with written submissions from which it appears that the assessee is maintaining a common pool of accounts known as overdraft account where all the cheques were deposited in connection with the utilisation and deposits.
The assessee-company was having sufficient funds which were at least three times more than the amount invested/deposited during the assessment years under consideration. In the case of Woolcombers of India Ltd. vs. CIT (1982) 134 ITR 219 (Cal), the jurisdictional High Court observed that the assessee-company had paid advance tax out of the overdraft account with a bank in which its collections from customers were also deposited. When the advance tax was paid, there was already debit balance appearing in the overdraft account. Finally, the Hon'ble jurisdictional High Court observed that the profit generated during the year which was embedded in the overdraft account far exceeded the payment of tax. In the circumstances, the assessee-company had actually paid the tax out of the profits of the company embedded in the overdraft account and not from the borrowings, notwithstanding the existence of debit balance in the overdraft account at the time of payment of the tax.
23. In the instant case before making the said addition the AO has not proved the nexus pertaining to deposit/investment vis-a-vis the income chargeable under the head 'profit and gains of business or profession'.
Now it is well settled law that the deposits from the various sources are put in a common account, no attempt should be made to relate or match the payments made out of the amount with the deposits or borrowing since it is not possible to co-relate a particular receipt with particular expenditure. Further, if a question arises as to whether particular payment is made from the composite account was out of the overdraft fund or out of an accumulated profits embedded in the collection of sale proceeds and other incomes deposited therein, it cannot be said that the payment was made out of the overdraft account.
On the other hand, the presumption should be that the payment was made out of the profits generated during the relevant previous year and embedded in the overdraft account. The jurisdictional High Court observed in the Alkali case (supra) that the fact that the said overdraft had a continued debit balance would make no difference to the presumption that the income-tax has, in fact, been paid out of the profits and not out of the borrowings. Further, the jurisdictional High Court observed in the case of Indian Explosives (supra) that if a payment was made from a common fund where several forms of moneys were deposited the assessee would have the option to choose the source most beneficial to it from which the payment could be said to have been made.
24. We are satisfied that the quantum of business profits earned by the assessee-company during each of the previous years relevant to the assessment years under consideration were almost 3 to 4 times of the aggregate of the utilisation and deposits made with respect to the respective assessment years. Therefore, it can be safely presumed that the said utilisation and deposits were all made out of the business profits earned by the assessee during the relevant previous years and not out of the borrowed or other funds. By considering the totality of the facts and circumstances of the case we agree with the observation made by the CIT(A) that the assessee-company satisfied all the conditions necessary for deduction under s. 32AB. In the absence of any additional material/evidence we find no infirmity in the order of the CIT(A) who has rightly directed the AO to allow the claim for deduction as worked out by the auditors for the assessment years under consideration. The same is hereby upheld.26. It relates to the deletion of the addition of Rs. 1,75,304 paid to staff recreation club under s. 40A(9). During the assessment year under consideration, the assessee claimed the said amount pertaining to staff recreation club as staff welfare expenses under s. 37(1). The AO has not allowed the same as per s. 40A(9).
27. We have heard both the parties and gone through the materials available on record, from which it appears that the CIT(A) has deleted the said addition by following the Tribunal's order in the case of Dy.
CIT vs. A.P.E. Belliss India Ltd. ITA Nos. 527 to 531 (Cal) of 1989.
The Tribunal vide its order dt. 13th February, 1992, (p. 11 of the paper book), observed that s. 40A(9) is not applicable because this section stands for any funds, institutions, where the assessee made the subscription for the purpose of welfare of the employees. That means that there should be a complete identity between the donor and the donee. Here staff recreation club and the staff club are a part and parcel of the organisation itself and they are given money by way of subsidy, an age old practice. In various Government departments also subsidies are given as a matter of course for carrying on welfare activities. So finally the Tribunal upheld the order of the CIT(A) who has deleted the said addition. By respectfully following the earlier order of the Tribunal and by keeping in mind the ratio laid down in the following cases :Gujarat State Export Corpn. Ltd. vs. CIT (1994) 209 ITR 649 (Guj).
28. We find no infirmity with the order of CIT(A) who has rightly deleted the said addition pertaining to the staff welfare. By considering the totality of the facts and circumstances of the case, we uphold his order.
29. After hearing both the parties it appears that the assessee has filed cross-objections for both the assessment years under consideration as an abundant caution. In the light of our discussion the same do not deserve any discussion on merit. Therefore, they are rejected.
30. In the result, both the appeals, filed by the Department and the cross-objections filed by the assessee, are dismissed.