Tudor Knitting Works Pvt. Ltd. vs Commissioner of Income Tax

Ajay Kumar Mittal, J.—The assessee has preferred this appeal u/s 260A of the income tax Act, 1961 (in short, "the Act"), against the order dated September 16, 2009, annexure A.3 passed by the income tax Appellate Tribunal, "A" Bench Chandigarh in I.T.A. No. 653 (Chandi) 2005 for the assessment year 2002-03, claiming the following substantial questions of law:

I. Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was justified in law in holding that the appellant was not entitled to the deduction u/s 80IB on the surrendered amount though utilized for the business of the appellant without placing any evidence against the assessee on record and without rebutting the evidence presented by the assessee on record and thereby reversing a well versed and reasoned orders by the Commissioner of income tax (Appeals) ?

II. Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was justified in denying the claim of the appellant u/s 80IB of the income tax Act, 1961, by blindly relying upon the judgment of this hon''ble court in the case of National Legguard Works Vs. Commissioner of Income Tax (Appeals) and Another, which is distinguishable on facts itself and rather favours the present appellant''s case ?

III. Whether, on the facts and in the circumstances of the case, the findings of the income tax Appellate Tribunal are perverse and against the evidences on record thus unsustainable in law?

IV. Whether the income tax Appellate Tribunal has misdirected itself in being influenced by irrelevant factors and applying the erroneous criteria while deciding the issue for claiming deduction u/s 80IB of the income tax Act, 1961 ?

Briefly, the facts necessary for adjudication of the controversy involved, as narrated in the appeal may be noticed. The assessee is a company engaged in the manufacture of hosiery goods at Ludhiana. It is a regular income tax assessee. On November 6, 2001, a survey operation u/s 133A of the Act was conducted at the business premises of the assessee. During this operation, the assessee surrendered an amount of Rs. 1.20 crores stating that this amount was part and parcel of the business activities and was in addition to the normal business income and that there was direct and proximate connection of this income with the business of the industrial undertaking. The assessee filed its income tax return for the assessment year 2002-03 on October 28, 2002, declaring an income of Rs. 86,31,329. The case of the assessee was selected for scrutiny. The assessee attended the proceedings and filed the requisite information/documents. Its books of account were called for. The assessee was asked to explain as to why the deduction in respect of income of Rs. 1.20 crores u/s 80IA/IB of the Act be not disallowed. Deduction was also claimed on the amount of Rs. 59,852 representing income from bank interest as the same was also earned during the normal course of business activities and was out of the surplus funds lying with it. The Assessing Officer, vide order dated October 27, 2004, annexure A.3 disallowed the deduction u/s 80IB of the Act by relying upon the judgment of the apex court in Commissioner of Income Tax, Karnataka Vs. Sterling Foods, Mangalore, holding that, according to section 80IB, deduction is available on profits and gains derived from the business of an industrial undertaking. Aggrieved by the order, the assessee preferred an appeal before the Commissioner of income tax (Appeals) (the CIT(A)). Vide order dated January 28, 2005, annexure A.2, the Commissioner of income tax (Appeals) allowed the appeal. Not satisfied with the order, the Revenue filed an appeal before the Tribunal relying upon the judgment of this court in National Legguard Works Vs. Commissioner of Income Tax (Appeals) and Another, wherein it was held that in the case of amount surrendered, the burden was on the assessee to prove that the amount represented profits on which deduction was permissible under Chapter VI-A. The Tribunal, vide order dated September 16, 2009, annexure A.3 allowed the appeal and set aside the order passed by the Commissioner of income tax (Appeals). Hence, the present appeal by the assessee.

Learned counsel for the appellant-assessee submitted that the surrendered amount of Rs. 1.20 crores was part and parcel of business activities and was in addition to the normal business income and there was direct and proximate connection of this income with the business of the industrial undertaking. According to the learned counsel, the finding recorded by the Tribunal that it was not derived from the industrial undertaking was erroneous. It was in fact as a result of business income and, therefore, deduction u/s 80IB of the Act was admissible. It was also argued that the income was assessed by the Assessing Officer under the head "Business or profession" and, therefore, the assessee was entitled for deduction u/s 80IB of the Act. Reliance was placed upon the judgments in Broach Distt. Co-operative Cotton Sales Ginning and Pressing Society Limited Vs. Commissioner of Income Tax, Ahmedabad, Commissioner of Income Tax, Bombay Vs. Gwalior Rayon Silk Manufacturing Co. Ltd., ) Bajaj Tempo Ltd., Bombay Vs. Commissioner of Income Tax, Bombay City-II, Bombay, Commissioner of Income Tax Vs. Margaret''s Hope Tea Co. Ltd., ) Gopal Stores Vs. Commissioner of Income Tax M/s Mysore Minerals Limited, M.G. Road, Bangalore Vs. The Commissioners of Income Tax, Karnataka, Bangalore, ), Commissioner of Income Tax Vs. Rathore Brothers, ), Padmasundara Rao and Others Vs. State of Tamil Nadu and Others, Commissioner of Income Tax Vs. Simplex (Indore) (P) Ltd., and Commissioner of Income Tax Vs. Allied Industries, in support of the submissions.

Controverting the aforesaid submissions, learned counsel for the Revenue relied upon the judgments in Sterling Foods and National Leg-guard Works'' cases (supra). He submitted that there could be trading activity as well and the assessee had not produced anything to prove that it was on account of industrial undertaking and the onus upon the assessee was not discharged.

After hearing learned counsel for the parties and perusing the record, we do not find any merit in the appeal.

The Tribunal, while declining the claim of the assessee, had specifically recorded as under:

We have considered the rival submissions carefully. The first and the foremost point which is required to be kept in mind is that for the purposes of computing deduction u/s 80IB, only the profits and gains which have a direct nexus with the industrial undertaking are alone liable to be considered. Section 80IB envisages deduction in respect of profits and gains derived from any business of industrial undertaking only as the expression ''derived from'' finds a place in the section. In order to appreciate the import of the expression ''derived from'', a reference may be made to the judgment of the hon''ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, wherein the difference in the expressions ''attributable to'' and ''derived from'' was considered. The hon''ble Supreme Court observed that the expression ''derived from'' wherever used, intends to cover only the receipt from the actual conduct of the business of specified nature, whereas the expression ''attributable to'' has a wider import and would cover receipts from sources other than the actual conduct of the business of the specified nature. Similar proposition has been upheld by the hon''ble Supreme Court again in the case of Commissioner of Income Tax, Karnataka Vs. Sterling Foods, Mangalore,

To the similar effect is the judgment of the hon''ble jurisdictional High Court in the case of Liberty India Vs. Commissioner of Income Tax, ). From the aforesaid, it is safe to deduce that in order to entitle an assessee to deduction u/s 80IB, there must be a direct nexus between the income in question and the industrial undertaking. In other words, even if a particular income is liable to be assessed as business income but the nexus is indirect or incidental, such income, though assessable as business income, would not qualify for deduction u/s 80IB of the Act because it cannot be said to be derived from an industrial undertaking on account of it being devoid of any direct nexus.

With this discussion, we may now examine the facts of the present case. In this case, the assessee surrendered an amount of Rs. 1,20,00,000 during the course of a survey operation u/s 133A of the Act on account of difference in stock, debtors receivable and on account of difference in the amount invested in construction of building. The assessee claimed deduction u/s 80IB on such income declared in the return. Ostensibly, in order to hold such income eligible for deduction u/s 80IB, the nexus with the industrial undertaking is required to be established. The moot question is whether the same stands established in this case or not ? Before we proceed on this aspect, it would also be of relevance to notice the judgment of the hon''ble jurisdictional High Court in the case of National Legguard Works Vs. Commissioner of Income Tax (Appeals) and Another, wherein the following discussion is worthy of notice (page 21):

We are unable to accept this submission. Deduction u/s 80HHC of the Act is available only on showing fulfilment of the conditions specified therein and there could be no presumption that surrender made on account of unexplained stocks represented export income. The assessee was unable to give any explanation. There could be no presumption that the additional amount surrendered represented income from exports. Deduction u/s 80HHC of the Act can be claimed only on showing facts which make the assessee eligible for the deduction. The burden to prove these facts was on the assessee and not on the Revenue.

In our view, the aforesaid observations, though made by the hon''ble High Court in respect of section 80HHC of the Act is equally applicable to the computation of deduction u/s 80IB of the Act. In other words, there can be no presumption that the amount surrendered represented income eligible for section 80IB benefits and that the onus was on the assessee to prove that the surrendered income was derived from the industrial undertaking. In this case, the learned counsel for the assessee reiterated the submission made before the Commissioner of income tax (Appeals) that at the time of surrender, the assessee has clearly indicated that the amount surrendered is a part and parcel of the business activities and is in addition to the normal business income. In our view, the said stand of the assessee does not demonstrate that the burden cast on the assessee stands discharged. The learned counsel has further submitted that the assessee''s industrial undertaking was the only source of income and there is no other manufacturing activity and, therefore, there was nothing to establish that the income in question was not derived from the industrial undertaking.

We have considered the said plea of the assessee and find that the same only entails a presumption that the additional amount surrendered represented income derived from the industrial undertaking. As observed earlier, in terms of the decision of the hon''ble jurisdictional High Court, there cannot be a presumption that surrendered income is eligible for section 80IB benefits. On the contrary, the assessee has to demonstrate that the income in question is eligible for 80-IB benefits. In this case, though the income surrendered is assessed by the Assessing Officer as business income, however, its nexus with the industrial undertaking is left to be established. There is nothing on record relied upon by the assessee to show that in the course of survey, any evidence of unaccounted turnover, inflation of expenses, etc., was discovered, so as to say that the surrendered income was directly linked to the business of the industrial undertaking. There is no positive evidence led by the assessee to establish direct nexus with the industrial undertaking and, therefore, in our considered opinion, the burden cast on the assessee has not been discharged.

In this background, in our view, the Commissioner of income tax (Appeals) was wrong both on facts and in law to allow the claim of the assessee for deduction u/s 80IB with respect to the surrendered amount. Firstly, the Commissioner of income tax (Appeals) is wrong in transferring the burden on the Revenue to establish that the surrendered income was not entitled to section 80IB benefits. Secondly, even factually, there is no positive material or evidence to establish the nexus between the surrendered amount and the industrial undertaking. Further, the Commissioner of income tax (Appeals) has also not considered the reliance placed by the Assessing Officer on the decision of the Amritsar Bench of the Tribunal in the case of Deepak Mittal, P/O Sonalika Agriculture Industrial Corporation, Hoshiarpur, dated July 2, 2004, for the assessment year 1989-90, wherein a similar issue has been dealt with in favour of the Revenue. Moreover, the reliance placed by the Commissioner of income tax (Appeals) on the decision of the Amritsar Bench of the Tribunal in the case of Kashmir Steel Rolling Mills v. Deputy CIT [1991] 55 Taxman 424 (Amritsar) (Mag.), is also not appropriate. The learned Departmental representative quite fairly contended that the decision of the Amritsar Bench in the case of Kashmir Steel Rolling Mills has been further explained by the Amritsar Bench in the case of (2005) 97 TTJ 1 . Moreover, the decision of the Amritsar Bench of the Tribunal in the case of Kashmir Steel Rolling Mills (supra) is dated May 16, 1990, and the judgment of the hon''ble Supreme Court in the case of Sterling Foods (supra) is dated April 15, 1999, wherein it has been held that the nexus between the profit and the industrial undertaking has to be direct and not indirect or incidental or based on any circumstantial evidence. Moreover, in view of the authoritative pronouncement of the hon''ble jurisdictional High Court in the case of National Legguard Works (supra), the issue in question is required to be held against the assessee.

The contention of the learned counsel for the appellant that the income was assessed under the head "Business", is not borne out from the record. A perusal of the assessment order shows that it nowhere suggests that the Assessing Officer had taken the surrendered income under the head "Business or profession". Moreover, nothing had been produced by the assessee to show that the surrendered income was derived from the industrial undertaking. The onus was upon the assessee to show that the income on which deduction had been claimed u/s 80IB under Chapter VI-A of the Act was in fact derived from the industrial undertaking.

From the perusal of the findings as noticed above, the Tribunal had come to the conclusion that the onus upon the assessee was not discharged. In such a situation, it could not be said that the Tribunal had erred in holding that the deduction u/s 80IB of the Act was not admissible to the assessee. This court in Home Tex Vs. Commissioner of Income Tax, considering similar issue had noticed as under:

It is quite evident from the above letter submitted by assessee that Rs. 40 lakhs income was surrendered only on account of excess stock found as per physical verification. It was also stated in the letter that no adjustment will be made against the surrendered income and such surrendered income is over and above the regular income as per the books of account. Advance tax on the additional income was also proposed to be deposited, vide post-dated cheques. Since in the letter itself the assessee has accepted that this additional income was over and above the regular income as per the books of account, the regular income which is arising out of the industrial undertaking can only be subject to deduction u/s 80IB and no other income surrendered on account of additional stock found during the course of survey can be considered for deduction u/s 80IB. More particularly, in view of the decision of the hon''ble Supreme Court in the case of Liberty India (supra) wherein even the income from the DEPB and duty drawback which are received by the industrial undertaking as an incentive in the course of their business were held to be not eligible for claim of deduction u/s 80IB, nothing is left for granting deduction in respect of such income surrendered during the course of survey which is attributable to the excess stock found during the survey. Nothing was brought on record by the learned authorised representative to show that the amounts so invested in the excess stock was derived from the industrial undertaking. It is not only the income of the business which can be claimed for deduction u/s 80IB but it is only that income which is derived from industrial undertaking and comes within the first degree of nexus between the profit and the industrial undertaking as found by the hon''ble Supreme Court in the case of Liberty India (supra), that can be made available for allowing the deduction u/s 80IB of the income tax Act. We, therefore, do not find any infirmity in the orders of lower authorities for declining claim of deduction u/s 80IB in respect of extra income surrendered during survey on account of excess stock physically found as compared to the stocks indicated in the regular books of account.

The Tribunal had specifically recorded that the assessee had failed to show that the amount which was invested in the excess stock and was surrendered at the time of survey was derived from industrial undertaking. In the absence of any such finding or nexus established by the assessee, the Tribunal had rightly declined the claim of deduction u/s 80IB of the Act in respect of excess income surrendered during survey on account of excess stock which was not reflected in the regular books of account. Learned counsel for the assessee was unable to show any perversity or illegality in the findings which may warrant interference by this court.

Similar view was recorded in National Legguard Works Vs. Commissioner of Income Tax (Appeals) and Another,

We are unable to accept this submission. Deduction u/s 80HHC of the Act is available only on showing fulfilment of conditions specified therein and there could be no presumption that surrender made on account of unexplained stocks represented export income. The assessee was unable to give any explanation. There could be no presumption that additional amount surrendered represented income from exports. Deduction u/s 80HHC of the Act can be claimed only on showing facts which made the assessee eligible for the deduction. The burden to prove these facts was on the assessee and not on the Revenue.

The judgment relied upon is on its own facts and not in respect of claim for deduction u/s 80HHC of the Act. In any case, from the facts of the present case, the assessee cannot be held to be entitled to claim income surrendered as a result of unexplained stocks as income from exports.

Adverting to the judgments relied upon by the counsel for the assessee, it may be noticed that in those cases, either the Tribunal had recorded the finding that the surrendered income was derived from the industrial undertaking or they were based on individual fact situation involved therein. Thus, the assessee cannot derive any benefit from those judgments. The findings recorded by the Tribunal have not been shown to be illegal or perverse in any manner. Consequently, the substantial questions of law are answered against the assessee and in favour of the Revenue. The appeal is dismissed.