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M/s. Liberty Shoes Limited, Karnal v. Commissioner of Income Tax, Central Circ - ITA-140-2005  RD-P&H 5339 (8 August 2006)
IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH
ITA No.140 of 2005
Date of decision:17.8.2006
M/s. Liberty Shoes Limited, Karnal
Commissioner of Income Tax, Central Circle, Ludhiana.
CORAM: HON'BLE MR. JUSTICE ADARSH KUMAR GOEL
HON'BLE MR. JUSTICE RAJESH BINDAL
Present: Mr. R.P.Sawhney, Sr. Advocate
with Mr. Ranjit Sharma, Advocate
for the appellant.
Mr. S.K.Garg Narwana, Advocate for the respondent.
This appeal has been preferred by the assessee proposing following substantial questions of law arising out of order of the Income Tax Appellate Tribunal, Delhi Bench 'E', New Delhi, in ITA No.2809/DEL/01, for the assessment year 1996-97:- "i) Whether on the facts and circumstances of this case, the Income Tax Tribunal was right in law to hold that appellant was not entitled to deduction under section 80- IA in respect of profits and gains from the business of sale of PVC, Liberty Shoes got manufactured according to its own specifications, design etc.?
ii) Whether on the facts and circumstances of this case, the interpretation on section 80-1A placed by the Tribunal is legally correct when it has not focused its attention on the word "any" business used in the said section?" The assessee computed its income after deducting income of ITA No.140 of 2005 2
Rs. 37,95,908/- under section 80-IA of the Income Tax Act, 1961 (in short, 'the Act'). Claim of the assessee was that finished goods were purchased and exported and the said goods were not attributable to manufacturing activities of the assessee. Accordingly, the Assessing Officer disallowed the claim, which was affirmed by the Commissioner of Income Tax (Appeals) as well as by the Tribunal. However, claim to the extent the goods were manufactured by the assessee was allowed.
We have heard learned counsel for the parties and have perused the relevant finding of the Tribunal on the said questions, which is to the following effect:-
"21. The issue before us revolves around as to whether the profit derived by the assessee from export of finished goods purchased by it can be considered to be the profits derived from the industrial undertaking of the assessee which is inter-alia, engaged in the manufacture of footwear. We find the legal position in this regard is now well settled by various judgments of the Apex Court. The decision of the Apex Court in the case of Cambay Electrical Supply Co. Ltd. 113 ITR 84 makes a distinction between the expression namely "attributable to" and "derived from". According to the Hon'ble Apex Court the expression "attributable to" has a much wider import than the expression "derived from" thereby intending to cover receipts from sources other than the actual conduct of the business of the industrial undertaking. In other words, it can be understood to mean that there can be receipts which are incidental to the actual conduct of the business of industrial undertaking yet the same may not fall within the expression of "derived from" so as to be eligible for the benefits envisaged u/s 80IA of the Act. Another notable judgment on the issue is in the case of Sterling Foods 237 ITR 53(SC). Herein also, the Apex court opined that where the nexus between the income and the industrial undertaking was not direct but was only ITA No.140 of 2005 3
incidental, it would not fall within the expression "profits derived from industrial undertaking". Similar is the decision of the Hon'ble Apex Court in the case of Pandian Chemicals Ltd. ITR 278(SC). Their Lordships, in the aforesaid case, were dealing with the question as to whether the interest derived from the deposit made with the Electricity Board could be construed as a profit derived from the industrial undertaking of the assessee for the purposes of deduction u/s 80 HH. According to the Hon'ble Apex Court, the said income was not eligible for the purposes of the claim u/s 80HH. In the instant case before us, we do not find ample ground to hold that the income derived by the assessee from the export of traded goods could be said to have been derived from the industrial undertaking of the assessee and, therefore, the AO was correct in excluding the same for the purposes of computing deduction u/s 80IA of the Act. The reason being that the impugned business of the eligible undertaking of the assessee is the manufacture and sale of PVC and footwear, i.e. the goods so manufactured by the industrial undertaking per se. Although the profits from such exports, on parameters of being incidental to business, can fall within the scope of the business of the assessee, yet it cannot be said to have been derived from the eligible industrial undertaking of the assessee, so as to be eligible for deduction u/s 80IA of the Act. Therefore, on this count, we do not sustain the stand of the assessee.
The revenue has to succeed on this issue."
22. In so far as the stand of the assessee regarding reliance on the decision of the Apex Court in the case of Ashok Leyland Ltd. 224 ITR 122 (SC) is concerned, the same is misplaced. The assessee contended that the purchase of finished goods by it according to his requirement and of specific design etc. would constitute the business of the ITA No.140 of 2005 4
assessee's industrial undertaking on account of the decision of Ashok Leyland (supra). The Hon'ble Apex Court was dealing with the provisions of Section 80I as they stood for the Ays 1966-67 and 1967-68. Section 80I, at that time, was couched with the words "attributable to", whereas during the year under consideration, the provisions of Section 80I are couched with the words "derived form". The distinction between the two expressions has already been discussed by us in the earlier part of our order and is thus, in our view, reliance placed by the CIT (A) and by the respondent assessee on the decision of the Apex Court in the case of Ashok Leyland (supra) is not relevant."
Learned counsel for the appellant submitted that once the assessee qualified for exemption under section 80-IA of the Act by being covered by the description of industrial undertaking, any profit earned by the business of the assessee was eligible for deduction. It was not necessary that the business must be from activity of industrial undertaking as such.
Learned counsel for the Revenue, however, submitted that the exemption was not applicable where profit derived by the assessee had no nexus with the industrial activity of the assessee. The trading activity of the assessee could not be intended to be covered by the exemption. The exemption was not available merely by setting up an industrial undertaking.
The exemption was available only in respect of profit derived from the said undertaking. It was submitted that as held by the Hon'ble Supreme Court in CIT v. Sterling Foods, (1999) 237 ITR 579, it did not cover any and every income of the assessee. In the said judgment, income of the assessee from trading of import entitlement was held not to be covered, though the said profit was also derived by the assessee. The reasoning for excluding the said claim was fully applicable to profit earned by the assessee from trading of products of other concerns.
We have considered the rival submissions and are of the view that complete answer to the issue raised by the assessee is available in ITA No.140 of 2005 5
Section 80-IA of the Act itself, if read as a whole. Sub-section 5 of Section 80IA of the Act provides for the quantum of benefit available to an industrial undertaking. It clearly provides for a fixed percentage of the profits and gains derived from such industrial undertaking. The relevant sub-section is extracted below:-
"80-IA(5). The amount referred to in sub-section (1) shall be -
(i) (a). in the case of an industrial undertaking referred to in sub-clause (a) or sub clause (d) of clause (iv) of sub-section (2), twenty percent of the profits and gains derived from such industrial undertakings;" (emphasis supplied).
We have also gone into similar issue in ITA No.642 of 2005, (M/s. Nahar Exports Limited v. The Commissioner of Income Tax), decided on 4.7.2006, wherein, following passage from the judgment of the Hon'ble Supreme Court in Sterling Foods's case (supra) was relied upon, which deals with the words 'derived from':- "The word "derive" is usually followed by the word "from" and it means: "get, to trace from a source; arise from, originate in, show the origin or formation of". The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements became available. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applied. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking. The ITA No.140 of 2005 6
receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income-tax Act, 1961."
Accordingly, we are of the view that the assessee will not be entitled to deduction under section 80-IA of the Act in respect of profit derived from business of trading of products of other concerns as the same cannot be held to be profits and gains derived from industrial undertaking.
The questions are, accordingly, answered against the assessee and in favour of the Revenue.
Accordingly, the appeal is dismissed.
(Adarsh Kumar Goel)
August 17, 2006 (Rajesh Bindal)
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