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2024 DIGILAW 1715 (GUJ)

Commissioner Of Income Tax v. Nirma Limited

2024-08-13

BHARGAV D.KARIA, NIRAL R.MEHTA

body2024
ORDER : Bhargav D. Karia, J. [1] Both these Tax Appeals are admitted on the following substantial questions of law. The writ petitions are pending with the prayer to accept and approve Form 1 and 2 of the petitioner and settle the dispute of pending Tax Appeals under the Direct Tax Vivad se Vishwas Act, 2020 (for short, “DTVSV Act”) and the Rules framed thereunder. [2] With the consent of learned advocates of both the parties, Tax Appeals and writ petitions are taken up for hearing and depending upon the outcome of the Tax Appeals, prayers made in the writ petitions shall be considered. TAX APPEAL NO.781 OF 2009 WITH R/SPECIAL CIVIL APPLICATION NO.19378 OF 2021: [3] Tax Appeal No.781 of 2009 is admitted by order dated 30th August 2010 on the following proposed substantial questions of law for the Assessment Year 1996-97: “(a) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in directing to allow deduction under Section 35AB of the Income Tax Act, 1961 though the business of the concerned unit had not commenced during the year under consideration? (b) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in directing to exclude only the net income from FDR interest while computing deduction under section 80HH and section 80I of the Income Tax Act, 1961? (c) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in holding that interest on income from insurance claim, truck hiring charges and truck rent is derived from industrial undertaking? (d) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in treating the miscellaneous income being commission, discount charges, sale of wastages and diesel sales as income derived from industrial undertaking? (d) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in treating the miscellaneous income being commission, discount charges, sale of wastages and diesel sales as income derived from industrial undertaking? (e) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in holding that the assessee was entitled to deduction of technical know-how fees under section 35AB of the Income Tax Act, 1961?” [4] At the outset, both the learned advocates for the parties submitted that all the questions are covered in favour of the assessee by judgement and order passed in various Tax Appeals in the case of the assessee. [5] So far as question No.(a) is concerned, the same pertains to deduction under Section 35AB of the Income Tax Act, 1961 (for short “the Act”). The Tribunal has followed its decision in assessee’s own case for the Assessment Year 1999-2000 in ITA No.175/Ahd/2003 wherein the decision of ITAT Hyderabad in the case of VBC Industries ltd vs. DCIT 48 ITD 292 (Hyd) was followed. [6] This Court, in Tax Appeal No.45 of 2007 arising from ITA No.175/Ahd/2003 vide order dated 7th June 2017, has decided the question as under: “6. As noted, the assessee was engaged already in the business of manufacturing soap. In order to set up soda ash manufacturing plant, the assessee acquired technical knowhow by making lumpsum payment. Had the new business of the assessee completely independent, unconnected and separate, we would have considered the Revenue's contention of the applicability of section 35AB of the Act further. However, in the context of allowing deduction of interest on the borrowed funds for the soda ash manufacturing unit against the income of the existing business of manufacturing soap, this Court had made following observations in case of Commissioner of Income Tax vs. Nirma Ltd (supra). “6. Whether the Appellate Tribunal is right in law and on facts in deleting the disallowances of interest from debtors of Rs.33,63,494/-, Misc. “6. Whether the Appellate Tribunal is right in law and on facts in deleting the disallowances of interest from debtors of Rs.33,63,494/-, Misc. income in respect of Printing charges recovered of Rs.45,326/- in respect of Kanpur Division, made by AO for the purpose of calculation of deduction under Sections 80I, 80IA & 80HH of the IT Act and confirmed by CIT (A) while relying upon its own decisions in the cases of Nirma Ltd. & Harjivandas which have not reached finality and without considering the fact that such expenses incurred from the business income only and not for earning income liable to be excluded? 7. Whether the Appellate Tribunal is right in law and on facts restoring the issue back to AO to decide for granting benefits of netting to the Assessee and further directing the AO to allow expenses after verifying nexus with income of Rs.57,40,830/- out of sale gunny bags, bardans for the purpose of deduction under Section 80I, 80IA & 80HH of the Act for Kanpur Division of the assessee as not derived from and industrial undertaking and further directing that net income should be excluded from the business profit for the purpose of allowing deductions under section 80I, 80IA & 80HH of the Act for netting purpose without considering the facts that such expenses were incurred from the business income only and not for earning incomes and hence liable to be excluded? 8. Whether the Appellate Tribunal is right in law and on facts restoring the issue back to AO to decide for granting benefits of netting to the Assessee and further directing the AO to allow expenses after verifying nexus with various income such as Interest on Loan given to staff of Rs.583/- and Truck hire charges of Rs.90,950/- for the purpose of deduction under Section 80I, 80IA & 80HH of the Act for Kanpur Division of the assessee as not derived from and industrial undertaking and further directing that net income should be excluded from the business profit for the purpose of allowing deductions under section 80I, 80IA & 80HH of the Act for netting purpose without considering the facts that such expenses were incurred from the business income only and not for earning incomes and hence liable to be excluded? 9. 9. Whether the Appellate Tribunal is right in law and on facts in confirming the order of CIT(A) deleting the disallowances of interest from debtors of Rs.2,38,97,496/- and Rs.75,68,786/- made by AO on account of interest from debtors and other sales with respect to profit of Indore Division for the purpose of calculation of deduction under Sections 80I, 80IA & 80HH of the IT Act while relying upon its own decisions in the cases of Nirma Ltd. & Harjivandas which have not reached finality and without considering the fact that such expenses incurred from the business income only and not for earning income liable to be excluded? 10. Whether the Appellate Tribunal is right in law and on facts in confirming the order of the CIT(A) to recalculate interest expenditure of Rs.82,98,93,839/- in respect of Mandali Division, Rs.9,25,330/- in respect of Trikampura Divison, Rs.40,38,063/- in respect of Kanpur Division and Rs.4,75,178/- in respect of Indore Division from the interest income while working out the deduction u/s. 80I, 80IA and 80HH of the Act and further directing the Assessing Officer to allow netting, if the Assessee is able to establish the nexus between interest expenditure and interest income?” 7. It can thus be seen that the Court confirmed the decision of the Tribunal that the setting up of the manufacturing facility of soda ash was by way of an extension of the existing business of the assessee of manufacturing soap. That being the situation, deduction under section 35AB cannot be denied. In plain terms, sub section (1) of section 35AB grants exemption to the extent of 1/6th of the expenditure incurred by the assessee by way of lumpsum payment towards consideration for acquiring technical knowhow for the use for the purpose of the business. These conditions are satisfied. The question is, therefore, answered in the negative against the Revenue. Tax appeal is dismissed and disposed of.” [7] In view of the above, we answer the question No.(a) in affirmative in favour of the assessee and against the Revenue. [8] So far as question No.(b) is concerned, the same is also squarely covered by the decision rendered on 24th June 2016 by this Court in Tax Appeal No.780 of 2009 in the case of the assesse, wherein, on similar issue, it was held as under: “5. Mr. [8] So far as question No.(b) is concerned, the same is also squarely covered by the decision rendered on 24th June 2016 by this Court in Tax Appeal No.780 of 2009 in the case of the assesse, wherein, on similar issue, it was held as under: “5. Mr. Soparkar, learned Counsel appearing on behalf of the respondent – assessee has submitted that the questions raised in the present appeal are covered by the decision of this Court rendered in the case of Commissioner of Income – Tax vs. Nirma Ltd. reported in (2014) 367 ITR 12 (Guj). He submitted that the Tribunal has rightly answered the issue in favour of the assessee by directing to exclude only the net income from FDR interest, interest on loans, discounting income and transport income. 6. We have adverted to the merits of the rival submissions. This Court in the case of Nirma Ltd. (Supra) has held that in computing the special deductions under sections 80-I, 80-IA and 80HH net incomes not derived from industrial undertaking should be excluded and that the Tribunal was right in granting benefit of deduction under section 80-I of the Act on various incomes such as job work receipt, sale of empty soda ash bardan, sale of empty barrels and plastic waste. Therefore we are of the opinion that the Tribunal is justified in directing to exclude the net income from FDR interest, interest on loans, discounting income and transport income. We do not see any infirmity in the same and therefore the said question is required to be answered in favour of assessee and against the revenue.” [9] In view of the above, we answer the question No.(b) in affirmative in favour of the assessee and against the Revenue adopting the same reasoning given by this Court in the case of the assessee for the Assessment Year 1996-97 to the effect that in computing the special deductions under Sections 80-I, 80-IA and 80HH, net incomes not derived from industrial undertaking should be excluded and the Tribunal was right in holding the net income from FDR interest, etc. We therefore do not see any infirmity in the impugned order. We therefore do not see any infirmity in the impugned order. [10] So far as question No.(c) is concerned, the same is also covered by the judgement and order dated 27th January 2014 rendered by this Court in Tax Appeal No.810 of 2013, wherein in the similar facts, this Court has held as under in the case of the assessee: "Coming to the question of transport income, counsel for the assessee conceded that the same would not qualify for deduction under 80-I/80HH of the Act but argued that what should be excluded is net income and net gross received thereof. This argument of the counsel for the assessee would have bearing also on question Nos.2 and 3 which have the identical element in the context of slightly different fact situation. We may, therefore, examine the entire question of netting of the income for the exclusion from deduction provision, be it under section 80HH or 80-I of the Act. The question is when certain income of the assessee is excluded from the claim of deduction under section 80I or 80HH of the Act, should the gross income be excluded or should it be only net, that is, total receipt minus the expenditure incurred by the assessee for earning such income which should be so excluded. Such a question in the context of deduction under section 80HHC came up for consideration before the Supreme Court in the case of ACG Associated Capsules Pvt. Ltd v. CIT, 343 ITR 89 (SC). The Supreme Court held that for the purpose section 80HHC of the Act, it is not the entire amount received by the assessee on sale of DEPB credit, but the sale value of less the face value of the DEPB that will represent profit on transfer of DEPB credit by the assessee. Heavy reliance was placed in the case of Topman Exports v. CIT, 342 ITR 49 (SC). Extending such logic, it was further held that even other amounts, such as, interest or rent when are to be excluded for the purpose of explanation (baa) to section 80HHC of the Act. Ninety per cent of not the gross rent or gross interest, but the net thereof shall have be excluded. Extending such logic, it was further held that even other amounts, such as, interest or rent when are to be excluded for the purpose of explanation (baa) to section 80HHC of the Act. Ninety per cent of not the gross rent or gross interest, but the net thereof shall have be excluded. It was observed as under: “If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as expense in accordance with sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head “Profits and gains of business or profession”, ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to section 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included int eh profits of business of the assessee as computed under the head “Profits and gains of business or profession”, is to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining the profits of the business.” In view of such decision, question No.3 raised by the Revenue gets automatically answered since the amounts referred to in the said question are to be excluded for the purpose of deduction under section 80HHC of the Act. Learned counsel for the Revenue vehemently contended that the ratio of the decision in the case of ACG Associated Capsules Pvt. Ltd (supra) cannot be applied to a situation where the exclusion from the claim of deduction relates to section 80HH or section 80-I of the Act. He strenuously urged that the language used in both the sets of provisions are different. Section 80HHC is also vitally different and that therefore the concept of netting may not be automatically applied to deduction under section 80HH and 80-I of the Act. He submitted that number of tax appeals have been admitted by this Court on this issue and this appeal may also be likewise admitted. Section 80HHC is also vitally different and that therefore the concept of netting may not be automatically applied to deduction under section 80HH and 80-I of the Act. He submitted that number of tax appeals have been admitted by this Court on this issue and this appeal may also be likewise admitted. He drew our attention to the order dated 6.5.2013 passed by this Court in the case of Bloom Decor Ltd. in Tax Appeal No.447 of 2013 where at the instance of the assessee, similar question was not considered. On the other hand, learned counsel Shri Soparkar for the assessee, in addition to relying on the decision in the case of ACT Associated Capsules Pvt. Ltd. (supra), also placed heavy reliance on an order dated 30.11.2013 in Tax Appeal No.213 of 2006 in the case of Rajoo Engineers Ltd. in which the Revenue’s appeal raising such a question came to be dismissed relying on the decision in the case of ACG Associated Capsules Pvt. Ltd. (supra). The counsel also relied on a decision of the Delhi High Court in the case of Essel Shyam Communication Ltd. v. Commissioner of Income tax, (2012) 28 taxmann.com 243 (Delhi), in which in detailed consideration, relying on the decision of the Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. (supra), exclusion was approved for deduction under section 80-IA of the Act. Having heard the learned counsel for the parties, we see no reason to entertain this tax appeal. The Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. (supra) has already laid down the foundation for the logic for excluding the net profit and not the gross profit from the claim of deduction when it is found that the source of income does not quality for such deduction under section 80HHC of the Act. It is true that section 80HHC represents vastly different scheme of deduction and also provides for complex formula for deriving for the eligible profit for deduction under different situations depending on whether the exporter is also engaged in the local business or not. However, this distinction would not be material insofar as central question of exclusion of certain profit from the activity which is not eligible for deduction under section 80HH and 80-I are concerned. However, this distinction would not be material insofar as central question of exclusion of certain profit from the activity which is not eligible for deduction under section 80HH and 80-I are concerned. The logic being when the profit is being excluded form the claim of deduction, not the gross profit but the net thereof, that is the gross profit minus the expenditure incurred for earning such profit should be excluded. That is precisely how this Court in the case of Rajoo Engineers (supra) viewed the situation. That is how the Delhi High Court in the case of Essel Shyam Communication (supra) held referring to the decision in the case of ACG Associated Capsules Pvt. Ltd. (supra). It is true that in the case of Bloom Decor Ltd., a question was suggested by the assessee which may have some bearing on the controversy on hand. However, the entire focus of the order of the Court was regarding applicability of the decision of the Supreme Court in the case of Topman Exports (supra) and not on the question of netting. In any case, therein, the decision in the case of ACG Associated Capsules Pvt. Ltd was not noticed.” [11] In the result, question No.(c) is answered in favour of the assessee and against the Revenue as the Tribunal was right in granting deduction under Section 80-I by holding that interest on income from insurance claim, truck hiring charges and truck rent is derived from industrial undertaking. [12] Similarly, question No.(d) is with regard to grant of deduction under Section 80-I by treating the miscellaneous income being commission, discount charges, sale of wastages and diesel sales as income derived from industrial undertaking. This issue is also decided by this Court in assessee’s own case by following the decision of this Court in the case of Dy. CI.T. vs. Harjivandas Juthabhai Zaveri reported in 258 ITR 785, in which the Court upheld the decision of the Tribunal granting benefit of deduction under Section 80-I of the Act on various incomes such as job work receipt, sale of empty soda ash bardan, sale of empty barrels and plastic waste. In view of such findings, question is answered in favour of the assessee and against the Revenue holding that the Tribunal was justified in law in treating the miscellaneous income being commission, discount charges, sale of wastages and diesel sales as income derived from industrial undertaking. In view of such findings, question is answered in favour of the assessee and against the Revenue holding that the Tribunal was justified in law in treating the miscellaneous income being commission, discount charges, sale of wastages and diesel sales as income derived from industrial undertaking. [13] Question No.(e) pertains to deduction of technical know-how fees under Section 35B of the Act. The same is already answered in Tax Appeal No.45 of 2007 as reproduced hereinabove in relation to question No.(a). Considering the same, question No. (e) is also answered in favour of the assessee and against the Revenue. [14] Thus, Tax Appeal No.781 of 2009 being devoid of any merit and in view of the questions answered in favour of the assessee and against the Revenue, the same stands dismissed. [15] In view of dismissal of Tax Appeal No.781 of 2009, R/Special Civil Application No.19378 of 2021 would not survive and the petitioner – assessee would not be required to apply for settlement of dispute for questions raised in Tax Appeal No.781 of 2009. As the Tax Appeal is already dismissed, R/Special Civil Application No.19378 of 2021 has become infructuous and is accordingly disposed of. TAX APPEAL NO.610 OF 2010 WITH R/SPECIAL CIVIL APPLICATION NO.19368 OF 2021: [16] Tax Appeal No.610 of 2010 is admitted vide order dated 27th March 2012 on the following substantial questions of law: “[1] Whether the Tribunal below committed substantial error of law in reversing the order of the Commissioner of Income Tax [Appeals] ["CIT [Appeals]"] passed under Section 154 of the Income Tax Act, 1961 ["the Act"] and thereby allowing the assessee's claim of deduction of other expenses with respect to Soda Ash Project and LAB Project when the said expenditure was capitalized in the books of account and the said issue was debatable one. [2] Whether the Tribunal below committed substantial error of law in entertaining the assessee's additional ground relating to the claim on account of interdivision transfer of Rs. 2070.55 Lac, when the said issue was not raised before the Assessing Officer or CIT [Appeals] and did not arise out of the order of the CIT [Appeals] dated May 17, 2001 passed under Section 154 of the Act. [3] Whether the Tribunal below committed substantial error of law in entertaining and allowing the assessee's additional ground relating to the claim on account of sales tax of Rs. [3] Whether the Tribunal below committed substantial error of law in entertaining and allowing the assessee's additional ground relating to the claim on account of sales tax of Rs. 1786.55 Lac and excise duty of Rs. 16428.75 Lac to be excluded from the total turnover for the purpose of computation of deduction under Section 80HHC of the Act when those issues were not raised before the Assessing Officer or the CIT [Appeals] and at the same time, did not arise out of the order dated May 17, 2001 passed by the CIT [Appeals], under Section 154 of the Act.” [17] Question No.(1) pertains to claim of deduction of other expenses with respect to Soda Ash Project and LAB Project when the said expenditure was capitalized in the books of account and the said issue was debatable one. Similar issue has been considered by this Court in the case of the assessee in Tax Appeal No.358 of 2014 decided on 2nd September 2014 wherein this Court has held as under: “15. On due consideration of rival submissions, we notice at this stage that this Court, while adjudicating the said issue, had at length discussed the same to hold that the expansion since was of an existing business, the tests applied in case of CIT v. Alembic Glass Industries Limited, 103 ITR 715 (Guj) as also in case of Dy. CIT v. Core Health Care Limited, 298 ITR 194 (SC) would have relevance and the borrowings were whether capital or revenue expenditure would be of no consequence. Profitable it would be to reproduce these observations made in this respect, which reads thus - “The sole surviving question No.13, pertains to disallowance of soda ash project interest expenses of Rs.3.33 crores (rounded off) and lab project interest of Rs.12..27 crores (rounded off). The Assessing Officer, questioned the assessee on these expenses and deleted the same on two grounds, firstly that the interest was paid by way pre-operative expenditure and secondly the assessee had capitalized such expenditure. The assessee carried the matter in appeal. CIT (Appeals) relying on a decision of this Court in the case of CIT v. Alembic Glass Industries Ltd., 103 ITR 715 (Guj) held in favour of the assessee. In addition to coming to the conclusion that there was commonality of business it was further held that the expenditure was in connection with the expansion of the existing business. CIT (Appeals) relying on a decision of this Court in the case of CIT v. Alembic Glass Industries Ltd., 103 ITR 715 (Guj) held in favour of the assessee. In addition to coming to the conclusion that there was commonality of business it was further held that the expenditure was in connection with the expansion of the existing business. On such ground, the expenditure was held allowable. It is this order of the CIT (Appeal) which the Tribunal upheld in the impugned judgment. Having heard the learned counsel for the parties and having perused the documents on record, we notice that CIT (Appeals) and the Tribunal concurrently came to the conclusion that there was interconnection, interlacing and inter-dependence of the management, financial and administrative control of various units of Nirma Limited. It was on this ground, the Tribunal held that the business in question is continuation of the existing business and not a new business. In this context, the decision relied on by the authorities below of this Court in the case of Alembic Glass Industries Ltd. (supra) laid down tests for ascertaining whether a business was part of existing business or the assessee was starting a new unit. It was held that merely because the unit was coming to a distant point by itself would not mean that it was a new business. If the facts as recorded by the CIT (Appeals) and the Tribunal can be said to have achieved finality, it would emerge that the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called ‘lab’ for its captive consumption for the purpose of its existing manufacturing business. It is no doubt that the assessee is engaged in the business of manufacture of soap and the soda ash and ‘lab’ so produced is used by way of captive consumption. When such facts viewed in light of the findings of the CIT (Appeals) and the Tribunal, we have no reason to interfere with the ultimate conclusion. Had it been a case of entirely a new project undertaken by the assessee as canvassed by the counsel for the Revenue, a serious question of claiming preoperative expenditure of interest by way of revenue expenditure would arise. Had it been a case of entirely a new project undertaken by the assessee as canvassed by the counsel for the Revenue, a serious question of claiming preoperative expenditure of interest by way of revenue expenditure would arise. However, when the authorities below found that it was an expansion of the existing business, applying the tests laid down by this Court in the case of Alembic Glass Industries Ltd. (supra), in view of the decision of the Supreme Court in the case of Deputy CIT v. Core Health Care Ltd, 298 ITR 194 (SC), the fact whether the borrowing is capital or revenue expenditure would be of no consequence.” 15.1 Question, as raised in the instant case, does not speak of the interest. In light of the observations made earlier, decision relied upon by this Court, this would be clearly covered and needs to be held in favour of the assessee.” [18] With regard to question No.(2), the Tribunal has restored the issue back to the Assessing Officer without giving any finding. The Tribunal has observed as under: “21.2 So far as assessee’s claim for exclusion of Inter Division Transfer of an amount of Rs.2070.55 lacs from the total turnover, we are of the opinion that none of the Authority having an opportunity to deal with this issue, it will be in the interest of justice, if the Assessing Officer is given a chance to deal with the assessee’s claim and, consequently, we restore this issue back to the file of Assessing Officer for deciding the same in accordance with law, after allowing the assessee an opportunity of being heard.” [19] We therefore decline to answer the question No.(2). [20] So far as question No.(3) is concerned, the same is already answered by this Court vide order dated 8th June 2015 passed in Tax Appeal No.1214 of 2005 by following the decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax vs. Lakshmi Machine Works reported in [2007] 290 ITR 667 (SC). [21] In view of the decision of the Hon’ble Supreme Court in the case of Lakshmi Machine Works (supra), the Tribunal was justified by directing the Assessing Officer to re-compute the deduction under Section 80-HHC of the Act, after excluding the amount of sales tax and excise duty from the quantum of turnover. [21] In view of the decision of the Hon’ble Supreme Court in the case of Lakshmi Machine Works (supra), the Tribunal was justified by directing the Assessing Officer to re-compute the deduction under Section 80-HHC of the Act, after excluding the amount of sales tax and excise duty from the quantum of turnover. [22] In view of dismissal of the Tax Appeal No.610 of 2010, R/Special Civil Application No.19368 of 2021 preferred by the petitioner – assessee would not survive as there was no requirement to avail the benefit under the DTVSV Act by the petitioner assessee. In view of dismissal of the Tax Appeal, R/Special Civil Application No.19368 of 2021 has become infructuous. [23] Accordingly, all these four matters are disposed of.