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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Judges
  • Supreme Court In B R Ltd V V P Gupta
  • Cit (1978) 113 Itr 647 (Sc) Where It Was Laid Down Certain Parameter 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
Acts
  • section 4 of the Central Excise Rules, 1944.
  • provision of section 80HH(3)(b)
  • FINANCE ACT 1986
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Judges
  • Supreme Court In B R Ltd V V P Gupta
  • Cit (1978) 113 Itr 647 (Sc) Where It Was Laid Down Certain Parameter 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
Acts
  • section 4 of the Central Excise Rules, 1944.
  • provision of section 80HH(3)(b)
  • FINANCE ACT 1986
See more information ...
Smart Summary

Tribunal Consolidated Order — Summary (Assessment Years 1988-89 & 1989-90)

Factual and Procedural Background

The department filed two appeals against the orders of the Commissioner (Appeals) dated 23-12-1999 and 28-5-1992 in respect of assessment years 1988-89 and 1989-90, respectively. The assessee filed cross-objections for both years as a precaution. Because common issues arose in both appeals and cross-objections, the Tribunal heard the matters together and produced a consolidated order after hearing both parties and examining the record. The order addresses multiple grounds raised by the department (and the assessee's cross-objections) concerning: (i) deletion of an addition for incentive wages; (ii) valuation of closing stock and entitlement to MODVAT benefits; (iii) computation of deduction under section 80HHC (whether an export unit constituted a separate business); (iv) claims under section 32AB (Investment Deposit Account Scheme); and (v) disallowance under section 40A(9) for amounts paid to a staff recreation club.

Legal Issues Presented

  1. Whether the assessing officer was justified in making an addition of Rs. 30,40,000 in AY 1988-89 by treating incentive wages as disallowable (bonus) when earlier years' disallowances had been deleted.
  2. Whether additions to income for under-valuation of closing stock (Rs. 98.11 lakh for one year and Rs. 6.6 lakh for another) were justified on the ground that MODVAT benefit did not reduce assessable value because MODVAT did not require input–output correlation.
  3. Whether the Haldia 100% export factory constituted a separate business such that deduction under section 80HHC should be computed partly under clause (a) (exclusive export business) and partly under clause (b), or whether all units formed a single composite business requiring computation under section 80HHC(3)(b) only.
  4. Whether the assessee was entitled to deduction under section 32AB for deposits and utilisation for purchase of plant & machinery (figures certified by auditors), particularly whether the deposits/utilisations were made "out of" profits chargeable to tax under the head "profit and gains of business or profession".
  5. Whether payments made to a staff recreation club (Rs. 1,75,304 in AY 1989-90) were disallowable under section 40A(9) or allowable as staff welfare under section 37(1).

Arguments of the Parties

Departmental Representative (Revenue)

  • Incentive wages: The assessing officer treated incentive wages as akin to bonus and disallowed the amount in line with earlier assessments.
  • MODVAT/Stock valuation: The assessing officer submitted that MODVAT does not automatically reduce assessable value for excise law purposes and that no input–output correlation was required; therefore, under-valuation of closing stocks justified additions.
  • Section 80HHC: The Haldia 100% export unit is an identifiable, separate business for which separate books are maintained; hence deductions should be computed under section 80HHC(3)(a) for that unit and under (3)(b) for others.
  • Section 32AB: The assessing officer limited deduction to 20% per statutory cap and required identification of the sources of deposits and investments (bank statements, narration, debtor accounts) to ensure they were made out of business income chargeable to tax; in absence of such proof, disallowance was justified.
  • Section 40A(9): Payments to staff recreation club should be disallowed under section 40A(9) and not treated as allowable staff welfare expenditure under section 37(1).

Authorised Representative for the Assessee (including submissions of Price Water House)

  • General: The Commissioner (Appeals) orders were relied upon; the assessee maintained common business operations across units and in several instances did not maintain separate statutory accounts for the export unit.
  • On business character (80HHC): Relied on Supreme Court parameters (B.R. Ltd. v. V.P. Gupta) — common management, interlacing of funds, unity of control, and results embraced in common accounts — to argue the Haldia unit is not a separate business but part of the same composite business.
  • On MODVAT: Supported Commissioner (Appeals) reasoning and ICAI guidance that input costs may be debited net of MODVAT and that MODVAT is revenue-neutral; benefit available only for inputs actually consumed (here only 50% consumed with gate passes), so the assessing officer's conclusions on profit distortion were incorrect.
  • On section 32AB: Argued the statutory scheme requires profits of the eligible business to exist, but that "out of such income" should not be read to require one-to-one tracing of payments from specific bank receipts; where overdraft accounts are used and collections and receipts are deposited into the same accounts, the profits are embedded in those accounts and payments can be presumed to be from profits. Relied on CBDT Circular (scope of section 32AB) and case law (including K.P. Varghese and several High Court decisions) to support the proposition that deposits and utilisations were made out of business profits.
  • On staff recreation club: Argued (following Commissioner and Tribunal precedents) that the staff recreation club is part and parcel of the organisation and payments to it are staff welfare, not payments to an independent fund requiring disallowance under section 40A(9).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Tribunal, ITA No. 1564 (Cal.) of 1991 (assessment year 1987‑88) Prior Tribunal deletion of addition in respect of incentive wages for the earlier year. The Tribunal followed the earlier Tribunal order deleting the incentive-wages addition; absence of fresh material meant no reason to disturb the Commissioner (Appeals).
B.R. Ltd. v. V.P. Gupta, CIT (1978) 113 ITR 647 (SC) Parameters to determine whether two activities constitute the same business or distinct businesses (presence of common management; interlacing of funds; unity of control; results embraced in common accounts). Cited by the assessee to argue the Haldia unit is part of the same composite business; the Tribunal considered these parameters in concluding a single composite business existed for section 80HHC purposes.
Produce Exchange Corporation Ltd v. CIT (1970) 77 ITR 739 (SC) Support for the proposition that maintenance of separate books alone does not automatically make a unit a separate business. Referred to by the assessee; Tribunal relied on this principle in assessing whether the Haldia unit constituted a separate business and concluded it did not.
International Research Park Laboratories Ltd v. Assistant Commissioner (1994) 50 ITD 37 (SB) Even where one unit exclusively exports, all businesses together may comprise one composite business and clause (b) of section 80HHC(3) applies (not a mix of clauses (a) and (b)). The Tribunal relied on this Tribunal-SB decision to hold that the assessee had one composite business and that section 80HHC(3)(b) alone should govern computation of export profit.
Textile Machinery Corpn. Ltd v. CIT (1977) 107 ITR 195 (SC) Ratio relevant to determining the business character for statutory benefits (as referenced in the order). The Tribunal considered this Supreme Court ratio when confirming the Commissioner (Appeals) direction to compute deduction under section 80HHC(3)(b) only.
K.P. Varghese v. ITO (1981) 131 ITR 597 (SC) Statutory interpretation principle: a statute should be interpreted to achieve the object or intention of the Legislature. Cited by the assessee to support a purposive interpretation of section 32AB (that deposits/utilisations need not be traced on a strict one-to-one basis if the legislative object is satisfied); the Tribunal considered this interpretative approach.
Reckitt & Colman of India Ltd. v. CIT (1982) 135 ITR 698 (Cal.) High Court authority relied upon by the assessee in support of the section 32AB position (specific ratio not detailed in the opinion). The assessee cited this case among other High Court decisions to justify that payments from a composite/overdraft account can be presumed to be out of profits; the Tribunal considered such authorities in reaching its conclusion.
Indian Explosives Ltd. v. CIT (1984) 147 ITR 392 Where payment is made from a common fund containing various monies, the assessee may elect the source most beneficial to it. The Tribunal applied this principle to hold that deposits/utilisations could be presumed to be out of profits embedded in a common overdraft account rather than borrowings.
Alkali & Chemical Corporation of India Ltd. v. CIT (1986) 161 ITR 820 Continued debit balance in an overdraft does not preclude the presumption that a payment was made out of profits embedded in that account. The Tribunal relied on this authority to support the presumption that deposits/utilisations were made from business profits despite the overdraft nature of accounts.
British Paints (I) Ltd. v. CIT (1991) 190 ITR 196 (Cal.) High Court authority invoked by the assessee in relation to source of payments from composite accounts (specific ratio not detailed in the opinion). One of the High Court decisions cited by the assessee to support the assumption that payments could be treated as made out of profits; the Tribunal considered this along with other authorities.
Woolcombers of India Ltd. v. CIT (1982) 134 ITR 219 (Cal.) Where an overdraft account contains collections from customers, and profit embedded in that account exceeds the payment, it can be held that the payment was made out of profits (not borrowings). The Tribunal expressly relied on this High Court decision to conclude that payments/deposits could be presumed to have been made out of profits embedded in overdraft accounts.
Dy. Commissioner v. A.P.E Belliss India Ltd. (IT Appeal Nos. 527–531 (Cal.) of 1989) — Tribunal order dated 13‑2‑1992 Section 40A(9) does not apply where the recipient (staff recreation/club) is part and parcel of the organisation and payments are subsidies for welfare; not a payment to an independent fund requiring disallowance. The Commissioner (Appeals) followed this Tribunal decision in deleting the disallowance under section 40A(9); the Tribunal in the present order upheld the deletion by following this precedent.
Otis Elevator Co. (I) Ltd. v. CIT (1992) 195 ITR 682 (Bom.) High Court authority cited in context of staff welfare/section 40A(9) issues (specific ratio not detailed in the opinion). Cited by the Tribunal among authorities supporting the conclusion that payment to staff recreation club is allowable as staff welfare and not caught by section 40A(9).
Gujarat Slate Export Corporation Ltd. v. CIT (1994) 209 ITR 649 (Guj.) High Court authority referenced in relation to staff welfare and section 40A(9) (specific ratio not detailed in the opinion). Considered by the Tribunal as part of the precedent basis for holding that the staff-recreation-club payment was allowable and not disallowable under section 40A(9).

Court's Reasoning and Analysis

The Tribunal considered each ground on the record and applied established principles, prior orders and cited authorities. The analysis is set out below by issue (following the Tribunal's structure).

Ground 1 — Incentive wages (AY 1988‑89)

The Tribunal noted that similar disallowances had been consistently deleted since AY 1982‑83 and that the Commissioner (Appeals) had deleted the disallowance here by following earlier decisions. The assessing officer made the addition without bringing fresh material on record. The Tribunal observed that the Tribunal itself in ITA No. 1564 (Cal.) of 1991 for AY 1987‑88 had deleted a similar addition. Respectfully following that earlier Tribunal order, and in absence of additional material, the Tribunal found no reason to interfere with the Commissioner (Appeals) and upheld the deletion.

Ground 2 — MODVAT and valuation of closing stock

The assessing officer's position was that MODVAT did not automatically reduce assessable value and no input–output correlation was required; therefore, alleged under‑valuation of closing stock justified additions. The Commissioner (Appeals) analysed the MODVAT scheme (introduced 1‑3‑1986), explaining its revenue‑neutral character, that it provides instant credit for input duties against output duties, and that benefits are available only for inputs actually consumed in production of final goods sold. The Commissioner (Appeals) also examined accounting treatment (gross excise duty debited; input costs debited net of MODVAT) and followed ICAI guidelines on netting input cost with MODVAT. On facts, only 50% of MODVAT‑covered inputs were shown to be consumed (gate passes), so MODVAT benefit was only 50%. The Tribunal accepted the Commissioner (Appeals)'s analysis, found no impact on profit whether raw material cost is shown gross or net of MODVAT, and upheld deletion of the assessing officer's additions in the absence of further evidence.

Ground 3 — Section 80HHC (Haldia Export Factory)

The assessing officer treated the Haldia 100% export factory as a separate business and applied section 80HHC(3)(a) for it and section 80HHC(3)(b) for other factories. The Commissioner (Appeals) rejected that approach, holding that Haldia formed part of the same long‑running business and that computation should be under clause (b) alone. The Departmental Representative relied on the assessing officer's view that separate books were maintained for the Haldia unit. The assessee (through Price Water House) relied on Supreme Court parameters (B.R. Ltd. v. V.P. Gupta and Produce Exchange) showing unity of business (common management, interlacing of funds, unity of control, common accounts) and on Tribunal precedent (International Research Park Laboratories Ltd) that where various businesses include an export unit, the businesses together may be treated as one composite business for section 80HHC(3). Applying these authorities and CBDT Circular No. 564 (5‑7‑1990), the Tribunal concluded the assessee had one composite business and that the Commissioner (Appeals) was correct to direct computation under section 80HHC(3)(b) alone. The Tribunal therefore confirmed the Commissioner (Appeals).

Ground 4 — Section 32AB (Investment Deposit Account Scheme)

The assessee claimed deductions certified by auditors for deposits with IDBI and subsequent utilisation for plant and machinery; the assessing officer restricted the claim to 20% and sought proof that the deposits/utilisations were made "out of such income" (business profits). He issued notices under section 142(1) and requested bank statements and debtor accounts. The Commissioner (Appeals) accepted the auditors' certification and observed that the assessing officer had computed business profit far in excess of the investment/deposit amounts. The Tribunal examined authorities concerning payments from common/overdraft accounts (Woolcombers; Alkali; Indian Explosives) and the interpretative principle in K.P. Varghese. The Tribunal noted the assessee's accounts used common overdraft accounts into which collections and receipts were deposited and found that profits generated in the relevant years were substantially greater (3–4 times) than the deposits/utilisations. Applying the precedents, the Tribunal accepted the presumption that payments from a composite overdraft account could be regarded as made out of profits embedded in that account and not from borrowings. On this factual basis and in absence of contradictory material, the Tribunal upheld the Commissioner (Appeals)'s deletion of the assessing officer's addition and directed allowance of the deduction as certified by auditors.

Ground 5 — Section 40A(9) (staff recreation club)

The assessee claimed Rs. 1,75,304 as staff welfare under section 37(1); the assessing officer disallowed it under section 40A(9). The Commissioner (Appeals) deleted the addition following a Tribunal order in Dy. Commissioner v. A.P.E Belliss India Ltd., which held that section 40A(9) does not apply where payments are to clubs or funds integral to the employer's organisation (complete identity between donor and donee) and are subsidies for employee welfare. The Tribunal followed that reasoning and other cited High Court authorities (Otis Elevator; Gujarat Slate Export Corporation) and upheld deletion of the disallowance.

Holding and Implications

Holding: The Tribunal upheld the orders of the Commissioner (Appeals) in all contested respects and dismissed the department's appeals. The assessee's cross‑objections were rejected as not requiring separate consideration. Specifically:

  • The deletion of the incentive‑wages addition (Rs. 30,40,000) for AY 1988‑89 is upheld.
  • The assessing officer's additions for alleged under‑valuation of closing stock and denial of MODVAT benefit (Rs. 98.11 lakh and Rs. 6.6 lakh respectively) are deleted and the Commissioner (Appeals)'s order is upheld.
  • The assessing officer's method of computing deduction under section 80HHC (treating the Haldia unit as a separate business) is rejected; computation must be in accordance with section 80HHC(3)(b) for the composite business.
  • The Commissioner (Appeals)'s acceptance of the assessee's deduction under section 32AB (as certified by auditors) is upheld and the addition is deleted.
  • The deletion of the disallowance under section 40A(9) for payments to the staff recreation club is upheld.

Implications: The direct effect is that the assessing officer's additions and disallowances challenged in the departmental appeals are set aside and the Commissioner (Appeals) decisions reinstated. The Tribunal applied existing precedent and statutory interpretation principles to the facts; the opinion does not purport to lay down a new legal principle beyond applying and following cited authorities and prior orders. No broader novel precedent was announced by this consolidated order; its practical consequence is the relief to the assessee on the specified grounds and confirmation that the Commissioner (Appeals)'s approach on these points was legally sustainable on the record before the Tribunal.

Result: Both departmental appeals are dismissed and the assessee's cross‑objections are rejected.

Show full summary ...

    Deputy Commissioner Of Income Tax v. Chloride Industries Ltd

    M.

    Both the appeals have been filed by the department against the orders of the Commissioner (Appeals) dated 23-12-1999 and 28-5-1992 for the assessment years 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 issues involved as under :

    2. Ground No. 1 for the assessment year 1988-89:

    It relates to the deletion of addition of Rs. 30,40,000 on account of incentive wages. The assessing officer has disallowed the amount by following his order for the earlier assessment years. The Commissioner (Appeals) has deleted the disallowance by following his order for the earlier assessment years. The assessing officer 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 Commissioner (Appeals) has followed his earlier decision and also discussed case laws mentioned in his order at page 4 and finally, observed that the assessing officer has failed to bring any material on record for not accepting the order in the assessee's case for the earlier assessment year.

    3. We have heard both the parties and gone through the materials available on record, from which it appears that, since, assessment year 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 assessing officer made the addition without bringing any material on record. The matter was also discussed by the Tribunal for the assessment years 1985-86 to 1987-88. In the just previous assessment year 1987-88, the Tribunal (ITA No. 1564 (Cal.) of 1991) has deleted the addition pertaining to the incentives wages (copy on record at pages 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 Commissioner (Appeals) who has rightly deleted the said addition. The same is hereby upheld.

    4. Ground No. 2 for the assessment year 1988-89 and ground No. 1 for the assessment year 1989-90:

    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 assessing officer made additions of Rs. 98.11 lakh; and Rs. 6.6 lakh respectively. In brief, the assessing officer 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 section 4 of the Central Excise Rules, 1944. He observed that no input and output co-relation is required for availing 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 Commissioner (Appeals) 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 23-A. The Commissioner (Appeals) further observed that after examining the record, the gross excise duty was being debited in the accounts, the input cost was being debited net of MODVAT credit. The result was that when the aggregate debits to profit and loss account on account of cost of raw material consumed and excise duty paid, was same. But, the Commissioner (Appeals) has not agreed with the observation of the assessing officer that profits were being reduced due to artificial under valuation of the closing stocks. The Commissioner (Appeals) 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.

    5. 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 with effect from 1-3-1986. 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 on excise. The shifting of 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 Commissioner (Appeals) 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.

    6. Moreover, the issue has come up before the Tribunal in the assessee's case for the assessment year 1987-88, where the Tribunal has discussed a number of orders by different Benches (supra). Finally, the Tribunal upheld the deletion made by Commissioner (Appeals).

    7. In the light of our discussion and in the absence of additional material/evidence, we agree with the order of the Commissioner (Appeals) 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 Commissioner (Appeals) who has rightly deleted the said additions pertaining to the MODVAT and the same is hereby upheld.

    8. Ground No. 3 for the assessment year 1988-89 and ground No. 2 for the assessment year 1989-90:

    Both the grounds relate to the disallowance under section 80HHC for the profit from 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 profit and loss account of the company. From the Haldia Factory 100 per cent production is exported. So, the assessing officer treated the Haldia Export Factory as a separate business of the assessee-company. Therefore, he computed the deduction by applying provision of section 80hhc(3)(a) in respect of export made from Haldia Export Factory. He applied the provision of section 80HH(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 Commissioner (Appeals) in his order by following his earlier order for the previous assessment years. The Commissioner (Appeals) 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 section 80HHC may be made in accordance with section 80HHC(3)(b) only and not partly under clause (a) and partly under clause (b) of section 80HHC.

    9. The learned Departmental Representative relied on the orders of assessing officer 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 section 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 section 80HH from the consolidated accounts which reproduce the aggregate position of the business comprises several industrial undertakings of which Haldia Export Unit is apart, the profit from Haldia Export Unit was computed for the purpose of relief under section 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 section 80HH(5) as mentioned by Commissioner (Appeals) in his order at page 21. On query from the Bench, he accepted that section 80HHC and section 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 section 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 section 80HHC is related to the profit earned by the export.

    10. On the other hand, the learned Authorised Representative from Price Water House relied on the order of the Commissioner (Appeals) and mentioned that the assessing officer 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. v. V.P. Gupta, CIT (1978) 113 ITR 647 (SC) where it was laid down certain parameter 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 Honble Supreme Court (supra) (also Produce Exchange Corporation Ltd v. CIT (1970) 77 ITR 739 (SC).

    11. 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 v. Assistant Commissioner (1994) 50 ITD 37 (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 clause (b) of sub-section (3) of section 80HHC of the Act shall only apply and not partly clause (a) and partly clause (b). The clause (a) relates to the business consisting exclusively of the export of goods outside India and clause (b) relates for the other businesses.

    12. In the light of our discussion and by keeping in mind the CBDT Circular No. 564 dated 5-7-1990, 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 section 80HH(3)(b). In the absence of any additional material/evidence we find no infirmity in the order of Commissioner (Appeals) who has observed that though the assessee has claimed deduction under sections 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 v. CIT (1977) 107 ITR 195 (SC), we confirm the order of Commissioner (Appeals) who has rightly directed the assessing officer to give the benefit under section 80HHC for both the assessment years under consideration by computing the deduction in accordance with section 80HHC(3)(b) only and not partly under clause (a) and partly under clause (b) of section 80HHC.

    13. Ground No. 4 for the assessment year 1988-89 and ground No. 3 for the assessment year 1989-90 :

    Both the grounds relate to the claim of the assessee under section 32AB to the tune of Rs. 3,02,04,347 and Rs. 5,34,62,826 for the assessment years 1988-89 and 1989-90, respectively. The said claim was properly certified by auditors as required under section 32AB(3). Further, details of the deposits and utilisation in respect of which deduction was claimed under section 32AB were as under:

    Assessment year 1988-89

    (a) Amount deposited with IDBI on 29-2-1988 (within six months from 30-8-1987) Rs. 1,70,00,000

    (b) Amount utilised for purchase of plant and machinery Rs. 1,33,14,041 Rs. 3,03,14,041 Assessment year 1989-90

    (a) Amount deposited with IDBI on 28-9-1989 Rs. 3,20,00,000

    (b) Amount utilised for purchase of plant and machinery Rs. 2,20,13,788 Rs. 5,40,13,788

    14. Since, the maximum deduction permissible under section 32AB is 20 per cent of the eligible profit computed under section 32AB(3); the assessing officer restricted the claim to 20 per cent of the business income as worked out by the auditors. The assessing officer had issued notices under section 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, debtor's 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 assessing officer 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.

    15. In the first appeal, the Commissioner (Appeals) 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 section 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 Commissioner (Appeals) has observed in his order that the assessing officer 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 Commissioner (Appeals) observed that the assessing officer did not dispute the sanctity of the audit report but ironically, the assessing officer 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 assessing officer and mentioned that the claim for deduction was restricted to 20 per cent as per statutory provision. He mentioned that as per CBDT Circular No. 461 dated 9-7-1986, 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 section 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, deposit under section 32AB(1)(a) and any amount utilised under section 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 section 32AB(5), whichever is less. So, he justified the disallowance made by assessing officer.

    16. On the other hand, the learned Authorised Representative Shri R.K. Mitra from Price Water House, mentioned that the said circular was issued by way of extent, scope and effect of the newly inserted section 32AB. In clause (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 section 32A was linked merely to the cost of plant and machinery whereas in section 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 assessing officer, where he has shown the business profit of more than investment/deposit.

    17. 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 section 32A of the Act. He submitted that the object of section 32AB was actually earning profit in order to be eligible for deduction. He mentioned that the Hon'ble Supreme Court in the case of K.P. Varghese v. ITO (1981) 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 section 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 Commissioner (Appeals) by mentioning the ratio laid down by the jurisdictional High Court in the following cases :

    (1) Reckitt & Colman of India Ltd. v. CIT (1982)135 ITR 698 (Cal.) (2) Indian Explosives Ltd. v. CIT (1984) 147 ITR 392 (3) Alkali & Chemical Corporation of India Ltd. v. CIT (1986) 161 ITR 820 (4) British Paints (I) Ltd. v. CIT (1991) 190 ITR 196 (Cal).

    18. 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. v. 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 over-draft account at the time of payment of the tax.

    19. In the instant case, before making the said addition the assessing officer 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 Alkali's 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.

    20. 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 Commissioner (Appeals) that the assessee-company satisfied all the conditions necessary for deduction under section 32AB. In the absence of any additional material/evidence, we find no infirmity in the order of the Commissioner (Appeals) who has rightly directed the assessing officer to allow the claim for deduction as worked out by the auditors for the assessment years under consideration. The same is hereby upheld.

    21. Ground No: 5 for the assessment year 1989-90 :

    It relates to the deletion of the addition of Rs. 1,75,304 paid to staff recreation club under section 40A(9). During the assessment year under consideration, the assessee claimed the said amount pertaining to staff recreation club as staff welfare expenses under section 37(1). The assessing officer has not allowed the same as per section 40A(9).

    22. We have heard both the parties and gone through the materials available on record, from which it appears that the Commissioner (Appeals) has deleted the said addition by following the Tribunal's order in the case of Dy. Commissioner v. A.P.E Belliss India Ltd. (IT Appeal Nos. 527 to 531 (Cal.) of 1989). The Tribunal vide its order dated 13-2-1992 (page 11 of the paper-book) observed that section 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 Commissioner (Appeals) 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 (1) Otis Elevator Co. (I) Ltd. v. CIT(1992) 195 ITR 682 (Bom.) (2) Gujarat Slate Export Corporation Ltd. v. CIT (1994) 209 ITR 649 (Guj.) We find no infirmity with the order of Commissioner (Appeals), 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.

    23. 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.

    24. In the result, both the appeals, filed by the department and the cross objections, filed by the assessee, are dismissed.

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