Ahmad Farred, Accountant Member. - This appeal by the assessee is directed against the order of the CIT(A)-III Pune, dated 29th Nov., 2001 for assessment year 1998-99.

2. The grounds raised by the assessee in this appeal are as under :

"1. The learned CIT(A)-III Pune erred in confirming that export incentives and miscellaneous income of Rs. 80,66,246 and Rs. 63,231 respectively are not ‘derived from’ the eligible industrial undertaking and hence are not to be considered as eligible for deduction under section 80-IA of the Income-tax Act, 1961.

2. The learned CIT(A)-III, Pune erred in reducing 90 per cent of the liabilities written back and miscellaneous receipts amounting to Rs. 4,84,293 and Rs. 63,231 while computing profits of the business eligible for deduction under section 80HHC of the Income-tax Act, 1961.

3. The learned CIT(A)-III, Pune erred in confirming disallowance out of staff welfare expenses, telephone expenses and miscellaneous expenses to the extent of Rs. 10,000, Rs. 25,000 and Rs. 25,000 respectively on account of non-business use for want of verification.

4. The appellant-company craves leave to add to, alter, amend, modify and/or delete any or all of the above grounds of appeal."

3. In the return filed for assessment year 1998-99 on 24th Nov., 1998, the assessee-company had claimed deduction of Rs. 81,94,588 under section 80-IA of the Act. In the assessment order passed under section 143(3) on 15th Dec., 2000, the Assessing Officer restricted the assessee’s claim for deduction under section 80-IA to Rs. 46,99,378 worked out as under :

Ground No. 1

4. This ground relates to the export incentive of Rs. 80,66,246 excluded by the Assessing Officer while computing the deduction allowable under section 80-IA.

5. Shri S.N. Inamdar, the learned Authorised Representative reiterated the arguments put forward on behalf of the assessee before the Assessing Officer and before the CIT(A). The submissions made by him are summarized below :

uthat the export incentive received by the assessee under the Duty Entitlement Pass Book Scheme (DEPBS) entitled the assessee to import raw material free of import duty against the exports made;

uthat the DEPB Scheme, in effect, gave the assessee-company a reimbursement/credit against cost of raw material consumed for manufacture of finished goods which were exported;

uthat DEPB Scheme had the effect of reducing the customs duty which was an integral part of the cost of raw material for manufacture of goods;

uthat the impugned export incentive was in the nature of cost compensatory support;

uthat in an industrial undertaking raw materials are purchased, finished goods are manufactured therefrom and are then sold and, therefore, any receipt which had the effect of reducing the cost of raw material represented profits and gains ‘derived from’ the industrial undertaking;

uthat the impugned incentive was ‘derived from’ the eligible industrial undertaking and was, therefore, eligible for deduction under section 80-IA of the Act;

uthat the incentive received under the DEPB Scheme was similar in nature to the ‘duty drawback’, that it was not an ‘import entitlement’, that it was customs duty credit;

uthat this issue was covered in favour of the assessee-company by the decision of Gujarat High Court in the case of CIT v. India Gelatine & Chemicals Ltd. [2005] 275 ITR 284 (Guj.);

uthat this issue was also covered in favour of the assessee-company by the decisions of Tribunal in the following cases :

(i) A.P. Industrial Components Ltd. v. Dy. CIT [2002] 124 Taxman 76 (Hyd.) (Mag.);

(ii) Anil L. Shah v. Asstt. CIT [2005] 95 TTJ (Mum.) 216;

(iii) Dy. CIT v. Metro Tyres Ltd. [2001] 79 ITD 557 (Delhi).

6. Shri P.V. Kulkarni, the learned Departmental Representative relied on the order of the Assessing Officer and of CIT(A) and vehemently argued saying that the order of the CIT(A) needed to be upheld. It was, however, pointed out by him that the Assessing Officer had no occasion to examine the issue in the light of DEPB Scheme.

7. We have considered the rival submissions in the light of material on record and the precedents cited. It was noted by the Assessing Officer in his order that the export incentive amounting to Rs. 80,66,246 had been received by the assessee due to the policy of the Government, that it was not income ‘derived from’ the manufacturing activity and that the assessee was not eligible for deduction in respect of this income. He placed reliance on the decision of the Supreme Court in the case of Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore [1999] 237 ITR 579 (SC). The CIT(A) while confirming the Assessing Officer’s action observed that the receipt of Rs. 80,66,246 was out of promotional scheme of the Central Government and hence it could not be considered as profits of industrial undertaking eligible for deduction under section 80-IA.

7.1 The sub-section (1) of section 80-IA, before its amendment by the Finance Act, 2001 w.e.f. 1st April, 2002 read as under :

"(1) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or an enterprise referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to hundred per cent of profits and gains derived from such business for the first five assessment years commencing at any time during the periods as specified in sub-section (2) and thereafter, twenty-five per cent of the profits and gains for further five assessment years;

Provided that where the assessee is a company, the provisions of this sub-section shall have effect as if for the words "twenty-five per cent", the words "thirty per cent" had been substituted."

7.2 Shri Inamdar, the learned Authorised Representative heavily relied on the decision of the Gujarat High Court in the case of India Gelatine & Chemicals Ltd. (supra). In this case one of the issues was whether the ‘duty drawback’ received by the assessee constituted income ‘derived from’ an industrial undertaking and was eligible for relief under section 80-I of the Act. While deciding this issue it was observed by the Court that the incentives like ‘cash compensatory support, and ‘import entitlements’ are in the nature of general incentives though for determining the quantum of such incentives the Government could take into consideration the export turnover of the undertaking and hence such receipts are not ‘derived from’ the industrial undertaking but are merely attributable to it. But when it comes to ‘duty drawback’ it is given specifically to reduce the cost of manufacturing goods. The very scheme of duty drawback was framed in order to relieve the goods, to be exported, of the burden of customs duty and excise duty. The object of the ‘duty drawback’ was to reimburse the customs duty and excise duty paid by the assessee. The customs duty and excise duty are an integral part of the cost of production and any receipts by way of reimbursement of such duties are inextricably linked with the cost of production, which had to be reflected in the profit and loss account of the assessee.

7.3 The Court observed that the distinction between the general incentives like ‘cash assistance’ and ‘import entitlement’ on one hand and the specific incentives like ‘duty drawback’ was not brought to the notice of the Madras High Court. The Gujarat High Court, therefore, recorded disagreement with the view taken by the Madras High Court in the cases of CIT v. Jameel Leathers & Uppers [2000] 246 ITR 97 and CIT v. Viswanathan & Co. [2003] 261 ITR 737 (Mad.).

7.4 Shri Inamdar took us through the salient features of the DEPB Scheme. He submitted that the benefit available under the DEPB Scheme was of the nature of ‘duty drawback’. He explained that the deposit of DEPB Scheme was to neutralize the incidence of basic customs duty and surcharge on the import content of the export product. The neutralization was provided by way of grant of duty credit against the export product. He reiterated that the value of the benefit under of DEPBS was not import entitlement but it was customers duty credit. He, therefore, contended that the issue involved in the present appeal was squarely covered by the decision of the Gujarat High Court in the case of India Gelatine & Chemicals Ltd. (supra).

7.5 The Madras High Court, on the other hand, held in the case of Jameel Leathers & Uppers (supra), that it was not the industrial undertaking which yielded the income by way of ‘cash compensatory support’, duty draw-back and ‘import entitlements’, but it was the scheme of the Government which made it possible for the assessee to receive these amounts and the existence of such a scheme was not an essential part of the industrial undertaking.

7.6 In the case of Sterling Foods (supra), the Supreme Court observed as under :

"We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become 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 is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee’s industrial undertaking."

7.7 The Madras High Court in the case of CIT v. Pandian Chemicals Ltd. [1998] 233 ITR 497, while explaining expression ‘derived from’ as appearing in section 80HH of the Act, observed as under :

". . . . The fact that the Legislature has used the expression ‘Profits and gains derived from the industrial undertaking’ has some significance and it connotes that the immediate and effect source of income eligible for grant of relief under section 80HH of the Act must be the industrial undertaking itself and not any other source. The mandate of law is that unless the source of the profit is the undertaking the assessee is not eligible to claim the deduction under section 80HH of the Act. . . . If the Legislature had intended to grant deduction to any profit from the industrial undertaking it would have very well used the expression ‘attributable to’ in section 80HH of the Act. We, therefore, do not find any justification to give the expression ‘derived from’ a wider meaning to cover every receipt connected with the industrial undertaking. . . ."

7.8 It was noted by the Madras High Court in Pandian Chemicals Ltd.’s case (supra) that the expression ‘attributed to’ had a wider meaning than the expression ‘derived from’.

7.9 While affirming the decision of the Madras High Court in the case of Pandian Chemicals Ltd. (supra) the Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC) held that the word ‘derived from’ in section 80HH of the Act must be understood as something which had direct or immediate nexus with the assessee’s undertaking.

7.10 In our opinion, the decisions of the Madras High Court in the cases of Jameel Leathers & Uppers (supra) and Viswanathan & Co. (supra) are in line with the judgments of the Supreme Court in the cases of Sterling Foods (supra) and Pandian Chemicals Ltd. (supra). It makes no difference that the benefit received under the DEPB Scheme had the effect of reducing the customs duty which in turn, had the effect of increasing the profits. What is important is that because of the export inceptive/benefit; received under the DEPB Scheme the assessee got same profit; which manifestly flowed from the DEPB Scheme the Government and not from the business of the industrial undertaking of the assessee-company.

7.11 The Government has been giving incentives to the exporters in different forms namely ‘import entitlement’, ‘cash assistance’, ‘duty drawback’, ‘DEPB Scheme’, etc. and the incentive received in each of these forms results in some extra profit in the hands of the assessee. The question is as to what can be said to be the ‘source’ of that extra profit that arises from the incentive/benefit given by the Government to the exporter-assessee under its various schemes.

7.12 The extra profit, resulting from the various export incentives benefits of the Government, cannot be said to flow directly from the business of the industrial undertaking itself. The ‘source’ of such extra profit is surely the particular scheme of the Government, under which the export incentive/benefit flows to the assessee in one form or the other. In one case, the assessee received ‘cash’ straightaway and in another case, the assessee received ‘import entitlement’ which could be converted into cash and in yet another case, the customs duty paid by the assessee was reimbursed. But in all such cases, in whatever form the export incentive/benefit flowed to the assessee resulting in some extra profit, the ‘source’ was surely that particular scheme of the Government. This humble opinion of ours is based on the principles laid down by the Supreme Court in the cases of Sterling Foods (supra), and Pandian Chemicals Ltd. (supra) and by the Madras High Court in the cases of Jameel Leathers & Uppers (supra) and Viswanathan & Co. (supra). This ground No. 1 is accordingly rejected.

Ground No. 2

8. In this ground, it has been contended that the CIT(A) erred in reducing 90 per cent of the ‘liabilities written back’ of Rs. 4,84,293 and ‘miscellaneous receipts’ of Rs. 63,231 while computing profits of business eligible for deduction under section 80HHC of the Act. It was submitted by the learned Authorised Representative that this issue was covered in favour of the assessee by the decision of Tribunal Pune in the case of Finolex Pipes Ltd. v. Dy. CIT [2000] 68 TTJ (Pune) 422.

8.1 We have considered the rival submissions in the light of material and the precedent cited. The CIT(A) while confirming the Assessing Officer’s action observed in para 7.3 of his order as under :

"The rival submissions have considered. I agree with the Assessing Officer that in view of the decision of Bombay High Court decision in the case of CIT v. K.K. Doshi & Co. [2000] 163 CTR (Bom.) 472 : [2000] 245 ITR 849 (Bom.) the income though assessable as business income have no link with the export. These receipts do not have direct nexus with the export income hence the appellant is not entitled to claim deduction under section 80HHC on these receipts. The Assessing Officer’s action in reducign 90 per cent of the liability written back and misc. receipts while computing the profits of the business eligible for deduction under section 80HHC is upheld. The appeal fails."

8.2 We find that the decision of Tribunal Pune in the case of Finolex Pipes Ltd. (supra) does not render any help to the case of the assessee insofar as this issue is concerned. It is seen that the relevant facts with regard to the nature of the ‘liabilities written back’ and also of the ‘miscellaneous receipts’ were not brought on record by the authorities below. In the circumstances, therefore, we remit this matter back to the file of the Assessing Officer with a direction that he should bring the relevant facts/material on record and should pass a fresh speaking order with regard to this issue, after giving adequate opportunity of being heard to the assessee. The ground No. 2 is decided accordingly.

Ground No. 3

9. In this ground, it has been contended that the CIT(A) erred in confirming the disallowance out of staff welfare expenses, telephone expenses and miscellaneous expenses of Rs. 10,000, Rs. 25,000 and Rs. 25,000 respectively on account of non-business use and for want of verification.

9.1 It was submitted by Shri Inamdar, the learned Authorised Representative that this issue was covered in favour of the assessee by the decisions of the Gujarat High Court in the cases of Sayaji Iron & Engg. Co. v. CIT [2002] 253 ITR 749 and Dinesh Mills Ltd. v. CIT [2002] 254 ITR 673 .

9.2 We have considered the rival submissions in the light of material on record and the precedents cited. The assessee had debited Rs. 22,02,292 on account of telephone expenses out of which the Assessing Officer disallowed Rs. 50,000 on the ground that personal use of the telephone could not be ruled out. The CIT(A) restricted this disallowance to Rs. 25,000.

9.3 Further, the assessee had debited Rs. 39,03,923 as ‘miscellaneous expenses’ out of which Rs. 50,000 was disallowed by the Assessing Officer for want of verification. The CIT(A) restricted this disallowance to Rs. 25,000.

9.4 The assessee debited Rs. 13,67,000 on account of staff welfare expenses, out of which Rs. 25,000 was disallowed by the Assessing Officer for want of verification. The CIT(A) restricted this disallowance to Rs. 10,000.

9.5 We have considered the matter and we find that the Assessing Officer and also the CIT(A) did not give cogent reasons for making the above disallowances. In our opinion, the above disallowances are based on conjectures and surmises and cannot be sustained. Further, the decision of the Gujarat High Court in the case of Sayaji Iron & Engg. Co. (supra) supports the case of the assessee. In the circumstances, therefore, the above disallowances are deleted and the ground No. 3 is allowed.

10. In the result, the appeal filed by the assessee is partly allowed.