Emerson Network Power India (P.) Ltd. v. Assistant Commissioner of Income-tax, Cir.-3, Thane

V.K. Gupta, Accountant Member. - This is a bunch of 8 appeals, filed by the same assessee, involved common issues, hence, these were heard together and disposed of through this consolidated order for the sake of convenience.

2. We have heard both the sides and have also perused the materials placed on record and applicable legal position.

3. The assessee has submitted a chart which depicts the issues involved in each of assessment year. For the sake of convenience, the details furnished in this chart are reproduced as under :—

4. As far as the issue raised at Sl. No. 6 of the chart regarding re- opening under section 148 of the Act for assessment year 1994-95 is concerned, the same was not pressed, hence, the relevant grounds in these assessment years are dismissed as not pressed.

5. Similarly, the issue at Sl. No. 4 of the chart was not pressed in all the assessment years, hence, the relevant ground in each year is dismissed as not pressed.

6. The issue regarding provision for warranty at Sl. No. 2 of the chart pertaining to assessment year 1994-95 was not pressed, hence, dismissed as not pressed.

7. The issue raised at Sl. No. 5 in assessment years 1996-97 to 2001-02 is in respect of lease premium. The ld. Counsel for the assessee was fair enough to state that this issue was covered against the assessee by the decision of Special Bench of the Tribunal in the case of Joint CIT v. Mukand Ltd. [2007] 291 ITR 249¹ (AT), hence, we dismiss the relevant ground in each year.

8. The ld. Counsel for the assessee, thereafter, proceeded with the issue relating to treatment of retention money as raised at Sl. No. 3. He submitted that in assessment year 1996-97, this issue first arose, hence, he proceeds to deal with the matter firstly in that year. He also submitted that the same issue was raised in assessment year 1997-98 by way of additional ground and, since all the facts were on record and it required no investigation into facts, hence, this additional ground should be admitted.

9. The ld. D.R. objected to the admission of the additional ground in assessment year 1997-98, however, on due consideration of facts and circumstances, we admit the same for adjudication.

10. The facts, in brief, are that assessee is a company engaged in manufacture and trading of UPS systems. In the original return, the assessee did not make any claim for exclusion of retention money while computing the total income. However, it had mentioned a fact to the effect that the claim in this regard would be subsequently made when quantum was ascertained. Subsequently, the assessee filed a revised calculation on 17-9-1998 wherein the assessee claimed deduction on account of retention money of Rs. 36,99,543. The Assessing Officer held that technically, this claim could not be considered as the assessee had not made such claim by filing a revised return within the prescribed time as per the provisions of section 139(5) of the Act. Thereafter, on merits, the Assessing Officer found that the assessee had credited the P&L account with the full sale price as no money had been retained by the customer. The amount calculated by the assessee on account of retention money pertained to a number of customers who had made the full payment to the assessee-company on furnishing of bank guarantee by the assessee up to 10 per cent of the contracted price for indemnifying the customers on account of assessee’s failure to perform it’s duties as per the terms and conditions of the contract and/or also for unsatisfactory performance of the material supplied by the assessee. The Assessing Officer further noted that the figure representing the value of bank guarantees issued by the assessee in this regard did not enter into the books of account at all and the assessee made a claim for exclusion of amount represented by such bank guarantees on the basis of decision of the Tribunal in the case of Associated Cables (P.) Ltd. v. Dy. CIT [1994] 206 ITR 49 (Bom.) (AT). The Assessing Officer, however, held that the facts of the case of the assessee were distinguishable from the facts of that case because in that case the assessee was manufacturing cables according to the particular specifications of the customers and no manufacturing was carried out by that assessee company without receiving the customer’s specification, whereas, in the present case, the assessee was manufacturing and supplying standard equipments and it was also engaged in trading, hence, it could not be said that right to receive such amount had not accrued to the assessee at the time of supply of material to it’s customers as the transaction got completed when the goods were delivered to the customer. It was also noted by the Assessing Officer that no expenditure had been incurred by the assessee till the date of completion of assessment proceedings as no performance guarantee had been invoked till that date. It was also noted by the assessee that there was no mention of liability in the financial statements nor any provision had been made by the assessee on this count in the books of account, hence, the Assessing Officer held that it was nothing more than a contingent liability. The Assessing Officer also held that income chargeable under the head ‘Profits and gains of business or profession’ was to be computed either on the basis of cash system of accounting and mercantile system accounting regularly followed by the assessee and the assessee could not follow a different method for working out it’s profit for tax purposes which was not even recognized by the assessee itself or it’s auditors. Accordingly, he rejected the claim of the assessee both on technical ground as well as on merits. Aggrieved by this, the assessee carried the matter in appeal before the ld. CIT(A) wherein, besides reiterating the submissions made before the Assessing Officer, reliance was placed on the decision of Hon’ble Supreme Court in the case of CIT v. C. Parakh & Co. (I.) Ltd. [1956] 29 ITR 66 to contend that assessee was entitled to a particular deduction on the basis of legal position and not on a view which it could take about it’s rights. The ld. CIT(A), however, confirmed the action of the Assessing Officer following the appellate order for assessment year 1997-98 on merits and also for the reason that it was not made through a valid return. Still aggrieved, the assessee is in appeal before us.

11. The ld. counsel for the assessee narrated the facts and contended that in assessment years 1994-95 and 1995-96 assessee’s claim for exclusion of retention money amount from the income of the assessee was accepted by the Department, hence, for the reason of consistency, the assessee’s claim was liable to be allowed. He also contended that the decision of the Associated Cables (P.) Ltd. (supra) was subsequently confirmed by the Hon’ble Bombay High Court as in Commissioner Of Income-Tax v. Associated Cables P. Ltd. [2006] 286 ITR 596 and the facts of the present case were identical to the facts of that case, hence, the issue was covered in favour of assessee. He also drew our attention to the bank guarantee provided by the assessee to show that amount to the extent of such bank guarantee did not accrue to the assessee, hence, assessee was correct in making such claim. He also contended that there were following other decisions also wherein it was held that retention money would accrue to the assessee only on satisfactory performance of products and acceptance by the customers.

(i) Dy. CIT v. Deccan Mechanical & Chemical Industrial (P.) Ltd. [2006] 102 ITD 171;

(ii) Janatha Contract Co. v. Commissioner Of Income-Tax, Kerala. [1976] 105 ITR 627 (Ker.);

(iii) Commissioner Of Income-Tax v. Ignifluid Boilers (I) Ltd. [2006] 283 ITR 295 (Mad.);

(iv) CIT v. Simplex Concrete Tiles (India) (P.) Ltd. [1989] 179 ITR 8 ¹ (Cal.);

(v) Anup Engg. Ltd. v. CIT [2001] 114 Taxman 584 (Guj.).

As regards the rejection of the claim by the Revenue Authorities on technical ground of non-filing of revised return for making such claim, the ld. counsel submitted that this issue was involved only in the assessment year 1996-97 and not in other years. The ld. counsel drew our attention to the income computation chart filed along with the return of income, copy of the same at page 17 to 20, wherein this fact had been mentioned and contended that this aspect was examined by the Tribunal in the case of Chicago Pneumatic (I.) Ltd. v. Dy. CIT [2007] 15 SOT 252 (Mum.) wherein the Tribunal after considering the decision of Hon’ble Supreme Court in the case of Commissioner Of Income Tax v. Parry Agro Industries Ltd. [2006] 284 ITR 353 ² had held that the Assessing Officer was obliged to give due relief to the assessee or entertain its claims if admissible as per law even though the assessee had not filed revised return, hence, the assessee’s claim could not be rejected on technical grounds. In this regard, he also placed reliance on the following judicial decisions :—

(i) Chokshi Metal Refinery v. Commissioner Of Income-Tax, Gujarat-Ii. [1977] 107 ITR 63 (Guj.);

(ii) Bharatiya Engg. Corpn. (P.) Ltd. v. R.G. Deshpande, Addl. CIT [1981] 130 ITR 442³ (Bom.).

A query was also raised by the Bench with regard to the nature of performance guarantee given by the assessee as per the copy of the bank guarantee submitted by the assessee, such bank guarantee had been given for compliance of terms and conditions of the tender also. The assessee submitted that the same would be submitted subsequently. The ld. counsel also contended that such retention money was accounted for as income in the relevant financial year wherein such bank guarantee(s) expired. As far as the quantum of retention money was concerned, it was worked out on the basis of all pending bank guarantees at the end of the year as reduced by the opening balance of such bank guarantees and in this regard, he submitted a chart for assessment year 1994-95 till assessment year 2005-06.

12. The ld. D.R., on the other hand, narrated the facts and placed strong reliance on the orders of revenue Authorities.

13. We have considered the submissions made by both parties, material on record and orders of authorities below. It is noted that assessee is engaged in the manufacturing and trading of UPS systems of different specifications. It is also noted that as a part of supply of such products, the assessee also undertakes to install and commission such systems at the site of the customer. It is also noted that apart from UPS systems manufactured by the assessee, certain other accessories/spares are also required, which may be supplied by the assessee or the customer can directly procure such accessories/spares from other vendors. It is also noted that UPS systems can also be procured by a customer from abroad through assessee’s associate entities. However, in such cases, installation/commissioning and warranty services are provided by the assessee. The assessee has also stated that from total bank guarantees pending at the year end, the opening balance of pending bank guarantees is reduced to compute the amount of retention money which is not treated as it’s income of the concerned year and in a year, whatever bank guarantees expire, the same are taken into the income of that year, hence, the assessee, in actual sense, has not benefited substantially because of same rate of tax applicable to the assessee in almost all the years under consideration. In this background, we find the activities carried on by the assessee fall into two categories i.e., (i) supply and installation and (ii) installation and commissioning when UPS systems are imported by customers from assessee’s associate concern’s situated abroad. During the course of hearing, the assessee has submitted copy of performance security bond in relation to supply made to ITI whereas the Bench desired for submission of tender documents, other terms and conditions of supplies and installation and commissioning, which have not been submitted, as promised, hence, we are constrained to take a view on the basis of material on record. Clause (1) of such performance security bond provides some insights into the various eventualities which could arise between the assessee and it’s customer in future, hence, we consider it proper to re-produce the same as under :—

"The bank hereby irrevocably and unconditionally guarantees to ITI Limited that the Bidder shall render all necessary and efficient services which may be required to be rendered by the Bidder in connection with and/or for the performances of the said contractor and further guarantees that the goods which shall be supplied by the bidder under the said contract shall be actually performing the work required of it to the satisfaction of ITI Limited and shall be free from any defects arising from faulty materials, designs and workmanship, such as corrosion of the equipment inadequate quantity of materials, inadequate contact protection, deficiencies in circuit design and/or otherwise whatsoever and in the event of the Bidder failing or neglecting to render necessary services as aforesaid and/or in the event of goods failing to give satisfactory performance or proving and particularly warranty clause mentioned therein, the Bank shall indemnify and keep ITI Limited indemnified to the extent of Rs. 1,80,000 (Rupees one lakh eighty thousand only) against any loss or damage that may be caused to or suffered by ITI by reason of any breach by the Bidder of any of the aforesaid terms and conditions and the bank further undertake to pay to ITI Limited such sum not exceeding Rs. 1,80,000 (Rupees One Lakh Eighty Thousand only) on demand and without DEMUR in the event of the bidder’s failure to perform and discharge the aforesaid several duties and obligations on his part to be observed and performed under the said contract and/or deficiencies and defects in the satisfactory performance of the goods and equipment."

Thus, this bank guarantee has been given relation to two obligation i.e., firstly, for due performance by the assessee of contract and secondly, for deficiencies/defects in satisfactory performance of the goods and equipment supplied by the assessee. It is also important to note that the ITI, while issuing the letter of intent to the assessee-company has required by the assessee to submit the said performance security bond and only thereafter the purchase order is placed. As per the copy of the purchase order placed at page 26 of the paper book, it is noted that assessee is entitled for 100 per cent payment through bank after pre-dispatch inspection of goods at works by the customer (IIT). It is also noted that installation and commissioning charges, which are roughly 4 per cent of value of material, hence, very nominal as compared to the value of supplies and such charges have also been received at the time of supply of the material. It is also evident that the customer is making payment to the assessee after pre-despatch inspection of goods at works of the assessee, hence, the quality, specifications and suitability of the product is checked and ensured before the delivery of the material by the assessee to the customer. This is very important, as in such situation, when the delivery is made, the property in goods is transferred to the buyer and, thereafter, it is the buyer who has to bear the risk and rewards of ownership. This leads to another legal consequence whereby a legally enforceable debt is created in favour of the assessee at that very point and, therefore, the whole income is accrued to the assessee immediately on delivery of the product to the customer as far as sale value of the product is concerned. As far as the installation and commissioning activity is concerned, the income thereon shall normally accrue to the assessee at the moment when such services are rendered by the assessee and, therefore, the total amount received by the assessee i.e., sale value of the product and as well as installation and commissioning charges is to be accounted for as income at two stages i.e., income from sale at the time of delivery of the product and income from installation and commissioning at the time of rendering of the specified services. It is important to reiterate here that the assessee has received the total amount payable by the customer at the time of delivery only, hence, there can be a case where the assessee might have delivered the goods and those goods have not been installed till the end of accounting year and only in those cases, the amount received on account of installation and commissioning charges can be treated as advance. Having stated so, when we analyse the nature of obligations cast upon the assessee as evident from the clause (1)

of the performance security bond reproduced herein above, we find that the assessee’s obligation till the delivery of the goods has already been performed and other obligations are related to installation and commissioning as well as satisfactory performance of the goods and equipments. As far as installation and commissioning is concerned, we have already stated that the amount received pending discharge of such obligation can be treated as an advance and in case where such obligations have been performed before the year end, the income stands accrued to the assessee, hence, no retention/deduction is required from the income earned by the assessee in this regard also. As far as the assessee’s obligation in respect of satisfactory performance of the product is concerned, this is in the nature of implied warranty of the contract of sale because the customer can claim damages only as specifically mentioned in the performance security bond whereby the assessee’s banker would indemnify the customer and it is also noted that the focus is on the warranty clause, hence, giving of such bank guarantee does not, in any manner leads to any uncertainty regarding the collectibility of revenue nor there is attached any other uncertainty so as to justify the postponement of accrual of revenue to the extent of amount of bank guarantee in the hands of the assessee till the date of expiry of such bank guarantee. It is also noted that assessee is a reputed manufacturer and supplier of these products and no material has been brought on record to show the cases where bank guarantee was actually invoked by the bank at the instances of the customer because in the copy of one performance security bond, it is clearly mentioned that such performance security bond could be invoked by the bank only if it was so consented by the customer, that means such bank guarantee has been taken by the customer only to create some pressure for timely performance and obligations under the contract and it has got nothing to do with accrual of income in the hands of the assessee.

13.1 Whatever has been stated by us hereinbefore is also supported by the Accounting Standard No. 9, relating to revenue recognition, issued by Institute of Chartered Accountants of India wherein it has been provided that in respect of a transaction involving sale of goods, the revenue should be recognized when the seller has the property in goods to the buyer for a consideration and the transfer of property in goods, in most cases, results in or coincides with the transfer of significant risks and rewards of ownership to the buyer. In the present case, we have already held that when the goods has been delivered to the buyer by the assessee, the property in goods has been transferred to the buyer in terms of provisions of Sales of Goods Act, 1930, hence, the revenue has to be recognized in the period when such delivery has been made. In the Accounting Standard, it has also been provided that the recognition of revenue can be postponed if there exists uncertainties regarding the ultimate collection, however, in the present case the assessee has already received the amount of sale consideration though it has provided the bank guarantee for satisfactory performance and compliance with the terms and conditions of the contract and which cannot be said to have resulted into any uncertainty as regards the timing of recognition of revenue, hence, the total revenue from the sale transaction has to be recognized at the time of delivery of goods. As regards the case laws relied on by the assessee are concerned, we find that the decision of the Tribunal in the case of Associated Cables (P.) Ltd. (supra) which has been approved by the Hon’ble Jurisdictional High Court, the assessee was billing only for 90 per cent of the value of the goods manufactured, dispatched and delivered with the exception that 100 per cent of Excise and Sales Tax was charged at that time and the balance 10 per cent was payable to the assessee only subsequently and if the assessee required its customer to pay this 10 per cent amount before, then, it could receive the same only on receipt and acceptance of goods at purchaser’s site, submission of all final technical documentation, submission of performance and workmanship bank guarantee, hence, in that case if the assessee required the payment of 10 per cent amount before the agreed period, then, it had to comply with certain terms and conditions and also to exclude some more activities and in that situation, it was held that there were attached certain additional conditions for getting that sum, hence, it could not said that the retention money had accrued to the assessee before compliance of those conditions. Whereas in the present case, as stated earlier, goods have already been delivered and accepted and other obligations are only of the nature of warranty which do not in any way effect the right of the assessee to receive the amount, hence, the decision of the Hon’ble Bombay High Court and the Tribunal in that case is not applicable on the facts of this case. It is also noted that in that case the assessee was manufacturing only against specific orders whereas in the present case the assessee is dealing standard products as a manufacturer as well as trader, hence, facts of both cases are different in this manner also. Similarly, the facts of the case of Simplex Concrete Tiles (India) Ltd. (supra) are also different in as much as in that case the assessee was a contractor and not a supplier which is a predominant situation in the case on hand and payment in that case was based upon different milestones, hence, the ratio of that decision is also not applicable to the present case. As regards the reliance placed by the assessee on the decision of Hon’ble Gujarat High Court in the case of Anoop Engg. Ltd. (supra), we find that there was a dispute between the supplier and the customer as regards to quality/configuration of product/material supplied and which is not the case here, hence, the ratio of that decision is also not applicable. Thus, on merits the assessee does not have any case. As far as the technical ground of rejection is concerned, which is involved only in one year, the same stands covered in favour of the assessee by the decision of the Tribunal in the case of Chicago Pneumatic (I.) Ltd. (supra), hence, we hold that the order of the ld. CIT(A) is not correct to that extent.

14. Before parting with this issue, we consider it pertinent to deal with the other aspect of the issue involved i.e., once the assessee is postponing the revenue recognition in such situations, in spite of following the mercantile system of accounting, the assessee is not following the principle of matching which requires the assessee to match cost with revenue and vice versa. Further, there is accounting concept of periodicity which requires the financial statement to be prepared for a definite accounting period and which is also recognized under the provisions of the Income-tax Act as the assessees are required to file return of income for a previous year. There is a concept of accrual which is the basis of mercantile system of accounting wherein the effect of transaction and other events are recognized when those occur and those are recorded in the account records and reported in the financial statements of the period to which those relate and not when the money received or paid. All these accounting concepts/principles i.e., periodicity, accrual and matching work together for income measurement and recognition of the assets and liabilities and profit and this can be depicted as follows :—

Periodic profit = periodic revenue (-) matched expenses.

Thus, if it is assumed that revenue has not accrued to the assessee to the extent of bank guarantee so provided, then, correspondingly all the direct expenses relating to such unaccrued income should be reduced from the direct expenses relatable thereto and be shown either as pre-paid expenses or as work-in-progress or as expenses relatable to unearned income etc., so that the profit of a particular accounting period is correctly computed. This has also not been done in the present case, hence, the exercise done by the assessee is essentially in the realm of postponement of income which is not permissible in law as held by the Hon’ble Supreme Court in the case of CIT v. British Paints Ltd. [1991] 188 ITR 44 ¹.

14.1 Thus, we are of the view that the revenue from sale of UPS is to be recognized at the time of delivery of the same to the customer and revenue from installation and service charges is to be recognized at the time of rendering of such services. However, if the assessee is recognizing such revenue prior to that stage i.e., at the time of receiving amount after pre-despatch inspection consistently then, the same can be followed by the assessee. But the assessee cannot postpone recognition of the same beyond the stages mentioned by us in the preceding lines. In this regard, it is also noted that there is no dispute in regard to these aspects before us, hence, it can safely be concluded that except for amount represented by performance bank guarantee, the assessee is accounting for revenue from such transactions at the appropriate stages and if such stage has not been achieved during the year, then, the same has been shown as advance. Having stated so, we have already taken into consideration factual, accounting, commercial and legal aspects in detail hereinbefore and, accordingly, we hold that there is no merit in the claim of the assessee not to recognize the amount represented by the performance bank guarantee as revenue of the year of sales. Accordingly, we dismiss this ground of the assessee in all the years under consideration.

15. The only issue which remains to be adjudicated in these appeals is regarding eligibility of the assessee’ s claim for deduction under section 80-IA of the Act on the profits of turnover of trading goods.

16. The facts, in brief, are that assessee claimed deduction under section 80-IA of the Act in assessment year 1996-97 at Rs. 69,45,300, being 30 per cent of the profits and gains of new industrial undertaking. The Assessing Officer as per Annexure 9A of the Notes of Account found that assessee had sold 6529 UPS and 17 PEC systems which had been purchased from outside. Besides these, it also sold 7404 UPS and 30 PEC systems manufactured by it during the year under consideration. The Assessing Officer required the assessee to explain its claim under section 80-IA of the Act. The assessee submitted that trading activity carried on by the assessee-company was in respect of Hitech UPS model series AP 410 and AP 420 and Model No. 248FA of Precision Environmental Control Systems to the Indian market and the absorption of technology for manufacturing these models subsequently. It was also submitted that this technology was absorbed and the company started manufacture of these items from the next financial year, hence, assessee’s trading activity and manufacturing activity were an integrated activity. It was also submitted that without such trading activity, the assessee-company could not remain competitive. The Assessing Officer, however, relying on the decisions of the Hon’ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. Cit [1978] 113 ITR 84, CIT v. Cochin Refinery Ltd. [1982] 135 ITR 278¹ (Ker.) held that the moot criterion was not that whether the income could be regarded as business income but was whether the income could be treated as derived from industrial undertaking or not. Accordingly, he re-worked out the claim made by the assessee under section 80-IA of the Act by excluding profits of trading turnover. Aggrieved by this, the assessee carried the matter in appeal before the ld. CIT(A) who also confirmed the findings of the Assessing Officer for similar reasoning and also in view of his decision in assessee’s own case for assessment year 1997-98. Still aggrieved, the assessee is in appeal before us.

17. The ld. Counsel for the assessee contended that the assessee-company was engaged in manufacture as well as trading of the UPS Systems and drew our attention to page 58 of the paper book to show that there were two options available to the customers i.e., a customer could order the special UPS System according to its requirement on the assessee which would consist imported UPS systems along with other accessories or only UPS Systems could be ordered and the customer could acquire other accessories from other vendors. Secondly, the customer could directly place order for supply of UPS Systems on Emerson Group Companies situated in Italy or China and assessee could be involved in integrating whole system at site and meet the requirements of the customer, however, in this option also, installation, commissioning and warranty services for UPS were given by the assessee, hence, both types of activities were closely integrated and, therefore, the assessee was entitled for deduction under section 80-IA of the Act on both the activities. The ld. Counsel also submitted a chart showing trading turnover from assessment years 1994-95 to 2001-02 and contended that generally trading turnover was 15 per cent of the total turnover except for assessment years 1995-96 and 1996-97 wherein some new products had been launched which were imported and sold and subsequently, these products were manufactured by the industrial undertaking owned by the assessee-company, hence, in these years particularly, the assessee was entitled for deduction under section 80-IA of the Act on such trading turnover. The Id, Counsel also contended that the language in section 80IA was wider in scope as compared the language employed in other similar incentive sections because in this section, it were the profits of the business of the undertaking which were eligible for deduction. The ld. Counsel placed reliance on the decision of the Tribunal in the case of Asstt. CIT v. Maxcare Laboratories Ltd. [2005] 213 ITR 1 ¹ (AT), wherein the Tribunal held that industrial undertaking was the only source of income of the assessee and, therefore, deposits had been made by the assessee out of business compulsion, hence, interest received thereon was to be treated as having direct and proximate connection with the business of the undertaking even though the same could not be treated as derived from the industrial undertaking and the same was eligible for deduction under section 80-IA of the Act. The ld. Counsel contended that the trading activities were also directly connected with the industrial undertaking, hence, assessee was entitled for deduction under section 80-IA on the income earned from such trading activities. The ld. Counsel also relied on the decision of Hon’ble Delhi High Court in the case of Commissioner Of Income-Tax v. Eltek Sgs P. Ltd. [2008] 169 Taxman 283, wherein the Hon’ble Delhi High Court, after noticing the difference in the language employed in sections 80-IB and 80HH of the Act, held that assessee was entitled for deduction under section 80-IB on the custom duty drawback received by the assessee because the same was derived from the business of industrial undertaking. He, thereafter, placed reliance on the decision of the Tribunal in the case of Dy. CIT v. Chaman Lal & Sons [2005] 93 TTJ (Asr.) 132 wherein the assessee was engaged in the manufacturing processing of rice and also entered into transactions of purchase and sale of rice and the Tribunal, in those circumstances, held that purchase and sale of rice was a part and parcel of the business of industrial undertaking, hence, assessee entitled for deduction under section 80-IA in respect of profit of the trading operations. At this stage, a query was raised that whether there was a difference between the assessee as such and industrial undertaking owned by such assessee for the purposes of relief/deduction to be granted under section 80-IA of the Act and, if so, then, whether the trading operations carried on by the assessee could be held transactions of the assessee-company and not of the industrial undertaking owned by the assessee-company. The ld. Counsel fairly accepted that the assessee and industrial undertaking were to be treated as different entities for the purpose of deduction/exemptions under the provisions of Income-tax Act, 1961, however, in the present case, both the activities were closely integrated and, therefore, these were to be treated as business of the industrial undertaking specially when new products were subsequently manufactured by such undertaking. He also argued that the facts of the present case were more strong than the facts of the case before the Tribunal in the case of Chaman Lal & Sons (supra) and that, being a decision of a co-ordinate bench was binding on the Tribunal.

18. The ld. D.R., on the other hand, placed strong reliance on the order of ld. CIT(A).

19. We have considered the submissions made by both sides, material on record and orders of authorities below. The nature of activities undertaken by the assessee have been narrated in detail in this appeal hereinbefore, hence, not repeated. The only question which requires our adjudication is whether the profit of trading activities can be considered as eligible for deduction under section 80-IA of the Act or not. The learned counsel for the assessee has relied on the decision of the Tribunal in the case of Maxcare Laboratories Ltd. (supra) and the decision of the Tribunal in the case of Chaman Lal & Sons (supra). The assessee has also placed reliance on the decision of Hon’ble Delhi High Court in the case of Eltek SGS (P.) Ltd. (supra) wherein the deduction under section 80-IB of the Act on the custom duty drawback was involved and the custom duty draw-back, being a part and parcel of operations of the industrial undertaking, is in the nature of reimbursement of expenses charged to the Profit and Loss Account of such industrial undertaking and in these circumstances, the Hon’ble Delhi High Court held that assessee was entitled for deduction under section 80-IB of the Act thereon after noticing the difference in the language of sections 80-IB and 80HHC of the Act, however, the facts remains that the nature of custom duty drawback was involved therein whereas in this case the issue involved is regarding entitlement of trading activities undertaken by the assessee, hence, the ratio of this decision is not applicable to the facts of the case. Similarly, in the case of Maxcare Laboratories Ltd. (supra), the issue involved is regarding interest received on deposits made in connection with the business of industrial undertaking, which is not so in the present case, hence, the ratio of this decision is also not applicable. As regards the decision of Chaman Lal & Sons ( supra) is concerned, we find that the aspect of industrial undertaking, being an independent entity, than that of the owner (assessee), was not brought to the notice of the Tribunal, hence, this decision also does not help to the cause of the assessee.

19.1 During the course of hearing, a question had been put to the assessee regarding whether the trading activities were activities of the industrial undertaking or of the assessee-company owning such industrial undertaking. The ld. Counsel for the assessee had submitted that the items which were sold in addition to items manufactured by the industrial undertaking were of the same type and were also manufactured subsequently, hence, both trading and manufacturing activities were inextricably linked, hence, the trading activities should be construed as carried on by the industrial undertaking. On this aspect, we are of the view that the assessee is a company and is authorized by its Memorandum of Association read with Articles of Association to carry on various activities and it has also been admitted that industrial undertaking and its owner are two different entities for the purposes of relief/deduction under the provisions of Income-tax Act, 1961. This is also an accepted concept even under accounting norms as per business entity concept which means that owner and business entities are distinct and separate. An industrial undertaking is established to carry out manufacturing, production or processing activities and not for carrying out trading activities, hence, in our opinion the trading activities are to be treated as carried by assessee-company and not by the industrial undertaking. As regards the assessee’s contention that these products were manufactured by such industrial undertaking subsequently, hence, trading activities relating to such products carried on in the year under consideration should be considered as part of industrial undertaking does not stand to our reason because both these aspects are independent of each other as the assessee-company may be trading various products of the same line to offer wide range of products to its clients and in those years, such trading activities would only be of the assessee-company and in the year of manufacture of such products by the industrial undertaking owned by the assessee-company, the industrial undertaking would be entitled for deduction under section 80-IA of the Act in respect of products so manufactured subject to satisfaction of other conditions mentioned therein, and if, in that year, the assessee company sale the same products by procuring from outside parties, then, also the industrial undertaking would not be entitled for deduction on such items. In this regard, we also consider it proper to reproduce the relevant findings of the decision of the Tribunal in the case of Gujarat Ambuja Cements v. Dy. CIT [IT Appeal No. 6474 (Mum.) of 1997] for assessment year 1992-93, order dated 15-9-2008 (TM).

"Now, I proceed to consider the second limb of the contention advanced on behalf of the assessee, which has been accepted by the learned Accountant Member. To recapitulate, the contention advanced on behalf of the assessee is that in the case of an assessee, who owns only one industrial undertaking, the income from all sources has got to be treated as the income of the industrial undertaking. This, contention, at the first sight, may appear to be attractive but in my humble view, it loses its luster when the assessee as a company and the industrial unit being one of its income earning apparatus is considered to exist independently. Under the Income-tax Act, 1961, tax is chargeable on the income of every person. Section 4 of the Act is the charging section, which reads as under :

‘4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and [subject to the provisions (including provisions for the levy of additional Income-tax) of this Act] in respect of the total income of the previous year of every persons :

Provided that where by virtue of any provision of this Act Income-tax Act is top be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), Income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.’

Section 2(7) defines an ‘assessee’ to mean a person by whom any tax or any other sum of money is payable under this Act and includes...........section 2(31) defines a "person" to include (iii) a company’. When the language of section 80-I reproduced elsewhere in this order is also kept in mind, there does not remain any scope for doubt that an assessee and an industrial undertaking are recognized distinctly under the statute. Section 80-I provides that where the gross total of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel. . . . It is evident, the Legislature has been conscious of the distinction between an assessee and the industrial unit etc., i.e., its income earning apparatus. So once a distinction between an assessee as a company and its industrial unit set up by it is kept in mind, the confusion of treating the income of the assessee-company from all its sources as the income of the industrial unit will not survive. Therefore, once it is accepted that the company has its own existence as an assessee and industrial unit is one of its profit earning apparatus, the view that the income of an assessee, who owns only one industrial unit, from all the sources has got to be treated as income of the industrial undertaking is bound to fail. If the contention on behalf of the assessee that the income of a company who owns only one industrial undertaking, say Unit No. 1, has got to be treated as the income of the industrial unit were to be accepted, then the income of any other unit, say Unit No. 2, set up by the company at any point of time is bound to be treated as the income of the Unit No. 1. This is not even the case of the assessee. The illusion of treating the income from all sources of the assessee-company of one industrial unit is considered distinct from the income of another industrial unit. If the assessee has income from various industrial units, the income of each unit is different and separate and the entire income from both the units and from any other source belongs to the company, namely the assessee and not the industrial unit No. The position of law will not be different if the assessee owns only one unit and has also income from other sources of income. In such a case, the assessee will have income from industrial unit and the income from other sources of income will be treated as the income of the industrial unit but the income of the company.

Taking the totality of facts and circumstances of this case into consideration, I am of the considered view that a sum of Rs. 4,35,52,000 (aggregate of brought forward unabsorbed losses, depreciation and investment allowance relating to the eligible industrial undertaking and which was set off in assessment years 1988-89 to 1991-92 against income of assessee from interest, capital gain and dividend) is required to be reduced as per section 80-I(6) of the Income-tax Act, 1961 from current year’s profits derived by the assessee from its eligible industrial undertaking for the purpose of computing deduction under section 80-I(1) of the Act. I hold accordingly. Consequently, with due respects, I disagree with the view expressed by the learned Accountant Member."

In view of above discussion, we hold that trading activities carried on by the assessee are of the assessee-company and not of the industrial undertaking, hence, the assessee is not entitled for deduction under section 80-IA of the Act on the profits thereon.

19.2 Having stated so, in our opinion, even on merits, the assessee has got no case for the reasons to follow :—

(i)the assessee has placed heavy reliance on the wordings used in sub-section (1) of section 80-IA of the Act. In our opinion, the words "any business of" have been used therein as a prefix not only to "undertaking" but these are also with reference to subsequent business(es) such as hotel or operation of ship or developing, maintaining and operating any infrastructure facility etc., etc., mentioned therein, hence, these words have been used to show the nature of business of activities which could be eligible for deduction under section 80-IA of the Act and, therefore, these words do not enlarge the scope of the deduction. We also find in section 80HH of the Act, the words in sub-section (1) were "profits and gains derived from industrial undertaking or the business of a hotel" and in section 80-IA, the word "any business of" have been used as prefix to hotel, which also support our view in this regard as stated in the preceding lines. Hence, in our opinion, the provisions of section 80-IA are not wider in scope as compared to the section 80HH.

(ii)Similarly, as per section 80-IA(2)(iii) and or (iv), an industrial undertaking should be engaged in the manufacturing or produce articles or things or to operate it’s cold storage plant or plants or in the generation and distribution of power that means the words "any business of an industrial undertaking" used in sub-section (1) has to be read in conjunction with the activities of such undertaking as defined in sub-section (2) and profits and gains of only those activities could be considered as profits and gains derived of any business of an industrial undertaking, hence, the trading activities carried on by the assessee cannot be considered as eligible for deduction under section 80-IA of the Act.

(iii)This view can further be explained by the provisions of sections 80-IA and 80-IB of the Act brought on statute subsequently in the place of the then existing section 80-IA wherein it has been stated that "where the gross total income of an assessee includes any profits and gains derived by the undertaking or enterprise from any business referred in sub-section (4) or referred to in sub-section (3) to (11) to (11B) respectively. We further find that as per the provisions of sub-section (5) of section 80-IA of the Act as it stood at the relevant point of time and sub-section (1) of section 80-IA brought on statute subsequently and sub-section (3) to (11B) of section 80-IB of the Act refer to the profits and gains derived from such industrial undertaking or other specified businesses are only eligible for computing the quantum of deduction which could be allowed to the assessee and if these provisions are read together with sub-section (1) of respective sections then, it becomes amply clear that the deduction is eligible only on profits and gains derived from such businesses and not from any other activities which may be attributable or incidental to manufacturing activity or which may be carried on simultaneously by the industrial undertaking.

20. Thus, in view of above discussion, we hold that assessee is not entitled for deduction under section 80-IA of the Act on the profits of trading activities for all the years under consideration.

21. To sum up, all the appeals of the assessee stand dismissed.