These three appeals in the case of M/s Shree Balaji Alloys, Kathua and M/s Pee Ell Alloys Unit-II, Jammu and M/s Ravenbhel Healthcare (P) Ltd., Jammu, filed by different assessees and one appeal by the Revenue in ITA No. 302/Asr/2009, are directed against the different orders of CIT(A), Bathinda, dt. 25th Feb., 2009, 4th Feb., 2009 and 25th March, 2009 respectively, passed under s. 250(6) of the IT Act, 1961 (hereinafter referred to in short, "the Act"), for the asst. yr. 2005-06. As the issues involved in these appeals are identical except variation in amounts, these were heard together and are being disposed of by this common order, for the sake of convenience.

2. In ITA No. 255/Asr/2009, the assessee has raised following grounds of appeal:

"1. That on the facts and in law, the orders passed by the AO, as well as by the learned CIT(A) are both illegal, invalid and void ab initio and bad in law and are liable to be cancelled.

2. The appellant denies his liability to tax as determined and computed and the manner in which it has been so determined or computed.

3. The CIT(A) has erred on facts and in law in upholding the action of the learned AO in making the impugned addition of Rs. 2,65,19,672 on account of excise duty refund by treating it as a revenue receipt and income of the appellant and not allowing the claim of deduction under s. 80-IB of the IT Act on this.

4. That on the facts and in law the learned CIT(A) erred in upholding that the excise duty refund of Rs. 2,65,19,672 received by the assessee was not derived from the industrial undertaking and thus was not eligible for claim of deduction under s. 80-IB of the IT Act, 1961. It is prayed that the deduction under s. 80-IB may be allowed at Rs. 2,65,19,672 as claimed.

5. That on the facts and in law the learned CIT(A) erred in upholding that the interest subsidy of Rs. 2,10,695 received by the assessee was not derived from the industrial undertaking and thus was not eligible for claim of deduction under s. 80-IB of the IT Act, 1961. It is prayed that the deduction under s. 80-IB may be allowed at Rs. 2,65,19,672 as claimed.

6. That on facts and in law the learned CIT(A) erred in upholding the levy of interest of Rs. 31,05,347 under s. 234B of the IT Act, 1961, No interest under s. 234B of the IT Act, 1961 was called for and the learned CIT(A) should have deleted the same. Alternatively interest charged under s. 234B is very high and excessive.

7. That the appellant prays for leave to add, alter, amend and/or vary the grounds of appeal at or before the time of hearing of the appeal.

8. That the appellant craves leave and sanction to file additional evidence, if so, required for proper prosecution of the case, based on facts and circumstances, which has not been or could not be adduced or filed before the lower authorities either because proper and sufficient opportunity/time was not provided or because it was not solicited or its need was not provided or because its need was appreciated."

2.1 The additional grounds raised by the assessee vide letter dt. 29th June, 2009 in this appeal are reproduced hereunder :

"1. That on the facts and circumstances of the case and in law refund of excise duty amounting to Rs. 2,73,25,405 is a capital receipt not liable to tax under the provisions of the IT Act, 1961 ('the Act').

2. That on the facts and circumstances of the case and in law interest subsidy amounting to Rs. 2,10,695 is a capital (receipt) not liable to tax under the provisions of the Act.

3. That the CIT(A) erred on facts and in law in holding that excise duty paid is debited to the manufacturing/trading account without appreciating that excise duty paid and refunded by the Central Excise Department is debited to the Central excise duty receivable account."

3. The grounds raised in ITA No. 209/Asr/2009 read as under:

"1. The learned CIT(A) and the AO have erred on facts and in law in passing the impugned order which is contrary to law, equity and justice and facts and material on record, arbitrary, based on conjectures and surmises.

2. That the appellant denies his liability to tax as determined and computed and the manner in which it has been so determined or computed.

3. That the CIT(A) erred on facts and in law in upholding the action of the learned AO in making the impugned addition in total or to the extent of:

(a) Rs. 2,26,70,986 on account of excise duty refund by treating it as a revenue receipt and income of the appellant and not allowing the claim of deduction under s. 80-IB of the IT Act, on this.

4. That on facts and in law the AO has erred in levying interest under s. 234B of the ITAct.

5. The appellant craves leave to and permission to add, to alter or delete any of the grounds of appeal at any time upto the final decision of the appeal.

6. That the appellant craves and sanction to file additional evidence, if so required for proper prosecution of the case, based on facts and circumstances, which has not been or could not be adduced or filed before lower authorities either because proper and sufficient opportunity/time was not provided or because it was not solicited or its need was not provided or because it was not solicited or its need was appreciated."

3.1 The additional grounds raised in this appeal vide letter dt. 2nd July, 2009 are reproduced hereunder :

" 1. That on the facts and circumstances of the case and in law refund of excise duty amounting to Rs. 2,26,70,986 is a capital receipt not liable to tax under the provisions of the IT Act 1961 ('the Act').

2. That the CIT(A) erred on facts and in law in holding that excise duty paid is debited to the manufacturing/trading account without appreciating that excise duty paid and refunded by the Central Excise Department is debited to the central excise duty PLA account."

4. The grounds of appeal and additional grounds of appeal raised by the assessee in ITA No. 305/Asr/2009, in the case of Ravenbhel Healthcare (P) Ltd., Jammu, are similar to the grounds of appeal as raised in ITA No. 255/Asr/2009 in the case of Shree Balaji Alloys, Kathua and in ITA No. 209/Asr/2009, in the case of M/s Pee Ell Alloys Unit-II, Jammu. Therefore, we do not consider it essential to reproduce the same.

5. At the outset, it is pertinent to mention that the learned Authorised Representative, for the assessee, Shri Ajay Vohra stated that the arguments, contentions and submissions made in the appeal, in the case of Shree Balaji Alloys, Kathua, in ITA No. 255/Asr/2009, for the asst. yr. 2005-06, are also applicable to the appeals filed in the case of M/s Pee Ell Alloys Unit-II, Jammu, in ITA No. 209/Asr/2009 and Revenbhel Healthcare (P) Ltd. in ITA No. 305/Asr/2009 for the same assessment year, as the issues including the additional grounds of appeals raised in these appeals are similar. The learned Authorised Representative, thus, argued the appeal, in the case of M/s Shree Balaji Alloys, Kathua, in ITA No. 255/Asr/2009 and his submissions and arguments would be adopted in other appeals also i.e. in ITA No. 209/Asr/2009 and ITA No. 305/Asr/2009.

6. The brief and undisputed facts of the case, as culled out from the relevant records and submissions of the assessee are that the assessee is a partnership concern. It had set up an industrial undertaking at Kathua, in the State of J&K. The assessee-firm is engaged in the business of manufacture and sale of aluminium alloy and zinc alloy ingots. The return of income, for the asst. yr. 2005-06, was filed on 29th March, 2006, declaring nil income, as the assessee-firm claimed deduction of Rs. 2,65,19,672 under s. 80-IB of the Act. The assessment was framed, for the impugned assessment year under s. 143(3) of the Act, on 30th Nov., 2007, determining total income of Rs. 2,65,19,672. The AO treated the refund of excise duty and interest subsidy, as income not eligible for deduction under s. 80-IB of the Act. The findings of the AO were upheld by the learned CIT(A), vide order, dt. 25th Feb., 2009. Aggrieved by the order of the learned CIT(A), the assessee filed the present appeal before us.

7. The assessee, vide letter dt. 29th June, 2009, raised the additional grounds of appeal, as reproduced above. In the additional grounds of appeal, the assessee contended that the excise duty refund amounting to Rs. 2,73,25,405, is a capital receipt, not liable to tax under the provisions of the Act. Similarly, it was also contended that interest subsidy of Rs. 2,10,695, is a capital receipt, not liable to tax under the provisions of the Act. On the admission of additional ground of appeal, it was submitted by the learned Authorised Representative for the assessee that the assessee-firm had set up an industrial undertaking, in Kathua, in the State of J&K. The Government of India announced 100 per cent excise duty exemption to an industrial undertaking set up in the State of J&K, for a period of 10 years, from the date of commencement of commercial production, with a view to encouraging industrial development, in the J&K State. It was contended in the written submission that such exemption was granted for the purpose of industrial development of the State, in terms of the Memorandum No. 1 (13)/2000-NER, dt. 14th June, 2002. It was, further, argued that in the return of income, the impugned receipts were not claimed as a capital receipt and were included in the taxable profits of the eligible industrial undertaking. The learned counsel for the assessee, Shri Ajay Vohra contended that the issue of taxability of excise duty refund and interest subsidy, under the provisions of the Act is purely a legal issue and is raised by the assessee, as advised of the correct position of law and the omission to raise the same earlier is neither wilful nor deliberate. The learned counsel placed reliance for admission of additional grounds on the decision of the Hon'ble Supreme Court, in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229ITR 383 (SC).

7.1 The learned counsel in the written submission referred to the impugned memorandum dt. 14th June, 2002, to substantiate his contention that the excise duty refund and interest subsidy, are capital receipts. To support his contention, the learned counsel, for the assessee, placed reliance on the decision of the Hon'ble Supreme Court in the case of V.S.S.V Meenakshi Achi v. Commissioner Of Income Tax, Madras [1966] 60 ITR 253 (SC) which lays down that incentive/subsidy by whatever name called, is determined by the purpose, for which the subsidy is granted and not by the form/mode/ manner, in which the subsidy is received /disbursed.

7.2. It was, further, argued by the learned counsel for the assessee, Shri Ajay Vohra, that the above principle has been reiterated by the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC). It was also highlighted that the Hon'ble Supreme Court, in the said decision referred to the decision of the Full Bench of the Kerala High Court, in the case of CIT v . Ruby Rubber Works Ltd. [1989] 78 CTR (Ker)(FB) 75 : [1989] 178 ITR 181 (Ker.)(FB), which was affirmed by the Hon'ble Supreme Court, in the case of Kalpetta Estates Ltd. v. Commissioner Of Income Tax, Cochin. [1996] 221 ITR 601 (SC). The Hon'ble Supreme Court also referred to the decision of Hon'ble Bombay High Court, in the case of Sadichha Chitra v. Commissioner Of Income-Tax. [1991] 189 ITR 774 (Bom).

7.3. The learned counsel for the assessee, further, placed reliance, on the decision of the Hon'ble Supreme Court, in the case of Ponni Sugars & Chemicals Ltd. v . CIT [2008] 306 ITR 392 (SC), contending that the ruling of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra), has been followed in the decision of Ponni Sugars & Chemicals Ltd. (supra). In a nutshell, he stressed on the 'purpose test' for ascertaining the true nature of such receipts. The learned counsel also placed reliance, on the decision of CIT v . Balarampur Chini Mills Ltd. [1999] 238 ITR 445 (Cal.). The learned counsel for the assessee also placed reliance, on the following decisions :

(1) CIT v . National Cooperative Consumers' Federation Ltd. [2002] 254 ITR 599 (Delhi);

(2)CIT v . Madurantakam Cooperative Sugar Mills Ltd. [2003] 263 ITR 388 (Mad);

(3)Vishnu Sugar Mills Ltd. v. Dy. CIT [1998] 62 TTJ (Cal) 275;

(4)Addl. CIT v . Chodavaram Coop. Sugars Ltd. [2003] 86 ITD 139 (Visakha);

(5)Modi Industries Ltd. v. ITO [2002] 120 Taxman 55 (Delhi);

(6)Honda Siel Cars India Ltd. (ITA No. 5577/Del/2004) (Delhi Bench);

(7)Dy. CIT v . Reliance Industries Ltd. [2004] 88 ITD 273 (Mumbai)(SB).

The learned counsel for the assessee also placed reliance on the Circular No. 142, dt. 1st Aug., 1974.

7.4 It was contended by him that in view of the avowed object of the schemes applicable to the State of J&K, to promote industrialization of the backward areas, generation of employment and overall development of the State of J&K, such incentives in the form of excise duty and interest subsidy are clearly, in the nature of capital receipts and, hence, not chargeable to tax. It was argued that the learned CIT(A), has misconstrued the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra), while holding that such incentives are revenue receipts, because the same were received, after the commencement of commercial operations. To rebut the findings of the learned CIT(A), the learned counsel for the assessee extensively quoted and relied upon the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra). Finally, it was contended by the learned counsel that the impugned receipts are capital in nature.

8. The learned Departmental Representative, Shri Girish Dave, on the other hand, vide written submissions dt. 23rd Oct., 2009 contended that the application made for admission of additional grounds does not assign any reason or basis, for claiming the impugned receipts of Rs. 2,73,25,405, as being of capital in nature. No material has been adduced to substantiate as to how the assessee was advised, as to the correct position in law, on the issue in question. No reason has been given by the assessee, for not claiming the same receipts as capital in nature. The memorandum of the Government of India dt. 14th June, 2002, is made the only basis for such a claim. It was pointed out that this memorandum was already available with the assessee and the said memorandum nowhere indicates that Central excise duty should be treated as capital receipt. It was, further, contended that the additional ground cannot be taken, at this stage and he placed reliance, on the decision of Hon'ble Supreme Court, in the case of Addl. CIT v. Gurjargravures (P) Ltd. (1978) 111 ITR 1 (SC). It was further argued that the Hon'ble apex Court, in the case of Jute Corporation of India Ltd. v . CIT [1991] 187 ITR 688 (SC) did not consider it necessary to overrule the view taken in the case of Gurjargravures (P) Ltd. (supra). It was contended by the learned Departmental Representative that the decision, in the case of Gurjargravures (P) Ltd. (supra) had not been overruled and still holds the field. The learned Departmental Representative, further, argued that as held, in the case of CIT v . Ramakrishna Deo (1959) 35 ITR 312 (SC), the burden of showing that a particular income is exempt lies on the assessee and the appellant, in this case has failed to discharge the same before the ITO and the CIT(A). Consequently, the issue cannot be raised, before the Bench, at this stage. It was also submitted by the learned Departmental Representative that in case the additional grounds are admitted, the same should go back to the AO, for consideration on merits, as the issue was not raised before the CIT(A) and the AO. The learned Departmental Representative placed reliance on the following decisions :

(i) Himachcd Gramin Bank v . Dy. CIT [2008] 305 ITR 163 (HP);

(ii) Abhishek Industries Ltd. v . CIT [2007] 290 ITR 655 (P&H);

(iii) Dr. (Miss) Chandrawati v . CIT [2007] 164 Taxman 24 (All).

8.1 The learned Departmental Representative, further, submitted that the complete change in the complexion of the matter is not permissible. To support his contention, he relied on the decision of the Tribunal, Special Bench, Mumbai, in the case of ICICI Bank Ltd. v. Dy. CIT [2003] 81 TTJ (Mumbai)(SB) 37 : (2003) 87 ITD 537 (Mumbai)(SB). As far as admission of additional ground in respect of interest subsidy of Rs. 2,10,695 is concerned, the learned Departmental Representative submitted that the AO dealt this issue at p. 5 of the assessment order and held that the issue is covered by the decision of the Tribunal, Amritsar Bench, in the case of Jai Saraswati Flour Mills, for the asst. yr. 2001-02, wherein it was held to be not derived from an industrial undertaking and, hence, deduction under s. 80-IB was not allowed. It was also contended by the learned Departmental Representative that in the grounds of appeal before the learned CIT(A), in Form No. 35, the assessee did not include this as a ground and only mentioned this as a fact, in the statement of facts. A mere mention in the statement of facts does not make the issue a ground of appeal, on which the learned CIT(A) would be required to adjudicate. Consequently, the learned CIT(A) did not adjudicate this issue. It was, further, contended that the ground as well as additional ground on this account do not require admission and reliance was placed on the decision of Hon'ble Rajasthan High Court in the case of Santlal Kalyani & Co. v. CIT [1995] 213 ITR 273 (Raj).

8.2 The learned Departmental Representative, further, argued and contended that the Tribunal is required to adjudicate the admission of additional ground initially and then to proceed with the disposal of the appeal as contemplated in the decision of the Hon'ble Delhi High Court, in the case of Maruti Udyog Ltd. v . ITAT [2000] 111 Taxman 491 (Delhi). It was submitted by the learned Departmental Representative, that a separate order first be passed for admission of additional grounds of appeals before disposal of the appeal.

9. Now, we proceed to discuss the contentions of the learned Departmental Representative on the issue of nature of such receipt.

9.1. The learned Departmental Representative, contended that the learned counsel for the assessee has relied upon eight cases and Board's circular, in construing such receipts as capital receipts. The learned Departmental Representative, discussed the said case laws and distinguished the same, as factually different and distinguishable. It was contended that such case laws support the contention of the Revenue and, hence, such incentives receipts are revenue in nature.

9.2. The learned Departmental Representative, discussed and deliberated the case laws extensively after referring to the facts of the case laws relied upon by the learned counsel for the assessee vis-a-vis case laws, in the present case and contended that none of the case law is applicable to the fact situation of the present case. It was also contended by the learned Departmental Representative, that the Board's Circular No. 142, dt. 1st Aug., 1974 quoted by the assessee, is confined to the scheme referred to therein and it cannot be said that it is applicable to all the future schemes introduced by the Government of India, as has been discussed and appreciated in number of case laws. It was, further, pointed out by the learned Departmental Representative, that the decisions, in the cases of Ponni Sugars & Chemicals Ltd. (supra), Ruby Rubber Works Ltd. (supra), Kalpetta Estates Ltd. (supra), Balarampur Chini Mills Ltd. (supra), Reliance Industries Ltd. (supra) and Honda Siel Cars India Ltd. (supra), have merely followed the fundamental norms and the purpose tests as laid down by the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra). Further, all these cases quoted and relied upon by the learned counsel, for the assessee, support the case of the Revenue. Therefore, none of the case laws renders any assistance to the case of the present assessee. These case laws clearly point out that in the light of 'purpose test' as laid down by the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra), the impugned receipts are revenue in nature.

10. In the rejoinder or rebuttal, the learned counsel for the assessee stated that it is settled law that there is no estoppel in law and the assessee is entitled to resile from the position wrongly taken while filing the return of income. It was argued that the objective of the assessment is to compute and assess correct income of the assessee, as per provisions of the law and not to make assessment merely on the wrong position taken by the assessee. To support his contention, the learned counsel for the assessee placed reliance on the following decisions :

(i) Commissioner Of Income-Tax v. Bharat General Reinsurance Co. Ltd.* [1971] 81 ITR 303 (Delhi);

(ii) Pt. Sheo Nath Prasad Sharma v. CIT [1967] 66 ITR 647 (All.);

(iii) Smt. Sneh Lata Jain v . CIT [2004] 192 CTR (J&K) 50;

(iv) S.R. Koshti v . CIT [2005] 276 ITR 165 (Guj);

(v) Dy. CIT v. Sanmukhdos Wadhwani [2003] 85 ITD 734 (Nag);

(vi) Jyotsna Holding (P) Ltd. v . Dy. CIT [1991] 37 ITD 430 (Delhi);

(vii) Indo Java & Co. v . IAC [1989] 30 ITD 161 (Delhi)(SB);

(viii) ITO v. G.E. Hawn [1987] 21 ITD 553 (All).

10.1. It was argued by the learned counsel for the assessee that in view of the aforesaid settled position in law, it is submitted that merely because the assessee, in the return of income, treated the excise duty recovered as a revenue receipt, under a mistaken belief/misconception of law, cannot be made the basis for treating the said receipt, as revenue receipt.

10.2. On the issue of admission of additional ground of appeal, the learned counsel for the assessee placed reliance, on the decision of the Hon'ble Supreme Court, in the case of National Thermal Power Co. Ltd. (supra), whereby in the context of powers of the Tribunal, in the matter of admission of the additional grounds of appeal, it was held that where the Tribunal is only required to consider the question of law, arising from the facts, which are on record, the question should be allowed to be raised, when it is necessary, to correctly assess the tax liability.

10.3. The learned counsel for the assessee, further, contended that the facts of the case are squarely covered by the decision of the Hon'ble Supreme Court, in the case of National Thermal Power Co. Ltd. (supra). It was submitted by the learned counsel that in the application filed by the assessee, for admission of additional grounds, it has been clearly stated that the additional grounds are being raised, on being recently advised of the correct position of law. It was, further, argued by the learned counsel for the assessee that the issue of taxability of refund of excise duty is a fundamental issue, which goes to the roots of the matter and, hence, the same must be decided, for the purpose of determining the correct tax liability of the assessee, as held by the Hon'ble Supreme Court, in the case of NTPC Ltd. (supra). It was, further, submitted by the learned counsel, for the assessee that the Hon'ble Supreme Court, in the case of NTPC Ltd. (supra), followed the decision of Three Judges Bench of the Hon'ble Supreme Court, in the case of Jute Corporation of India Ltd. (supra). In that case, the Hon'ble Supreme Court, distinguished the earlier decision of the two Judges Bench of the Supreme Court, in the case of Addl. CIT v. Gurjargravures (P) Ltd. (supra), which has been heavily relied upon the learned Departmental Representative, in the present case. It was highlighted by the learned counsel that their Lordships in the case of Jute Corporation of India Ltd. (supra) held in clear words that there appears to be no reason to justify curtailment of power of the AAC, in entertaining additional ground of appeal raised by the assessee. Their Lordships, further, observed that the decision of Gurjargravures (P) Ltd. (supra) was based on specific facts of that case.

10.4. It was, further, contended by the learned Authorised Representative that in the present case, the assessee raised additional grounds purely as a legal issue. The additional grounds of appeal are firstly, purely a legal issue and the relevant notification/scheme required to decide the same are already available on record and, consequently, the facts of the assessee's case falls squarely within the ambit of the decision of the Supreme Court, in the case of Jute Corporation of India Ltd. (supra). It was argued that the decision of Gurjargravures (P) Ltd. (supra) is not applicable to the facts of the present case, as the learned CIT(A), on p. 17 of his order, has given a specific finding, on the aforesaid issue of- taxability of excise duty recovered by treating the same as revenue receipt, by following the decision in the case of Sahney Steel & Press Works Ltd. (supra).

10.5. The learned counsel for the assessee submitted that the reliance is placed on the following decisions, wherein it has been consistently held that the legal issue can be raised for the first time before the Tribunal, even though, not raised before the lower authorities :

(i) Orissa Cement Ltd. v . CIT [2001] 250 ITR 856 (Delhi);

(ii) Commissioner Of Income-Tax v. Eveline International [2000] 243 ITR 493 (P&H);

(iii) Steel Ingots (P) Ltd. v. CIT [1996] 135 CTR (MP) 3 79;

(iv) Rashi Leathers (P) Ltd. v . CIT [1999] 240 ITR 702 (Mad);

(v) CIT v. Ashok Leyland Ltd. [2002] 253 ITR 425 (Mad.);

(vi) Commissioner Of Income-Tax v. A.M Moosa, Bharath Sea Foods [2004] 191 CTR (Ker) 441 ;

(vii) Zakir Hussain v . CIT [2006] 202 CTR (Raj) 40;

(viii) Dy. CIT v. Turquoise Investment & Finance Ltd (2008) 299 ITR 143 (MP);

(ix) Abhishek Industries Ltd. (supra);

(x) Velji Tokarshi Vikmani v . ITO [1999] 68 ITD 521 (Mumbai);

(xi) Shri Rama Multi Tech Ltd. v.. Asstt. CIT [2005] 92 TTJ (Ahd) 568;

(xii) Kanoi Industries (P) Ltd. v . Dy. CIT (2007) 289 ITR 76 (Kol)(AT);

(xiii) Jethalal K. Morbia v. Asstt. CIT [2007] 109 TTJ (Mumbai) 1 ;

(xiv) Ashwani Kumar v. Asstt. CIT [2007] 110TTJ(Asr) 890;

(xv) Commissioner Of Income-Tax v. Ruchira Papers Ltd. [2007] 110 TTJ (Chd) 995 .

10.6. The learned counsel for the assessee, also contended that the reliance placed by the learned Departmental Representative, on the decision of Mcruti Udyog Ltd. vs. ITAT (supra), that in case the Hon'ble Tribunal admits the additional grounds of appeal, in the present case, then a prior separate order is required to be passed by the Tribunal, adjudicating the admission of additional ground of appeal. It was, further, contended that such contention of the Departmental Representative is wholly misplaced, as the Hon'ble Delhi High Court, in the given case held that the Tribunal is required to indicate the reasons, for admitting the additional grounds of appeal and then take up the appeal for disposal. No requirement has been prescribed in the said decision, for passing prior separate order, on admission of additional ground. In view of the above, the additional grounds raised by the assessee being purely a legal issue, which has to be decided on the basis of facts available on record, needs to be adjudicated and decided on merits.

10.7. It was pointed out by the learned counsel for the assessee that at the stage of admission of additional ground of appeal, the issue of discharging of burden, in respect of particular income, being exempt is not at all relevant. The learned counsel, for the assessee, further, submitted that the contention of the learned Departmental Representative, that if the additional grounds taken by the assessee are admitted, the matter should go back to the AO, for consideration on merits, as without substance. In this context, it is respectfully submitted that is stated above, the learned CIT(A), on p. 17 (3rd last para), has given a specific finding, on the aforesaid issue of taxability of excise duty recovered. In the aforesaid circumstances, as definite finding has already been recorded by the first appellate authority, on the issue now being raised by the assessee, no useful purpose will be served, in restoring the issue back to the AO.

10.8. The learned counsel for the assessee, further, stated that the very issue of taxability of excise duty refund is purely a legal issue and fundamental to determination of the correct tax liability of the assessee. The assessee is seeking to raise the additional grounds as abundant caution, being legal issue raised by way of additional grounds of appeal though already encompassed in ground Nos. 2 and 3 before the Tribunal and not at all seeking to change the complexion of the matter, as contended by the learned Departmental Representative, after placing reliance on the decision of the Tribunal, Special Bench, Mumbai in the case of ICICI Bank Ltd. (supra). It was submitted by the learned counsel that the decision is not at all applicable to the facts of the present case, as the issue now being raised is purely a legal issue and had been considered and decided by the learned CIT(A) [p. 17, 3rd last para of the CIT(A)'s order in question]. Further, it was pointed out that the facts and documents required for adjudicating the same are already available, on the record of the lower authorities. In view of this, consideration of the issue now being raised by the assessee is not, therefore, barred in law and, even otherwise, would not, in any manner, change the factual complexion of the matter. The learned counsel, further, placed reliance on the decision of the Tribunal, Delhi Bench, in the case of Slocum Investment (P) Ltd. v . Dy. CIT [2007] 106 ITD 1 (Delhi), highlighting the distinction between the right of the assessee and the Revenue to raise additional grounds.

11. We have carefully perused and considered the written submissions made in the course of present appellate proceedings and the case laws relied upon therein, facts of the case, paper books filed by the parties and also the relevant records. It is an undisputed fact that the impugned office memorandum dt. 14th June, 2002, Notification Nos. 56 of 2002-CE and 57 of 2002-CE both dt. 14th Nov., 2002 and various circulars and clarifications connected with the scheme, introduced in the State of J&K, for the purpose of its development, were available on the relevant records, before the AO and the CIT(A). Both the AO and the CIT(A) had considered such scheme and gave their respective findings, after appreciation of the same. The reliance placed by the learned counsel, for the assessee, for admission of additional ground, on the decisions of Hon'ble Supreme Court, in the cases of National Thermal Power Co. Ltd. (supra) and Jute Corporation of India Ltd. (supra), clearly covers the fact situation of the present case. The contention of the learned counsel for the assessee that the additional ground of appeal is purely a legal issue and the facts of the issue in question are already available on record, in the form of relevant notifications and scheme remains unrebutted by the Revenue. Consequently, in view of the submissions of the learned counsel for the assessee, we are of the considered opinion that the issue of admission of additional grounds falls within the ambit of the ratio of the decisions of the Hon'ble Supreme Court, in the cases of Jute Corporation of India Ltd. (supra) and National Thermal Power Co. Ltd. (supra). The issue of additional grounds is purely a legal issue, which directly emerges from the notifications and scheme, which are integral part of the assessment record and record before the CIT(A). Such legal issue goes to the roots of the matter and is essential for determination of the correct tax liability of the assessee. We have carefully perused and considered the-decision reliedupon by the learned Departmental Representative, in the case of ICICI Bank Ltd. (supra); as also the decision of Hon'ble Delhi High Court, in the case of Maruti Udyog Ltd. (supra). We find that there is no requirement laid down by the Hon'ble Delhi High Court, in the case of Maruti Udyog Ltd. (supra) to decide the admission of additional grounds, by way of separate order, prior to the adjudication of the appeal. The decision mandates recording of reasons for admission of additional grounds. Similarly, the decision of 'Special Bench' Mumbai, in the case of ICICI Bank Ltd. (supra), is not applicable to the fact situation of the present case, as the issue now being raised by the assessee is purely a legal issue which was considered and decided by the CIT(A), as rightly submitted by the asjessee's counsel, Shri Ajay Vohra, in the impugned appellate order (at p. 17). It would be pertinent to reproduce the findings of the learned CIT(A), wherein he had clearly referred to and considered the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra) and following the said decision gave categorical findings that the impugned central excise duty refund is a revenue receipt. The relevant part of the impugned appellate order of the CIT(A), is reproduced hereunder :

"With regard to the submission of the appellant that the refund of Central excise duty is not an income, it would also be pertinent to refer to the judgment of Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd. v . CIT [1997] 228 1TR 253 (SC), wherein it has been held that whenever a subsidy or assistance is given by the Government in order to carry on the business i.e. , after the commencement of business, being operational aid, it is a revenue receipt. It is only when the incentive, aid or subsidy is given to set up the industry, then only it can be said to be a capital receipt. Following this principle sales-tax refunds were considered to be revenue receipt. Sales-tax was first required to be paid to the Government. Then 10 per cent of the same was refunded under the scheme in the same manner as in the case of the eligible manufacturers of J&K where 100 per cent of excise duty paid in cash is refunded. This refund was held to be revenue receipt. The relevant paras of the above-referred judgment are reproduced below:

'By no stretch of imagination can the subsidies whether by way of refund of sales-tax on relief of electricity or water charges be treated as an aid to the setting up the industry of assessee. As we have seen earlier, the payments were to be made only if any when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of production in assessee's factory. The subsidies are operational and not capital subsidies……………

……….If any subsidy is given, the character of the subsidy in the hands of the recipient—whether revenue or capital—will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is: quite immaterial……………

……….If the purpose is to help assessee to set up its business or complete a project as in Seacham Harbour Dock Co.'s case [1931] 16 Tax Cases 333 (HL), the monies must be treated as having been received for a capital purpose. But if monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of trade…………..

………A Division Bench of the Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd. v. CIT [1991] 191 ITR 518 (Cal), also examined a scheme of refund of sales-tax framed by the Andhra Pradesh Government to assist newly set up industries. There the assessee had set up a cement plant. The Calcutta High Court held the receipt of the incentives from the State Government was incidental to carrying on the business of the assessee. Such subsidies were received year after year by refund of sales-tax. The benefit was received in the course of carrying on the assessee's business. It was a benefit incidental to its business. The subsidy was not intended to be a contribution towards capital outlay of the industry. Therefore, it was held that the subsidy received by the assessee in that case could not be regarded as anything but a revenue receipt.'

Thus, following the law laid down by the Hon'ble Supreme Court in the above-referred case, it has to be inferred that the refund of excise duty is a revenue receipt, as this incentive is given as an operational assistance by the Government, which is available only after the commencement of production in the course of carrying on the business."

11.1 A perusal of the above extracted relevant part of the impugned appellate order passed by the CIT(A) incorporating specific findings, reveals that the CIT(A) has considered the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra), in the specific context of refund of central excise duty and adjudicated the issue by holding such receipt as revenue receipt. After extensively quoting the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra), the learned CIT(A), in the last para of the above reproduced extract has categorically held that following the law as laid down by the Hon'ble Supreme Court, in the above case, it has to be inferred that the refund of central excise duty is a revenue receipt, as this incentive is given by the Government, which is available only after the commencement of the production, in the course of carrying on the business. In view of this, the contention of the Revenue that the learned CIT(A), has not considered the issue raised by the assessee, in the additional grounds is without substance and factually incorrect. Consequently, the decision quoted and relied upon by the learned Departmental Representative, in the case of Addl. CIT vs. Gurjargravures (P), Ltd. (supra) is also not applicable to the facts of the present case, as the learned CIT(A), has clearly referred to and considered the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra) and given categorical finding that the excise duty refund is a revenue receipt. In view of the above discussions, it is evident that the additional grounds raised by the assessee sprout from the relevant records available, before both the AO and the CIT (A). Both the AO and the CIT (A) had carefully considered the relevant scheme introduced in the State of J&K, for the purpose of industrialisation of the State. Accordingly, the additional grounds raised by the assessee are borne out of the facts available on record before both the lower authorities. The additional grounds raised by the assessee represent purely a legal issue, which cannot be divorced from the fact-situation of the present case, being integral part of the same. In view of this, the additional grounds raised by the assessee are fundamental to the determination of the correct tax of the assessee. Further, the contention of the Revenue that the additional ground would change the factual complexion of the matter, is not in consonance with the factual position of the present case, as the issue has been extensively considered and adjudicated by the CIT(A), as is evident from the above reproduction of the relevant part of the impugned appellate order.

11.2. The fundamental principle regarding admission of additional ground was laid down by the Hon'ble Delhi High Court, in the case of Taylor Instrument Company (India) Ltd. v. CIT [1992] 198 ITR 1 (Delhi), as "Under Art. 265 of the Constitution, the State is entitled to recover or realise only that tax which is imposed in accordance with law. It is the duty of the State to see that justice is done to the citizens. Therefore, shelter shouldn't ordinarily be taken behind procedural technicalities, with a view to defeating the claim of the assessee". It was, further, held by the Hon'ble Court as "that as an appellate authority and specifically in view of r. 11 of the ITAT Rules, 1963, the Tribunal had jurisdiction to allow such a ground to be raised. The question which was raised was a pure question of law and, normally, where no fresh evidence was required to be taken, there was no reason why the additional ground shouldn't be entertained-Jute Corporation of India Ltd. v . CIT [1991] 187 ITR 688 (SC) applied."

11.3. It is pertinent to mention here that the additional grounds are origin to the facts already available on record, before both the AO and the CIT(A), in the form of various notifications and Government memorandum. Further, such additional grounds require no further enquiry, into the facts for adjudication thereof, as the relevant and material facts are already on record. The AO disallowed the claim of the assessee after considering the said scheme. Similarly, the learned CIT(A), extensively referred to and appreciated various notifications, clarifications and Government memorandum relevant for the State of J&K and recorded his findings thereon. The learned CIT(A), considered the applicability of the landmark decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra) and held that the excise duty refund is revenue receipt. The learned CIT(A), also reproduced the relevant and operative part of the said decision of the Hon'ble Supreme Court and after consideration of the same recorded his finding. Thus, there is no legal and factual merit, in the contention of the Revenue that the issue has not been considered by the CIT(A). As CIT(A) is superior IT authority to the AO, as per s. 116 of the Act, including in the discharge of statutory functions and he had considered the issue in question, by following the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra), it would not be in consonance with the scheme of the Act, to refer the issue to AO, for fresh adjudication, as sought by the learned Departmental Representative.

11.4. In view of the above legal and factual discussions, we are of the considered opinion that the additional grounds raised by the assessee are borne out of the records available before the AO and the CIT(A). Further, the CIT(A), also gave findings, on the issue of refund of excise duty, in the light of the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra). Having regard to the above legal and factual discussions and following the decision of the Hon'ble Supreme Court, in the case of National Thermal Power Co. Ltd. (supra) and Jute Corporation of India Ltd. (supra), we admit the additional grounds raised by the assessee and consequently consider and adjudicate the same.

11.5. Now, we turn to consider and adjudicate the additional grounds of appeal on merits.

11.6. We have carefully perused and considered the case laws relied upon by the assessee, to support his contention that the impugned receipts are capital in nature. We are of the considered opinion that the case laws relied upon by the assessee are not applicable to the fact-situation of the present case, being factually different and distinguishable, as discussed, hereinunder :

(i) In the case of Ponni Sugars & Chemicals Ltd. (supra), the Hon'ble Supreme Court followed and applied the test laid down, in the case of Sahney Steel & Press Works Ltd. (supra). The ratio laid down by the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra) has been followed and reiterated by the Hon'ble apex Court, in the case of Ponni Sugars & Chemicals Ltd. (supra) and the same has not been diluted in any form and held that the incentive had to be used for repayment of loans taken by the assessee to set up new unit or for substantial expansion of existing unit, to be utilised for repayment of loan. Consequently, subsidy received by the assessee was not in the course of trade but was of capital nature. The Hon'ble Supreme Court examined the schemes in the case of Ponni Sugars & Chemicals Ltd. (supra) and culled out four factors, therefrom, which are reproduced hereunder :

(i) Benefit of the incentive subsidy was available only to new units and to substantially expanded units not to supplement the trade receipts.

(ii) The minimum investment specified was Rs. 4 crores for new units and Rs. 2 crores for expansion units.

(iii) Increase in the free sale sugar quota depended upon increase in the production capacity. In other words, the extent of the increase of free sale sugar quota depended upon the increase in the production capacity.

(iv) The benefit of the scheme had to be utilized only for repayment of term loans.

On the basis of analysis of the Scheme, the Hon'ble Supreme Court held that the subsidy given was of capital account, as the loan was given to make repayment and incentive was given for utilisation of the same for repayment of loans taken by the assessee,, to set up new unit or expansion or substantial expansion of existing unit.

(ii) In the case of Ruby Rubber Works Ltd. (supra), the Hon'ble Kerala High Court held that the subsidy was received for replanting rubber trees and the subsidy was not given for upkeep or maintenance of mature or immature rubber plants. The subsidy received was used to acquire an asset by replanting high yield variety of rubber trees and, hence, the same is not a revenue receipt.

Further, the Hon'ble Kerala High Court in the case of Ruby Rubber Works Ltd. (supra), held as under :

"The subsidy scheme makes it very clear that the amount of subsidy has to be spent for the acquisition of an asset by replanting rubber plants of high yielding varieties."

"It is difficult for us to say that the subsidy given to the rubber growers for replanting is not for a beneficial purpose. We feel certain that it is for the definite purpose to encourage rubber growers to undertake replanting of old and uneconomic plantations and for that Board is offering them assistance under its replantation subsidy scheme. This economic assistance is offered by the Board under stringent conditions for implementing a scheme designed to achieve development of the rubber plantation industry of efficient and economic lines. It is done to promote public interest. We find it difficult to hold that the replantation subsidy given to the growers is to 'swell' the profits of the assessees. In this view, with great respect, we are unable to concur with the Division Bench decision reported in CIT vs. Mcdayalam Plantations Ltd. [1987] 168 ITR 63 (Ker)."

(iii) The Hon'ble Supreme Court in the case of Kalpetta Estates Ltd. vs. CIT (supra), approved the decision of Hon'ble Kerala High Court, in the case of Ruby Rubber Works Ltd. (supra) and held that the rubber replanting subsidy is not a revenue receipt The Hon'ble apex Court further held that in view of the concession by the Revenue, the replantation subsidy received by the planters from Rubber Board could not be treated as a revenue receipt and taxed as capital. It is added that in the case of Ruby Rubber Works Ltd. (supra), the subsidy had to be spent for the acquisition of asset by replanting rubber of high-yielding variety. Therefore, the Hon'ble Supreme Court, has approved the Full Bench decision of the Hon'ble Kerala High Court in the case of Ruby Rubber Works Ltd. (supra) as the subsidy was for replantation.

(iv) Balarampur Chini Mills Ltd. (supra) :

In this case, the Hon'ble Court, after referring to the case of Sahney Steel & Press Works Ltd. (supra), held that "Thus their Lordships made it clear that whether it is a revenue receipt or capital receipt, it is to be seen for which purpose it has been given to the assessee. If it is given for running the day to day business, that is a revenue receipt. If it is given to meet the capital cost of asset, then it is a capital receipt. The admitted fact in this case is that the incentive has been received by the assessee for payment of the loan, which was taken for expansion of plant and machinery—a capital asset".

(v) The learned counsel for the assessee placed reliance on the decision of Tribunal, Special Bench, Mumbai, [2004] 88 ITD 273 (Mumbai)(SB) (supra), wherein the Hon'ble Special Bench held that if the subsidy is given for the setting up or expansion of the industry in a backward area, it will be capital, irrespective of the modality or the source of funds through or from which it is given. The relevant part of the decision is reproduced hereunder :

"'The question for consideration was whether the Tribunal in the case of the assessee for the asst. yr. 1985-86, viz. Reliance Industries Ltd. case (supra) had correctly appreciated and interpreted the ratio of the decision of the Supreme Court in Sahney Steel & Press Works Ltd.'s case (supra). On a careful reading of the order of the Tribunal in the case of the assessee, it appeared that the ratio of the judgment in Sahney Steel & Press Works Ltd.'s case (supra) had been correctly interpreted and appreciated by the Bench."

(vi) The learned counsel for the assessee placed reliance on the decision of Tribunal, Delhi Bench in the case of Honda Siel Cars India Ltd v. Asstt. CIT (Tribunal, Delhi 'F' Bench order dt. 26th Sept., 2008 in ITA No. 5577/Del/2004). In this case, the issue before the Bench was whether the learned CIT(A) erred on facts and law in upholding the action of the AO in bringing to tax as revenue receipt a sum of Rs. 3,00,81,697, being grant received by the assessee from Greater Noida Industrial Development Authority (in short 'GNIDA') in respect of premium paid/payable by the assessee towards the land allotted on lease by GNIDA. The Hon'ble Tribunal after examining this scheme held as under :

"6.3 We have heard the rival submissions. A perusal of the Industrial Policy of, 1998 UP specifically identified the automobile industry as one of the thrust areas for development. The said Industrial Policy was a time bound action plan and was monitored at the Chief Minister's level. A perusal of the scheme for industrial plots shows that the incentive scheme was given to a unit which commences the production within the specified time limit. In the said scheme capital subsidies provisions have also been provided for. It is further notified that as per the scheme the plot was allotted on lease basis. The plots that had been leased could be used only for the specified projects as envisaged in the application form. The scheme also provides that the allottee is required to give employment to at least 5 per cent of the total employment in the unit to those whose land has been acquired by Greater NOIDA. These facts put together shows that the incentive that has been given for the commencement of production is not an incentive in connection with the actual business activities of the assessee. The incentive is being given for early utilization and early execution of the specified projects as envisaged in the application form as also the Industrial Policy of 1998 of the State of UP. The fact that the allottee is required to give employment to at least 5 per cent of the total employed in the unit to those whose land has been acquired by Greater NOIDA gives further emphasis for the purpose of incentive. If the project envisaged starts production the commitment of the State for employment of the person, whose land has been acquired for the development of the industrial policy of the State get assisted. By this incentive the assessee does not get any specific benefit in its production or its business per se. This is because the land does not belong to the assessee but is a leasehold land and all that the assessee would benefit from the incentive is the reduction in the premium payable / paid for the said land. It does not assist the assessee by financial assistance in the test of the raw materials, subsidies in the taxes, or deferred revenue benefits. This being so, obviously the incentive as received by the assessee was not a package given to the assessee to run more profitably from the date, of commencement of production for any period of time nor was it a helping hand provided to the assessee during the early days to enable them to a competitive on a level with other established industries. In the present case it is noticed that this is an incentive which was given by the Government Department with the idea that by its use men might be kept in employment and was simply to enable them to carry out the work upon which they were engaged with the idea that by doing so people might be employed. It is noticed that the incentive is an amount paid by the Government with the expressed purpose in line with its industrial policy as also, with the express purpose benevolent and beneficial in the public interest and it had nothing to do with the assessee in the sense of acquiring profits or gains of the trade and consequently it cannot be held as anything but a capital receipt. In the circumstances the assessing authority is directed to treat the incentive received by the assessee from GNIDA for the sum of Rs. 3,00,81,697 as a capital receipt. In the circumstances this issue is decided in favour of the assessee and the orders of the learned CIT(A) and the assessing authority on this issue are reversed."

(Emphasis, italicized in print, supplied)

From the decision, it follows that in this case, Hon'ble Tribunal was guided by the facts that:

1. There was a specific purpose for which the incentive was given.

2.The plots which were allotted were allotted on lease and the land did not belong to the assessee. What the assessee got was a reduction in the premium paid/payable.

2.1 The assessee was required to fill up an application form so that the project could be monitored by the State Government.

3.Incentive did not assist the assessee by financial assistance in the cost of raw materials, subsidies in the taxes or deferred revenue benefits.

4.It was not a package given to the assessee to run more profitably nor was it a helping hand during the early days to enable them to a competitive on a level with other established industries.

The facts in the present case are entirely different as can be seen when compared with the case of Honda Siel Cars India Ltd. 's case (supra).

(vii) The learned counsel for the assessee referred to the decision of the Hon'ble Supreme Court, in the case of V.S.S.V. Meenakshi Achi (supra), wherein it was held that the character of the subsidy in the hands of the recipient is to be determined having regard to purpose for which the subsidy is given.

(viii) It was, further, pointed out by the learned counsel that the said principle has been reiterated by the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra). The relevant and operative part of the judgment of Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra) is reproduced hereunder :

"If payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The character of the subsidy in the hands of the recipient—whether revenue or capital—will have to be determined, having regard to the material. However, if the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes. But if monies are given to the assessee for assisting him in carrying out the business operations and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade.

A notification was issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings which commenced production or after 1st Jan., 1969, with investment capital (excluding working capital) not exceeding Rs. 5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. Concession was also available for subsequent expansion of 50 per cent and above of existing capacities, provided, in each case, the expansion was located in a city or town or Panchayat area other than that in which the existing unit was located. The salient features of the scheme formulated by the Andhra Pradesh Government were that the incentives were not available, unless and until production had commenced : the availability of the incentives would be limited to a period of five years from the date of commencement of production; the incentives were to be given by way of refund of sales-tax and also by subsidy on power consumed for production to the extent stated in the notification; exemptions were given from payment of water rate; refund was also provided for water rate in respect of water drawn from Government sources. The assessee company, S, set up a factory at P which went into production in the year 1973. The assessee maintained its accounts of the said Government order in the calender year 1973, which meant the asst. yr. 1974-75. In the said accounting year, the assessee obtained refund totalling Rs. 14,665.70 being refund of sales-tax on purchase of machines, purchase of raw materials and sale of finished goods. The ITO, while making the assessment for the year 1974-75, included the said amount in the assessable income of the assessee which was confirmed on appeal by the CIT(A). On further appeal, however, the Tribunal upheld the assessee's contentions and held that the amount of Rs. 14,665.70 refunded to the assessee in terms of the said Government order 'did not represent refund of sales-tax' but was a development subsidy in the nature of a capital receipt. The High Court held that the amount was assessable. On appeal to the Supreme Court by the assessee :

Held, dismissing the appeal, that, under the notification in question the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It was true that the assessee could not use this money, for distribution as dividend to its shareholders. But the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose. The subsidies had not been granted for production of, or bringing into existence any new asset. The subsidies were granted year after year, only after the setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. The subsidies were of revenue nature and would have to be taxed accordingly."

11.7. The assessee also placed reliance on the decision of Hon'ble Bombay High Court, in the case of Sadichha Chitra v . CIT (supra). wherein subsidy released, to assist the assessee. to acquire a new capital asset was held to be a capital receipt on the ground that scheme of the subsidy had been formulated to assist the assessee, in acquiring asset without any objective of supplementing the trade receipts.

11.8 The learned counsel for the assessee placed reliance, on the decision of the Hon'ble Delhi High Court, in the case of CIT vs. National Co-operative Consumers' Federation Ltd. (supra), wherein the Hon'ble High Court, followed the view taken by the Hon'ble Calcutta High Court, in the case of Balarampur Chini Mills Ltd. (supra). It was also pointed out by the learned counsel that the Hon'ble Madras High Court in the case of CIT vs. Madurantakam Co-operative Sugar Mills Ltd. (supra), has taken the similar view. Similarly, the learned counsel placed reliance on the decisions of the Benches of the Tribunal, wherein the subsidy of similar nature was held as being capital receipt :

(1)Vishnu Sugar Mills Ltd. (supra);

(2)Chodavaram Co-op. Sugars Ltd. (supra);

(3)Modi Industries Ltd. (supra).

11.9. In the case of National Co-operative Consumers' Federation Ltd. (supra), the Hon'ble Delhi High Court held that the subsidy from Government on capital account earmarked for and utilised for acquiring capital asset is capital receipt. Similarly, following the decision of the Hon'ble Supreme Court, in the case of Ponni Sugars & Chemicals Ltd. (supra), the Hon'ble Madras High Court, in the case of CIT vs. Madurantakam Co-operative Sugar Mills Ltd. (supra) held that the incentives given exclusively for the purpose of repayment of loan borrowed for the purpose of meeting capital cost from financial institution is capital receipt.

11.10. At this juncture, it is crucial to point out that the judicial precedents are to be applied with care and caution and not mechanically, as each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant details may alter the entire aspect. It is cardinal principle in applying judicial precedent that one should avoid the temptation to decide cases, by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive.

11.11. Precedent should be followed only so far as it marks the path of justice, but you must cut the dead wood and trim off the side branches else you will find yourself lost in thickets and branches. The path of justice must be clear of obstruction which could impede it.

11.12. The assessee has placed reliance on the above decisions without discussing, as to how, the factual situation of the present case fits in the fact-situation of the cases relied upon. The observations of the Court must be read in the context in which they appear to have been stated. The fact situation of the present case clearly demonstrates that the case laws relied upon by the assessee, to support its contention are factually different and distinguishable, rather these case laws support the contentions raised by the Revenue that such incentives are in the nature of revenue receipts. In the present case, the impugned excise refund and interest subsidy have not been given to establish industrial unit, as the industry had already been established, as is evident from the submission of the assessee itself. The excise refund and interest subsidy are not tied to any specific purpose for acquisition of assets. The assessee is free to utilise such incentives, which are recurring in nature. The incentives are neither given to acquire capital asset or to complete any project. It is clearly laid in the said scheme that such incentives can be given only after commencement of commercial production. In the case laws, relied upon by the assessee as discussed above, incentives were given for acquiring capital assets or for setting up the industry. The incentives were specifically marked for acquisition of assets or payment of loan taken for setting up the industry. Consequently, in view of diametrically opposite fact situation of the case laws relied upon by the assessee visa-vis the facts obtaining in the present case, the ratio of the said decisions are not applicable, to the instant cases.

11. 13. In view of the above discussions, none of the case laws relied upon by the learned counsel for the assessee is applicable to the fact situation of the present case. It is pertinent to mention here that a decision of the Court is applicable to that case itself unless it is clearly demonstrated that there is similarity of the facts. As is evident, in the present case, the facts are materially different and clearly distinguishable vis-a-vis the case laws relied upon by the assessee, as indicated above. In view of the above, we are of the considered opinion that none of the case laws relied upon by the assessee as indicated above are applicable to the facts of the present case.

11.14. The fact-situation of the present case are squarely covered by the ratio of the decision of Supreme Court, in the case of Sahney Steel & Press Works Ltd. v . CIT (supra), which was subsequently followed, in the case of Ponni Sugars & Chemicals Ltd. (supra) and other decisions. A bare reading of all the case laws cited by the learned counsel clearly reveals that the ratio laid down by the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra) has been strictly followed to decide the true nature of the incentive or subsidy received by the assessee. In the present case, industrial unit has already been established and the impugned incentives have not been utilised, for acquisition of capital asset, hence, such receipts cannot be treated, as capital receipts. In view of the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra), the impugned incentives are revenue in nature. We are of the considered opinion that the case laws relied upon by the assessee are founded on materially different and distinguishable facts vis-a-vis the fact situation of the present case. In view of this, such case laws are factually different and distinguishable. It is, further, mentioned that the case laws relied upon by the learned Departmental Representative are relevant and applicable to the fact situation of the present case.

11.15 The learned counsel for the assessee, further, placed reliance on Board's Circular No. 142, dt. 1st Aug., 1974. The relevant circular is reproduced as under:

"34. Taxability of subsidy—Revenue receipt or capital receipt- 10 per cent Central Outright Grant of Subsidy Scheme, 1971.

1. The Board had occasion to consider whether the amount of subsidy received under 10 per cent Central Outright Grant of Subsidy Scheme for industrial units to be set up in certain selected backward districts/areas would constitute revenue receipt or capital receipt in the hands of the recipient for the purpose of income-tax.

2. I am directed to say that the payment of subsidy under the scheme is primarily given for helping the growth of industries and not for supplementing their profits. Under the scheme, the quantum of subsidy is determined with reference to the fixed capital and not the profits. The working capital has been specifically excluded from the computation of fixed capital for this purpose. One of the conditions for the grant of the subsidy is that the undertaking must remain in production at least for a period of five years after it goes into production. Since the subsidy is intended to be a contribution towards capital outlay of the industrial unit, the Board are advised that such subsidy can be regarded as being in the nature of capital receipt in the hands of the recipient."

Circular No. 142 [F.No. 204/25/74-IT (A-II)], dt. 1st Aug., 1974.

The circular has been analysed by the Hon'ble Supreme Court, in the cases of Sahney Steel & Press Works Ltd. (supra), CIT v . Malayalam Plantations Ltd. [1987] 168 ITR 63 (Ker) and U.P. State Handloom Corporation Ltd. vs. Dy. CIT (1992) 42 1TD 436 (All) and the circular has been held to be applicable, in the context of that particular scheme. The said circular of the Board does not in any manner laid down a general rule to be followed in all the future schemes. Hence, its application cannot be applied to the scheme applicable to the case of the present assessee, as sought by the learned counsel for the assessee.

11.16 The learned Departmental Representative, on the other hand, placed reliance on various notifications comprising schemes applicable to the State of J&K. The learned Departmental Representative, also placed reliance on the decisions and submissions made before the CIT(A). The learned Departmental Representative further contended that the contention of the learned counsel that debt is created is not tenable, in view of the following reasons :

(a)The exemption is not absolute as the assessee is liable to pay duty since there is no exemption in terms of s. 5A(1A) of the Central Excise Act, 1944 where the Act grants under sub-s. (1) in respect of any excisable goods exemption from the whole of the duty of excise leviable thereon absolutely.

(b)Although the notifications speak of exemption but it is really not so. There is no exemption until the liability to pay duty is determined by the assessee and paid to the Government. It is thereafter that the concept of exemption is brought in as an enabling provision to allow payment of incentive to the manufacturer-assessee and not to exempt the excisable goods from the payment of duty per se.

(c)The para '2' of the Circular No. 682 further substantiates the inference that payment made by the assessee to the Government is in lieu of discharge of his statutory liability towards duty. The relevant part of para 2 is reproduced as under :

"2. The above two notifications for the State of J&K exempt that portion of the excise duty, which is paid by the manufacturers in cash. For this purpose, a suitable mechanism has been incorporated in the notifications. The manufacturer is first required to pay the excise duty and thereafter, whatever is paid in cash is to be refunded"

(Emphasis, italicized in print, supplied)

(a) The conclusion referred to above are further supported by the language of para 4 of the said Circular 682, which is reproduced as under :

"4. The notifications provide for expeditious refund of duty paid in cash. It is for this reason that a provision has been made for allowing refund even on provisional basis by the 15th of the next month, in case there is likely to be a delay in verification of the refund claims. Any excess or shortfall in case of refund allowed on provisional basis may be adjusted in the subsequent refund claims. Considering the fact that verification of refund claims basically involves checking of duty paid in cash, in most cases, it should be possible to allow refund by the 15th of the subsequent month."

(Emphasis, italicized in print, supplied)

"The assessee is thus under legal obligation to discharge his liability to pay excise duty on excisable goods, which is collected or to have been collected from the customers as per s. 12B of the Central Excise Act, 1944 at specified rates. There is thus no exemption from the payment of such duty already collected by the assessee to the Government. However the whole scheme is so designed that whatever amount of duty is collected from the customers and paid to the Government by the assessee, is refunded back to him in the form of an area-based incentive in the form of refund, even though the incidence of the said duty was not borne by the assessee but by the customers. This results in additional financial advantage to the assessee."

11.17 The learned Departmental Representative, further, placed reliance on the various decisions quoted and relied upon by the learned CIT(A), in his impugned order wherein it was held that the excise duty collected is income of the assessee, in the context of the learned counsel's contention before him that the refund of central excise duty is not income of the assessee. The reliance was placed on the following decisions :

(1)Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal [1973] 87 ITR 542 (SC);

(2)Sinclair Murray & Co. (P) Ltd. v. CIT (1974) 97 ITR 615 (SC);

(3)Motilal Ambaidas v. Commissioner Of Income-Tax, Gujarat-Ii. [1977] 108 ITR 136 (Guj);

(4)Wolkem (P) Ltd. v. CIT [2003] 259 ITR 430 (Raj);

(5)CIT v . Bharat Iron & Steel Industries [1993] 199 ITR 67 (Guj);

(6)CIT v . Markanda Vanaspati Mills Ltd. [IT Appeal No. 51 of 1990, dt. 30th Oct., 2006 (P&H)];

(7)Asstt. CIT v. Eastern Electronics 2004-TIOL-132-ITAT-Mumbai, dt. 6th Aug., 2004.

11.18. The learned Departmental Representative, further, stated that CIT(A), has also held that irrespective of the accounting treatment given by the assessee, the same remain the income of the assessee. To support his contention, he placed reliance on the following three decisions of the Hon'ble Supreme Court :

(1)Chief CIT v . Kesaria Tea Co. Ltd. [2002] 254 ITR 434 (SC);

(2)Polyfiex (India) (P) Ltd. v. CIT [2002] 257 ITR 343 (SC);

(3)CIT v . Thirumalaiswamy Naidu & Sons [1998] 230 ITR 534 (SC).

11.19 It was vehemently contended by the learned Departmental Representative, that the assessee consistently claimed central excise refund is part of the profits of its undertaking and consequently sought deduction under s. 80-IB of the Act. It is incumbent upon the assessee who is claiming the said receipts as capital in nature and, consequently, exempt from tax, to discharge the onus that lies upon the assessee, to prove the same, as held by the Hon'ble Supreme Court, in the case of CIT v . Ramakrishna Deo (supra). The learned Departmental Representative also referred to audit report, in Form 10CCB (Cols. 21 and 22), filed by the Revenue, to support his contention wherein profits and gains derived by the undertaking/enterprise from eligible business is indicated at Rs. 2,64,44,406 and in the next column deduction under s. 80-IB is claimed at 100 per cent of Rs. 2,64,44,406. In Form No. 3CB, at p. 54 of the Departmental paper book Vol. 1 (Col. 26), the assessee has claimed deduction under Chapter VI-A-under s. 80-IB at Rs. 2,64,44,406. At p. 59 of the paper book-Annexure to effect under s. 145A, the profit as per P&L a/c is shown at Rs. 2,64,44,406. The treatment so far given to these receipts by the assessee, in its accounts shows such receipts as its trading profits. This factum is, further, demonstrated by the following facts :

1.Audit report in Form No. 10CCB (Refer Cols. 21 and 22—Page 51 of Department's compilation on Facts Vol. 1).

2.Audit report in Form 3CB (Refer Col. 26—Page 54).

3.Annexure to effect under s. 145A—Page 59.

11.20. The learned Departmental Representative, further, contended that the arguments of the assessee that the memorandum, dt. 14th June, 2002, of the Government of India, decides the purposes of incentives which include generation of employment is grossly misplaced. The memorandum offers a bouquet of incentives,with mixed purposes underlying therein. The purposes of each such incentive requires to be judged in the context of each one of them and with reference to the grantee as to how such scheme has helped the grantee. Some of the incentives available by the notification are clearly in the capital field but other ones are in the form of financial concessions and for easy market access. In this context, if one examines the purpose for the grant of central excise duty refund, it is obviously for the purpose of free market access whereby the recipient of such incentive is able to reduce the cost of its product. The appellant, in the present case, has admitted this fact, as is evident from its own submission before the CIT(A). The relevant paras 2.4 and 5 at pp. 3 and 7 respectively of order of CIT(A), are reproduced hereunder :

"2.4 Central excise duty is an indirect form of taxation, which is to be borne by the manufacturer as duty on goods manufactured. However, the same becomes payable at the time of removal of goods from the factory.

The central excise duty simply adds to the manufacturing/production cost and this cost has to be paid as duty at the time of removal of goods, irrespective of whether the same is included in the sale price or not. The refund of the excise duty under Central Excise Notification No. 56 of 2002 paid by the manufacturer is provided just to reduce the cost of production. This refund simply reduce the amount already spent by the manufacturer and such refund cannot be excluded for the purpose of working out the deduction under s. 80-IB of the IT Act, 1961.

5. Being exempt from excise duty, the object of the excise duty refund scheme is to reimburse manufacturer for excise duty paid on the removal of goods produced/manufactured by the assessee. Excise duties raised the cost of production in industries and thereby affect the competitiveness of industry. Therefore, industries in the backward States like J&K need to be assisted by neutralizing the escalation in their costs, attributable to such excise duties. Excise duty refund is, therefore, intended to reduce the cost of production. Hence, excise duty is an integral part of the pricing of the goods and therefore, excise duty has to be treated as derived from the industrial undertaking. The excise duty is inextricably linked with the production cost of the goods manufactured by the assessee and so the excise duty was a trading receipt of the industrial undertaking having direct nexus with the activity of such industrial undertaking and, therefore, it forms part of the income derived from such industrial undertaking."

11.21 The learned Departmental Representative, further, submitted that inclusion of the central excise duty, in the sale invoices issued to its customers, payment of the sale consideration (inclusive of excise duty) by the customers to the assessee, payment thereof subject to certain adjustments and credits by the assessee to the Central Excise Department and subsequent refund thereof by the Department to the assessee definitely goes to the revenue side of the accounts, as held in the following cases :

(i) Chowringhee Sales Bureau (P) Ltd. (supra);

(ii) Sinclair Murray & Co. (P) Ltd. (supra);

(iii) CIT v. Saraswati Industrial Syndicate Ltd. [1973] 91 ITR501 (P&H);

(iv) Thirumalaiswamy Naidu & Sons (supra);

11.22 It was, further, contended by the learned Departmental Representative, that nature of receipt is fixed once for all and its taxability is fixed with reference to its character at the moment it was received and would not change merely because the recipient treated it differently. This principle has been laid down by the Hon'ble Delhi High Court, in the case of Commissioner Of Income-Tax…Petitioner v. M/S. Motor & General Finance Ltd.… [1974] 94 ITR 582 (Delhi). Their Lordships held in the said decision that the nature of receipt is fixed once for all when it is received. Subsequent event do not change the character of receipt. As at its inception the excise duty so collected bears the character of trading receipt, it is taxable in the year when collected. Similarly, learned Departmental Representative placed reliance on the decision of Hon'ble Supreme Court in the case of CI T v . TV. Sundaram lyenger & Sons Ltd. [1996] 222 ITR 344 (SC), wherein it was held :

"9………….The only point to be decided is that even though the deposits were of capital nature at the point of time of receipt by the assessee, could its character change by influx of time ? In the case of Morley (Inspector of Taxes) v . Tattersall (1939) 7 ITR 316 (CA), it was laid down by Lord Greene that the taxability of a receipt was fixed with reference to its character at the moment it was received and that merely because the recipient treated it subsequently in his income account as his own did not alter that character. This principle of law is the basis of several judgments delivered on this issue by our Courts. In some cases, the principle laid down by Lord Greene has not been followed because of special facts, but the principle as such has not been doubted.

(Emphasis, italicized in print, supplied)

This deviation can be seen in the case of The Gurdaspur Co-op. Sugar Mills v . Dy. CIT where by the orders of the Government, the amounts of loan were changed to grant-in-aid and the Hon'ble Bench held the same as revenue in nature. Kindly refer to the decision of this Hon'ble Tribunal in the case in ITA No. 344/Asr/2008 and SA No. 11/Asr/2008 decided on 31st Dec, 2008 [reported at (2009) 122 TTJ (Asr) 528 : (2009) 19 DTR (Asr)(Trib) 209-Ed.]. A copy of this decision is already handed over at the time of hearing."

11.23. The learned Departmental Representative, further, submitted that besides the notifications, the assessee has not given any additional evidence, to prove that the incentives, in the form of refund of central excise duty available under the said notification is of capital in nature. It is a fact that it has gone to add the profits of the undertaking. In case of it being capital in nature, it would have increased the reserves of the undertaking. Some of the receipts which were treated as of capital in nature by the assessee has been crediting to the "Reserves and surplus", in Sch. 2 forming part of the balance sheet as on 31st March, 2005. The receipt of refund of central excise duty has gone to add to the profits of the asses see and ultimately that profit has found its way to increase the capital of the partners to whom this additional profit has been allocated. This conduct of the assessee proves that this incentive has gone to increase their profits and would, thus, be of revenue in nature.

11.24. The learned Departmental Representative, further placed reliance, to support his contention, on the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra) and Hon'ble Punjab & Haryana High Court, in the case of Abhlshek Industries Ltd. (supra).

12. We have heard both the parties and carefully perused and considered the written submissions including the case laws therein and the submissions made in the course of appellate proceedings by the parties, facts of the case, paper books filed by the parties and also the relevant records. The core question before us is whether the refund of excise duty amounting to Rs. 2,73,25,405, and interest subsidy amounting to Rs. 2,10,695 is capital receipt, not liable to tax under the provisions of the Act, as contended in the additional grounds of appeal. A careful perusal and analysis of the Office Memorandum No. 1(13) of 2000-NER, dt. 14th June, 2002, Notification Nos. 56 of 2002-C.E. and 57 of 2002-C.E., dt. 14th Nov., 2002 and other notifications pertaining to new industrial policy introduced, in the State of J&K reveals that the Government of India decided to provide package of fiscal incentives to new industrial units and existing units undertaking substantial expansion. In para 3.1 of the Office Memorandum of the Government of India, dt. 14th June, 2002, such package of incentives are enlisted and the assessee availed of the excise duty refund and interest subsidy, as contemplated in the said memorandum. In the scheme, such fiscal incentives have been granted to both the new industrial units, as well as existing units on their substantial expansion, for a period of 10 years only after the date of commencement of the commercial production. The Central Excise Department formulated scheme, to give effect to the memorandum of Government of India dt. 14th June, 2002, and, consequently, issued Notification Nos. 56 and 57, dt. 14th Nov., 2002. As per para 3 of Notification No. 56 of 2002-C.E., it is clearly stipulated that exemption contained, in this notification shall apply only to the following kind of units, namely,-

(a)new industrial units, which have commenced their commercial production on or after 14th day of June, 2002;

(b)industrial units existing before 14th day of June, 2002 but which have undertaken substantial expansion by way of increasing installed capacity by not less than 25 per cent on or after 14th day of June, 2002.

12.1 Based on such notifications and memorandum the package of facilities and incentives were given to the new industrial undertaking and other industrial undertaking, who undertook substantial expansion, as contemplated in the said scheme, which commenced production, on or after 14th June, 2002. The incentives, in the form of excise duty refund and interest subsidy are allowed for a period of 10 years, from the date of commencement of the commercial production. The package of incentives provided under the scheme has been reproduced above. A critical analysis, examination and appreciation of the notifications, memorandum and circulars pertaining to the said scheme, formulated for the State of J&K, . by the Central Government reveals that such incentives were not available unless and until commercial production has commenced. Further, the availability of such incentives would be limited to a period of 10 years, from the date of commencement of commercial production, The incentives were recurring in nature.

12.2. A bare perusal of the fact-situation of the present case clearly reveals that the assessee-firm had already set up an industrial undertaking, in Kathua, State of J&K, as admitted by the assessee itself, in the written submission. Therefore, it is undisputed fact that the assessee-firm had already established an undertaking and the said unit was eligible for such incentives, for a period of 10 years, from the date of commencement of commercial production. In this context, it would be relevant to reproduce the extract of the written submission filed by the assessee, hereunder :

"The appellant is a partnership concern, which had put up an industrial undertaking in Kathua in the State of J&K, engaged in the business of manufacture of aluminium alloy and zinc alloy ingots. The appellant filed its IT return for the period ending 31st March, 2005 relevant for the asst. yr. 2005-06 on 29th March, 2006 declaring nil income after claiming deduction of Rs. 2,65,19,672 under s. 80-IB of the IT Act, 1961.

The appellant had, as stated above set up an industrial undertaking in Kathua in the State of J&K. The said industrial unit was eligible for 100 per cent (hundred per cent) excise duty exemption for a period of 10 years from the date of commencement of commercial production. The broad modality of the scheme was that the eligible industrial undertaking was first required to pay the excise duty and the duty so paid was subsequently refunded by the excise authorities."

12.3. A bare perusal of the submission of the assessee clearly establishes that the assessee-firm had already set up industrial unit in the State of Kashmir. Therefore, crucial point is that such incentives are production incentives, in the sense that the assessee-firm would be entitled to such fiscal incentives, only after it goes into commercial production. It is crystal clear that the scheme which confers such package of incentives, on the assessee-firm was not to make any payment for setting up of the industry, as the industrial unit had already been set up by the assessee- firm. The incentives in question would be granted on the assessee recipient, only after the commencement of commercial production by the industrial unit which had already set up by the appellant.

12.4. The learned counsel for the assessee contended that the impugned incentives are capital in nature, as they have been granted for industrial development of the State of J&K. It was contended that new initiatives would provide the required incentives and enabling environment for industrial development, improve availability of capital and increase market access to provide a fillip to the private industries in the State. The learned counsel for the assessee placed reliance on the 'purpose test' for determining the true nature of the incentives granted to the assessee. Both the learned counsel for the assessee and the learned Departmental Representative placed reliance, on the various decisions, to support their respective contentions which have carefully been earlier perused and considered by us.

12.5. The assessee submitted before the learned CIT(A), that the central excise duty is an indirect form of taxation, which is to be borne by the manufacturer as duty on goods manufactured. However, the same becomes payable at the time of removal of goods from the factory. The central excise duty simply adds to the manufacturing/production cost and this cost has to be paid as duty at the time of removal of goods, irrespective of whether the same is included in the sale price or not. The refund of the excise duty under central excise Notification No. 56 of 2002, paid by the manufacturer is provided just to reduce the cost of production. This refund simply reduces the amount already spent by the manufacturer and such refund cannot be excluded for the purpose of working out the deduction under s.80-IB of the Act. It was also submitted before the learned CIT(A), that being exempt from excise duty, the object of the excise duty refund scheme is to reimburse manufacturer for excise duty paid on the removal of goods produced/manufactured by the assessee. Excise duties raised the cost of production in industries and thereby affect the competitiveness of industry. Therefore, industries in the backward States like J&K need to be assisted for neutralizing the escalation in their costs, attributable to such excise duties. Excise duty refund is, therefore, intended to reduce the cost of production. Hence, excise duty is an integral part of the pricing of the goods and the refore, excise duty has to be treated as derived from the industrial undertaking. The excise duty is inextricably linked with the production cost of the goods manufactured by the assessee and so the excise duty was a trading receipt of the industrial undertaking having direct nexus with the activity of such industrial undertaking and, therefore, it forms part of the income derived from such industrial undertaking.

12.6. From perusal of the submissions made before the learned CIT(A), it is evident that the incentives were not given for the purpose of setting up of an industry or for the purchase of capital asset, as the industrial unit had already been set up as admitted and submitted by the learned counsel, for the assessee. These incentives were given to make such eligible industry, to run the business more competitively and profitably, in the State of J&K.

12.7. The facts, in the case of Sahney Steel & Press Works Ltd. vs. CIT (supr a), are relevant, in the context of the fact-situation of the present case. The contention of Mr. Ganesh, learned counsel of the assessee was that the subsidies were of capital nature and were given for the purpose of stimulating setting up and expansion of industries in the State. This contention was not upheld by Hon'ble Supreme Court because no financial assistance was granted to the assessee for setting up of the industry. It was only when the assessee had set up its industry and commenced production that various incentives were given for the limited period of five years. It appears that the endeavour of the State was to provide the newly set up industries a helping hand for 5 years to enable them to be viable and competitive. Sales-tax refund and the relief on account of water rate, land revenue as well as electricity charges were all intended to enable the assessee to run the business more profitably.

12.7.1. Mr. Ganesh, appearing on behalf of the assessee, has contended that the incentive scheme was for setting up new industrial undertakings in the State and also for the purpose of stimulating substantial expansion of the industries. The primary object was rapid industrialisation of the State. This object was sought to be achieved by the various incentives. It was, further, contended that the subsidy given by the State was upto 10 per cent of the capital investment in the undertakings. Since the subsidy was calculated on the basis of the quantum of investment in capita such subsidy cannot be considered to have been received by the assessee on revenue account.

12.7.2. It was further contended by Mr. Ganesh that grant of subsidy was on the basis of refund of sales-tax on raw materials, machinery and finished goods already paid for by the assessee. These subsidies would be enjoyed by the assessee for a period of 5 years and were of capital nature. The object of granting refund of sales-tax was that the assessee could set up new business or expand substantially his existing business.

12.7.3. The contention of Mr. Ganesh that the subsidies were of capital nature and were given for the purpose of stimulating the setting up and expansion of industries in the State cannot be upheld, because of the subsidy scheme itself. No financial assistance was granted to the assessee for setting up of the industry. It is only when the assessee had set up its industry and commenced production that various incentives were given for the limited period of five years. It appears that the endeavour of the State was to provide the newly set up industries a helping hand for five years to enable them to be viable and competitive. Sales-tax refund and the relief on account of water rate, land revenue as well as electricity charges were all intended to enable the assessee to run the business more profitably. The basic principle to be applied for determination as to whether a subsidy payment is in the nature of capital or revenue, has been stated by Viscount Simon in Pontypridd & Rhondda Joint Water Board v. Ostime (H.M. Inspector of Taxes) [1946] 14 ITR (Suppl) 45, 47 : [1946] 28 Tax Cases 261 (HL) in the following words (p. 278) :

"'The first proposition is that, subject to the exception hereafter mentioned, payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker's trade or business are trading receipts, that is, are to be brought into account in arriving at the balance of profits or gains under Case 1 of Sch. D. It is sufficient to cite the decision of this House in the sugar beet case, Smart v . Lincoln-shire Sugar Co. Ltd. (1937) 20 Tax Cases 643."

12.8. The Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra) also discussed and dealt with the case laws rendered by the Courts in India, on the issue in question. The Hon'ble Supreme Court, discussed the decision of the Supreme Court, in the case of V.S.S.V. Meenakshi Achi (supra). The decision of Full Bench of the Hon'ble Kerala High Court, in the case of Ruby Rubber Works Ltd. (supra) was also examined and discussed, with a view to ascertaining the specific purpose for which the subsidy was granted. Similarly, the case of the Hon'ble Bombay High Court, in the case of Sadichha Chitra (supra) and decision of Hon'ble Andhra Pradesh High Court, in the case of CIT vs. Chitra Kalpa [1989] 177 ITR 540 (AP), adjudicated the issue following the 'purpose test', in the context of relevant scheme. The Hon'ble Supreme Court also discussed and referred to the case of Hon'ble Calcutta High Court, in the case of Kesoram Industries & Cotton Mills Ltd. v. CIT [1991] 191 ITR 518 (Cal).

12.9. Therefore, having regard to the discussions of cases decided by the Indian Courts and foreign cases, the Hon'ble Supreme Court laid down the 'purposetest', for the purpose of ascertaining true nature of incentives or subsidy i.e. whether capital or revenue in nature. The issue in question was decided in favour of the Revenue in that case. In subsequent decisions, the fundamental principles, as laid down by the Hon'ble Supreme Court, on the issue of ascertaining the true nature of incentives and subsidy, the said 'purpose test' was reiterated and followed by the Hon'ble Supreme Court and High Courts and there has not been any dilution or deviation therefrom.

12.10. The core question before us is whether incentives/subsidy as provided in the said scheme are granted to set up the new industry or to purchase capital asset or to purchase machinery or for completion of project. If answer is in affirmative then such fiscal incentives are capital in nature. However, where such incentives conferred, on the recipient or were grantee were for assisting, in carrying on the business operation more profitably and competitively, on the condition precedent of post commencement of commercial production, then the nature of such incentives would be patently, revenue in nature. In view of this, such receipts would be trade receipt or supplementary receipts and following the fundamental rule of the 'purpose test', as laid down by the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra), such receipts can only be revenue receipts.

12.11 It is essential to highlight that the Hon'ble Supreme Court has, in Sahney Steel & Press Works Ltd. (supra) laid down the following fundamental principles, which were followed by the Supreme Court and various High Courts, in subsequent decisions and these fundamental principles were not diluted, in subsequent decisions. These are as under :

(i) The character of the subsidy in the hands of the recipient—whether revenue or capital-will have to be determined having regarding to the purpose for which the subsidy is given.

(ii) The source of the fund from which the subsidy is given is immaterial,

(iii) The manner in which the subsidy is given is of no consequence.

(iv) If the subsidy is given to the assessee to assist him to set up his business or complete a project, it is a capital receipt.

(v) If the subsidy is given to the assessee to assist him in carrying on his trade or business, it is a revenue receipt.

If the monies are given only after and conditional upon commencement or production such subsidy must be treated as assistance for the purpose of trade or business.

12.12. In the present case, such incentives in the form of excise duty refund and interest subsidy are not given to the assessee for purchasing capital asset or for purchase of machinery or for setting up industrial unit, as the same had already set up, as discussed earlier.

12.13. We are of the considered opinion that the fact situation of the present case, is covered by the ratio of the decision of the Hon'ble Supreme Court laid down, in the case of Sahney Steel & Press Works Ltd. (supra). The purpose laid down in this decision is squarely applicable to the facts of the present case and, consequently, such receipts are revenue in nature. Hence, the findings of the learned CIT(A), founded on the said decision of the Hon'ble Supreme Court, as reproduced above, cannot be assailed.

12.14. Further, it is apt to highlight that the issue of taxing subsidies has been engaging the attention of Courts for the past many years. Subsidy is a grant by the Government, to the promoters of any enterprise, in which the Government desires to participate or which is considered a proper subject for Government aid. Such purpose is likely to be of benefit to the public. Subsidy given to a company for running its business is considered taxable. Grant from the Government after completion of, say, a film is revenue receipt. Subsidy under export promotion schemes, power subsidy, purchase, tax subsidy and sales-tax subsidy have all been considered by various High Courts as revenue receipts taxable, in the hands of the recipient.

12.15. The leading and landmark case on the subject is that of Sahney Steel & Press Works Ltd. (supra) decided by the Supreme Court, in 1997. In a well considered ruling, the apex Court observed that payments from public funds to assist companies in carrying on trade or business are revenue receipts. In that case, refund of sales-tax, subsidies on power consumed and exemption from payment of water charges, etc.were considered by the Court as amounts received by way of production incentives. They were operational subsidies and not capital subsidies. They were, therefore, revenue in nature.

12.16. In the case before the Court, the Andhra Pradesh Government issued a notification, authorising payment of subsidies to assist new industries, at the commencement of business, to carry on their business. These were considered supplementary trading receipts. The company was barred from using the money for distribution of dividends to shareholders. But it was otherwise free to use the money in its business entirely as it liked and was not obliged to spent the money for a particular period. The subsidies were not granted for production of or bringing into existence any new asset. Grant was made year after year, only after the setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for carrying on of the business of the company. The subsidies were of revenue nature and would have to be taxed accordingly.

12.17. In 1980, on account of economic factors new sugar factories could not come up. Financial institutions were reluctant to advance loans for establishing new factories. On the basis of the recommendations of the Sampath Committee, the Central Government formulated a scheme for grant of subsidies, to new units and for expansion of old one. Companies were allowed to increase free sale sugar quota if they increased production capacities. Benefit of the scheme was to be utilised only for repayment of the term loan. The Government of India, financial institutions and sugar companies were made parties to the scheme. Incentives were given through the mechanism of price and duty differentials.

12.18. The Revenue contended that price related mechanism led to the presumption that the subsidies were revenue in nature. The sugar company argued that the object of the scheme must be examined. The incentive was utilised for repayment of loans to set up new units or the substantial expansion of existing units. It is the object for which the assista nce is given which determines the nature of the incentive subsidy. The form of the mechanism through which subsidy is given is irrelevant.

The Supreme Court considered its earlier ruling, in the case of Sahney Steel & Press Works Ltd. (supra) and distinguished that case, o n the ground that Sahney Steel was free to use the money in its business entirely as it liked. It was not obliged to spend the money for a particular purpose. In the case of Ponni Sugars & Chemicals Ltd. (supra), there was an obligation on the part of the company to utilise the subsidy only for repayment of term loans undertaken by the company for setting up new units/expansion of existing business. Keeping in mind the object behind the payment of subsidy, the Supreme Court took the view that the subsidy payment received by Ponni Sugars under the scheme formulated by Central Government was not in the course of trade but was of capital nature. It upheld the view of the Madras High Court in this regard.

12.20. .The fact situation of the present case is squarely covered by the ratio of the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. v. CIT (supra). As discussed earlier, the incentive in the form of excise duty refund and interest subsidy are granted year after year (on recurring basis), for a period of 10 years, from the date of commencement of commercial production. It is, further, mentioned that such incentives are not given to the grantee, i.e. the present assessee for the purpose of setting up industrial unit, as the same had already been set up by the assessee or for bringing into existence any new capital asset or for the purchase/acquisition of capital asset. The assessee is free to utilise such incentive as per its volition. Further, consistent treatment given by the assessee to such receipts as revenue receipts for the purpose of claiming deduction under s. 80-IB of the Act, cannot altogether be ignored but must be seen in the light of entirety of circumstances and facts of this case. The said incentives are given for easy market accessibility and to run the business more profitably. In view of this, such incentives are of revenue nature and would have to be taxed accordingly. We are of the considered opinion that both the cases of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra) and Ponni Sugars & Chemicals Ltd. (supra) support this view, as in the latter case, 'purpose test' has merely been reiterated and followed.

12.21. Having regard to the above legal and factual discussions, we are of the considered opinion that the impugned excise duty refund and interest subsidy are revenue receipts and not the capital receipts as contended by the assessee in the additional grounds of appeal. Consequently, additional grounds of appeal raised by the assessee are dismissed.

13. In ground No. 4, the learned counsel for the assessee contended that on law and facts, the CIT(A), erred in upholding that the excise duty refund of Rs. 2,65,19,672, received by the assessee was not 'derived from' an industrial undertaking and, hence, not eligible for deduction under s. 80-IB of the Act. Similarly, in ground No. 5, the learned counsel for the assessee contended that the CIT(A), erred in upholding that the interest subsidy of Rs. 2,10,695 received by the assessee was not 'derived from' an industrial undertaking and, hence, not eligible for deduction under s. 80-IB of the Act. Both these grounds of appeal pertains to the eligibility of the receipts for deduction under s. 80-IB of the Act. Hence, the same are being considered and adjudicated together.

13.1 The AO, after placing reliance on the following decisions, in the impugned assessment order and also discussing the scheme relevant to the State of J&K, disallowed the deduction under s. 80-IB of the Act, in respect of impugned receipts of excise duty refund and interest subsidy :

(i) Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore [1999] 237 ITR 579 (SC);

(ii) CIT v. Cambay Electric Supply Industrial Co. Ltd. (1978) 113 ITR 84 (SC);

(iii) CIT v. Pandian Chemicals Ltd. [1998] 233 ITR 497 (Mad);

(iv) CIT v . Andaman Timber Industries Ltd. [ 2000] 242 ITR 204 (Cal);

( v) Tribunal Amritsar Bench's decision in the case of Jai Saraswati Flour Mills, asst. yr. 2001-02.

(vi) Chowringhee Sales Bureau (P) Ltd. v . CIT [1973] 87 ITR 542 (SC).

In the case of interest subsidy, the AO relied on the decision of the Tribunal, Amritsar Bench, in the case of Jai Saraswati Flour Mills, for the asst. yr. 2001-02, and disallowed the claim of the assessee.

13.2. The learned CIT(A), in his detailed and well reasoned order, passed after an examination of the impugned scheme operative in the State of J&K, submissions made by the assessee and considering various case laws, adjudicated the issue, in favour of the Revenue and upheld the findings of the AO. The learned CIT(A), had discussed and relied on the decision of the Hon'ble Supreme Court, in the case of Sahney Steel & Press Works Ltd. (supra) and given clear finding that the 'excise duty' is a revenue receipt, as this incentive was given as an operational incentive by the Government, which was available only after commencement of, commercial production, in the course, of carrying on the business. The findings given by his learned CIT(A), in the impugned appellate order are reproduced hereunder :

"I have carefully considered the facts and circumstances of the case, written submissions of the Authorised Representative of the appellant, remand report of the AO and the assessment order. Considering the totality of the facts and circumstances, the appeal is being decided as under :

The appellant is engaged in the manufacture of aluminum alloy ingots in District Kathua of J&K. Hence, the allowability of deduction under section 80-IB is not in dispute but only the quantum of deduction under section 80-IB is in dispute.

The material issue which is involved in this appeal is the impact of refund of excise duty on the profits of the industrial undertaking and allowability or otherwise of such profit as deduction under section 80-IB(4) of the IT Act, 1961.

As per section 80-IB of the IT Act, which has been brought in by the Finance Act, 1999 w.e.f. 1st April, 2000, it has been provided that where the gross total income of an assessee includes any profit and gains derived from any business referred to in sub- sections (3) to (11), (11A) and (11B), the assessee shall be allowed deduction from such profits and gains of an amount equal to such percentage for such number of years as specified in the section in computing the total income of the assessee. Sec. 80-IB(4) of the IT Act, 1961 covers the industrial undertaking established in backward states specified in Schedule Eighth (which also covers the State of J&K) for 100 per cent deduction for the first five years and 25 per cent (30 per cent in case the industrial unit is a company) for the next five years.

There is no denying to the fact that excise duty refunds received/ receivable are an incentive given by the Government as provided in the notification issued by the Government of India e.g. No. 1(3)/2000-NER, Government of India, Ministry of Commerce and Industries (Department of Industrial Policy and Promotion) dt. 14th June, 2002. Thus, in the State of J&K, certain fiscal incentives are available to the industrial units which have been newly set up or which have been substantially expanded after 14th June, 2002. These incentives have been provided to allow the industries in J&K to become competitive with those outside the State. These incentives are in the form of—

(a)Refund of that part of excise duty which is paid in cash, and

(b)Deduction of profits 'derived from' a new industrial undertaking from gross total income for a specified period.

The excise duty is collected by the manufacturer from its customers and the same is being paid to the Central Excise Department. That part of the excise duty which is paid in cash i.e. , after reducing the excise duty paid at the time of purchase of raw material (Cenvat) as reduced from the excise duty collected from its customers, is paid back to the manufacturer by the Central Excise Department. The said paid back excise duty is not supposed to be given back to its customers by the manufacturer.

It is the contention of the appellant that it is the reimbursement of expenses already debited to the P&L a/c by including the same in the excise duty account and that the same is not a fresh source of income to the appellant. It has been submitted that the excise duty refund has a direct nexus with the activities of the appellant's undertaking. It has been contended that the excise duty refund partakes the same character as that of the amount of expenses of the industrial undertaking and that the same is neither a new source of income nor an income which is distinct from the industrial undertaking whose income is deductible under section 80-IB of the IT Act, 1961. The main arguments on the issue are that the receipt of refund of excise duty is not an income, that payment and refund is not on account of excise duty but it is merely a creation of debt with Central Excise Department and that the repayment of the same is only to give effect to exemption notifications of the Government and that the refund of excise duty has no impact on the P&L a/c etc. and hence no disallowance can be made on this account under section 80-IB of the IT Act, 1961, etc.

Thus, it is the contention of the appellant that the AO's action in not allowing deduction under section 80-IB on excise duty refund, defeats the very purpose of deduction made available to the industrial undertaking and that the said action of the AO is highly unjustified. The appellant has also placed reliance on a number of case laws/decisions in support of its contentions.

The AO is of the view that keeping in view the factual and legal position, the accounting practices and the issue involved, the refund of excise duty given to the manufacturer by the Central Excise Department is taxable. In this respect, the AO has also relied upon a number of case laws which support the case of the Department. The AO has not treated the excise duty refund as part and parcel of industrial undertaking deductions under section 80-IB of the Act. The AO has treated the same as separate income in respect of which no deduction is available. Hence, the said 'excise duty refund has been added back in the assessment of the appellant.

For correct appreciation of facts in respect of the material issue/ground of taxability of excise duty refund, it is considered necessary to go into the objectives of the scheme of granting financial incentives to the industries in the J&K by examining the relevant notifications on the issue as well as taking into account to relevant case laws/decisions and the AO's stand vis-a-vis the contentions of the appellant in this regard.

As per section 80-IB of the Act, which was brought in by the Finance Act, 1999 w.e.f. 1st April, 2000, it Is provided that where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub- sections (3) to (11), (11A) and (11B), then the assessee shall be allowed deduction from such profits and gains of an amount equal to such percentage and for such number of years as specified in the section in computing the total income of the assessee.

Sec. 80-IB(4) of the IT Act, 1961, covers the industrial undertakings established in backward states specified in Schedule Eighth (which covers the State of J&K), for 100 per cent deduction for the first five years and 25 per cent (30 per cent in case the industrial unit is of a company) for the next five years.

In fact the sum and substance of the submission is as to whether 'that part of gross total income of an eligible industrial undertaking in the State of J&K, which is attributable to the fiscal incentive received by such industrial undertaking in the form of refund of Central excise duty would be eligible for deduction under section 80-IB(4) of the IT Act, 1961 or not.

Mainly, the submissions are—

(i)The receipt of refund of central excise duty is not income of the eligible manufacturer.

(ii)The payment made to Central Excise Department and refund of the same to the industrial undertaking is not on account of payment of excise duty but is merely a creation of debt with Central Excise Department and repayment of the same by the Government to give effect to exemption notification of the Government, and

(iii)The refund of central excise duty has no impact in the profit and loss account etc. and thus no disallowance can be made on this account under section 80-IB of the IT Act, 1961 etc .

The basic purpose of granting fiscal incentives is to attract investment in industrial sector in J&K and to enable the industrial units in the state to compete with other manufacturers, who, either enjoy economies of scale or are advantageously placed to be cost effective. The Government of India, while announcing the Fiscal Incentive relating to union exercise duty has issued two notification i.e, Notification Nos. 56 of 2002-CE and 57 of 2002-CE both dt. 14th Nov., 2002, according to which the benefits are available and the manner in which the benefits is to be given to an eligible industrial undertaking. As per these notifications the eligible manufacturer is allowed to obtain by way of refund only so much of the excise duty as is paid by the manufacturer in cash. The procedure for claiming refund of Central excise duty is so devised that the manufacturer gets enriched by an amount, which he is required to pay to the Central Government towards his statutory liability after collecting the same from his customers or paid by the manufacturer on. their behalf, as an 'incentive" for running the industrial undertaking in a notified backward area. The manufacturer is not required to refund the same to his customers from whom the same was collected. Thus, the manufacturer gets an additional financial advantage equivalent to the refund of excise duty as compared to his counterpart running exactly the same industrial undertaking in a non-notified area. To confer this additional financial advantage on the manufacturer in a notified area, the following procedure is adopted :

(i)The manufacturer at the time of selling the goods to his customers collects central excise duty at the prescribed rates from the customers.

(ii)The central excise duty so collected from the customers during a particular month is aggregated.

(iii)Thereafter, any amount of central excise duty already paid at the time of purchase of raw material by the manufacturer (Cenvat) is adjusted (reduced) from the central excise duty so collected from the customers.

(iv)The remaining amount of central excise duty so collected is paid to the Central Government by a due date of the next month and a statement thereof is required to be submitted to the Central Excise Department.

(v)Lastly, the amount of central excise duty paid to Central Government is refunded back to the manufacturer by the Government after verification of the relevant particulars furnished in the statement filed along with details of excise duty paid.

The excise duty which is collected by the manufacturer from the customer and paid to the Central Government when refunded to the manufacturer, is not required to be passed on to the customer from which the same was collected but the same is allowed to be retained by the manufacturer in relaxation of provisions of section 11 IB of the Central Excise Act. At the same time, the customer is also entitled to claim the full, Cenvat credit for duty so paid by him to the manufacturer for onward payment to the Government in accordance with section 3 of Central Excise Act, 1944 even though the duty so paid is refunded to the manufacturer by the Government. There is a Notification No. 39 of 2002-CE(NT) dt. 14th Nov., 2002 issued by the Government in this regard. Thus, there is double credit for the same payment, as such,. The amount of excise duty refunded by the Central Government to the manufacturer is the cost of fiscal incentive, which is borne by the Government out of its exchequer, in addition to the amount of revenue forgone on account of allowance of Cenvat credit to the buyer of the goods in respect of the same payment of the excise duty to the Government thus, not only the Government looses on account of revenue forgone, but also bears the additional cost of refunds.

From the above, it becomes clear that the receipt of excise duty refund adds to the profit of the manufacturer and the direct source of this profit is not the industrial undertaking but the scheme of the Central Government. The submission that the manufacturer debits the excise duty to the P&L a/c, when it is paid to the Government and credits the P&L a/c, when the refund of the excise duty is received, thus, having no impact on the net profit of the manufacturer is factually incorrect. The fact is that when the excise duty is collected by the manufacturer from the customers as indirect tax, either as embedded in the sale price or reflected separately in the invoice, the same is credited to the manufacturing/trading account and when the same is paid, it is debited to the same account. Till this stage, there is no effect on the profit of the industrial undertaking since central excise duty does not have an element of profit by the manufacturer as it collects it as an intermediary for and on behalf of the Government and passes it on to the Government. It is when the said excise duty is refunded by the Government in the form of an incentive in relaxation of relevant provision of the Central Excise Act, 1944, then it results in (unjust) enrichment and adds to the profit of the industrial undertaking. Thus, it is factually incorrect to infer or claim that the receipt of refund of excise duty by the manufacturer does not have impact on the profit of the said industrial undertaking.

To clarify the issue further, it is also pertinent to elaborate the concept of 'unjust enrichment'. Central excise duty like any other indirect tax is collected by the manufacturer from his customers for an on behalf of the Government and is paid to the Government. Thus, the manufacturer is merely an intermediary. Sometimes, excess amount of excise duty is collected from the customers by the manufacturer and paid to the Central Excise Department. It may be for various reasons e.g. ambiguity regarding the category or class of the goods, ambiguity over rates of duty, duty paid under protest and duty paid under provisional assessment etc . Later on, when it is established that the duty is collected and paid by the manufacturer was in excess of what was actually due to be paid, the same may get refunded. This refund of duty may be claimed by the manufacturer, who had paid the duty but actually the manufacturer pays the duty after collecting it from his customers. Therefore, when refund of excise duty is received and retained by the manufacturer, it results in undeserving profits to the manufacturer leading to his unjust enrichment. Therefore, section 11B of the Central Excise Act, 1944, puts a legal bar on such unjust enrichment. For ready reference, the same is reproduced below :

Sec. 11B. Claim or refund of duty—(1) Any person claiming refund of any duty of excise may make an application for refund of such duly to the (Asstt. CCE or Dy. CCE) before the expiry of (one year) from the relevant date (in such form and manner) as may be prescribed and the application shall be accompanied by such documentary or other evidence (including the documents referred to in section 12A) as the applicant may furnish to establish that the amount of duty of excise in relation to which such refund is claimed was collected from, or paid by, him and the incidence of such duty had not been passed on by him to any other person :

Provided that where an application for refund has been made before the commencement of the Central Excises and Customs Laws (Amendment) Act, 1991, such application shall be deemed to have been made under this sub-section as amended by the said Act and shall be dealt with in accordance with the provisions of sub- section (2) substituted by that Act.

Provided further that the limitation of one year shall not apply, where any duty has been paid under protest.

(2) If, no receipt of any such application, the (Asstt. CCE or Dy. CCE) is satisfied that the whole or any part of the duty of excise paid by the applicant is refundable, he may make an order accordingly and the amount so determined shall be credited to the fund :

Provided that the amount of duty of excise as determined by the (Asstt. CGE or Dy. CCE) under the foregoing provisions of this sub-section, shall instead of being credited to the fund, be paid to the applicant, if such amount is relatable to—

(a)................

(b)unspent advance deposits, lying in the balance in the applicant's account current maintained with the CCE

(c)................

(d)the duty of excise paid by the manufacturer, if he had not passed on the incidence of such duty to any other person;

(e)the duty of excise borne by the buyer, if he had not passed on the incidence of such duty to any other person;

(f)................

Thus, a manufacturer would not be able to claim and retain refund of central excise duty unless bar imposed under section 11B of the Central Excise Act, 1944, is removed by the Government. This is what exactly has been done by the Government in respect of the eligible manufacturers of J&K.

It would be evident on perusal of the provisions of sections 11B and 11D of Central Excise Duty Act, 1944 and r. 7(6) of Central Excise Rules, 2002 that a manufacturer would no be able to claim the refund of excise duty unless it is proved by him that the said refund has actually been passed on to the customer from whom the excise duty was collected. However, to give an incentive to the eligible industrial undertaking in the State of J&K the above referred provisions have been relaxed by way of Notification Nos. 56 and 57 of 2002 (supra) and Circular No. 682/73/2002-CX dt. 19th Dec, 2002. This circular has been issued by the Central Board of Excise and Customs to clarify that the 'refund' envisaged in the notifications is not on account of any excess payment of excise duty by the manufacturer, but is basically designed to give effect to the exemption, and accordingly provisions of section 11B of the Central ..Excise Act 1944 would not apply in the case of these notifications. Thus, CBEC circular further clarifies that the refund is on account of regular payment of excise duly, which is refunded in due course of incentive to the manufacturer and thus adds to the profit of the manufacturer. This circular further elaborates the provisions of Notification No. 39/2202-CE(NT) dt. 14th Nov., 2002; whereby r. 10 of the Cenvat Credit Rules, 2002 has been amended and the buyer (customer of the goods has also been allowed to avail Cenvat credit of the input goods in spite of the fact that the excise paid by the manufacturer is refunded back to the manufacturer. This benefit is otherwise not available on such input goods which are declared exempt or on which excise duty is paid at nil rate.

The contention raised by the manufacturers that the amount paid to the Central Excise Department is merely a creating of debt with Excise Department in view Of the exemption granted vide Notification Nos. 56 and 57 of 2002 (supra) is also not tenable for the following reasons—

(i)The exemption as per the above notification is not absolute. When there is absolute exemption under section 5A(1) of the Central Excise Act, 1944, under which the notifications 56 and 57 of 2002 both dt. 14th Nov., 2002, have been issued, the manufacturer is not eligible to pay any duty. Under these notifications absolute exemption has not been granted. As per section 5A(A) of the Central Excise Act, 1944, where an exemption under sub- section (1) in respect of any excisable goods from the whole of the duty of excise leviable thereon has been granted absolutely, the manufacturer of such excisable goods shall not pay the duty of excise on such goods. In the case of scheme applicable to the J&K, the eligible industrial undertakings are required to pay the excise duty. Therefore, there is no absolute exemption as has been claimed. Sec. 5A(IA) of the Central Excise Act, 1944 is reproduced below for ready reference.

(IA). For the removal of doubts, it is hereby declared that where an exemption under sub section (1) in respect of any excisable goods from the whole of the duty of excise leviable thereon has been granted absolutely, the manufacturer of such excisable goods shall not pay the duty of excise on such goods.'

The appellant or any manufacturer claiming excise duty exemption under Notifications 56 and 57 of 2002 both dt. 14th Nov., 2002 is required to determine his liability to pay Central excise duty and thereafter to pay the same to the Government by the given date and thereafter subject to certain conditions to be fulfilled by the manufacturer, the manufacturer becomes eligible to claim refund of that part of excise duty, which was paid in cash. Had there been absolute exemption from payment of whole of the excise duty, there would have been no need for the appellant to pay the same at the prescribed rates and by the given date as per the provisions of Central Excise Act.

Although the Notifications 56 and 57/2002/CE dt. 14th Nov., 2002 speak of exemption to the manufacturers from the excise duty, which may be interpreted to suggest as if absolute exemption has been granted from whole of the excise duty to the industrial units but in reality it is not so. There is no exemption until the liability to pay excise duty is determined by the manufacturer and paid to the Government. Thereafter, the concept of exemption is brought in as an enabling provision to allow payment of incentive to the manufacturer and not to exempt the excisable goods from payment of Central Excise per se. For ready reference the relevant para of the Notification No. 56 of 2002 is reproduced below :

'In exercise of the powers conferred by sub- section (1) of section 5A of the Central Excise Act, 1944................the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the goods................ from so much of the duty of excise or additional duty of excise................ as is equivalent to the amount of duty paid by the manufacturer of goods, other than the amount of duty paid by utilisation of Cenvat credit under the Cenvat credit Rules', 2002.'

Therefore, the above underlined words i.e. , 'as is equivalent to the amount of duty paid by the manufacturer of goods' confirms that the amount of exemption from excise duty is to the extent of the excise duty already paid by the manufacturer. This means that first the manufacturer will pay the duty after collecting it from his buyers. Once it has been paid then the same is refunded back as an incentive. It is evident from the above referred notification that the basic intention and purpose of the notification is to enable the manufacturer of claim refund of only that part of excise duty which has been paid in cash and not by way of utilisation of Cenvat credit. If the manufacturer was actually exempted from payment of excise duty as is being claimed, the notification would have enable the manufacturer to claim refund of Cenvat credit also since the manufacturer is not liable to pay any excise duty on the goods manufactured by him, whereas the fact is that first the manufacturer is required to determine his liability and pay the same to the Government and only after it has been paid to the Government, the same is refunded back as an incentive after-verification of the relevant particulars. The refund of excise duty arises only after proper verification of the relevant particulars by the Excise Department. If the manufacturer is found lacking in some respect then no refund of excise duty is allowed.

(iii)The para '2' of the Circular No. 682 further substantiate the inference that payment made by the manufacturer to the Government is in lieu of discharge of his statutory liability towards central excise duty. The relevant part of para '2' is reproduced below :

'2. The above two notifications; for the State of J&K exempt that portion of the excise duty, which is paid by the manufacturer in cash. For this purpose, a suitable mechanism has been incorporated in the notifications. The manufacturer is first required to pay the excise duty and thereafter, whatever is paid in cash is to be refunded................'

(iv)The conclusions referred above are further supported by the language of para 4 of Circular No. 682 (supra).

'4. The notifications provide for expeditious refund of duty paid in cash. It is for this reason that a provision has been made for allowing refund even on provisional basis by the 15th of the next month, in case there is likely to be delay in verification of the refund claims. Any excess or shortfall in case of refund allowed on provisional basis may be adjusted in subsequent refund claims. Considering the fact that verification of refund claims basically involved checking of duty paid in cash, in most of cases, it should be possible to allow refund by the 15th of the subsequent month'

Therefore, it would be obvious that the assessee is under legal obligation to discharge his liability to pay excise duty on excisable goods, which is collected or deemed to have been collected from the buyers (as per section 12B of the Central Excise Act, 1944) at specified rates as per provisions of the Central Excise Act, 1944. As already mentioned above, there is no exemption from the payment of such duty collected by the manufacturer to the Government. However, the whole scheme has been so designed that whatever amount of excise duty is collected from the buyer and paid to Government by the appellant, is refunded back to the manufacturer by way of an area based incentive in the form of refund, even though the incidence said excise duty was not borne by the manufacturer but by the customers. This results in additional financial advantage to the manufacturer'.

The whole impact of the Notification Nos. 56 and 57 (supra ) is such that the amount equivalent to the excise duty which the assessee was otherwise liable to pay to the Government and which it has already paid, gets refunded pursuant to Industrial Promotion Scheme of the Government. This does not happen in normal cases which are not availing benefit under Notifications 56 and 57 both dt. 14th Nov., 2002. This implies that it is due to the Notifications Nos. 56 and 57; (supra ) that the assessee received the refund of excise duty already paid and not merely by virtue of running an industrial undertaking. Thus, the nexus of industrial undertaking with the refund of excise duty is on the incidental and not direct. The main source of the refund of the excise duty is the treasury of the Government and the notifications referred above which enable the manufacturer to claim the refund from the Government. The industrial undertaking is not the source of receipt of this income, which is clearly an incentive profit."

13.3 In the context of above analysis of the Scheme and facts of the case and consequential findings of the learned CIT(A), founded thereon, clearly demonstrate that industrial undertaking is not the source of such receipts, being incentive, hence, incidental income and not direct one. Further, such receipts swells the profit of the assessee, and, thus, contrary contention of the assessee is factually incorrect. Having regard to the legal and factual position of the present case, we concur with and uphold the finding of the CIT(A).

13.4. The case laws, relied upon by the AO has also been quoted and relied upon by the learned Departmental Representative in the course of present appellate proceedings. Hence, the same are not reproduced.

13.5. (a) The CIT(A), placed reliance on two categories of decisions. The first category pertains to his finding, based on such decisions wherein impugned receipts were held as revenue in nature. These decisions are as under :

(i) Chowringhee Sales Bureau (P) Ltd. ( supra);

(ii) Sinclair Murray & Co. (P) Ltd. ( supra);

(iii) Moti Lal Ambaidas (supra );

(iv) Wolkem (P) Ltd. (supra );

(v) Bharat Iron & Steel Industries ( supra);

(vi) Markanda Vanaspati Mills Ltd. (ITA No. 51 of 1990 dt. 30 Oct., 2006).

(vii) Sahney Steel Press Works Ltd. (supra);

(viii) Kesaria Tea Co. Ltd. (supra);

(ix) Pollylex India (P) Ltd. v. CIT (supra);

(x) Thirumalaswamy Naidu and Sons ( supra);

(b)In the second category of the case laws, the learned CIT(A), referred to, appreciated and relied upon the decisions wherein the expression 'derived from' and appearing in section 80-IB of the Act, has been judicially defined and interpreted. These decisions are listed as under :

(i) Cambay Electric Supply Industrial Co. ( supra);

(ii) Sterling Foods (supra );

(iii) Pandian Chemicals Ltd. (supra );

(iv) Ritesh Industries (supra );

(v) Commissioner Of Income-Tax v. J.B Exports Ltd. No. 519 of 2005, reported at [2006] 201 CTR (Delhi) 30—Ed.]

(vi) Liberty India v. Commissioner Of Income Tax [2007] 293 ITR 520 (P. & H.);

(vii) Nahar Exports Ltd. v. Commissioner Of Income-Tax [2007] 288 ITR 494 (P. & H.);

14. The learned counsel for the assessee contended that the excise duty refund and interest subsidy are eligible for deduction under section 80-IB of the Act, if the same are held as revenue receipts. The learned counsel for the assessee placed reliance on the decision of Hon'ble Delhi High Court, in the case of CIT v. Dharam Pal Prem Chand Ltd. [2009] 221 CTR (Delhi) 133 : [2008] 16 DTR (Delhi) 130. The learned counsel for the assessee also placed reliance on the decision of Hon'ble Madhya Pradesh High Court, in the case of Commissioner Of Income-Tax v. Siddharth Tubes Ltd. [2008] 296 ITR 221 (MP) and the decision of Tribunal, Jaipur Bench, in the case of Suresh Kumar Bqjoria v. ITO [2008] 113 TTJ (Jp) 364 : [2008] 1 DTR (Jp)(Trib) 359.

14.1. The learned counsel for the assessee further submitted as under :

"(i) The lower authorities have, totally misconstrued the aforesaid notification issued by the excise authority to the industrial unit set up in the State of J&K was not in the nature of exemption.

(ii) It is respectfully submitted that the CIT(A) failed to appreciate that the amount received back by the eligible undertaking is the same excise duty which is paid in cash at the time of clearance of goods. The mere fact that the excise authorities have issued a specific provision/rule for granting Cenvat credit to the purchaser of the goods cannot result in altering or changing the character of the receipt in the hands of the eligible undertaking.

(iii) It is respectfully submitted that excise duty is paid by the eligible undertaking on the goods manufactured from the eligible industrial undertaking eligible for exemption under section 80-IB of the Act. The payment of excise duty is necessary incidence of manufacture of goods by the eligible undertaking. The amount so paid by the eligible undertaking is subsequently refunded. The aforesaid notification granting credit to the purchaser is merely an additional advantage granted to the purchaser of the goods and has nothing to do with the refund of the duty to the manufacturers.

(iv) The other observations of the CIT(A) on p. 11 of the order that excise duty paid is debited to the manufacturing/trading account is, it is further submitted, factually incorrect. The CIT(A) failed to appreciate that excise duty paid and refunded by the Central Excise Department is not debited by the appellant to the manufacturing/trading account but is debited to a separate excise duty receivable account. An affidavit in support of this contention of the appellant is also being filed separately, in terms of the r. 10 of the IT (ITAT) Rules, 1963.

(v) As regards the observations of the CIT(A) on pp. 15 to 17 of the order that various Courts have repeatedly held that the amount received as excise duty is part of trading receipts and therefore, the contention of the assessee that refund of excise duty is not income is not correct, the same, it is respectfully submitted untenable under law for reasons elaborated as under :

(vi) The CIT(A) it is respectfully submitted has missed the import and substance of appellant's contention. It was contended on behalf of the appellant that if the refund of excise duty is to be regarded as a trading receipt which is inextricably linked with the industrial undertaking, the amount received has to be regarded as income eligible for deduction under section 80-IB of the Act. The appellant has not taken any stand contrary to law laid down by the Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal [1973] 87 ITR 542 (SC) and other decisions referred by the CIT(A).

(vii) The observations of the CIT(A) on pp. 18 to 24 that excise duty collected from buyers is not income "derived from" the industrial undertaking is, it is respectfully submitted, fallacious. The appellant it is respectfully submitted, fails to appreciate as to how it can be held that excise duty, which is an inextricable and vital part of the manufacture/production of good eligible for deduction under section 80-IB of the Act, could be held to be income not 'derived from' the eligible industrial undertaking. As explained hereinabove, excise duty is a direct charge on manufacture/production of goods and without excise duty it is not at all permissible in law to clear the manufactured goods. Therefore, levy and collection of excise duty clearly has inextricable and first degree nexus with the manufacture/production of goods. The amount received towards excise duty has to be, as a necessary corollary, treated as income 'derived from' the eligible undertaking.

(viii) In view of the aforesaid, it is respectfully submitted that the observations of the CIT(A) that excise duty received/collected from the buyers cannot be regarded as income 'derived from' the eligible undertaking is patently erroneous and deserves to be rejected."

14.2. The learned counsel for the assessee, further argued that the decisions of the Hon'ble Supreme Court, in the case of Cambay Electric Supply Industrial Co. Ltd. (supra), Sterling Foods (supra) and Pandian Chemicals Ltd. v. CIT (supra), are not applicable to the facts of the present case, as therein deduction under different sections 80E and 80HH of the Act, was considered. Similarly, it was contended that the decision of Liberty Shoes Ltd. v. Commissioner Of Income-Tax [2007] 293 ITR 478 (P. & H.), is not applicable to the fact-situation of the present case.

14.3. The learned Counsel for the assessee submitted that the decision of the Hon'ble Punjab & Haryana High Court in the case of Liberty India v. Commissioner Of Income Tax (supra) has recently been affirmed by the Hon'ble Supreme Court and the same is also not applicable, to the facts of the present case, in view of the following reasons :

"(a) The decision in Liberty India, as noted hereinabove, was rendered in the context of eligibility of duty draw back whereas the issue in the present case is the eligibility of the excise duty recovered as part of the turnover.

(b) It will be kindly appreciated that duty drawback is in the nature of refund of duty given under the import export policy in respect of goods exported by any person. The duty drawback is, therefore, directly related to export, whereas refund of excise duty is the refund of duty paid by the assessee, in the first instance, at the time of clearance of manufactured goods.

Recovery of the excise duty, as explained aforesaid, clearly has a first degree and inextricable nexus with the activities of manufacture/ production of goods from the eligible undertaking and has to be treated as income 'derived from' the eligible undertaking.

(c) The Supreme Court held that the receipts by way of duty drawback and the sale of DEPB license may constitute profits and gains of the business, but cannot be construed as profits and gains 'derived from' the eligible industrial undertaking since the said profits are in the nature of ancillary profits of an undertaking, and are therefore, not eligible for deduction under section 80-IB of the Act.

It will be kindly appreciated that the facts in the case of the appellant are poles apart from the facts before the Supreme Court in the aforesaid case. The issue in the present appeal is the excise duty recovered and retained by the eligible undertaking, which can, by no stretch of imagination, be characterised as ancillary profits of the appellant.

It would be further appreciated that the appellant's industrial undertaking is a unit exempted from payment of excise duty and is, therefore, not at all required to pay such excise duty. However, to ensure control on various units, the State Government has framed a mechanism in which every such exempted unit is first required to pay the excise duty and then claim refund of the same.

(d) Further, while analyzing the concept of duty drawback, the Supreme Court have observed that in case of duty drawback the refund of excise or custom duty is the average amount of duty paid on material of any particular class or description of goods used in the manufacture of export goods of specified class. The rules do not envisage a refund of an amount arithmetically equal to the custom duty or Central excise duty actually paid by an undertaking. The Hon'ble Court, having regard to the concept of duty drawback, thus, held that profits derived from such incentives do not fall within the expression 'profits derived from industrial undertaking' in section 80-IB of the Act.

However, in the present appeal the facts are totally different. In the present case, the refund of excise duty to the undertaking is exactly of the very same amount of excise duty actually paid by the undertaking in the first instance. Therefore, bearing in the mind the above facts, it can be clearly said that there is one to one nexus between the excise duty paid and its subsequent refund .

In view of the aforesaid, it is vehemently reiterated that refund of excise duty is nothing but mere reimbursement of duty paid in the first instance. Accordingly, refund of duty goes to offset the amount of duty paid by the unit and is actually not in the nature of 'income' as such. In any case, such receipt/refund of duty being inextricably linked to manufacturing operations of the eligible unit, such refund is income 'derived from' the eligible undertaking, entitled for deduction under section 80-IB of the Act."

14.4. The learned counsel, for the assessee, further, argued that liberal and favourable construction of the provisions may be made. In case of some doubt, having regard to the decision of Hon'ble Delhi High Court, in the case of Dharam Pal Prem Chand Ltd. (supra) the following decisions may be considered : .

(i) Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341 (SC);

(ii )Asstt. CIT v. Thanthi Trust [2001] 247 ITR 785 (SC);

(iii) CIT v. Orissa Cement Ltd. [2002] 254 ITR 24 (Delhi);

(iv) Dr. Prannoy Roy v. CIT [2002] 254 ITR 755 (Delhi);

(v )Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC);

(vi) CIT v. Karamchand Premchand Ltd. [1960] 40 ITR 106 (SC);

(vii)C.A. Abraham v. ITO [1961] 41 ITR 425 (SC).

14.5. It was, further, contended by the learned counsel that interpretations favourable to the assessee be considered. He placed reliance on the following decisions :

(i) P.R. P.R Prabhakar v. Commissioner Of Income Tax, Coimbatore [2006] 284 ITR 548 (SC);

(ii )Thanthi Trust ( supra);

(iii) Commissioner Of Income-Tax, U.P, Lucknow v. J.K Hosiery Factory, Kanpur. [1986] 159 ITR 85 (SC);

(iv) CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC);

(v) Orissa Cement Ltd. (supra );

14.6. In the ultimate analysis, the learned counsel for the assessee contended that the learned CIT(A), erred in holding that the refund of excise duty is not liable for deduction under section 80-IB of the Act.

15. The learned Departmental Representative, on the other hand, contended that the decision of the Hon'ble Delhi High Court, in the case of Dharam Pal Prem Chand Ltd. (supra) is not applicable to the facts of the present case. It was contended by the learned Departmental Representative that the issue is covered by the decision of the Hon'ble Supreme Court, in the case of Liberty India v. Commissioner Of Income Tax [2009] 225 CTR (SC) 233 : [2009] 28 DTR (SC) 73 : [2009] TIOL-100-SC IT and the contention of the assessee that the same is not applicable to his case is not factually and legally tenable. The relevant submission of the learned Departmental Representative is reproduced hereunder :

"(A) On accounting entries as observed by Hon'ble High Court of Delhi in the case of CIT v. Dharam Pal Prem Chand Ltd. [2009] 221 CTR (Delhi) 133 : [2008] 16 DTR (Delhi) 130:

Relevant part of the decision dealing with this aspect is available in para 4.8 of the judgment and the same are reproduced as under :

'4.8 To our mind, the procedure for granting of exemption is, as indicated above, that the, assessee in the first instance, pays the excise duty from its current account. The statement with respect to clearances made, is submitted with the concerned central excise authorities by the 7th of the succeeding month. The central excise authorities after verifying the claim of the assessee are required to grant refund of excise duty paid from the current account during the month under consideration to the manufacturer/assessee by the 15th of the succeeding month. The notifications further provided that in the event it was not possible for the concerned authorities to verify the claim for refund of excise duty then it had to be made on provisional basis.'

In fact, in this case the correct factual aspects were not brought before the authorities below up to the stage of the Tribunal and this fact is noticed by Hon'ble Court in their decision at para 4.10 :

'4.10 The other contention of the learned counsel for the Revenue that the assessee by virtue of Notification No. 48 of 1999 would claim double benefit by having passed on the duty paid to its customers then recovering it in the form of sale price, even while claiming deduction under section 80-IB of the Act is also misconceived and deserves to be rejected at the very threshold. The reason being, firstly, no such case has been set up by the Revenue before any of the authorities below. This Court cannot be called upon for the first time to appreciate submissions which have no factual foundation. Secondly, what is important to note is that the assessee as mentioned hereinabove is in the business of manufacturing chewing tobacco and kiwam. These goods by themselves are not inputs for any other goods and hence, the apprehension of the Revenue that the assessee would claim a benefit of Notification No. 48 of 1999 has no substance.'

Finally, Hon'ble Court has clearly observed in para 5 of their decision that factual aspects are required to be kept in mind and thus made their observations as under :

'5. Having considered the decisions cited by the learned counsel for the Revenue, as well as, by the counsel for the assessee, we are of the view that in the instant case, as noted above, the factual aspects are required to be kept in mind. The finding of the authorities below is, that the, refund of excise duty is pivoted on the manufacturing activity carried on by the assessee. Once such a finding of fact has been returned we need not go further and examine the immediate and proximate source of refund of excise duty. In other words, as to whether there was direct nexus between the refund of excise duty and industrial activity. As a matter of fact, in the questions proposed by the Revenue, there is no specific question, that this finding of the authorities below is perverse. There is of course a very broad based and general question that the order passed by the Tribunal is perverse in law and on facts. According to us, such a question is vague. A perusal of the grounds of appeal would substantiate this aspect of the matter. There is no ground taken by the Revenue whereby the substantial findings of fact have been challenged by the Revenue as being perverse.

5.1 An important aspect of the matter which clearly distinguishes the instant case from the facts of the other cases cited before us is, that the net effect of the accounting methodology employed by the assessee was that it did not, in sum and substance, impact the derivation of profits and gains ascertainable for the purposes of deduction under section 80-IB of the Act.'

(B) Whether the decision in the case of Dharam Pal Prem Chand Ltd is binding :

(i) On facts :

The findings recorded by the CIT(A) in the case of CIT v. Dharam Pal Prem Chand Ltd, [2009] 221 CTR (Delhi) 133 : [2008] 16 DTR (Delhi) 130 was not agitated by the Revenue in that case and which fact has been observed by Hon'ble Judges in that case very clearly. Rather, Hon'ble Judges refused to entertain arguments in this regard as can be seen from their comments in para 4.8 onwards of the decision. Thus facts are distinguishable from that case. In the present case, it is admitted that excise duty has been collected by the assessee from its customers, which has been paid to the Central Excise Department. Refund has been obtained out of the said duty paid in cash subject to certain adjustments, in PLA Account. Three steps are therefore involved in the transaction and not two as was noticed in the case of Dharam Pal Prem Chand Ltd. There is therefore correct presentation of facts for proper appreciation of the case.

(ii) on the language used in the section 80-IB in contradistinction to other sections :

On this issue, Hon'ble Supreme Court very recently in their decision dt. 31st Aug., 2009 in the case of Liberty India v. Commissioner Of Income Tax [2009] 225 CTR (SC) 233 : [2009] 28 DTR (SC) 73 : 2009 TIOL-100- IT- SC has clearly held that all these sections have a common scheme. Having heard the counsels of both the parties the Bench has observed that:

1. The 1961 Act broadly provides for two types of tax incentives - investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of 'profit linked incentives'. Therefore, when section 80- IA/80-IB .refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under section 80-IA/80-IB is the generation of profits (operational profits).

2. It is for this reason that Parliament has confined deduction to profits derived from eligible businesses mentioned in sub- sections (3) to (11 A) (as they stood at the relevant time). Each of the eligible business in sub- sections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. That is the reason why the concept of 'segment reporting' stands introduced in the Indian Accounting Standards (IAS) by the ICAI.

3. Sec. 80-IB/80-IA are the Code by themselves as they contain both substantive as well as procedural provisions. Sec. 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words "derived from" are narrower in connotation as compared to the words 'attributable to'. In other words, by using the expression 'derived from', Parliament intended to cover sources not beyond the first degree.

4. sub- section (13) of section 80-IB provides for applicability of the provisions of sub- section (5) and sub- sections (7) to (12) of section 80-IA, so far as may be, applicable to the eligible business under section 80-IB. These two sections have a common scheme. On perusal of sub- section (5) of section 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub- section (5) of section 80-IA, which are also required to be read into section 80-IB. [See section 80-IB(13)].

5. Sees 80-I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. On analysis of sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub- section (2), would be entitled to deduction under sub- section (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, sub- section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words 'derived from industrial undertaking' as against 'profits attributable to industrial undertaking'.

6. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. DEPB/duty drawback are incentives which flow from the schemes framed by Central Government or from section 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under section 80-IB. They belong to the category of ancillary profits of such undertakings.

7. The remission of duty is on account of the statutory/policy provisions in the Customs Act/scheme(s) framed by the Government of India.

In fact, the submission of Shri Gourab Banerji, learned Addl. Solicitor General on behalf of the Revenue is reproduced in para 10 of the decision as under :

'10. In reply, Shri Gourab Banerji, learned Addl. Solicitor General, submitted that, for application of the words 'derived from' there must be a direct nexus between the profit and the industrial undertaking. According to the learned senior counsel, merely because under the scheme to encourage exports a certain amount was repaid as 'duty drawback', it cannot be regarded as profit 'derived from' the industrial undertaking. It may constitute profit from business under section 28, but it cannot be construed as profits 'derived from' the industrial undertaking, for its immediate and proximate source was not the industrial undertaking but the scheme for 'duty drawback'. According to the learned counsel, this position was placed beyond doubt by a judgment of this Court in Sterling Food ( supra). Therefore, according to the learned counsel, the source of duty drawback was not the industrial undertaking but the duty drawback scheme of the Central Government where under the duty drawback entitlement became available. According to the learned counsel, duty drawback, therefore, would stand on the same footing as import entitlements and could not be said to be derived from industrial undertaking. Reliance was also placed on the judgment of this Court in Pandian Chemicals Ltd. v. CIT [2003] 183 CTR (SC) 99 : [2003] 262 ITR 278 (SC) : 2003-TIOL-51-SC-IT. According to the learned counsel, duty drawback was a matter of policy; hence, the proximate and immediate source of duty drawback cannot be industrial undertaking. On interpretation of section 80-IB, learned senior counsel submitted that what was relevant for section 80-IB (1) was profits derived from an eligible business. According to the learned counsel, various eligible businesses are enumerated in sub- sections (3) to (11) of section 80-IB. A perusal of sub- sections (3), (4) and (5) would also show that eligible business under those provisions means certain specific undertakings. In contrast, sub- sections (6) and (7) cover the business of a ship, hotel etc. Thus, for all practical purposes, according to the learned counsel, the section has used the words 'eligible business' and 'industrial undertaking' interchangeably and, therefore, there is no material difference between section 80-I and section 80-IB as in both cases profits have to be derived from an industrial undertaking.'

The Hon'ble Court has approvingly confirmed the submissions of the Revenue and finally, Hon'ble Supreme Court held that profits derived by way of such incentives do not fall within the expression 'profits-derived from industrial undertaking' in section 80-IB. In fact Hon'ble Judges have gone to the extent of observing that the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub- section (5) of section 80-IA, which are also required to be read into section 80IB. [see section 80-IB(13)]. Reference may kindly be made to the observations of Hon'ble Judges in para 15 of their judgment.

This decision now finally settles the dispute and the decision of Hon'ble High Court of Delhi in the case of CIT v. Dharam Pal Prem Chand Ltd. [2009] 221 CTR (Delhi) 133 : [2008] 16 DTR (Delhi) 130 would no longer cover this issue."

15.1. It was contended by the learned Departmental Representative that the contention of the assessee that irrespective of the receipts, from the customers, he is required to make payment of the excise duty, lacks in merit. It was argued that when the assessee makes payment and includes the excise duty element in the sale price, he is raising two debtors, in its accounts, one the Central Excise Department and the other one, the concerned customer. From the customer, he is recovering the sale price which includes the excise duty element included therein and from the Central Excise Department, he would recover the duty paid by him and respective entries would be passed in its accounts. Any unpaid sale price is recoverable by him under the law and, therefore, it makes no difference whether he pays first to the Central Excise Department and recovers later on the sale price from his customers which includes the element of excise duty paid by him.

15.2. It was argued by the learned Departmental Representative that the contention of the learned counsel for the assessee, on the claim that excise duty element from customers embedded in the sale price is claimed as deduction under section 80-IB, appears illogical and misplaced. It was contended by the learned Departmental Representative, that any sale price includes element of profit over the cost of production plus central excise duty depending upon the manner in which it is accounted for by the assessee in its accounts. It was, further pointed out that central excise duty included has no profit involved in it, as it has to be paid to the Government. If assessee accepts this, then central excise duty included in sale price on which deduction is claimed is revenue receipt. The question remains whether it is derived from the industrial undertaking and in his opinion, it falls beyond the purview from the expression "derived from". As the excise duty has no element of profit embedded in it and it does not have 'first degree' or 'proximate source' of profit from the industrial undertaking but represent refund from the Central Excise Department which is nothing but remote source of profit, which calls beyond the purview of expression derived from the industrial undertaking.

15.3. The learned Departmental Representative also submitted that there is fundamental difference between the schemes operative, in Himachal Pradesh and the State of J. & K. The learned Departmental Representative, on the applicability of the decision in the case of CIT v. Vegetable Products Ltd. [1973] 88 1TR 192 (SC) submitted that in view of the observations of the Hon'ble Bombay High Court in the case of Commissioner Of Income-Tax v. Thana Electricity Supply Ltd. [1994] 206 ITR 727 (Bom.), the decision is not applicable to the facts of the present case. The relevant part of the said decision of Hon'ble Bombay High Court is reproduced hereunder :

"Before we proceed to decide the question of law referred to us on the merits, it is necessary also to decide the second submission of learned counsel for the assessee that on interpretation of section 33(6) of the Act, even if this Court takes a view which is against the assessee, in view of the fact that the Tribunal has taken a view in favour of the assessee and the Calcutta High Court has also taken a view in its favour we should adopt a view beneficial to the assessee following the decisions of the Supreme Court in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) and CIT v. Naga Hills Tea Go. Ltd. [1973] 89 ITR 236 (SC). We have considered the submission. We have also carefully considered the decisions of the Supreme Court. We, however, find it difficult to accept this submission, as in our opinion, the observations of the Supreme Court in those decisions have been stretched too far. The Supreme Court in Vegetable Products Ltd. ( supra) (at p. 195), merely observed :

'If we find that language to be ambiguous or capable of more meanings than one, then we have to adopt that interpretation which favours the assessee, more particularly so because the provision relates to imposition of penalty.'

Similarly, in CIT v. Naga Hills Tea Co. Ltd. [1973] 89 ITR 236 (SC), at p. 240, the Supreme Court had observed as follows :

'If a provision of a taxing statute can be reasonably interpreted in two ways, that interpretation which is favourable to the assessee, has got to be accepted. This is a well-accepted view of law."

15.4. The learned Departmental Representative also referred to decision of the Hon'ble Supreme Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43 (SC) and submitted that there are no two possible views, hence, the case of Vegetable Products (supra) is not applicable on the issue of liberal interpretation.

15.5. The learned Departmental Representative, contended that' the contention of the learned Authorised Representative for the assessee that the incentive provisions should be interpreted liberally is misplaced, in view of the decision of the Hon'ble Supreme Court, in the case of Novopan India Ltd v. CCE 1994 Suppl (3) SCR 549.

15.6. Finally, it was argued by the learned Departmental Representative that the submissions filed by the assessee against the decision of the learned CIT(A), lacks in merits that is (1) on the capital nature of the receipt of refund of central excise duty and interest subsidy as contained in the additional ground, and (2) on the issue of the profits resulting from the receipt of refund of central excise duty being claimed as eligible for deduction under section 80-IB of the Act.

16. We have heard both the parties, considered the rival submissions with reference to facts, evidence and material placed on record. We have also considered the case laws relied upon by the parties to support their respective contentions. The learned counsel for the assessee placed reliance, on the decision of Hon'ble Delhi High Court, in the case of CIT v. Dharam Pal Prem Chand Ltd. (supra). The learned counsel for the assessee contended two issues based on said decision, as mentioned hereunder :

(a)Self-cancellation of accounting entries in respect of accounting of refund of Central excise duty, and

(b)Wider scope of the language used in section 80-IB as compared to the language of section 80HH and 80-I etc.

16.1. It was argued that when the assessee receives duty from the customers and allowed to retain the same, there is no effect. Thereafter, step (2) and (3) involved in the procedure neutralize each other. Based on the observations of the Hon'ble Judges, in the case of Dharam Pal Prem Chand Ltd. (supra), it was argued that the Hon'ble Court held that the net effect, on the profit and loss was 'nil' on account of the methodology followed by the assessee and, consequently, the Court held that there was no reason to exclude the amount of refund of excise duty, in arriving at "profit derived" for the purposes of claiming deduction under section 80-IB of the Act. As regards to the second issue, it was contended that the Hon'ble Delhi High Court, in the said case held that as noted by the Division Bench that in the case of Commissioner Of Income-Tax v. Eltek Sgs P. Ltd. [2008] 215 CTR (Delhi) 279 : [2008] 3 DTR (Delhi) 241 : [2008] 169 Taxman 283 (Delhi), the language of section 80-IB is materially different from those obtaining, in the cases cited by the counsel for the Revenue, in Sterling Foods ( supra), Cambay Electric Supply (supra), J.B. Exports (supra), Vishwanathan & Co. (supra ) as well as Ritesh Industries ( supra.)

16.2. A careful perusal and consideration of the decision of the Hon'ble Delhi High Court, in the case of Dharam Pal Prem Chand Ltd. ( supra) reveals that correct factual aspects were not brought before the authorities below up to the stage of the Tribunal, as rightly contended by the learned Departmental Representative as is evident from the judicial notice taken by the Hon'ble High Court, in their decision at para 4.10, which is reproduced hereunder :

"4.10 The other contention of the learned counsel for the Revenue that the assessee by virtue of Notification No. 48 of 1999 would claim double benefit by having passed on the duty paid to its customers then recovering it in the form of sale price, even while claiming deduction under section 80-IB of the Act is also misconceived and deserves to be rejected at the very threshold. The reason being, firstly, no such case has been set up by the Revenue before any of the authorities below. This Court cannot be called upon for the first time to appreciate submissions which have no factual foundation. Secondly, what is important to note is that the assessee as mentioned hereinabove is in the business of manufacturing chewing tobacco and kiwam. These goods by themselves are not inputs for any other goods and hence, the apprehension of the Revenue that the assessee would claim a benefit of Notification No. 48 of 1999 has no substance."

Para 4.8 Of the said decision deals with the issue in question and the same is also reproduced hereunder :

"4.8 To our mind, the procedure for granting of exemption is, as indicated above, that the, assessee in the first instance, pays the excise duty from its current account. The statement with respect to clearances made, is submitted with the concerned central excise authorities by the 7th of the succeeding month. The central excise authorities after verifying the claim of the assessee are required to grant refund of excise duty paid from the current account during the month under consideration to the manufacturer/assessee by the 15th of the succeeding month. The notifications further provided that in the event it was not possible for the concerned authorities to verify the claim for refund of excise duty then it had to be made on provisional basis."

16.3. The Hon'ble Court clearly observed, in para 5 of their decision that factual aspect of the case are required to be kept in mind and their observations of this factual aspect are pertinent while considering the applicability of this case to the present case. The relevant para 5 is reproduced as under :

"5. Having considered the decisions cited by the learned counsel for the Revenue, as well as, by the counsel for the assessee, we are of the view that in the instant case, as noted above, the factual aspects are required to be kept in mind. The finding of the authorities below is, that the, refund of excise duty is pivoted on the manufacturing activity carried on by the assessee. Once such a finding of fact has been returned we need not go further and examine the immediate and proximate source of refund of excise duty. In other words, as to whether there was direct nexus between the refund of excise duty and industrial activity. As a matter of fact, in the questions proposed by the Revenue, there is no specific question, that this finding of the authorities below is perverse. There is of course a very broad based and general question that the order passed by the Tribunal is perverse in law and on facts. According to us, such a question is vague. A perusal of the grounds of appeal would substantiate this aspect of the matter. There is no ground taken by the Revenue whereby the substantial findings of fact have been challenged by the Revenue as being perverse."

16.4. In this case relied upon by the assessee, the learned CIT(A), returned a finding of fact that the assessee-company at the relevant point of time, had a unit at Agartala, which was exempted from payment of excise duty under the notifications referred to hereinabove, and had debited the P&L a/c and merely on receipt of the refund of excise duty credited the amount to the profit and loss of the Agartala unit. The CIT(A), thus, came to the conclusion that the net effect was nil. In other words, the CIT(A), found that if the assessee had maintained separate excise account then the excise duty would have to be debited on one side and the refund would have to be credited on the other. The net effect in any event would be 'nil' . He accepted the contention of the assessee that it cannot be denied the benefit of, perhaps, incorrect entries in the accounts.

16.5. In the present case, firstly, the assessee collects the excise duty from the customers and after collection it makes the payment, to the Excise Department. In the third step, the Excise Department refunds the excise duty to the assessee. In view of this, there is no question of self- cancellation of accounting entries, as contended by the learned counsel for the assessee, based on the specific fact-situation of the decision of Hon'ble Delhi High Court quoted and relied upon by the assessee, in the case of Dharam Pal Prem Chand Ltd. ( supra). In the present case, three steps are involved in the entire procedure viz. collection of excise duty from the customers, payment to the Excise Department and finally refund of the excise duty by the Excise Department to the assessee. In view of this, this refund swells the profit of the assessee. However, such receipts have no first generation nexus or source, which is essential for any profit to be treated as 'derived from', as explained by the Hon'ble Supreme Court in the case of Liberty India v. Commissioner Of Income Tax in Civil Appeal 2009 (arising out of Special Leave Petn. (Case) No. 5827 of 2007,dt. 31st Aug., 2009 (supra).

16.6. In view of the above, the factual position of the present case is materially different and distinguishable, from the facts, obtaining in the case of Dharam Pal Prem Chand Ltd. (supra), as returned by the lower authorities and the Hon'ble Delhi High Court, rendered the decision, based on such facts. There is, thus, fundamental distinction and distinguishing factum, in the finding recorded by the CIT(A), in the present case vis-a-vis the finding returned by the CIT(A), in the case of Dharam Pal Prem Chand Ltd. ( supra), to the effect that net effect was 'nil' as discussed earlier. The learned CIT(A), after appreciation of the factual position of the present case and on examination of the scheme applicable to the State of J&K, recorded specific finding that excise duty refund has swelled the profit of the assessee and, thus, rejected the contention of the assessee, as is evident from the relevant finding of the CIT(A) reproduced below :

"From the above, it becomes clear that the receipt of excise duty refund adds to the profit of the manufacturer and the direct source of this profit is not the industrial undertaking but the scheme of the Central Government. The submission that the manufacturer debits the excise duty to the P&L a/c, when it is paid to the Government and credits the P&L a/c, when the refund of the excise duty is received, thus, having no impact on the net profit of the manufacturer is factually incorrect. The fact is that when the excise duty is collected by the manufacturer from the customers as indirect tax, either as embedded in the sale price or reflected separately in the invoice, the same is credited to the manufacturing/trading account and when the same is paid, it is debited to the same account. Till this stage, there is no effect on the profit of the industrial undertaking since central excise duty does not have an element of profit by the manufacturer as it collects it as an intermediary for and on behalf of the Government and passes it on to the Government. It is when the said excise duty is refunded by the Government in the form of an incentive in relaxation of relevant provision of the Central Excise Act, 1944, then it results in (unjust) enrichment and adds to the profit of the industrial undertaking. Thus, it is factually incorrect to infer or claim that the receipt of refund of excise duty by the manufacturer does not have impact on the profit of the said industrial undertaking."

17. We have carefully perused and considered the findings of the learned CIT(A), and found that the same have been recorded after extensive detailed analysis of the scheme, Government memorandum etc. The learned CIT(A) has dealt with the issue in a detailed manner and the said findings of the learned CIT(A) are speaking and well reasoned in nature. These findings extracted from the impugned order and as reproduced hereinabove are materially different from finding given by the CIT(A), in the case of Dharam Pal Prem Chand Ltd. (supra).

17.1. As far as second issue raised by the assessee, based on the decision of the Hon'ble Delhi High Court, in the case of Dharam Pal Prem Chand Ltd. ( supra), regarding wider scope of language in section 80-IB, as compared to the language of sections 80HH and 80-I etc ., is concerned, it is respectfully submitted that the Hon'ble Supreme Court, in the case of Liberty India (supra), after examination of the legal and statutory provisions and considering the various case laws, demolished the contention of the assessee, in para 15 of the said judgment. After detailed analysis and appreciation of the statutory provisions and judicial findings, on the expression "derived from" the Hon'ble apex Court, in the case of Liberty India (supra) clearly held that Chapter VI-A provides incentives, in the form of tax deductions essentially belong to the category of "profit linked incentives". It was, further held that the word "derived from" is narrower in connotation as compared to the words 'attributable to'. In this context, contention of the learned Departmental Representative, based on the decision of the Hon'ble Supreme Court has legal merit.

17.2. In light of the above clear ratio laid down by the Hon'ble Supreme Court, the issue of excise duty refund and interest subsidy, is no longer res integra. The Hon'ble Supreme Court, in a plethora of decisions had categorically held that the profit which sprouts from the industrial undertaking itself, having direct and proximate nexus or the first degree source or nexus as also held in the case of Liberty India ( supra), is alone eligible for deduction under section 80-IB of the Act. We submit with utmost respect that the decision of the Hon'ble Delhi High Court, in the case of Dharam Pal Prem Chand Ltd. ( supra), is distinguishable on facts, as the findings recorded by the CIT(A), in this case were not agitated by the Revenue and this factum had been observed by the Hon'ble Judges, in that case very clearly, as contended by the learned Departmental Representative. Rather the Hon'ble Judges refused to entertain the arguments, in this regard, as can be seen from their comments in para 4.8 onwards of the decision. In view of this, in the decision of Dharam Pal Prem Chand Ltd. ( supra), only two steps have been stated in matter of excise duty refund i.e. , payment of excise duty and refund of the same, by the Department. These facts are distinguishable from the present case. In the present case, it is an admitted fact that the excise duty has been collected by the assessee, from the customers, which has been paid, to the Central Excise Department. Further, the refund has been obtained, in respect of the duty paid in cash, subject to certain adjustments, in P&L a/c. Therefore, three steps are involved in the transactions and not two, as was recorded by the CIT(A) in the case of Dharam Pal Prem Chand Ltd. (supra). Further, findings of the CIT(A) in the case relied upon by the assessee and findings of the CIT(A) in the present case are materially different.

17.3. Further, other case-laws relied upon by the assessee are not applicable to the fact-situation of the present case. The decision of the Hon'ble Supreme Court in the case of Liberty India (supra), saps the life blood of such case laws, as is evident from the ensuing discussions. We have carefully perused the decision of the Hon'ble Madhya Pradesh High Court in the case of Commissioner Of Income-Tax v. Siddharth Tubes Ltd. ( supra) and with utmost respect, we submit that this decision is not applicable to the facts of the present case, as the refund of excise duty has not been generated by any scheme as is evident from the facts of the case. In the present case, excise duty refund sprouts from the scheme of the Government of India. Hence, the ratio of the said decision is not applicable to the facts of the present case, as the facts are materially different and distinguishable. Further, the assessee placed reliance on the decision of the Tribunal Jaipur Bench 'A' in the case of Suresh Kumar Bqjoria v. ITO (supra). Respectfully, we submit that the facts of the case relied upon by the assessee are materially different and distinguishable, in view of the findings of the CIT(A), in the present case, as discussed earlier. It is further, mentioned that the assessee has given a list of cases, which were incorporated in the written submissions. We have considered all such cases in the context of present case and found the same not applicable to the facts of the present case.

17.4. Further, the relevant and operative part of the decision of the Hon'ble Supreme Court, in the case of Liberty India ( supra) is reproduced hereunder with a view to appreciating the same, as the present case is covered by this decision.

"Discussions and findings :

12. In this batch of civil appeals we are concerned with admissibility of the amounts of duty drawback and DEPB for deduction under section 80-IB.

13. Before analyzing section 80-IB, as a prefactory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of 'profit linked incentives'. Therefore, when section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under section 80-IA/80-IB is the generation of profits (operational profits). For example, an assessee company located in Mumbai may have a business of building housing projects or a ship in Nava Sheva. Onwership of a ship per se will not attract section 80-IB(6). It is the profits arising from the business of a ship which attracts sub- section (6). In other words, deduction under sub- section (6) at the specified rate has linkage to the profits derived from the shipping operations. This is what we mean in drawing the distinction between profit linked tax incentives and investment linked tax incentives. It is for this reason that Parliament has confined deduction to profits derived from eligible businesses mentioned in sub- sections (3) to (11A) (as they stood at the relevant time). One more aspect needs to be highlighted. Each of the eligible business in sub- sections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. That is the reason why the concept of 'segment reporting' stands introduced in the Indian Accounting Standards (IAS) by the Institute of Chartered Accountants of India (ICAI).

14. Analysing Chapter VI-A, we find that section 80-IA/80-IA are the code of themselves as they contain both substantive as well as procedural provisions. Therefore, we need to examine what these provisions prescribe for 'computation of profits of the eligible business.' It is evident that section 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words 'derived from' is narrower in connotation as compared to the words 'attributable to'. In other words, by using the expression 'derived from', Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is : whether the DEPB credit/duty drawback receipt comes within the first degree sources ? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit/duty drawback receipt do not come within first degree source as the said incentives flow from incentive schemes enacted by the Government of India or from section 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, Department places heavy reliance on the judgment of this Court in Sterling Food ( supra). Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture [see CIT v. Ktrloskar Oil Engines Ltd. [1986] 157 ITR 762 (Bom).

15. Continuing our analysis of section 80-IA/80-IB it may be mentioned that sub- section (13) of section 80-IB provides for applicability of provisions of sub- section (5) and sub-sections (7) to (12) of section 80-IA, so far as may be, applicable to the eligible business under section 80-IB. Therefore, at the outset, we stated that one needs to read sections 80-I, 80-IA and 80-IB as having a common scheme. On perusal of sub- sections (5) of section 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub- section (5) of section 80-IA, which are also required to be read into section 80-IB [see section 80-IB(13)]. We may reiterate that sections 80-I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s), which are linked to profits and not to investment. On analysis of sections 80- IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub- section (2), would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after specified dates. Hence, apart from eligibility, sub- section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words 'derived from industrial undertaking' as against 'profits attributable to industrial undertaking'.

16. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc. DEPB credit under the scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view DEPB/duty drawback are incentives which flow from the Schemes framed by Central Government or from section 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under section 80-IB. They belong to the category of ancillary profits of such undertakings.

17. The next question is—what is duty drawback ? Sec. 75 of the Customs Act, 1962 and section 37 of the Central Excise Act, 1944 empower Government of India to provide for repayment of customs and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The rules do not envisage as refund of an amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum-manufacturer. Sub- section (2) of section 75 of the Customs Act requires the amount of drawback to be determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported. Basically, the source of duty drawback receipt lies in section 75 of the Customs Act and section 37 of the Central Excise Act.

18. Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/ policy provisions in the Customs Act/Scheme(s ) framed by Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression 'profits derived from industrial undertaking' in section 80-IB.

19. Since reliance was placed on behalf of the assessee(s ) on AS-2 we need to analyse the said standard.

20. AS-2 deals with valuation of inventories. Inventories are assets held for sale in the course of business; in the production for such sale or in form of materials or supplies to be consumed in the production.

21. 'Inventory' should be valued at the lower of cost and net realizable value (NRV). The cost of inventory' should comprise all costs of purchase, costs of conversion and other costs including costs incurred in bringing the 'inventory' to their present location and condition.

22. The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Hence, trade discounts, rebate, duty drawback and such similar terms are deducted in determining the costs of purchase. Therefore, duty drawback, rebate etc . should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly (see p. 44 of Indian Accounting Standards and GAAP by Dolphy D'souza). Therefore, for the purposes of AS-2, Cenvat credits should not be included in the cost of purchase of inventories. Even ICAI has issued Guidance Note on Accounting Treatment for Cenvat/Modvat under which the inputs consumed and the inventory of inputs should be valued on the basis of purchase cost net of specified duty on inputs (i.e. , duty recoverable from the Department at later stage) arising on account of rebates, duty drawback, DEPB benefit etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets etc. Therefore, we are of the view that duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the P&L a/c for purposes of section 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking.

23. We are of the view that Department has correctly applied AS-2 as could be seen from the following illustration :

Note : In above example, Department is allowing deduction on profit of Rs. 100 under section 80-IB of the 1961 Act.

24. In the circumstances, we hold that duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of section 80-I/80-IA/80-IB of the 1961 Act.

25. The appeals are, accordingly, dismissed with no order as to costs."

17.5. The crucial test for entitlement of deduction under section 80-IB of the Act, is that the profits and gains must 'sprout from the industrial undertaking itself. The expression 'derived from' has been judicially defined in plethora of decisions by the Hon'ble apex Court and several High Courts and it has been consistently clearly held that all incidental and miscellaneous incomes which don't conform to "the test of direct nexus" between the profit and the industrial undertaking are ineligible for deduction under section 80-IB of the Act. The expression "derived from" appears in various statutory provisions contained under Chapter VI-A of the Act and, hence, such provisions are pari materia, in nature. The judicial precedents on the expression "derived from" are also applicable to the present case. The legislative intent as enshrined in the expression "derived from" which appears in section 80-IB of the Act, has been judicially defined and explained by the Hon'ble Supreme Court, in the cases of National Organic Chemical Industries Ltd. v. CCE [1997] 106 STC 467 (SC), Cambay Electric Supply Industrial Co. Ltd. (supra), Sterling Foods (supra ), Pandian Chemicals Ltd. ( supra) and Liberty India v. Commissioner Of Income Tax in Civil Appeal No. of 2009 [arising out of Special Leave Petn. (Case) No. 5827 of 2007], dt. 31st Aug., 2009 (supra). The Hon'ble Supreme Court consistently and categorically held that eligible profit, as contemplated under the expression 'derived from' must sprout from the industrial undertaking itself. The 'rule of proximate' or the Maxim 'Causa Proxima' is to be applied to the profit, for ascertaining the eligibility of deduction under section 80-IB of the Act. The principle of 'Causa Proximd means 'in law the immediate and not the remote cause'. Hence, immediate and direct source of profit is to be traced, to find out the geneology of such profit as contemplated by the Hon'ble Supreme Court, in the phrase 'first degree nexus', in the case of Liberty India (supra). In a nutshell, direct, immediate and proximate cause is vital and fundamental to include, any profit under the statutory expression 'derived from', which is eligible for deduction under section 80-IB of the Act.

17.6. The Hon'ble Supreme Court, in the case of Liberty India ( supra) categorically held that to be eligible for deduction under section 80-IB of the Act, there must exist direct nexus between the profits and industrial undertaking. The duty drawback does not represent such direct nexus and, hence, the same cannot be said as profit derived from the industrial undertaking. In the present case, the source of excise duty and interest subsidy is not the industrial undertaking, but the scheme of the Central Government and, hence, such receipts do not fall in the category of first degree source or nexus, as held by the Hon'ble Supreme Court, in the said decision, while considering and adjudicating eligibility of deduction under section 80-IB of the Act. The Hon'ble Supreme Court analysed the scheme of incentives, as contemplated under Chapter VI-A of the Act and observed that the form of tax deductions under that chapter essentially belonged to the category of profit linked incentives. Accordingly, the Hon'ble Supreme Court held that the incentives under sections 80-IA and 80-IB of the Act, must be from the generation of profits (operation of profits 'derived from' from the industrial undertaking). In para 14 of the said decision, the Hon'ble Supreme Court analysed the provisions of Chapter VI-A of the Act and found that section 80IA/80IB are the code by themselves, as they contain both substantive as well as procedural provisions. It was, further, held that the words "derived from" as appearing under section 80-IB of the Act, are narrower in connotation as compared to the words "attributable to". By using the expression "derived from", Parliament intended to cover sources not beyond the first degree nexus or source. The impugned receipts, in the present case, did not represent the nexus or the source belonging to the said first degree. The source of excise duty and interest subsidy is not industrial undertaking, but the scheme of the Central Government. The Hon'ble apex Court further proceeded to hold that sections 80-I, 80IA and 80IB of the Act represent common scheme. The profits eligible for such deduction are to be computed, as if such eligible business is the only source of income of the assessee. Consequently, the Court categorically held that the devices adopted to reduce or inflate the profits of eligible business has got to be rejected, in view of the overriding provisions of section 80-IA(5), which are also required to be read into section 80-IB of the Act

17.7. The crucial issue is whether the income was 'derived from' industrial undertaking, as against income from other sources irrespective of the question whether such source was inextricably connected with the business activity of the assessee. In the present case, the nature of income from the refund of excise duty and interest subsidy are similar to the nature of income, which was considered by the Hon'ble Supreme Court, in the case of Sterling Food (supra) and Pandian Chemicals ( supra). Therefore, the reasoning adopted by the Hon'ble Supreme Court, in these two cases including the latest decision in the case of Liberty India (supra), such receipts of the assessee, from excise duty and interest subsidy, cannot be held to be income 'derived from' specified business. The distinction sought to be made by the learned counsel for the assessee between the income from duty drawback or import entitlements, which were the subject-matter of the decision of the Supreme Court, in the cases of Sterling Food (supra) and Pandian Chemicals ( supra), cannot be accepted as relevant distinction, as the core question before the Court was that such income was 'derived from the specified business, which reasoning is fully applicable to the facts of the present case. The Hon'ble Supreme Court, in plethora of decisions consistently upheld the similar view, in the light of both the skin and the soul of the statutory provisions. Thus, the interpretation of the Hon'ble Supreme Court, in the light of the Deha and Dehi of the relevant statutory provisions is applicable to the incentives provisions of sections 80-I, 80-IA and 80-IB of the Act.

17.8. In the course of present appellate proceedings, the learned counsel for the assessee contended while arguing his case on the nature of such receipts that the excise duty refund is form of subsidy. The Hon'ble Himachal Pradesh High Court, while dealing with transport subsidy in the case of Commissioner Of Income-Tax v. Kiran Enterprises [2009] 32 DTR (HP) 111 : 2009-YIOL- 577-HC-HP-IT, dt. 6th Oct., 2009, followed the decision of the Hon'ble Supreme Court, in the case of Liberty India (supra ) and decided the issue against the assessee and in favour of the Revenue, holding that such receipts are not eligible for deduction under section 80-IB of the Act. The relevant and operative part of the findings of the Hon'ble Himachal Pradesh High Court in the case of Kiran Enterprises ( supra), is reproduced hereunder :

"After the aforesaid detailed analysis, the apex Court held that the duty drawbacks could not be deemed to be profits derived from business. It is apparent that the apex Court held that it is only the profits generated i.e. operational profits which are entitled to the benefit under section 80-IA. In Sterling Food the apex Court has also laid down a test as to what is the source of income. In the present case, the source of income transport subsidy is not the business of the assessee but the scheme framed by the Central Government.

Applying the test laid down in Liberty India's case and Sterling Food's case it is apparent that the transport subsidy received by the assessee is not a profit derived from business since it is not an operational profit. The source of the subsidy is not the business of the assessee but scheme of the Central Government.

In view of the above discussion, we are clearly of the view that the questions have to be answered in favour of the Revenue and against the assessee. The appeals are accordingly allowed."

17.9. It is pertinent to mention that the said decision was not available before the Hon'ble Delhi High Court, while rendering the decision in the case of Dharam Pal Prem Chand Ltd. (supra). It has been held by the Hon'ble apex Court, in the case of Liberty India (supra) that duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the P&L a/c for the purposes of section 80-IA/80-IB, as such remissions would constitute independent source of income beyond the first degree nexus between profits and industrial undertaking.

17.10. We have given serious thought to the decisions relied upon by the assessee, on liberal interpretation of the incentive provisions, as also the interpretation favourable to the assessee, in case the language of the provisions is ambiguous and found the same inapplicable, in view of the interpretation assigned on the expression "derived from", consistently by the Hon'ble Supreme Court, in a number of decisions, as discussed above. Thus, judicially defined expression "derived from" is not ambiguous in text, context and meaning.

17.11. The legislative intent is discernible from the words employed in the relevant statutory provisions. Primarily language employed is the determinative factor of legislative intention, as it is found in the words used by the legislature itself. The expression 'derived from' is employed by the legislature in preference to the expression 'attributable to'. These expressions undisputedly carry different connotation and scope. Thus, the expression "derived from" has been judicially defined by the Hon'ble Supreme Court, having regard to the text and context of the statutory provisions of section 80-IB of the Act. In view of this, expression "derived from" cannot embrace incidental income such as excise duty refund and interest subsidy, as the same do not have first degree nexus with the 'operational profit' derived from the industrial undertaking itself.

18. Having regard to the above legal and factual discussions, we are of the considered opinion that the impugned receipts are duly covered by the decision of the Hon'ble Supreme Court, in the case of Liberty India ( supra). Consequently, we are of the considered opinion that the impugned receipts, in the form of excise duty refund and interest subsidy are not eligible for deduction under section 80-IB of the Act, within the contemplation of the decision of the Hon'ble Supreme Court, in the case of Liberty India ( supra).

19. As regards ground No. 6, the learned counsel for the assessee contended that the CIT(A) erred in upholding the levy of interest of Rs. 31,05,347 under section 234B of the IT Act, 1961. However, in the course of present appellant proceedings, it was contended that the issue raised in this ground is consequential in nature.

19.1. Having heard both the parties and considering the rival submissions, we are of the opinion that this ground of appeal is mandatory (sic) and consequential in nature and, hence, needs no adjudication.

20. Ground Nos. 1, 2, 7 and 8 are general in nature, hence, we do not consider it essential to adjudicate the same.

21. As the issues involved, in the cases of M/s Pee Ell Allocs Unit-II, Jammu (IT Appeal No. 209/Asr/2009), and M/s Revenbhen Healthcare (P) Ltd., Jammu (ITA No. 305/Asr/2009), for the assessment year 2005-06, are similar to the issues, as raised by the assessee, including the additional grounds of appeal in the case of Shree Balaji Alloys, Kathua, the additional grounds raised by the assessee(s) in these appeal(s) have been admitted and adjudicated on merit against the assessee and in favour of the Revenue. Further, the grounds pertaining to the claim made by the assessee(s) under section 80-IB of the Act, in respect of excise duty refund and interest subsidy are also decided in favour of the Revenue and against the assessee. Consequently, the impugned receipts are revenue in nature but not eligible for deduction under section 80-IB of the Act, being not "derived from" the industrial undertaking, which have been duly considered by us, in the case of Shree Balaji Alloys, Kathua (ITA No. 255/Asr/2009) above and the findings given therein shall apply equally, mutatis mutandis, to these appeals also.

22. Now, we would take up appeal filed by the Revenue in ITA No. 302/Asr/2009 for the assessment year 2005-06, wherein the Revenue raised following grounds of appeal :

"1. That the learned CIT(A) has erred in directing the AO to reduce the amount of Rs. 8,14,374 from the total excise duty refund of Rs. 37,65,184 for the purpose of making disallowance of deduction under section 80-IB of the IT Act 1961.

2. That the learned CIT(A) has erred in not appreciating the findings of the AO regarding the assessee's attempt of passing on the normal trade discount in the shape of credit notes and claiming it as excise duty benefit passed on to the customers.

3. That the learned CIT(A) has erred in not appreciating the fact that the excise duty charged by the manufacturer belong to the Central Excise Department and is to be paid in its entirety to the said Department and no part of this collection can be passed on to the customers.

4. That the appellant carves leave to add or amend or alter the ground of appeal before the appeal is heard."

22.1. In the course of present appellate proceedings, the learned Departmental Representative, stated that the CIT(A), erred in directing the AO, to reduce the amount to Rs. 8,14,374 out of total excise duty refund of Rs. 37,65,184, for the purpose of making disallowance under section 80-IB of the Act. He, further, relied on the order of the AO.

22.2. The learned counsel for the assessee, on the other hand, relied on the order of the CIT(A) and reiterated that the submissions made before the authorities below. He prayed for upholding the order of the CIT(A).

23. We have heard both the parties, considered the rival submissions and carefully gone through the order of the CIT(A). The findings given by the learned CIT(A) are reproduced hereunder :

"In this respect, I find merit in the submissions of the Authorised Representative of the appellant in view of the following :

(a) Out of the total excise duty received of Rs. 37,65,184, the appellant company has passed on an amount of Rs. 8,14,374 to the following parties/customers by way of credit notes :

(b)The AO has not disputed the passing on of the excise duty benefit to the above parties.

(c) The products manufactured by the appellant company are required to be valued as per retail sale price as reduced by the abatement, under section 4A of the Central Excise Act, 1944 and not as per the section 4 of the Central Excise Act, 1994, as observed by the AO. The case laws relied upon by the AO are relatable to the cases falling under section 4 of the Central Excise Act, 1944 and not to the cases falling under section 4A of the Central Excise Act, 1944, hence distinguishable on facts since the appellant's case falls under section 4A of the Central Excise Act, 1944.

(d) There is no legal bar on the appellant for passing on the excise duty benefits to its customers.

(e) The appellant company is paying the excise duty under section 4A and not under section 4 of the Central Excise Act 1944.

(f) The Department itself in various cases has already accepted and allowed (reduced) the excise duty benefits passed on to its customers by way of discount/credit notes while calculating the disallowance of deduction under section 80-IB. For example, two cases are as under :

(1) Amtrex Equipments (P) Ltd., Bari Brahmana, Jammu.

(2) Aggarwal Industries, Bari Brahmana, Jammu. assessment year 2005-06, by the ITO, Ward 1(1), Jammu.

(g) The decision of the Hon'ble Supreme Court in the case of CIT v. Thirumalaiswamy Naidu & Sons [1998] 230 ITR 534 (SC) also supports the case of the appellant.

In view of these facts, I hold that the appellant company is entitled for adjustment of an amount of Rs. 8,14,374 (passed on to its customers by way of credit notes) as against the total excise duty refund of Rs. 37,65,184. The AO is, therefore, directed to reduce the said amount of Rs. 8,14,364 from the total excise duty refund of Rs. 37,65,184 for the purpose of making disallowance of deduction under section 80-IB of the IT Act, 1961."

23.1. In view of the above, we are of the considered opinion that the learned CIT(A), was justified in directing the AO to reduce the amount of excise duty refund for the purpose of making disallowance under section 80-IB of the Act. Accordingly, we do not find any infirmity in the findings of the learned CIT(A) and, hence, the same are upheld. Accordingly, the appeal of the Revenue is dismissed.

24. In the result, all the three appeals filed by different assessees i.e. , in ITA Nos. 255/Asr/2009, 209/Asr/2009 and 305/Asr/2009 and appeal by the Revenue in ITA No. 302/Asr/2009 are dismissed.

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^*Also Pee Ell Alloys v . ITO (ITA No. 209/Asr/2009; Asst. yr. 2005-06); Ravenbhel Healthcare (P) Ltd. v. ITO (ITA No. 305/Asr/2009; Asst. yr. 2005-06) and ITO v. Ravenbhel Healthcare (P) Ltd. (ITA No. 302/Asr/2009; Asst. yr. 2005-06)