ORDER
J. Kathuria, Accountant Member
1. This appeal by the assessee for assessment year 1985-86 is directed against the order dated 31 -12-1987 passed by the Commissioner of Income-tax, Meerut under Section 263 of the IT Act.
2. Brief facts of the case are that the assessee firm is a forest lessee with head office at Hardwar and branches at Jammu and Yamuna Nagar. The Commissioner of Income-tax (CIT for short) called for the record of the assessee firm for assessment year 1985-86 and was of the impression that the assessment framed by the Inspecting Assistant Commissioner (Assessment) on 31 -10-1985 was erroneous and prejudicial to the interests of Revenue. He accordingly issued a notice dated 9-9-1987 to the assessee and fixed the case for hearing for 9-1 0-1987. The assessee filed its objections vide letter dated 20-11-1987. The learned CIT, however, decided as under :-
(a) The assessee firm had been allowed deduction under Section 80HH amounting to Rs. 9,90,095. This consisted of Rs. 3,90,615 in respect of Yamuna Nagar branch and Rs. 5,99,480 in respect of Jammu branch. On the basis of the Supreme Court decisions in the cases of Anglo-French Textile Co. Ltd. v. CIT [1954] 25 ITR 27 and CIT v. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472, it was held that the assessee derived income form manufacturing of forest trees into sleepers and from sale thereof. According to the learned CIT the deduction under Section 80HH was not admissible to the assessee in respect of the trading activities involving the sale of the sleepers. He accordingly held that l/3rd of the profit in each of the branches was attributable to the trading activities on which deduction under Section 80HH was not admissible.
(b) It was noticed by the learned CIT that the head office profit and loss account had shown debit balance of Rs. 12.52 lakhs on account of interest. He was of the opinion that the amounts raised by the head office had been passed on to the branches and that the interest in fact relating to the branches had been debited to the head office profit and loss account. The turnover in Jammu branch was of the order of Rs. 2.09 crores and in the Yamuna Nagar branch RS. 1.14 crores. This roughly worked out to 65 per cent in the Jammu branch and 35 per cent in the Yamuna Nagar branch. The learned Commissioner accordingly reduced the income of Yamuna Nagar branch by Rs. 4,37,372 and of Jammu branch by Rs. 8,13,122 for working out the deduction under Section 80HH from the profits of the aforesaid branches.
(c) The Inspecting Assistant Commissioner (Assessment) had allowed deduction in respect of payment of Rs. 5,90,868 which represented payment to D.F.O. According to the learned CIT, the Assessing Officer had not ascertained the correct nature of such payment i.e., whether such payment represented interest or had an element of penalty or infraction of law embedded in it. He accordingly restored the matter to the file of the Inspecting Assistant Commissioner (Assessment) for re-enquiry and reassessment of the amount rightly allowable as deduction.
(d) The assessee had taken the plea that the Assessing Officer’s order had since merged with the order of Commissioner of Income-tax (Appeals) on 19-10-1987 when he passed the appellate order for assessment year 1985-86. The contention of the assessee was that before the learned CIT passed the order on 31-12-1987 the Assessing Officer’s order had already merged with the order of the learned CIT (Appeals) and hence the learned CIT had no jurisdiction under Section 263 of the Act. The learned CIT, however, held that the notice under Section 263 had been issued before the passing of order by the learned CIT (Appeals) and that the learned CIT (Appeals) had not touched or dealt with the issues which were the subject-matter of proceedings under Section 263 of the Act. His conclusion, therefore, was that there was no merger of the order of the IAC (Assessment) with that of CIT (Appeals).
(e) The learned CIT further held that depreciation on certain items pertaining to Yamuna Nagar branch had been wrongly claimed in the books of the head office. He accordingly held that the depreciation amount of Rs. 10,743 should be reduced from the income of the Yamuna Nagar branch for working out the deduction under Section 80HH.
3. The assessee has come up in further appeal against the aforesaid 5 decisions of the learned CIT. At the time of hearing, however, Shri O.P. Sapra, the learned counsel for the assessee pointed out that he would not address the Tribunal on the question whether there was merger or not of the order of the I AC (Assessment) with the order of the CIT (Appeals) in view of the retrospective amendment of Section 263. As this ground relating to merger has not been pressed before us, it shall be treated as dismissed.
4. Shri Sapra further pointed out that as regards the aforesaid sum of Rs. 5,90,868 the learned CIT had restored the matter to the Assessing Officer for a fresh decision. In this regard it was pointed out that the Deputy Commissioner of Income-tax, Assessment Range, Dehradun, had vide his order dated 2-11-1988 reconsidered the matter after making fresh enquiries and come to the conclusion that no disallowance was called for on account of interest on delayed payments of royalty and Sales-tax since no element of the same involved penalty for infraction of Sales-tax or forest laws. In view of the decision by the Assessing Officer in regard to this item Shri Sapra submitted that the assessee no longer had any grievance against the direction of the learned CIT and that the ground raised in that regard may be treated as withdrawn. For the reasons mentioned by the learned counsel, this ground is treated as withdrawn.
5. As regards the reduction of depreciation amounting to Rs. 10,743 for working out deduction under Section 80HH in respect of Yamuna Nagar branch, Shri Sapra, submitted that the order of the learned CIT could not be found fault with on this ground. In view of the learned counsel’s submission, the ground relating to the depreciation of Rs. 10,743 is, therefore, treated as dismissed.
6. We are, thus, left with two main issues. The first issue is whether there is any justification for bifurcating the profits of the industrial undertakings of the assessee at Jammu and Yamuna Nagar branches and secondly, whether there is any justification for apportioning the interest of Rs. 12.52 lakhs claimed in the profit and loss account of the head office and deducting it from the profits of the two branches. Shri Sapra addressed detailed arguments on these two issues.
7. As regards the first issue, it was submitted that the facts in the case of Anglo-French Textile Co. Ltd. (supra) were altogether different because there the question to be decided was as to what would be the income attributable to the taxable territories and what would be the income attributable to non-taxable territories. It was submitted that the scheme of Section 80HH was altogether different and it would be wrong to import the analogy of the aforesaid decision of the Supreme Court while working out the deduction under Section 80HH. It was submitted that the carrying on of manufacture or production of a thing or article was one of the conditions for an industrial undertaking to qualify for deduction under Section 80HH. But once an undertaking was held to be an industrial undertaking for the purposes of Section 80HH there could be no further bifurcation of the profits relatable to manufacture and referable to sale. It was submitted that the term used in Section 80HH was “derived from” and according to the learned counsel there was not an iota of doubt that the income of the branches was the income derived from the industrial undertaking. It was also submitted that the manufacture of sleepers and the sale thereof were part of the same integral activity and could not be bifurcated for the purposes of Section 80HH. Referring to the Karnataka High Court decision in Sterling Foods v. CIT [1984] 150 ITR 292, it was submitted that the word “derived” was not a term of art and that its use in the definition indeed demanded an enquiry into the genealogy of the product. It was emphasised by the learned counsel that the enquiry should stop as soon as the effective source was discovered. According to the learned counsel the moment it was discovered that the profits of the branches were derived from the industrial undertakings further enquiry was not permitted and the matter should have rested at that as the source had been identified. It was also submitted that if profits attributable to manufacture of the products only were to qualify for deduction under Section 80HH of the Act and not referable to the sale of the products then the purpose of giving relief to the assessees would be substantially defeated as these industrial undertakings would not be in a position to sell their products at the place of manufacture or in the backward region itself. Conversely, it was submitted that if an assessee did not manufacture or produce an article or thing himself, but sold it in the backward area, such an assessee would not be entitled to relief under Section 80HH. It was elaborated that so far as the profits of the Jammu branch were concerned there was no difficulty even if one went by the reasoning given in impugned order of the learned CIT because as be, notification issued under Section 80HH (a copy of which was filed before us) the whole of the State of Jammu & Kashmir was notified as backward area. As the manufacturing activity had been done in the forests of Jammu & Kashmir State and the sales had taken place at Jammu the entire profits of the Jammu branch qualified for deduction under Section 80HH even according to the reasoning of the learned CIT. According to Shri Sapra the above arguments were with regard to the Yamuna Nagar branch in which the manufacturing activity had been done in the forests of Himachal Pradesh which was a backward area for the purposes of Section 80HH, but the sales had been effected at Yamuna Nagar which was not a backward area.
8. The learned counsel further submitted that the object behind relief under Section 80HH had also to be taken into consideration and a literal construction that leads to absurdity or unjust result should be avoided. Reliance in this regard was placed on the Supreme Court decision in K.P. Varghese v. ITO [1981] 131 ITR 597. It was also submitted that it was well-settled principle of construction that in construing a provision for exemption or relief, it should be liberally construed. Reliance in this regard was placed on the Madras High Court decision in CIT v. Simpson & Co. [1980] 122 ITR 283.
9. Another point raised by Shri Sapra was that assessment year 1985-86 was not the initial year in which relief under Section 80HH had been allowed. The submission was that if in the initial year deduction under Section 80HH was allowed it could not be disallowed or whittled down or modified or varied in the subsequent year. Relying on the Gujarat High Court decision in Saurashtra Cement & Chemical Industries Ltd. v. CIT [1980] 123 ITR 669, it was submitted that without disturbing the relief granted in the initial year the Income-tax Officer cannot examine the question again and decide to withhold or withdraw the relief already granted under Section 80J. It was submitted by the learned counsel that though the aforesaid decision was under Section 80J of the Act, the principle enunciated by the High Court was equally applicable to Section 80HH and was binding on the learned CIT with equal force.
10. It was also submitted that in the assessee’s own case for assessment year 1986-87 no such bifurcation of income of industrial undertaking had been done and no action had been taken under Section 263 for that year.
11. As regards the second issue, our attention was drawn to the details filed by the assessee before the learned CIT in which it was pointed out by the assessee that in the year relevant to assessment year 1982-83 excess payments had been received from the Jammu branch to the head office to the tune of Rs. 24.52 lakhs. According to the learned counsel excess payments received for assessment year 1983-84 amounted to Rs. 60.65 lakhs. Similarly for assessment year 1984-85 excess payments received from Jammu branch amounted to Rs. 43.74 lakhs and for assessment year 1985-86 excess payments received amounted to Rs. 72,09,690. It was emphasized by the learned counsel that these payments did not include the profits received by the head office from the branch office. Referring to the copy of account of Jammu office for the period from 1-4-1984 to 31-3-1985 (a copy of which was placed on the record at our request) the learned counsel pointed out that even during the course of the year at no point was there an excess payment from the head office to the branch office. It was, therefore, submitted that when the head office did not transmit moneys to the Jammu branch, but raised loans for the purposes of the head office there was no question of deducting an amount of Rs. 8,13,122 from the profits of the Jammu branch. As regards the Yamuna Nagar branch it was submitted that as per page 30 of the paper-book the amount of interest worked out to Rs. 3,66,131 as against the figure Rs. 4,37,372 adopted by the learned CIT. However, the learned counsel did not want to enter upon controversy on this issue and wanted us to accept the interest figure a; worked out by the learned CIT at Rs. 4,37,372.
12. The last though not the least submission of Shri Sapra was that even if there were two views in the matter of apportionment of interest to the branches, the view canvassed by the assessee which was a reasonable view would have precedence over the view of the Revenue. Reliance in this regard was placed on the decisions in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC); CIT v. Naga Hills Tea Co. Ltd. [1973] 89 ITR 236 (SC) and Arvind Boards & Paper Products Ltd. v. CIT [1982] 137 ITR 635 (Guj.).
13. The learned Departmental Representative heavily relied on the order of the learned CIT.
14. We have carefully considered the rival submissions as also the facts on record. We have been called upon to give our decision on the two issues, namely, the bifurcation of the profits of the industrial undertaking and the apportionment and consequent deduction of interest from the profits of the Yamuna Nagar and Jammu branches. The other three issues have either been settled in favour of the assessee by the Revenue or have not been pressed before us.
15. As regards the issue of bifurcation of income for the purposes of Section 80HH, we find considerable merit in the submissions of the learned counsel for the assessee. The decision of the Supreme Court in the case of Anglo-French Textile Co. Ltd. (supra) was in an altogether different context. In that case the question was of bifurcation of income attributable to the taxable territories (British India) and attributable to the non-taxable territories. In that case bifurcation had to be made and was justified. The language of Section 80HH, however, is different. While applying the provisions of the said section one has to see whether there was an industrial undertaking and what were the profits and gains derived from such an industrial undertaking. There is no manner of doubt that the assessee was running two industrial undertakings at Jammu and Yamuna Nagar. The assessee was manufacturing sleepers out of the forest trees. The income was derived from these industrial undertakings. It could not be said that the profit was derived partly from manufacturing activities and partly from trading activities. According to us the activity of getting a forest on lease, of felling the trees, of manufacturing the sleepers, of transporting them to the branches and of selling them was one integrated activity which could not be bifurcated or partitioned.
Once the source was identified, namely, that the income had been derived from the industrial undertaking, no further enquiries could be made by the Revenue authorities. Shri Sapra’s reliance on the decision of Kamataka High Court in Sterling Foods case (supra) is well-founded. It is significant to note that where the legislature itself wanted bifurcation it had made provision for the same in the relevant section. Section 80HHC of the Act is a case in point. That section makes a clear distinction between the export sales and other sales because such a distinction was inherent in the situation and was called for. There is no such distinction contemplated under Section 80HH. Manufacture or production of an article or thing is a condition precedent for an undertaking to become an industrial undertaking. That, however, does not mean that the profits derived from manufacture alone can be taken into consideration for working out the deduction under Section 80HH. Once a particular undertaking is held to be an industrial undertaking then there is no alternative, but to go to the profits and gains derived from such an industrial undertaking for working out the relief under Section 80HH. The use of the word “manufacture” is in a different context which should not be lost sight of. There is no justification for stretching it further and to hold that only manufacturing profits in the backward area would be considered for the purposes of Section 80HH and not the trading profits. In a case where an assessee was manufacturing sleepers and was also purchasing sleepers for trading purposes it could perhaps be said that the assessee was having two separate activities and perhaps the income derived from the sale of sleepers which were purchased by the assessee it could be said that relief under Section 80HH was not admissible. That is, however, not the case with the assessee. The assessee was not purchasing any sleepers from outside parties in its branches at Yamuna nagar and Jammu. The activity of manufacture and sale of the sleepers by the assessee has been held by us to be an integrated activity which could not be bifurcated or divided. It is also a salutary and well-settled principle of law that while construing the exemption provision a liberal approach should be adopted. As regards the Jammu branch there was no justification for reducing the profits by Rs. 9,99,133 as the sales were also taking place at Jammu which is a backward area. So even as per the learned CIT’s own reasoning, such deduction from the profits was unjustified. Having regard to the entire facts and circumstances of the case including the one that assessment year 1985-86 was not the initial year. We hold that the learned CIT was in error in deducting amounts of Rs. 6,51,026 and Rs. 9,99,133 from the Yamuna Nagar branch and Jammu branch respectively for working out relief under Section 80HH.
16. As regards the question of apportionment of interest debited in the profits and loss account of the head office to the two branches and deducting interest of Rs. 4,37,372 and Rs. 8,13,122 from Yamuna Nagar branch and Jammu branch respectively, since the learned counsel for the assessee has not seriously disputed the deduction of Rs. 4,37,372 from the profits of Yamuna Nagar branch we must confirm the action of the learned CIT in that regard. As regards the deduction of interest of Rs. 8,13,122 from the profits of the Jammu branch, the facts narrated by the learned counsel for the assessee clearly show that there was no justification for such a deduction. In fact over a period of time as per details submitted by the learned counsel excess payments have been made by the branch office to the head office and not vice versa. Even if the head office had raised loans from the banks and other financial institutions, there is no evidence to suggest that such loans had been passed on to the Jammu branch by the head office. We have carefully gone through the detailed copy of account of the Jammu office in the books of the head office and find that excess payments have been made by the branch office to the head office and not the other way around. Even during the course of the year there is no date on which the branch office has received excess payments from the head office. In the light of these facts the apportionment of interest to the Jammu branch office is uncalled for. We hold accordingly.
17. The result is that the assessee would be entitled to deduction under Section 80HH on the entire amount of profits of Jammu branch shown at Rs. 29,97,398. As regards the Yamuna Nagar branch the assessee would be entitled to deduction under Section 80HH on Rs. 15,04,964 as per the following details:-
Income computed.
Rs. 19,53,079
Less : Interest as worked out by the Rs. 4,37,372
learned CIT. --------------
Rs. 15,15,707
Less : Depreciation as worked out by Rs. 10,743
the learned CIT.
--------------
Rs. 15,04,964
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18. In the result, the appeal is partly allowed.