ORDER
Pramod Kumar, Accountant Member
1. These cross appeals, as also the cross objection filed by the assessee, are directed against the order dated 27th October, 2004, passed by the Commissioner (Appeals) in the matter of assessment under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), for the assessment year 2001-02. As these appeals and the cross objection pertain to the same assessee, involve common issues and were heard together, both of these appeals as well as cross objection are being disposed of by way of this consolidated order.
2. Learned counsel for the assessee fairly accepts that cross objection filed by the assessee does not contain any ground requiring independent adjudication, and that the grounds raised therein are covered by the appeals filed by the assessee or the assessing officer. The cross objection filed by the assessee is, therefore, dismissed as infructuous. We now take up the cross appeals.
3. We will first take up the appeal filed by the assessee.
4. In the first ground of appeal, following grievances have been raised:
1. Hon’ble Commissioner (Appeals) has erred in law in sustaining the denial of deduction under Section 80-IB by :
(i) drawing an incorrect inference that only letting out the cold storage for hire, to others, for storage of their goods, amounted to ‘operating cold storage’ under Section 80-IB;
(ii) holding that as per the appellant company having maintained the cold storage plant only for the purpose of storing its own goods, it did not derive any income from operation of cold storage;
(iii) holding that the ratio of decisions in the cases of CIT v. George Marjo Exports (P.) Ltd. (2001) 250 ITR 4461 (Mad.) and CIT v. Asian Marine Products (P.) Ltd. as inapplicable, as both of these decisions were on the point of deduction under Section 80J and not 80-IB.
5. We must first set out the facts so as relevant to the first ground of appeal raised by the assessee. These facts are like this. The assessee-company is engaged in the business of marine products and production and sale of ice. During the course of assessment proceedings, the assessing officer A noticed that the assessee has claimed deduction under Section 80HHC of the Act, to the tune of Rs. 1,21,69,838, and deduction under Section 80-IB (3)(ii) to the tune of Rs. 57,11,304. The assessing officer required the assessee to show cause as to why, in view of various judicial precedents (which he set out in his show-cause notice) holding that processing of prawns, sea creatures/fish and other marine products cannot be considered as manufacturing activities, should he not decline the claim of the assessee. In his communication to the assessee, the assessing officer also required the assessee to elaborate the basis of, if he has so claimed, 80-IB deduction in respect of the cold storage activities, and also the percentage of profit derived from the cold storage activity. The submissions filed by the assessee were rejected on both the counts. As regards the processing of sea food having been held to be in the nature of manufacturing activities, the assessing officer placed rejected this plea by placing his reliance on the judicial precedents. As regards assessees’ claim that the income so earned by the assessee is on account of cold storage facilities, and that all other activities in the processing of sea food are in fact ancillary to the cold storage activities, the assessing officer rejected the same by relying upon legislative intention behind Section 80-IB. According to the assessing officer, the very purpose of deduction under Section 80-IB is as follows :
…in order to minimise the loss and wastage of perishable agricultural produce, vegetables and similar commodities and to ensure a smooth and uniform distribution of agricultural and processed products, benefit of 100% deduction of profit for initial 5 years, and 25% to 30% (in case of the companies) of the profit in subsequent 5 to 7 years extended to undertakings, which derived profits from operating cold chains; ‘Cold storage’ defined to mean a chain of facilities for the storage or transportation of agricultural produce under scientifically con trolled conditions including refrigeration and other facilities necessary for the preservation of such products.
It was in this backdrop that the assessing officer rejected the assessee’s claim for deduction under Section 80-IB. Aggrieved by the stand so taken by the assessing officer, assessee carried the matter in appeal before the Commissioner (Appeals) but without any success. Learned Commissioner (Appeals) relied upon the Hon’ble Supreme Court’s decision in the case of CIT v. Relish Goods to hold that the activities undertaken by the assessee are not in the nature of manufacturing activities. As for the assessee’s claim regarding entitlement to deduction under Section 80-IB on the ground that the assessee was earning income from cold storage, the Commissioner (Appeals) rejected this claim as well, and observed that the assessee-company “is not deriving any income due to operation of cold storage plant”and that “that the cold storage plant is maintained only for the purpose of storing its own goods so that perishable commodity is not damaged”. The Commissioner (Appeals) further held that “the deduction under Section 80-IB in the case of operation of cold storage plant could be allowed only when assessee derives the income from the operations of the cold storage plant”. The stand of the assessing officer was thus upheld, and in fact fortified, by the Commissioner (Appeals). The assessee is aggrieved and is in appeal before us.
6. We have heard the rival contentions, perused the material on record – including, of course, the elaborate paper book filed by the assessee, and considered factual matrix of the case as also the application legal position.
7. As regards the assessee’s contention that the processing of sea food is manufacture, it has to be rejected in the light of Hon’ble Supreme Court’s judgment in the case of Relish Foods (supra). To that extent, we confirm the order of the authorities below and decline to interfere in the matter. Learned counsel’s armoury, however, is not exhausted. His next line of arguments is that since the assessee was operating a cold storage plant, he is eligible for deduction under Section 80-IB on that count.
8. We find that Section 80-IB of the Act provides that where gross total income of an assessee includes any profits and gains derived from any of the eligible businesses, a deduction equal to specified percentage of such profits will be granted in computation of total income, and that this deduction will be given only for such period as may be specified. It is also an undisputed position that this section applies only to an industrial undertaking and one of the eligible businesses is that such an industrial undertaking ‘operates one or more cold storage or plant or plants in any part of the India’. A plain reading of this provision makes it clear that, in order to be eligible for deduction under Section 80-IB, profit must be derived from an industrial undertaking engaged in eligible business. The words in Section 80-IB(l) are “profits and gains derived from any of the eligible business”and it is only specified percentage of such profit which is eligible for deduction under Section 80-IB. What is, therefore, to be seen is whether or not the profits earned by the assessee could be said to be derived from the business of operating cold storage, and if so, to what extent can the profits earned by the assessee could be said to be derived from the business of cold storage.
9. Let us try to appreciate the nature of business that the assessee is involved in. The simplified process is this. The assessee buys raw material (i.e., squids, prawns and fish etc.), washes and cleans the same, weights them and stores the material in the chill room before deskinning, grading, further washing, cleaning and glazing the same. In the next step, the material so produced is froze, packed, labelled and kept in storage till it is shipped out. Can that be said to be the business of operating a cold storage plant ? We do not think all the other steps in business are simply incidental to the business of operating a cold storage plant. No doubt, cold storage of the material plays a vital role because not after the material in processed, but also in between the processing of the material, the cold storage plant is used, yet the entire business is not simply the business of operating a cold storage. There are important processes involved in A producing the frozen sea food. We are alive to the fact that in the case of CIT v. Sterling Foods (Goa) , Hon’ble Bombay High Court has held that subjecting the prawns etc. to processing for the purposes of exports, they do not lose the original character, and that no new commodity or article emerges as a result of such processing. It does not, however, mean that the input and output is the same, and there is nothing more than cold storage of the material. The material may retain its original identity, but the processing does add value to it. The entire profits from processing frozen sea food cannot therefore, be said to be derives from the business of operating a cold storage plant. We reject this contention of the assessee. Having said that, we must also not lose sight of the fact that cold storage has a vital and important role to play so far as processing of frozen sea food is concerned. At different stages before, during and after processing of material, cold storage facilities are to be used in the business. A significant part of the profit must be held to be derived from the business of operating cold storage plant. We see no force in the stand of the revenue that the assessee is eligible for deduction under Section 80-IB only when he receives the money for use of cold storage by an outsider and not when he uses the cold storage himself. The scheme of the Section 80-IB is that the deduction is available in respect of profits and gains derived from the business of operating a cold storage plant, and not the business of offering cold storage services to outsiders. As long as profit can be reasonably held to be from the business of operating cold storage plant, it is eligible for deduction under Section 80-IB – irrespective of whether or not the services are used by the assessee himself or by outsiders on payment of consideration. Ideally, it should be the amount that the assessee would have paid to an outside concern if he was to use these facilities from such a concern. However, since such an amount cannot be computed at this stage, and, having regard to the flow chart filed by the assessee which demonstrates various stages of processing and use of cold storage facilities in such processing, we consider it appropriate to hold that 30% of the profits of the assessee can be treated as derived from the business of operating the cold storage plant. We, accordingly, direct the assessing officer to compute deduction to the assessee in respect of 30% of the profits earned by the assessee from the business of processing frozen sea food.
10. We must put a word of caution here. As to what is the amount of profit attributable to the assessee in case an assessee uses own cold storage facilities is essentially a question of fact which may vary from case to case. Learned counsel for the assessee has very laboriously explained various aspects of the processes and even filed a flow chart showing stage by stage movement and process. Our findings in the present case are based on the material produced before us as regards the various stages of processing involved and the involvement of cold storage facilities therein. This cannot, therefore, be taken as an authority for the proposition that the same ratio of profits can be said to be derived from operation of cold storage plant in all cases.
11. Ground No. 1 of the assessee is thus partly allowed in the terms indicated above.
12. In ground No. 2, the assessee has raised the following grievance before us :
The Hon’ble Commissioner (Appeals) erred in not deleting the disallowance of purchases made from M/s. God Gift Marine Products, only on the ground that no confirmation had been received from the supplier, even when all the primary evidence regarding the purchases made, including the particulars of exports of those goods and the complete quantitative reconciliation of goods for the year had been produced during the assessment as well as appellate proceedings.
13. The relevant material facts are like this. In the course of assessment proceedings, the assessing officer noticed that the assessee had made purchases of various kinds of fish from one M/s. God Gift Marine Products (GMP, in short) but the summons issued under Section 131 to the said vendor remain uncomplied with. The assessee could also not produce the said vendor for verification by the assessing officer. When the assessing officer obtained bank account of this concern, the assessing officer also noticed that one of the directors of the assessee-company had introduced this concern to the bank, and that each time a cheque was deposited in the said account, the money so deposited was also immediately withdrawn. It was in this backdrop that the assessing officer came to the conclusion that the purchased alleged to have been made from GMP was bogus purchases, and, accordingly, he disallowed the same. Aggrieved, assessee carried the matter in appeal but without any success. It was submitted that owner of the said concern had discontinued business and has migrated to some country in middle east for employment purposes. It was also pointed out that in view of the fact that he had a bank account, it was beyond doubt that the person was in existence. As to the withdrawals from bank accounts, and infirmities in the billing by the said concern, it was pointed out that this was too usual a situation because most of the fisherman are illiterate, men of limited means and quite unlike a normal businessmen. As for introduction for bank account, the assessee submitted that this was done to facilitate assessee’s payments through banking channels. A quantitative statement showing reconciliation of purchases, processing and exports was also filed before the Commissioner (Appeals) with a view to demonstrate that the goods in question was actually purchased, processed and exported out of India. The Commissioner (Appeals) accepted the assessee’s quantitative reconciliation statements. The Commissioner (Appeals) observed that “in this type of trade, the parties normally do not have a fixed place of operations”, that “the business of purchases/sales of the marine products is highly unorganized business and the purchasing party as well as the selling parties are not generally inclined to carry out trade through A banking channels” and that “it is not assessee’s concern that the party to whom the payments have been made has immediately withdrawn the money from the bank…unless goods claimed to have been purchased are actually purchased, the stock would not tally”. Yet, the Commissioner (Appeals) confirmed the disallowance only on the ground that the assessee was not able to produce transaction confirmation from GMP. The assessee is aggrieved and is in appeal before us against ClT(A)’s confirming the impugned disallowance.
14. We have heard the rival contentions, perused the material on record, and duly considered factual matrix of the case as also the applicable legal position.
15. It is really difficult to reconcile between Commissioner (Appeals)’s agreeing with the assessee about the fact that the vendors are generally small fisherman of limited means, who are hig;hly mobile depending on the availability of work, and yet, at the same time, his holding that the disallowance is to be confirmed because the assessee could not produce the confirmation from the vendor. Non-filing of a transaction confirmation, by itself, cannot be reason enough for making or sustaining disallowance. All the things are to be considered in totality. The C1T(A) is himself on record to have accepted the quantitative reconciliation as also the fact that unless the purchases alleged to be bogus was made, it would not have possible to ensure that quantitative statements tally. The Commissioner (Appeals) has also acknowl-edged and appreciated the fact that immediate withdrawal of cash by the fishermen, out of the monies deposits by cheques, is a reality of everyday life and that, in any event, they have to make payments for the material purchased by them. The C1T(A) has also noted that there is no evidence whatsoever to establish, or even remotely indicate, that any portion of payment made by the assessee has flown back to the assessee. These observations made by the Commissioner (Appeals), in our considered view, are quite justified and reasonable. We approve his stand to that extent. However, despite all these well-reasoned findings, which meet out approval, the Commissioner (Appeals) has sustained the disallowance of Rs. 15,92,585 on account of purchases made by the assessee from GMP. In our considered view, and for the reasons set out above, the Commissioner (Appeals) indeed erred in sustaining this disall evance. We, therefore, direct the assessing officer to delete this disallowance of Rs. 15,92,585. The assessee gets the relief accordingly.
16. Ground No. 2 of the appeal filed by the assessee is, thus, allowed.
17. In the result, the appeal filed by the assessee is partly allowed in the terms indicated above.
18. That takes us to the appeal filed by the assessing officer.
19. In the first ground of appeal, the assessing officer has raised the following grievance :
On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in concluding that interest income is to be treated as income under the head ‘Business’ despite the fact that the accrual of interest income was not derived directly from the business of exports of the assessee-company.
20. In the course of assessment proceedings, the assessing officer noticed that the assessee has earned interest income of Rs. 4,22,443 from the bank deposits. The assessing officer was of the view that interest so earned is not derived from business activities of the assessee; it is earned out of unused or idle funds of the assessee. He thus held that this interest income is to be taxed under the head “Income from other sources”. Aggrieved, assessee carried the matter in appeal before the Commissioner (Appeals). The Commissioner (Appeals) took note of the fact the assessee’s contention that there was no question of idle funds or surplus funds as the assessee had a bank borrowing of Rs. 289.99 lakhs. The deposits were placed with the banks only to comply with the terms of financing by the lenders. On these facts, the Commissioner (Appeals) came to the conclusion that the assessee has placed bank deposits, in the course of and for the purposes of business expediency, and not as a mode of investment. The interest income was thus found to have direct nexus with the business. The Commissioner (Appeals) thus held that interest income was business income. The assessing officer is aggrieved of the relief so given by the Commissioner (Appeals) and is in appeal before us.
21. Having heard the rival contentions and having perused the material on record, we are not inclined to interfere in the matter. It is amply clear that the deposits on which interest is earned were placed for bona fide business reasons. It is not a case of parking of surplus or idle funds as evident from the fact that the assessee has huge borrowings and the cost of these borrowings is, beyond dispute, far more than the earning from interest. The nexus is also demonstrated in this case. In view of these discussions, and bearing in mind entirety of the case, we approve the conclusions arrived at by the Commissioner (Appeals) and decline to interfere in the matter. The order of the Commissioner (Appeals) is approved on this issue.
22. Ground No. 1 of the appeal filed by the assessing officer is thus dismissed.
23. In ground No. 2, the assessing officer has raised the following grievance :
On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in directing the assessing officer to delete the addition of Rs. 97,80,154 being purchases made in excess of the prevailing market rates from its sister concerns.
24. So far as the grievance of the assessee is concerned, the material facts are as follows. In the course of assessment proceedings, the Assessing Officer took note of the contents of the tax audit report which stated that the assessee-company had paid Rs. 5.94 crores and Rs. 63.82 lakhs to its sister concerns namely Ulhas Seafoods and Ulhas Seafoods Pvt. Ltd. respectively. The assessing officer also found, from the details filed by the A assessee, that the assessee-company had purchased Ribbon Fish of 2,35,829 kgs. from Ulhas Seafoods Pvt. Ltd. @ Rs. 20 per kg., 18,55,466 kgs. @ Rs. 14 per kg. from Ulhas Seafoods. The assessing officer observed that “same quality of Ribbon Fish has been purchased from S.M. Auti @ Rs. 10 per kg. Using this rate of Rs. 10 per kg. as the bench mark, the assessing officer disallowed the amount paid in excess of Rs. 10 per kg. as disallowable under Section 40A(2)(b) of the Income Tax Act. Aggrieved, assessee carried the matter in appeal before the Commissioner (Appeals). The Commissioner (Appeals) upheld the contention of the assessee that the prices of fish vary from day-to-day and depend on various grades of quality, that it is not possible to take any particular figure as representative rate, that the prices paid to the sister concerns are reasonable vis-a-vis the market rates and comparable with the rates paid to other vendors; and that the disallowance was uncalled for. The disallowance of Rs. 97,80,154 was thus deleted. The assessing officer is aggrieved of the relief so given by the Commissioner (Appeals) and is in appeal before us.
25. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
26. We find that the assessing officer has proceeded to take a particular rate of a fish as the rate which prevailed during the entire year. This kind of a generalization is contrary to realities in day-to-day life. The market price of commodities like fish vary from day-to-day and it also depends on the grade of the product. These prices are also severly affected by demand and supply, as also by season. One cannot have a standard price in such a situation. It is also important to bear in mind that prices at which one concern has supplied will only be relevant for comparison of supplies by other persons only if supplies were made on the same day and the supplies are of the same grade. There is no mention that the grades of fish supplied by all the vendors, including the sister concerns, is the same. That is not possible also. We have also taken note of the fact that as per details filed by the assessee, which have been reproduced in the order of the Commissioner (Appeals), there have been several instances in which the supplies by the sister concerns are at lower prices. Therefore, the kind of oversimplification that has been resorted to is indeed unsustainable in law and on facts. In this view of the matter, and for the reasons set out by the Commissioner (Appeals) with which we are in considered agreement, we hold that the assessing officer was indeed unjustified in making the impugned disallowance. The Commissioner (Appeals) rightly deleted the disallowance. We confirm and approve the action of the Commissioner (Appeals) and decline to interfere in the matter.
27. Ground No. 2 of the appeal filed by the assessing officer is also, therefore, dismissed.
28. In ground No. 3, the assessing officer has raised the following grievance :
On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in treating the sale of DEPB as an export incentive under Section 28(iiib) of the Income Tax Act.
29. Learned representatives fairly agree that this issue is covered, in favour of the assessee, by retrospective amendment in law. In this view of the matter, we approve the conclusion arrived at by the Commissioner (Appeals) and decline to interfere in the matter.
30. Ground No. 3 of the appeal filed by the assessing officer is also thus dismissed.
31. In ground No. 4, the assessing officer has raised the following grievance :
On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 93,57,250 made on account of bogus purchases in spite of the fact that the confirmation of the same could not be produced before the assessing officer.
32. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
33. A plain reading of this ground of appeal indicates that the only grievance of the assessing officer is against admission of additional evidence. However, not only that the Commissioner (Appeals) has confronted the Assessing Officer with the additional evidence so filed and obtained his report on the same, but the Commissioner (Appeals) also placed on record his reasons for doing the same as also his satisfaction that the assessee had bona fide reasons for not filing the same earlier. As regards the validity of admitting additional evidence, this issue is directly covered by jurisdictional High Court’s judgment in the case of Smt. Prabhavati S. Shah v. CIT . The grievance raised by the assessing officer is thus devoid of any substance. In any event, even on merits, we have upheld the action of the Assessing Officer in deleting the addition on account of bogus purchases, in paragraphs 13 to 15 above. Following the observations made by us in paragraph 15 above, we uphold the action of the Commissioner (Appeals) on merits as well. Therefore, on merits also, the action of the Commissioner (Appeals) deserves to be sustained. We, therefore, confirm the action of the Commissioner (Appeals) and decline to interfere in the matter.
34. Ground No. 4 is thus dismissed.
35. In fourth and last ground of appeal of the assessing officer, following grievance is raised :
On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in admitting fresh evidence under Rule 46A and directing that the payment of Rs. 5,42,600 towards processing charges paid to Mr. Vinod Kumar as genuine when assessee was not able to produce confirmations and prove genuineness of the party and purchases before the assessing officer.
36. We have heard the rival contentions, perused the material on record A and duly considered factual matrix of the case as also the applicable legal position.
37. We may mention that there is no admission of additional evidence in the case of Vinod Kumar, and the ground is therefore clearly misconceived. The Commissioner (Appeals) has deleted the addition and noted that confirmation cannot be filed now because Vinod Kumar has since passed away in a road accident, and that since Vinod Kumar had shifted to Gujarat, he had g bona fide reasons for not complying to the summons. The Commissioner (Appeals) has deleted the addition on merits as well. The grievance raised by the assessing officer does not arise out of the impugned order.
38. We, therefore, dismiss the grievance of the assessing officer and decline the interfere in the matter. The order of the Commissioner (Appeals) stands confirmed and approved by us on this count as well.
39. Ground No. 5 is also thus dismissed.
40. In the result, appeal filed by the assessing officer is dismissed.
41. To sum up, the appeal filed by the assessee is partly allowed in the terms indicated above, the appeal filed by the assessing officer is dismissed, and the cross objection filed by the assessee is dismissed as infructuous.