K.K. BOLIYA, A.M. ORDER These cross-appeals arising from order dt. 9th Jan., 2004 of CIT(A)- VIII, Mumbai, are disposed of by this common order as under : ITA No. 1795/Mum/2004 2. This is Departmental appeal and only ground raised is as under : "On facts and in circumstances of case and in law, CIT(A) erred in deleting disallowance of Rs. 12,81,710 being expenses incurred by assessee pertaining to its Aurangabad unit where no business activity was carried out by assessee during year under consideration without appreciating facts of case." 3. facts are that assessee company is engaged in manufacturing of pharmaceutical formulations. This manufacturing activity is carried out in three units viz., Daman 1, Daman 2 and Aurangabad. assessee is also engaged in some trading activity. expenses which are subject-matter of ground of appeal raised by Department have been incurred by assessee at Aurangabad unit. Aurangabad unit commenced manufacturing sometime in year 1975-76 and as part of expansion of business, new units were started in Daman in year 1994-95. During previous year relevant to assessment year, production at Aurangabad unit came to standstill due to labour problems and also on account of fact that old and outdated machineries resulted into low profit. workers at Aurangabad resorted to strike. assessee made efforts for settlement and reconciliation with workers, but these efforts failed and eventually production had to be stopped. During present year Aurangabad unit did not function single day. 4. assessee incurred following expenses : S. Amount Particulars No. (Rs.) 1. Staff payment 9,63,500 2. Electricity, power and fuel 1,21,724 Legal and professional 3. 62,250 charges 4. Telephone expenses 44,055 5. Other expenses 90,131 12,81,660 5 . AO called upon assessee to explain why aforesaid expenses may not be disallowed as no business was carried out at Aurangabad unit. It was submitted on behalf of assessee that manufacturing activity was only suspended due to labour problems and assessee had made all arrangements to recommence such activity. It was also submitted that assessee company was carrying on same business of manufacturing and sales of pharmaceutical products at other units. It was explained that necessary expenditure had to be incurred on payment of salaries to staff, to maintain assets of company, on legal and labour matters and other statutory payments like taxes, electricity charges, etc. AO rejected these submissions and disallowed expenses. learned CIT(A) held that expenses were for business purposes and have to be allowed. 6. We have heard both sides vis-a-vis relevant facts about which there is no dispute. It may be mentioned here that assessee company issued notice of closure dt. 31st Jan., 2000, copy of which is at pp. 31 to 33 of paper book. In this notice reasons for closure are stated as under : "After lifting lockout, company allowed workmen to resume duty and accordingly, workmen who were on roll of company reported for work w.e.f. 1st Sept., 1999. After cleaning up factory and preparing for commencement of work in factory, management initiated all required steps to put manufacturing activities on stream. machines were arranged and kept ready. However, management was required to apply for renewal of Food and Drug Administration licence required for manufacturing of drugs and medicines. drug inspector of Aurangabad, along with Asstt. Commr. Food and Drug Administration, visited plant on 20th Dec., 1999, and carried out inspection of premises, plant and machinery. In inspection report, drug authorities have pointed out many deficiencies and have refused to renew manufacturing licence unless and until all defects, deficiencies and shortcomings observed and pointed out by Food and Drug Administration authorities are rectified, attended to and complied with t o satisfaction of authorities. company also appointed M/s S.R. Enterprises, renowned project consultants for pharmaceuticals and food processing industries to advise management for rectification of deficiencies and defects pointed out by Food and Drug Administration authorities. consultants were requested to give their estimates and plan of action. consultants visited our plant on 24th Dec., 1999 and carried out necessary inspection/survey and submitted detailed report and plan of action. As per report, upgradation of facility to meet current norms of GMP will be so prohibitive that it will be much more than having new factory complying with current requirements. Considering report from Food and Drug Administration and recommendation of renowned consultants, management has come to conclusion that it is not possible to revive operations at Chikalthana, Aurangabad. workmen employed in factory will, therefore, be redundant and hence their services will be terminated with immediate effect. management has, therefore, decided to close down undertaking/factory at Chikalthana, Aurangabad. closure will come into effect from 1st Feb., 2000." 7 . facts are that assessee company was trying to revive manufacturing unit at Aurangabad but due to several problems it could not be done and ultimately unit was closed w.e.f. 1st Feb., 2000. Till unit was closed assessee had to maintain basic infrastructure and had to pay salaries and wages to employees and to incur other essential and fixed expenses. We agree with learned CIT(A) that these expenses have been incurred for business purpose and, therefore, his order on this issue is confirmed. ITA No. 1983/Mum/2004 8. Ground No. 1 is as under : "The learned CIT(A) has erred in upholding disallowance in respect of ex gratia payment amounting to Rs. 2,29,744 paid to Aurangabad unit workers due to closure of factory during year. learned CIT(A) has failed to appreciate that appellant company carried on similar manufacturing activities at its other units at Daman, and that only one of its units at Aurangabad was closed." 9. facts leading to closure of Aurangabad unit have already been stated above. aforesaid ex gratia payment is in nature of retrenchment compensation paid to workers at time of closure of Aurangabad unit. AO disallowed claim and disallowance has been confirmed by learned CIT(A). 1 0 . learned counsel appearing for assessee forcefully argued before us that manufacturing activity at Aurangabad unit was part of larger manufacturing activity carried on by assessee at three units. All three units are engaged in manufacturing of identical pharmaceutical formulations. It is contended that under compelling circumstances, Aurangabad unit was closed but same manufacturing activity was continued at two units at Daman. It is argued that in these circumstances compensation paid to workers of Aurangabad unit is allowable business expenditure and for this proposition he relied on following cases : (i) CIT vs. Diesel Engineer (1998) 149 CTR (Mad) 146 : (2000) 244 ITR 488 (Mad); (ii) CIT vs. P.I. Simon (1991) 187 ITR 302 (Ker). 11. learned Departmental Representative supported orders of Revenue authorities and relied on Tribunal Mumbai decision in case of Jt. CIT vs. Abbot Laboratories (India) Ltd. (2006) 102 TTJ (Mumbai) 423 : (2006) 100 ITD 343 (Mumbai). 12. We have considered rival submissions and have gone through relevant facts. In case of Diesel Engineer (supra), assessee firm was carrying on certain manufacturing activities in addition to certain trading activities as part of its business. assessee discontinued manufacturing business and sold all machinery to company and retrenched 20 workers. In these facts, Madras High Court held as under : "That there had been transfer of assets of manufacturing unit in favour of another company and there were certain surplus employees in assessee firm who had to be retrenched. Though assessee was not party to settlement arrived at before Labour Officer, order of Labour Officer clearly showed that assessee was required to pay retrenchment compensation to employees and their services were also terminated. assessee, in compliance with orders of Labour Officer had paid same. finding of Tribunal was that there was unity of control and unity of management of both units of business, viz., manufacturing activity as well as trading activity and both units constituted single business. Revenue had not specifically challenged that finding. In view of finding of Tribunal that both businesses constituted single business, assessee would be entitled to deduction of retrenchment compensation as well." 13. In above case there was finding by Tribunal that there was unity of control and unity of management of both units of business viz., manufacturing activity and trading activity and both units constituted single business. High Court held that in these circumstances retrenchment compensation was to be allowed. Similar view has been expressed by Kerala High Court in case of P.I. Simon (supra). learned Departmental Representative has relied on Tribunal s decision in case of Abbot Laboratories (India) Ltd. (supra). In that case also it was held by Tribunal that payment made by assessee to its employees under voluntary retirement scheme on closure of one of units, is allowable as deduction, if it is shown that closed unit and remaining business carried on by assessee constituted same business. In present case there is unity of control and management, even though separate books of account in respect of each unit h v e been maintained. All three manufacturing units were engaged in manufacturing of identical pharmaceutical formulations. One unit was closed due to reasons already mentioned supra. other two units have continued sim ilar manufacturing activity. Considering these facts in our view Aurangabad unit was part of same business activity and, therefore, compensation paid at time of closure of unit would be allowable expenditure. We, therefore, delete addition. 14. Ground No. 2 pertains to disallowance of depreciation of Rs. 7,72,903 in respect of assets of Aurangabad unit. depreciation has been disallowed by AO and such disallowance was confirmed by CIT(A) on ground that assets at Aurangabad were not put to use even for single day during entire year. learned counsel submitted before us that since assets were kept ready for use, depreciation was allowable. It is further contended that after introduction of concept of "block of assets" depreciation must be allowed. 15. learned Departmental Representative supported orders of Revenue authorities and relied on Tribunal Mumbai decision in case of Asstt. CIT vs. Rishiroop Polymers (P) Ltd. (2006) 105 TTJ (Mumbai) 132 : (2006) 102 ITD 128 (Mumbai). 16. We have considered facts which are undisputed. assets in Aurangabad unit have not been put to use for business purposes even for single day during entire previous year. Similar issue came up for consideration before Tribunal Mumbai Bench in case of Rishiroop Polymers (P) Ltd. (supra) and we reproduce ratio of this case from headnote : As per latest decision in case of Dinesh Kumar Gulabchand Agrawal vs. CIT (2004) 267 ITR 768 (Bom) : (2004) 141 Taxman 62 (Bom), assessee would not be entitled to depreciation on passive use or on plant and machinery ready for use. There should be actual use of asset for it to be eligible for depreciation. In instant case, there was lockout and strike for five years and plant and machinery was not put to use as there was admittedly no manufacturing activity. depreciation could not be allowed on such non-usage in view of clear verdict of decision in case of Dinesh Kumar Gulabchand Agrawal (supra) and CIT vs. Oriental Coal Co. Ltd. (1994) 206 ITR 682 (Cal) : (1994) 76 Taxman 240 (Cal), which were directly on point. Further inclusion of item in block, will not make it eligible for depreciation if other conditions for allowability of claim are not satisfied. Similarly, Tribunal is not bound to follow legally incorrect decision of AO taken in other years. Following aforesaid two judgments on issue, order of CIT(A) was to be reversed and that of AO was to be restored." 17. facts in present case before us are identical and, therefore, in our view issue is fully covered by decision of co-ordinate Bench of Mumbai Tribunal. We, therefore, confirm order of learned CIT(A) on this issue. 18. last ground raised by assessee is as under : "The learned CIT(A) has erred in deciding that while ascertaining exempt profits under s. 80-IB of Act, following incomes are to be excluded out of net profits, as they are not derived from activity of industrial undertaking : (a) Interest Rs. 57,19,479 (b) Sales-tax refund Rs. 11,16,254 19. Under s. 80-IB deduction is available in respect of profits and gains derived from certain industrial undertakings as stipulated therein. assessee claimed deduction in respect of interest income and sales-tax refund. details of interest income are on p. 43 of paper book. learned counsel appearing for assessee contended that interest is being earned on bank fixed deposits and other advances necessitated by business compulsions and, therefore, assessee is entitled to deduction. learned Departmental Representative relied on Supreme Court decision in case of Pandian Chemicals Ltd. vs. CIT (2003) 183 CTR (SC) 99 : (2003) 262 ITR 278 (SC). 20. We have considered rival submissions vis-a-vis facts and legal position. In case of Pandian Chemicals Ltd. (supra), interest income was earned on deposits with State Electricity Board for supply of electricity to industrial undertaking. Supreme Court held that such interest is not income derived from business of industrial undertaking. From above case it may be seen that even though deposit with Electricity Board was made by assessee for purpose of operating industrial undertaking, apex Court held that interest income received on such deposit was not eligible for deduction as it cannot be said to be income derived from business of undertaking. In our view Supreme Court decision squarely applies to facts of present case. Therefore, we uphold order of learned CIT(A) that deduction under s. 80-IB is not available on interest income. 2 1 . With regard to sales-tax refund learned CIT(A) recorded following finding at para 31 of his order : "In respect of sales-tax refund since amount had not gone into cost of goods manufactured in past when deduction in regard to sales-tax was claimed, receipt cannot be taken as part of profits of industrial undertaking. That leaves only scrap sales of Rs. 6,34,663. Since said scrap is generated in course of manufacturing activities, sale consideration thereof is required to be taken as part of total turnover and profits of industrial undertaking." 22. learned CIT(A) has recorded categorical finding that sales- tax amount did not form part of cost of goods manufactured and, therefore, on refund of such amount assessee is not entitled to any deduction under s. 80-IB. No material has been placed before us to controvert aforesaid finding of learned CIT(A). We agree with view taken by learned CIT(A) and his order on this issue is, therefore, conformed. 23. In result, Departmental appeal is dismissed and assessee s appeal is partly allowed. *** DEPUTY COMMISSIONER OF INCOME TAX v. MEDLEY PHARMACEUTICALS LTD.