M/s. Chokshi Exports, Ahmedabad V. The ACIT.,(OSD)Circle-10, Ahmedabad

ITA 1425/AHD/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 6113 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 31-05-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 22-04-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEETA SHAH
• Assessee Lawyers: BHAVESH R SHAH
• Keywords: Business income

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI,JM AND D.C.AGRAWAL, AM M/S CHOKSI EXPORTS, 604, SATKAR,B/H SWAGAT BUILDING, C.G. ROAD, AHMEDABAD. V/S . THE ASSTT. C.I.T. (OSD), CIRCLE-10, AHMEDABAD. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI BHAVESH R. SHAH, AR RESPONDENT BY:- SMT. NEETA SHAH, SR.DR. O R D E R PER D. C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE ASSESSEE RAISING FO LLOWING GROUNDS :- (1) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CON FIRMING THE DECISION OF AO TO EXCLUDE THE INTEREST INCOME OF RS .3,25,215/- FROM CALCULATION OF DEDUCTION U/S 80 HHC ON THE OBS ERVATION THAT THE APPELLANTS CONTENTION THAT EXPENSE SHOULD BE ALLOWED AGAINST THE INTEREST INCOME IS NOT VALID AS THE INT EREST EXPENSES HAVE BEEN INCURRED FOR CARRYING OUT THE EXPORT ACTI VITIES. 2. THE ONLY ISSUE INVOLVED IN THIS APPEAL IS THAT A O HAS NOT ALLOWED THE CLAIM OF ASSESSEE IN ADJUSTING INTEREST INCOME OF RS.3,25,215/- AGAINST INTEREST EXPENDITURE AND THUS NOT ALLOWING DEDUCTIO N UNDER SECTION 80 HHC ON THAT SUM. ITA NO.1425/AHD/2008 ASST. YEAR :2004-05 2 3. THE FACTS OF THE CASE ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTICED THAT ASSESSEE HAS CLAIME D DEDUCTION OF INTEREST PAYMENT AGAINST INTEREST INCOME OF RS.3,25 ,215/- WHILE CALCULATING DEDUCTION UNDER SECTION 80 HHC. THE CLA IM OF ASSESSEE WAS THAT IT HAD ADVANCED CERTAIN FUNDS TO SMC INDUSTRIE S WHO WAS THE MAIN SUPPLIER TO THE ASSESSEE FIRM FROM WHOM ASSESSEE HA S PURCHASED GOODS TO THE EXTENT OF RS.3.09 CRORES DURING THIS YEAR. AGAI NST THESE PURCHASES, THE ASSESSEE FIRM HAD ADVANCED FUNDS AND RECEIVED INTER EST WHICH IS A BUSINESS INCOME AND, THEREFORE, ASSESSEE SHOULD BE ALLOWED ADJUSTMENT OF INTEREST PAID AGAINST SUCH INTEREST INCOME. THE AO, HOWEVER, HELD THAT ASSESSEE HAS EARNED INTEREST INCOME ON DEPOSITS OF SURPLUS FUNDS AND THE SAME WAS INCOME FROM OTHER SOURCES. THE AO RELIED ON THE DECISION OF HON. KERALA HIGH COURT IN THE CASE OF K. RAVINDRANA THAN NAIR VS. DCIT (2003) 262 ITR 669 (KER) WHEREIN IT IS HELD THAT IN TEREST INCOME CANNOT BE HELD TO BE INCOME DERIVED FROM EXPORT. THE LD. C IT(A) CONFIRMED THE DECISION OF THE AO BY HOLDING THAT THERE IS NO DIRE CT NEXUS BETWEEN THE INTEREST EXPENDITURE AND INTEREST INCOME EARNED. EV EN THOUGH INTEREST INCOME IN THE CASE OF ASSESSEE MAY BE INTEREST INCO ME FROM THE BUSINESS, BUT IT CANNOT BE TREATED AS INCOME DERIVED FROM EXP ORT. THE LD. CIT(A) RELIED ON THE FOLLOWING JUDGMENTS :- (I) G.T.N. & TEXTILES VS. DCIT (2005) 279 ITR 72 (K ER) (II) URBAN STAINSLAUS CO. VS. CIT (2003), 263 ITR 1 0 (KER) (III) ACIT VS. SOUTH INDIA PRODUCE (2003) 262 ITR 2 0 (KER) (IV) SOUTHERN CASHEW EXPORT VS. DCIT (2003) 130 TAX MAN 203(KER) 4. AGAINST THIS THE LD. AR FOR THE ASSESSEE SUBMITT ED THAT INTEREST EXPENDITURE TO THE EXTENT OF RS.3,37,206/- WAS INCU RRED TOWARDS INTEREST INCOME OF RS.3,25,515/- BOTH ARE CONNECTED TO THE B USINESS OF THE ASSESSEE. THEREFORE, INTEREST EXPENDITURE SHOULD BE REDUCED FROM INTEREST 3 INCOME FOR THE PURPOSES OF CALCULATING DEDUCTION UN DER SECTION 80 HHC. ONCE THERE IS NO NET INCOME AS NET RESULT OF ADJUST MENT OF INTEREST INCOME AND EXPENDITURE WOULD BE EXPENSES OF RS.11,691/-, T HERE IS NO QUESTION OF REDUCING 90% OF THE INCOME WHILE CALCULATING DEDUCT ION UNDER SECTION 80 HHC. THE DEPOSIT MADE BY THE ASSESSEE FIRM WITH SMC INDUSTRIES WAS A BUSINESS DEPOSIT. SMC INDUSTRIES WAS THE MAIN SUPPL IER FOR THE ASSESSEE FIRM. THE ASSESSEE WAS REQUIRED TO MAKE SECURITY DE POSIT. IN THE ALTERNATIVE LD. AR SUBMITTED THAT ONLY 90% OF THE I NTEREST INCOME IS REQUIRED TO BE REDUCED FROM THE PROFITS OF THE BUSI NESS AS PER EXPLANATION (BAA) TO SECTION 80 HHC. 5. AGAINST THIS, LD. AR RELIED ON THE ORDER OF LD. CIT(A). 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE HAS NOT FURNIS HED ANY EVIDENCE TO THE EFFECT THAT IT HAD MADE DEPOSITS WITH SMC INDUSTRIE S AND THAT TOO FOR BUSINESS PURPOSES. NO AGREEMENT TO THE EFFECT THAT WITHOUT MAKING DEPOSIT, SMC INDUSTRIES WILL NOT SUPPLY MATERIAL TO THE ASSESSEE, HAS BEEN FURNISHED. A CLEAR DISTINCTION HAS TO BE MADE SO AS TO SHOW THAT DEPOSIT WITH SMC INDUSTRIES WAS A COMPULSION FOR SMOOTH SUP PLY OF RAW MATERIAL AND IT WAS NOT A CASE WHERE A VOLUNTARY DEPOSIT OF SURPLUS FUND WAS MADE WITH SMC INDUSTRIES IN CASE DEPOSIT WAS MADE WITH T HAT CONCERN. 7. IN A CASE WHERE IT WAS A VOLUNTARY DEPOSIT WITH SMC INDUSTRIES INTEREST INCOME EARNED ON SUCH DEPOSITS WOULD BE TR EATED AS INCOME FROM OTHER SOURCES. AS THERE IS NO DIFFERENCE BETWEEN A VOLUNTARY DEPOSIT MADE WITH BANK OR VOLUNTARY DEPOSIT MADE WITH ANY OTHER ORGANIZATION. INTEREST INCOME FROM SUCH DEPOSIT WOULD BE TREATED AS INCOME FROM OTHER SOURCES AND, THEREFORE, THERE IS NO QUESTION OF ANY ADJUSTM ENT OF INTEREST INCOME 4 AGAINST ANY INTEREST EXPENDITURE INCURRED DURING TH E COURSE OF BUSINESS. IN A CASE WHERE DEPOSITS WERE MADE WITH SMC INDUSTRIES , AS A COMPULSION AND ACCORDING TO AN AGREEMENT WITH THAT PARTY FOR E NSURING SUPPLY OF RAW MATERIAL TO THE ASSESSEE STILL THEN SUCH INTEREST I NCOME WILL NOT BE ENTITLED FOR DEDUCTION UNDER SECTION 80 HHC AS INTEREST INCO ME WILL NOT BE DERIVED FROM BUSINESS OF EXPORT. SUCH INCOME WILL H AVE TO BE REDUCED FROM THE BUSINESS PROFITS TO CALCULATE THE DEDUCTIO N UNDER SECTION 80 HHC. 8. IT HAS BEEN HELD IN CIT VS. MAHAVIR SPINNING MIL LS LTD. (2009) 308 ITR 445 (P & H) THAT INTEREST INCOME WHICH HAS CHAR ACTERISTICS OF BUSINESS INCOME CANNOT BE AS SUCH ADMISSIBLE FOR DE DUCTION UNDER SECTION 80 HHC AS IT IS NOT DERIVED FROM EXPORT BUT FOLLOWI NG EXPLANATION (BAA) TO SECTION 80 HHC 90% OF INTEREST RECEIVED FROM SMC INDUSTRIES HAS TO BE REDUCED FOR CALCULATION OF PROFITS OF THE BUSINE SS. SIMILAR VIEW WAS ALSO TAKEN BY HON. PUNJAB & HARYANA HIGH COURT IN C IT VS. MALWA COTTON SPINNING MILLS LTD. (2008) 302 ITR 53 (P& H) . THUS THE ENTIRE ISSUE SETTLES DOWN ON TWO ASPECTS -ONE IS WHETHER D EPOSIT WITH SMC INDUSTRIES IS A BUSINESS COMPULSION AS SUPPORTED BY AGREEMENT BETWEEN THE PARTIES THEN SUCH INTEREST INCOME WOULD BE BUSI NESS INCOME AND 90% THEREOF WOULD BE REDUCED FROM THE BUSINESS PROFITS AS PER EXPLANATION (BAA) TO SECTION 80 HHC BUT WHERE IT IS A VOLUNTARY DEPOSIT WITH SMC INDUSTRIES THAN INTEREST INCOME THEREON WOULD BE TR EATED AS INCOME FROM OTHER SOURCES AND IT WILL NOT BE TAKEN INTO ACCOUNT WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC. 5 9. WE ACCORDINGLY RESTORE THE MATTER TO THE FILE OF AO TO ENQUIRE INTO THE FACTS AND TAKE A DECISION AS PER OUR OBSERVATIO NS MADE ABOVE. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. SD/- SD/- (BHAVNESH SAINI) (D.C.AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD, DATED : 04/06/2010 MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD ORDER PRONOUNCED IN OPEN COURT ON 04/06/2010