Maharashtra Seamless Ltd, V. DCIT CC-6 (1),

ITA 1527/DEL/2008

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5691 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 15-12-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 23-04-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C L AL
• Keywords: Proportionate interest; Competent authority
• Section: 143(3); 234B; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E: NEW DELHI BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI DEEPAK R. SHAH, ACCOUNTANT MEMBER I.T.A.NO.1527/DEL/2008 ASSESSMENT YEAR : 2004-05 MAHARASHTRA SEAMLESS LTD., DY. COMMISSIONER OF I NCOME-TAX, 1/23B, 1 ST FLOOR, VS. CIRCLE 6(1), NEW DELHI. ASAF ALI ROAD, NEW DELHI. I.T.A.NO.1929/DEL/2008 ASSESSMENT YEAR : 2004-05 DY. COMMISSIONER OF INCOME-TAX, M/S. MAHARASHTRA SE AMLESS LTD., CIRCLE 6(1), NEW DELHI. VS. 106, NILGIRI APARTMENT , 9, BARAKHAMBA ROAD, NEW DELHI. (APPELLANTS) (RESPONDENTS) ASSESSEE BY : SHRI VED JAIN, CA . DEPARTMENT BY : SHRI C. L AL, CIT-DR. O R D E R PER DEEPAK R. SHAH, ACCOUNTANT MEMBER THESE CROSS APPEALS BY THE ASSESSEE AND REVENUE ARE DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-X, NEW DELHI, DATED 28 TH FEBRUARY, 2008 IN AN APPEAL AGAINST THE ASSESSMENT FRAMED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (T HE ACT). 2 ITA NO.1527/DEL/2008 2. THE FIRST ISSUE IN APPEAL BY THE ASSESSEE IS AGA INST DENIAL OF DEDUCTION UNDER SEC. 80-HHC. THE ASSESSEE IS A TRADING EXPOR TER. THE ASSESSING OFFICER FOUND THAT IF THE DEPB INCENTIVES OF RS.11. 90 CRORE ARE EXCLUDED, THERE IS LOSS IN THE TRADING ACTIVITIES AND HENCE T HE ASSESSEE IS NOT ENTITLED TO DEDUCTION UNDER SEC. 80HHC. THE SAME WAS CONFIRMED BY THE LEARNED CIT(A) AND HENCE THIS APPEAL. 3. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT THE ISSUE IN NOW SETTLED BY THE SPECIAL BENCH OF ITAT IN THE CASE OF TOPMAN EXPORTS VS. ITO, 33 SOT 337 (MUM.)(SB) WHEREIN IT WAS HELD AS U NDER:- (I) THE ARGUMENT OF THE REVENUE THAT DEPB IS A POST-EXP ORT EVENT AND HAS NO RELATION WITH THE PURCHASE OF GOOD S CANNOT BE ACCEPTED. THERE IS A DIRECT RELATION BETW EEN DEPB AND THE CUSTOMS DUTY PAID ON THE PURCHASES. FO R PRACTICAL PURPOSES, DEPB IS A REIMBURSEMENT OF THE COST OF PURCHASE OF THE EXTENT OF CUSTOMS DUTY; (II) THE DEPB BENEFIT (FACE VALUE) ACCRUES AND BECOMES ASSESSABLE TO TAX WHEN THE APPLICATION FOR DEPB IS FILED WITH THE CONCERNED AUTHORITY, SUBSEQUENT EVENTS SUC H AS SALE OF DEPB OR MAKING IMPORTS FOR SELF-CONSUMPTION , ETC. ARE IRRELEVANT FOR DETERMINING THE ACCRUAL OF INCOME ON ACCOUNT OF DEPB; (III) ON A HARMONIOUS CONSTRUCTION OF CLAUSES (IIIA), (II IB) AND (IIIC) OF S.28 IT IS EVIDENT THAT CLAUSES (IIIA) AN D (IIIC) DEAL WITH SPECIFIC SPECIES OF INCENTIVES, CLAUSE (IIIB) IS A RESIDUAL CLAUSE WHICH BRINGS WITHIN ITS SWEEP ALL F ORMS OF EXPORT INCENTIVES OTHER THAN THOSE SPECIFICALLY SET OUT IN CLAUSES (IIIA) AND (IIIC) ; 3 (IV) THE FACE VALUE OF DEPB BENEFIT FALLS WITHIN THE AMB IT OF S. 28 (IIIB) ; (V) S.28 (IIID) WHICH REFERS TO THE PROFITS ON TRANSFE R OF THE DEPB, OBVIOUSLY REFERS ONLY TO THE PROFIT ELEMENT AND NOT THE GROSS SALE PROCEEDS OF THE DEPB. IF THE REVENUES ARGUMENT THAT THE SALE PROCEEDS SHOULD BE CONSIDERED IS ACCEPTED, THERE WOULD BE ABSURDITY BE CAUSE THE FACE VALUE OF THE DEPB WILL THEN GET ASSESSED I N THE YEAR OF THE DEPB AND ALSO IN THE YEAR OF ITS TRANSF ER; (VI) PROFIT ON SALE OF DEPB REPRESENTING THE EXCESS OF S ALE PROCEEDS OF DEPB OVER ITS FACE VALUE IS LIABLE TO B E CONSIDERED U/S 28 (IIID) AT THE TIME OF SALE ; (VII) ONLY THE PROFIT (I.E THE SALE VALUE LESS THE FACE VALUE) IS REQUIRED TO BE CONSIDERED FOR THE PURPOSES OF S. 80 HHC; (VIII) WHATEVER HAS BEEN SAID ABOUT DEPB ALSO HOLDS GOOD F OR DFRC, ON BOTH ITS COMPONENTS, VIZ. THE FACE VALUE O F DFRC AND PROFIT ON ITS TRANSFER, EXCEPT FOR THE FAC T THAT THE PROFIT ON SALE OF DFRC SHALL BE CHARGED TO TAX U/S. 28 (IIIE); (IX) DUTY DRAWBACK SHALL BE CHARGEABLE TO TAX AT THE TIM E OF ACCRUAL OF INCOME U/S 28 (IIIB) WHEN APPLICATION IS FILED W ITH THE COMPETENT AUTHORITY AFTER MAKING EXPORTS. IN VIEW OF THE ABOVE FINDING BY THE SPECIAL BENCH, THE MATTER IS RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER TO RECOMP UTE THE DEDUCTION UNDER SEC. 80HHC. THE ASSESSEE IS ALSO DIRECTED TO COOPE RATE AND TO JUSTIFY ITS CLAIM FOR DEDUCTION U/S 80HHC. THE ISSUE IS THEREF ORE, RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER. 4 4. GROUND NO.3 IN APPEAL BY THE ASSESSEE IS AGAINST DISALLOWANCE OF RS.25,000/- BEING TREATED AS EXPENSES INCURRED TOWA RDS EARNING DIVIDEND INCOME WHICH IS EXEMPT AND HENCE NOT ALLOWABLE IN T ERMS OF SECTION 14A OF THE ACT. 5. AT THE TIME OF HEARING THIS GROUND WAS NOT PRESS ED AND HENCE THE SAME IS REQUIRED TO BE DISMISSED. 6. GROUND NO.4 REGARDING CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT IS CONSEQUENTIAL IN NATURE. THE SAME MAY BE CH ARGED AS PER LAW AFTER GIVING EFFECT TO THIS ORDER. ITA NO.1929/DEL/2008 7. THE FIRST ISSUE IN APPEAL BY THE REVENUE IS AGAI NST DELETION OF DISALLOWANCE OF RS.27,23,856/- BEING FOREIGN EXCHAN GE FLUCTUATION LOSS. THE ASSESSING OFFICER TREATED THAT THE REVALUATION OF T RADE DEBTORS AT THE YEAREND AT THE PREVAILING RATE OF EXCHANGE IS A NOTIONAL LO SS AND HENCE NOT ALLOWABLE. IN VIEW OF THE RECENT DECISION OF HONBLE SUPREME C OURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD., 312 ITR 254, THE LOSS WHICH IS IN THE COURSE OF TRADING OPERATION IS ALLOWABLE AND IS NOT CONSIDERED TO BE NOTIONAL LOSS. THEREFORE, THIS GROUND FAILS. 5 8. NEXT GROUND OF APPEAL IS AGAINST DELETION OF DIS ALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE, WHICH WAS TREATED AS RELAT ABLE TO TAX-FREE INCOME INVOKING PROVISION OF SECTION 14A OF THE ACT. 9. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HA D INCURRED INTEREST EXPENDITURE. THE ASSESSING OFFICER ALSO NOTED THAT THERE ARE LOAN FUNDS AS WELL AS OWN FUNDS, INTEREST IS PAYABLE ON LOAN FUND S. THE ASSESSEE HAS INVESTED A SUM OF RS.25.62 CRORE IN SECURITIES GIVI NG TAX-FREE INCOME. THE ASSESSING OFFICER DISALLOWED PROPORTIONATE INTEREST INVOKING PROVISION OF SECTION 14A OF THE ACT. THE LEARNED CIT(A) HELD TH AT AS HELD IN ASSESSEES OWN CASE FOR IMMEDIATELY PRECEDING ASSESSMENT YEAR, THE INVESTMENT IN TAX- FREE BONDS HAVING BEEN MADE OUT OF SHAREHOLDERS FU ND AND NOT BORROWED FUND, NO INTEREST IS ATTRIBUTABLE TO THE AMOUNT BOR ROWED WHICH IS UTILIZED FOR THE PURPOSE OF INVESTMENT IN TAX-FREE SECURITIES AN THEREFORE, NO DISALLOWANCE IS CALLED FOR. 10. WE ARE IN AGREEMENT WITH THE FINDINGS OF COMMIS SIONER (APPEALS). FOR SECTION 14A TO APPLY THE ASSESSING OFFICER HAS TO DEMONSTRATE THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME. SINCE THE FINDING G IVEN BY THE COMMISSIONER (APPEALS) IS THAT THE INVESTMENTS IN TAX-FREE SECUR ITIES WERE OUT OF OWN FUNDS AND NOT OUT OF BORROWED FUNDS, THE EXPENSES WHICH A RE NOT RELATED TO EARNING 6 INCOME WHICH IS NOT FORMING PART OF TOTAL INCOME. THEREFORE, NO PROPORTIONATE DISALLOWANCE IS CALLED FOR UNDER SEC. 14A OF THE ACT. THE DECISIONS RELIED UPON BY THE LEARNED DR IN THE CASE S OF CIT VS. H.R. SUGAR FACTORY, 187 ITR 363 (ALL) AND INDIAN METALS AND F ERRO ALLOYS LTD. 193 ITR 344 (ORISSA), DO NOT APPLY TO THE PRESENT CASE. IN THE PRESENT CASE THE ASSESSING OFFICER HAS INVOKED THE PROVISION OF SECT ION 14A AND HENCE IT IS FOR HIM TO DEMONSTRATE THAT THE EXPENSES ARE RELATA BLE TO INCOME, WHICH DO NOT FORM PART OF TOTAL INCOME. IN ABSENCE OF SUCH NEXUS BETWEEN THE BORROWAL AND INVESTMENT IN TAX-FREE SECURITIES, NO PROPORTIONATE DISALLOWANCE IS ENVISAGED UNDER SEC. 14A. THIS GRO UND ACCORDINGLY FAILS. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TR EATED AS PARTLY ALLOWED AND THAT OF THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 12 TH MARCH, 2010. SD/- SD/- (A.D. JAIN) (DEEPAK R. SHAH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 12 TH MARCH, 2010. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT BY ORDER 4. CIT(A) 5. DR *MG DEPUTY REGISTRAR, ITAT.