M/s. Chemcrux Enterprises Ltd., Baroda V. The ACIT, Circle-1(1), Baroda

ITA 2384/AHD/2006

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0325 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 27-08-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 09-11-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA
• Keywords: Business income; Depreciation; Business expenditure; Unabsorbed depreciation
• Section: 80HHC; 37; 56; 28

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' (BEFORE S/SHRI MAHAVIR SINGH AND D C AGRAWAL) ITA NO.2384/AHD/2006 (ASSESSMENT YEAR: 2003-04) CHEMCRUX ENTERPRISE LTD. T-7, NATIONAL PLAZA, R C DUTT ROAD, BARODA V/S THE ASSISTANT COMMISSIONER OF INCOME- TAX, CIRCLE-1(1), BARODA (APPELLANT) (RESPONDENT) APPELLANT BY :- SHRI MANISH J SHAH, ADVOCATE RESPONDENT BY:- SHRI C K MISHRA, DR O R D E R PER MAHAVIR SINGH (JUDICIAL MEMBER) : THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER PASSED BY T HE COMMISSIONER OF INCOME-TAX (APPEALS)-I, BARODA [TH E CIT(A) FOR SHORT] IN APPEAL NO.CAB/I-393/05-06, DATED 31-0 8-2006, FOR ASSESSMENT YEAR 2003-04. THE FOLLOWING FOUR EFFECTI VE GROUNDS HAVE BEEN RAISED BY THE ASSESSEE IN THIS APPEAL:- 1 THE CIT(A) ERRED IN DISALLOWING GUARANTEE COMMISS ION OF RS.1,90,000/- PAID TO DIRECTORS ON THE GROUND THAT THERE IS NO RESTRICTIVE COVENANTS IN THE LOAN AGREEMENT. IT WAS ONLY PERSONAL GUARANTEE OF DIRECTORS WITHOUT MORTGAGE OR SECURITY OF ANY PROPERTY. 2 THE CIT(A) ERRED IN DISALLOWING RS.1,91,650/- PRO VISION FOR GRATUITY FUND ON THE GROUND THAT THOUGH APPLICATION FOR APPR OVAL OF GRATUITY SCHEME HAS BEEN ALREADY MADE IN EARLIER YEARS, APPR OVAL FOR THE SAME HAS NOT BEEN GIVEN BY CIT TILL THAT DATE. 3 THE CIT(A) ERRED IN REFUSING NETTING OF INTEREST INCOME AGAINST INTEREST PAID FOR THE PURPOSE OF CALCULATION OF DED UCTION U/S 80HHC 2 ON THE GROUND THAT INTEREST RECEIVED IS ASSESSED U/ S 57 AS OTHER SOURCES AND INTEREST PAID IS BUSINESS EXPENDITURE. 4 THE CIT(A) ERRED IN DEDUCTION OF UNABSORBED DEPRE CIATION RS.1,05,000/- FROM CURRENT YEARS PROFIT FOR THE PUR POSE OF CALCULATION U/S 80HHC(3) ON THE GROUND THAT DEDUCTION IS AS PER COMPUTATION OF PROFIT UNDER BUSINESS THERE IS REASON TO CHANGE T HE ASSESSED PROFIT . 2 THE BRIEF FACTS IN RELATION TO GROUND NO.1 ARE T HAT THE ASSESSEE DEBITED GUARANTEE COMMISSION IN THE P&L AC COUNT ON ACCOUNT OF PAYMENT OF SUCH COMMISSION TO ITS DIRECT ORS, NAMELY, SHRI GIRISH SHAH AND SHRI SANJAY MARATHE AT THE VAL UE OF RS.95,000/- TO EACH. THE BASIS FOR SUCH PAYMENT IS STATED TO BE @ 1% OF TOTAL CREDIT FACILITIES OF RS.95,00,000/- OBT AINED BY THE ASSESSEE COMPANY. THE ASSESSEE COMPANY RELIED UPON CLAUSE 3(B) OF SANCTION LETTER, WHICH STATED THAT BOTH THE ABOVE DIRECTORS HAVE GIVEN PERSONAL GUARANTEE TOWARDS THE ENTIRE CREDIT FACILITIES OBTAINED BY THE ASSESSEE COMPANY. THE AS SESSEE ALSO EXPLAINED THAT IN THE CASE OF PRIVATE LIMITED COMPA NIES AND CLOSELY HELD LIMITED COMPANIES, LOANS AND CREDIT AR E GRANTED BY THE BANK NOT ONLY ON THE FINANCIAL STANDING OF THE COMPANY BUT ALSO ON THE CREDIT WORTHINESS OF THE DIRECTOR AND T HE SAME IS ALSO PLEDGED WITH THE BANK IN TERMS OF PERSONAL GUARANTE E OF THE DIRECTORS. THUS, THE DIRECTORS PERSONAL ASSETS GET INDIRECTLY PLEDGED TO THE COMPANY. THE ASSESSEE, THEREFORE, PL EADED THAT IT IS ONLY FAIR THAT COMPANIES ARE INCLINED TO PAY SOM E REWARD TO THE DIRECTORS WHICH IS TERMED AS GUARANTEE COMMISSI ON AND IS PERMITTED BY THE DEPARTMENT OF COMPANY LAW AFFAIRS AS A PAYMENT OVER AND ABOVE THE ALLOWABLE REMUNERATION U NDER THE COMPANIES ACT, 1956. HOWEVER, THE AO OBSERVED THAT THE ASSESSEE HAS NOT OBTAINED ANY LOAN FROM THE BANK DU RING THE YEAR UNDER CONSIDERATION AND THE LOAN WAS OBTAINED BY TH E COMPANY IN 3 EARLIER YEARS. THE AO FURTHER OBSERVED THAT THE DIR ECTORS HAVE ONLY GIVEN THE PERSONAL GUARANTEE AND NO ASSETS OF THE DIRECTORS HAVE BEEN MORTGAGED OR OFFERED AS SURETY FOR OBTAIN ING THE LOAN. THE AO ALSO OBSERVED THAT THE NAMES OF THE DIRECTOR S WHO HAVE GIVEN THE GUARANTEE HAVE NOT BEEN MENTIONED IN THE SANCTION LETTER AND THAT THE NAMES OF THE OTHER DIRECTORS HA VE BEEN MENTIONED BUT TO THEM NO SUCH GUARANTEE COMMISSION HAS BEEN PAID. THE AO ALSO OBSERVED THAT IN TERMS OF CLAUSE 219 OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION NO RISK ENSU RES TO THE DIRECTORS BECAUSE ANY ACT OF THE DIRECTORS OF THE C OMPANY SHALL BE INDEMNIFIED BY THE COMPANY OUT OF THE FUNDS OF T HE COMPANY. THEREFORE, THE AO OBSERVED THAT WHEN SPECIFIC PROVI SIONS UNDER CLAUSE 219 HAVE BEEN MADE TO PROTECT THE INTEREST O F THE DIRECTOR FOR GIVING SURETY AND PERSONAL GUARANTEE FOR THE BO RROWING, THE QUESTION OF PAYING ADDITIONAL COMPENSATION IN THE A BSENCE OF ANY RISK TO THE DIRECTORS APPEARS EXTRANEOUS FOR THE PU RPOSES OF TREATING THE SAME AS A BUSINESS EXPENSES IN THE HAN DS OF THE COMPANY. HE ACCORDINGLY HELD THAT THIS AMOUNT HAD N OT BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS AND THEREFORE, DISALLOWED THE AMOUNT OF RS.1,90,000 /- [RS.95,000/- EACH PAID TO SHRI GIRISH SHAH AND SHRI SANJAY MARATHE, DIRECTOR]. 3 THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE MADE WRITTEN SUBMIS SIONS DATED 21-08-2006 AND RELIED UPON VARIOUS DECISIONS. THE A SSESSEE CONTENDED BEFORE THE CIT(A) THAT THE GUARANTEE COMM ISSION CANNOT BE CONSIDERED AS EXTRANEOUS OR IRRELEVANT AN D IN THE INSTANT CASE, PAYMENT OF GUARANTEE COMMISSION TO DI RECTORS IS LEGALLY PERMITTED UNDER THE COMPANIES ACT. HOWEVER, THE CIT(A) 4 DID NOT AGREE WITH THE SUBMISSIONS MADE BY THE ASSE SSEE AND UPHELD THE ACTION OF THE AO. 4 BEING AGGRIEVED, THE ASSESSEE HAS COME IN APPEAL BEFORE US. THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT GUARANTEE COMMISSION OF RS.1,90,000/- PAID TO TWO D IRECTORS, WHO GAVE THEIR PERSONAL GUARANTEE ON BEHALF OF THE ASSESSEE- COMPANY AS COLLATERAL SECURITY FOR THE PURPOSE OF G ETTING LOAN FROM BANK. FOR THIS, HE REFERRED TO PAGE-17 OF THE PAPER BOOK, WHICH IS THE LETTER OF THE BANK IN WHICH UNDER THE TITLE COLLATERAL SECURITY IN PARA 3(B), IT HAS BEEN MEN TIONED THAT:- [B] PERSONAL GUARANTEE OF DIRECTORS OF THE COMPANY THE LEARNED COUNSEL FOR THE ASSESSEE ALTERNATIVELY SUBMITTED THAT THE ASSESSEE-COMPANY HAD PASSED A RESOLUTION IN CAS E OF BOTH THE AFORESAID DIRECTORS TO PAY A REMUNERATION OF RS.28, 500/- PER MONTH TO BOTH THE DIRECTORS AND TO COMPENSATE THE D IRECTORS FOR THE DRASTIC FALL IN REMUNERATION, THE ASSESSEE-COMP ANY PAID RS.95,000/- EACH TOTALING TO RS.1,90,000/- BEING 1% OF THE LOAN SANCTIONED OF RS.95,00,000/- LOAN GRANTED TO THE CO MPANY FOR WHICH BOTH THE DIRECTORS HAD GIVEN THEIR PERSONAL G UARANTEE. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE ORDER OF AUTHORITIES BELOW. 5 WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CONSIDERED THEIR SUBMISSIONS. WE HAVE ALSO GONE THR OUGH THE WRITTEN SUBMISSIONS FILED BEFORE THE CIT(A) AS WELL AS THE CASE LAW RELIED UPON BEFORE US. WE NOTED THAT THE ASSESS EE HAS PAID GUARANTEE COMMISSION TO ITS TWO WHOLE-TIME DIRECTOR S @ 1% EACH OF THE TOTAL CREDIT FACILITIES OF RS.95 LACS O BTAINED FROM ITS 5 BANKERS. THIS TOTAL AMOUNT OF GUARANTEE COMMISSION OF RS.1,90,000 HAS BEEN DISALLOWED BY THE AO WITHOUT P OINTING OUT ANY LEGAL REASON FOR DISALLOWING THE AMOUNT. IN THE ORDER ITSELF, THE AO HAS REPRODUCED THE SUBMISSION REGARDING THE JUSTIFICATION FOR PAYMENT OF GUARANTEE AS WELL AS THE COMPANY LAW PROVISIONS PERMITTING THE SAME. THE AO HIMSELF HAS FURTHER ANA LYSED THE MEMORANDUM AND ARTICLES AND HAS AGREED THAT ORDINA RILY WHEN A SURETY IS GRANTED TO INDEMNIFY THE LENDER AGAINST THE RISK OF HIS LENDING GOING BAD, THE SURETY GIVER OR GUARANTEE IS COMPENSATED BY VIRTUE OF MONETARY REWARD BY THE PERSON SEEKING SURETY. WE FIND THAT THE TERM PERSONAL GUARANTEE OF DIRECTORS , SPECIALLY IN CASE OF FINANCES OBTAINED FROM BANKS BY CORPORATE. IN CASE OF BANK FINANCE, BANKS USUALLY TAKE PRIMARY AS WELL AS COLLATERAL SECURITY BOTH OF WHICH ARE NORMALLY EQUAL TO THE AM OUNT LENT OF THE EXPOSURE TAKEN. AND YET THE FACILITIES ARE NOT SANCTIONED WITHOUT PERSONAL GUARANTEE OF THE WHOLE TIME DIRECT ORS. BANKS NORMALLY ANALYZES THE PERSONAL CREDITWORTHINESS OF THE DIRECTORS. LOANS AND CREDITS ARE GRANTED BY THE BANK NOT ONLY ON THE FINANCIAL STANDING OF THE COMPANY BUT ALSO ON THE CREDITWORTHINESS OF THE DIRECTORS. IN FACT, THE FAC ILITIES WOULD NOT BE SANCTIONED WITHOUT THE PERSONAL GUARANTEES SO GR ANTED. THUS, PERSONAL GUARANTEES ARE A CRITICAL NECESSITY IN OBT AINING BANK FINANCES, A NECESSARY PERMANENT ARRANGEMENT AND ONE OF THE REASONS WHY CORPORATE WOULD WANT TO REWARD THE DIRE CTORS FOR GRANTING THESE GUARANTEES. THE AOS CONTENTION THAT PERSONAL GUARANTEE WILL NOT ULTIMATELY RESULT IN A LIABILITY FOR THE DIRECTORS IS NOT VALID. THE BANKERS NORMALLY SECURE THEIR FINANCES BY WAY OF PRIMARY AND COLLATERAL SECURITIES. WE FIN D THAT THESE PERSONAL GUARANTEES ARE TAKEN TO ENSURE THAT IN CAS ES OF FAILURE TO PAY THE DEBT OF THE BANK BY THE COMPANY AND IN CASE S WHERE THE 6 SAME CANNOT BE RECOVERED FROM THE ASSETS, THE BANKE RS WOULD HAVE FULL RIGHT TO RECOVER DEBT FROM PERSONAL ASSET S OF THE DIRECTORS. THUS, THE PERSONAL ASSETS DO GET INDIREC TLY MORTGAGED TO THE BANK. THE COMPANY MAY BE IN A STRONG FINANCI AL POSITION WHEN THE FACILITIES ARE GRANTED BY THE BANKERS BUT THE DEFAULTS USUALLY OCCUR WHEN THE FINANCIAL POSITION IS WEAK. IN SUCH CASES, USUALLY THE COMPANY DOES NOT HAVE ASSETS OUTWEIGHIN G LIABILITIES FROM WHICH THE BANKERS COULD RECOVER THEIR AMOUNTS. THE PERSONAL GUARANTEES ACT AS A BUFFER FOR THE BANKERS FOR SECURING THEIR FINANCES. MOREOVER, GRANTING OF PERSONAL GUAR ANTEE IS A PERSONAL ACT AND NOT AN ACT DONE ON BEHALF OF THE C OMPANY. HENCE, THE AOS INTERPRETATION THAT CLAUSE 219 OF T HE MEMORANDUM AND ARTICLES WOULD ENSURE INDEMNIFICATIO N TO THE DIRECTORS IN CASE THEY ARE CALLED UPON TO PAY DUES OF THE COMPANY IS NOT VALID. FURTHERMORE, IN CASES WHERE THE DIREC TORS ARE MADE TO PAY DUES OF THE COMPANY IT IS HIGHLY UNLIKELY TH AT THE COMPANY HAS ANYTHING LEFT TO INDEMNIFY THE DIRECTOR S, IN FACT THAT IS THE REASON WHY THE BANKERS WILL TURN TO THE DIRECTORS. IT IS THEREFORE NOT CORRECT TO SAY THAT THERE IS NO RISK ATTACHED TO THE DIRECTORS BY GIVING PERSONAL GUARANTEE. 6 ANOTHER FACT THAT HAS BEEN TOTALLY OVERLOOKED BY THE AO IS THAT THE GUARANTEE COMMISSION PAID IN AY 2003 -04 IN THIS CASE WAS ALSO IN THE NATURE OF COMPENSATION FOR LOW ER REMUNERATION BEING PAID TO THE DIRECTORS. THE FACTS RELATING TO DIRECTORS REMUNERATION ARE AS UNDER: - DIRECTORS REMUNERATION IS PAID TO MR. GIRISH SHA H AND MR. SANJAY MARATHE ONLY, BEING THE WHOLE- TIME DIRECTOR S OF THE ASSESSEE COMPANY. 7 - FOR THE YEAR ENDING 31.03.2000, COMPANY HAD PASSE D RESOLUTION FOR PAYMENT OF REMUNERATION TO BOTH THE DIRECTORS RS.28500/- P.M. WITH EFFECT FROM 01.01.20 00 FOR 5 YEARS - REMUNERATION RS. 28500/- P.M. WAS PAID FORYEAR EN DING 31.03.01 ALSO. - IN FINANCIAL YEAR ENDING 31.03.02 THERE WAS SUBST ANTIAL REDUCTION IN BUSINESS AND ULTIMATELY RESOLUTION WAS PASSED ON 10.11.2001 THAT REMUNERATION OF DIRECTORS WILL B E ALLOWED ONLY RS.10000/- P.M. FROM 01 .04.2001. - POSITION IMPROVED IN FINANCIAL YEAR ENDING 31.03. 03 AND MATTER OF REMUNERATION WAS RECONSIDERED AND IT WAS RESOLVED ON 01.10.2002: I) TO INCREASE REMUNERATION RS.15000/- P.M. FROM 01.10.2002 II) TO COMPENSATE AGAINST THE REDUCTION IN REMUNER ATION IT WAS DECIDED TO GIVE GUARANTEE COMMISSION 1% OF CREDIT FACILITY AMOUNTING TO RS.95000 EACH TO BOTH DIRECTORS. - FROM FY 2003-04 AGAIN THE REMUNERATION WAS PAID A S PER ORIGINAL RESOLUTION OF RS.28500/- P.M. AND NO GUARA NTEE COMMISSION IS PAID SEPARATELY. - THE FIGURES OF WORKING RESULT OF COMPANY AND REMU NERATION PAID EVERY YEAR ARE AS UNDER: 7 WE FIND THAT PERSONAL GUARANTEES ARE NECESSARY FO R OBTAINING BANK FINANCES AND PAYMENT OF GUARANTEE CO MMISSION TO DIRECTORS IS LEGALLY PERMITTED UNDER COMPANIES A CT. GRANTING OF PERSONAL GUARANTEES DOES ENTAIL RISKS FOR THE GU ARANTORS AND REWARDING DIRECTORS FOR GIVING PERSONAL GUARANTEES WHICH ARE COMPULSORY TO OBTAIN BANK FINANCES AND WHICH INVOLV ED PERSONAL RISK IS A LEGITIMATE BUSINESS REQUIREMENT. THE GUAR ANTEE COMMISSION CANNOT BE CONSIDERED AS EXTRANEOUS OR IR RELEVANT AND 8 IN THE INSTANT CASE, GUARANTEE COMMISSION ALSO HAS THE ELEMENT OF COMPENSATING FOR THE REDUCED REMUNERATION BEING PAI D TO THE DIRECTORS.WE ALSO NOTED THAT VARIOUS COURTS HAVE AL SO HELD IN FAVOUR OF ASSESSEE COMPANIES GRANTING GUARANTEE COM MISSION AND HAS ALLOWED THE SAME AS BUSINESS EXPENSES. SOME OF SUCH DECISIONS ARE C.L.T. V/S AYURVED SEVASHRAM LTD. (59 ITR 199) (RAJ ) GUARANTEE COMMISSION CAN NOT BE DISALLOWED CIT. V/S L. H. SUGAR FACTORIES & OIL MILLS (P) LTD. (123 ITR 598) (ALL) GUARANTEE COMMISSION IS ALLOWABLE 8 IN VIEW OF ABOVE, WE DELETE THE DISALLOWANCE MAD E BY THE AO AND ALLOW GROUND NO.1 RAISED BY THE ASSESSEE . 9 GROUND NO.2 RELATES TO DISALLOWANCE OF RS.1,91,6 50/- BEING PAYMENT OF GRATUITY FUND NOT APPROVED BY THE COMMISSIONER OF INCOME-TAX. THE FACTS ARE THAT THE ASSESSEE- COMPANY HAS OPTED FOR LIFE INSURANCE CORPORATION OF INDIAS GROUP GRATUITY SCHEME TO TAKE CARE OF ITS GRATUITY LIABILITIES. THE AO DISALLOWED THE SUM OF RS.1,91,650/- ON THE G ROUND THAT GRATUITY FUND TOWARDS WHICH CONTRIBUTION HAS BEEN M ADE IS NOT APPROVED BY THE CIT. THE CIT(A) CONFIRMED THE ACTIO N OF THE AO FOR THE SAME REASON. 10 BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS AS MADE BEFORE THE CIT(A ) AND CONTENDED THAT APPROVAL HAS BEEN RECEIVED AS PER CO MMUNICATION DATED 02-12-2007 FROM THE OFFICE OF THE CIT-I, STAT ING THAT THE APPROVAL WILL TAKE EFFECT FROM 01-10-2000. THE LEA RNED DR, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE CIT(A). 9 11 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT TH E COMPANY REGULARLY PAYS THE PREMIUM AS CALCULATED BY LIC BAS ED ON ACTUARIAL VALUATION OF THE GRATUITY LIABILITY. ON F ORMULATION OF THE SCHEME, THE ASSESSEE COMPANY HAS FILED AN APPLICATI ON BEFORE COMMISSIONER OF INCOME TAX FOR APPROVAL OF THE SCHE ME ON 28/02/2001. HOWEVER, TILL ASSESSMENT THERE IS NEITH ER ANY OBJECTION NOR APPROVAL OF THE SCHEME BY THE COMMISS IONER OF INCOME TAX. FOR THIS, THE ASSESSEE FURNISHED A COPY OF THE APPLICATION TO THE AO. THE FACT OF THE MATTER IS TH AT THE ASSESSEE HAD APPLIED FOR APPROVAL WELL IN TIME. THERE IS NO FAULT ON PART OF THE ASSESSEE IF THE INCOME TAX DEPARTMENT DOES NOT GRANT THE APPROVAL FOR A LONG PERIOD OF TIME. THE DEPARTMENT HAS ALSO NOT RAISED ANY OBJECTION AND THE ASSESSEE CANNOT BE FOR CED TO WAIT FOR THE APPROVAL TO START CONTRIBUTING TO THE SCHEME. I N FACT, ON RECEIVING THE ASSESSMENT ORDER DISALLOWING THE CONT RIBUTION, THE ASSESSEE ONCE AGAIN APPLIED DURING MARCH 2006 TO TH E COMMISSIONER OF INCOME TAX FOR GRANTING APPROVAL AN D REGULARIZING THE MATTER. WE FIND THAT APPROVAL HAS BEEN RECEIVED AS PER COMMUNICATION DATED 02-12-2007 FROM THE OFFI CE OF THE CIT-I, STATING THAT THE APPROVAL WILL TAKE EFFECT FROM 01-10- 2000. THE RELEVANT APPROVAL BY THE CIT-I, BARODA U NDER RULE 2(1) OF PART-C OF THE FOURTH SCHEDULE TO THE ACT IS WITH EFFECT FROM 01-10-2000 AND THE RELEVANT ASSESSMENT YEAR UN DER CONSIDERATION IS 2003-04 RELEVANT TO PREVIOUS YEAR 2002-03. THAT MEANS THIS APPROVAL IS FOR THE RELEVANT ASSESS MENT YEAR ALSO AND ASSESSEE CAN BE ALLOWED THE CLAIM. THEREFORE, W E ARE OF THE VIEW THAT ADDITION OF RS.1,91,650/- ON ACCOUNT OF N ON-APPROVAL 10 OF GRATUITY FUND IS NOT JUSTIFIED. WE ACCORDINGLY D ELETE THE SAME. THIS GROUND OF APPEAL RAISED BY THE ASSESSEE IS ALL OWED. 12 GROUND NO.3 RAISED BY THE REVENUE RELATES TO RE FUSAL OF NETTING OF INTEREST INCOME AGAINST INTEREST PAID FOR THE PURPOSE OF CALCULATION OF DEDUCTION U/S 80HHC ON THE GROUND THAT INTEREST RECEIVED IS ASSESSED U/S 57 AS OTHER SOUR CES AND INTEREST PAID IS BUSINESS EXPENDITURE. 13 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS, AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT TH E ISSUE IN CONTROVERSY IS COVERED BY THE DECISION OF ITAT DELH I IN THE CASE OF LALSON ENTERPRISES V DCIT 89 ITD 25 (DELHI) (SB) . THE RELEVANT OBSERVATIONS OF THE SPECIAL BENCH WITH RES PECT TO COMPUTATION OF NET INTEREST ARE AS UNDER: (III) FOR THE PURPOSE OF APPLYING EXPLANATION (BAA ) BELOW SUB- SECTION (4B) OF SECTION 80HHC AND WHILE REDUCING 90 PER CENT OF THE RECEIPT BY WAY OF INTEREST FROM THE PROFITS OF THE BUSINESS, IT IS ONLY THE 90 PER CENT OF THE NET INTEREST REMAINING AFTER ALL OWING A SET OFF OF INTEREST PAID, WHICH HAS A NEXUS WITH THE INTEREST RECEIVED THAT CAN BE REDUCED AND NOT 90 PER CENT OF THE GROSS INTEREST . FURTHER, THE ISSUE IS ALSO COVERED BY THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V SHRI RAM HOND A POWER EQUIP 289 ITR 475 (DELHI). THE RELEVANT PORTION OF THE HEAD NOTE OF THE SAID JUDGMENT IS REPRODUCED BELOW: EXPORTSPECIAL DEDUCTION UNDER SECTION 80HHCCOMPUT ATION OF SPECIAL DEDUCTION MODE OF COMPUTATION PROFITS ASSESSABLE AS INCOME FROM OTHER SOURCES NOT PART OF PROFITS FOR PURPOSES OF SECTION 80HHCINTEREST I N CLAUSE (BAA) OF EXPLANATION REFERS TO NET INTEREST INCOME -TAX ACT, 1961, S. 80HHC . 11 SECTION 80HHC OF THE INCOME-TAX ACT, 1961, WAS FIRS T INSERTED BY THE FINANCE ACT, 1983, WITH EFFECT FROM APRIL 1,1983, A ND HAS SINCE UNDERGONE SEVERAL CHANGES. WHILE ASCERTAINING THE T RUE SCOPE OF A PROVISION IN A STATUTE, ATTENTION MUST NECESSARILY BE PAID NOT ONLY TO THE TEXT, VIZ., THE WORDS EMPLOYED IN THE RELEVANT PROVISION, BUT ALSO THE CONTEXT. THE IDEA OF SECTION 80HHC IS TO ENSURE THAT THE EXPORTER GETS THE BENEFIT WITH REFERENCE TO PROFITS DERIVED FROM EXPORT. WHERE SURPLUS FUNDS ARE PARKED WITH THE BANK AND IN TEREST IS EARNED THEREON IT CAN ONLY BE CATEGORISED AS INCOME FROM O THER SOURCES. THIS RECEIPT MERITS SEPARATE TREATMENT UNDER SECTION 56 OF THE ACT WHICH IS OUTSIDE THE RING OF PROFIT AND GAINS FROM BUSINESS AND PROFESSION. IT GOES ENTIRELY OUT OF THE RECKONING FOR THE PURPOSES OF SECTION 80HHC. TO GIVE EFFECT TO THIS POSITION, THE ASSESSING OFFI CER WHILE COMPUTING PROFITS OF THE EXPORT BUSINESS WILL HAVE TO REMOVE FROM THE DEBIT SIDE OF THE PROFIT AND LOSS ACCOUNT THE CORRESPONDING IN TEREST EXPENDITURE THAT HAS BEEN 'LAID OUT' TO EARN SUCH INCOME FROM O THER SOURCES. OTHERWISE THIS WILL DEPRESS THE PROFITS BY AN AMOUN T WHICH IS OUT OF THE RECKONING OF SECTION 80HHC, A CONSEQUENCE NOT I NTENDED TO BE BROUGHT ABOUT. THE OTHER CATEGORY IS WHERE THE EXPORTER IS REQUIRE D TO MANDATORILY KEEP MONIES INFIXED DEPOSIT IN ORDER TO AVAIL OF CR EDIT FACILITY FOR THE EXPORT BUSINESS. INTEREST EARNED ON FIXED DEPOSITS FOR THE PURPOSES OF AVAILING OF CREDIT FACILITIES FROM THE BANK, DOES N OT HAVE AN IMMEDIATE NEXUS WITH THE EXPORT BUSINESS AND THEREFORE HAS TO NECESSARILY BE TREATED AS INCOME FROM OTHER SOURCES AND NOT BUSINE SS INCOME. HOWEVER, THIS WILL APPLY ONLY WHERE THERE IS A SPEC IFIC FINDING BY THE ASSESSING OFFICER THAT THE INTEREST INCOME IS NOT B USINESS INCOME. IF IN A GIVEN CASE THE ASSESSING OFFICER HAS HELD THAT TH E INTEREST INCOME IS BUSINESS INCOME, AND THIS HAS NOT BEEN CHALLENGED B Y THE DEPARTMENT THEREAFTER'/ THAT QUESTION CANNOT TO BE PERMITTED T O BE REOPENED AND THE ONLY QUESTION THEN WILL BE IF NETTING SHOULD BE ALLOWED. CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC EN VISAGES A TWO- STEP PROCESS IN COMPUTING PROFITS DERIVED FROM EXPO RTS, FIRST, THE ASSESSING OFFICER IS REQUIRED TO APPLY SECTIONS 28 TO 44 IN ORDER TO COMPUTE THE PROFITS AND GAINS OF BUSINESS OR PROFES SION. IN DOING SO, THE ASSESSING OFFICER MAY FIND THAT CERTAIN INCOMES , WHICH HAVE NO NEXUS TO THE EXPORT BUSINESS OF THE ASSESSEE, ARE N OT ALLOWABLE AND THEREFORE OUGHT TO BE TREATED AS INCOME FROM OTHER SOURCES. ONCE THE ASSESSING OFFICER COMPUTES WHAT IS BUSINESS INCOME THEN HE PROCEEDS TO THE NEXT STEP OF DEDUCTING 90 PER CENT, OF THE R ECEIPTS REFERRED TO IN CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC IN ORDER TO ARRIVE 12 AT THE PROFITS DERIVED FROM EXPORT. THE EXPRESSION ''BY WAY OF' WHICH QUALIFIED THE WORD 'INCOME' IN SECTION 80M IS SIMIL AR TO THE WORDS 'RECEIPTS BY WAY OF' OCCURRING IN EXPLANATION (BAA) OF SECTION 80HHC OF THE ACT. FURTHER THE WORDS 'INCLUDED IN SU CH PROFITS' OCCURS IN BOTH THE PROVISIONS. JUST AS IN DISTRIBUT ORS (BARODA) WHERE IT WAS EXPLAINED BY THE SUPREME COURT THAT THE WORD S 'SUCH' PROFITS CAN ONLY BE UNDERSTOOD AS 'COMPUTED IN ACCORDANCE W ITH THE PROVISIONS OF THE ACT', SIMILAR WORDS IN CLAUSE (BA A) SHOULD PARTAKE OF THE SAME MEANING. THE UNDERLYING PRINCIPLE OF NETTI NG APPEARS TO LOGICALLY GET ATTRACTED AS NO PRUDENT BUSINESSMAN W OULD ALLOW TAXATION OF THE INTEREST INCOME DE HORS THE EXPENDI TURE INCURRED FOR EARNING SUCH INCOME. THE WORDS 'INCLUDED ANY SUCH P ROFITS' FOLLOWING THE WORDS RECEIPTS BY WAY OF INTEREST, COMMISSION, BROKERAGE, ETC., IS A CLEAR POINTER TO THE FACT THAT ONLY NET INTEREST WOULD BE INCLUDIBLE IN ARRIVING AT THE BUSINESS PROFIT. ONCE BUSINESS INCO ME HAS BEEN DETERMINED BY APPLYING ACCOUNTING STANDARDS AS WELL AS THE PROVISIONS CONTAINED IN THE ACT, THE ASSESSEE WOULD BE PERMITTED, IN TERMS OF SECTION 37 OF THE ACT, TO CLAIM AS DEDUCTI ON, EXPENDITURE LAID OUT FOR THE PURPOSES OF EARNING SUCH BUSINESS INCOM E. SUPPORT FOR THIS PROPOSITION IS TO BE FOUND FROM CIRCULAR NO. 621 DA TED DECEMBER 19,19911, OF THE CENTRAL BOARD OF DIRECT TAXES. THE IDEA OF SECTION 80HHC IS TO ENSURE THAT THE EXP ORTER GETS THE BENEFIT OF THE PROFITS DERIVED FROM EXPORT AND NOT TO DEPRESS THE PRO FIT FURTHER. THEREFORE, IT CAN ONLY BE THE NET INTEREST WHICH CAN BE INCLUDED IN THE PROFITS. IF NETTING WERE NOT TO BE PERMITTED THE RESULT WOULD BE THAT THE PROFITS OF THE EXPORTER WOULD BE DEPRESSED BY AN ITEM THAT IS EXPENDITURE INCURRED ON EARNING INTERE ST, WHICH DOES NOT FORM PART OF THE PROFIT AT ALL. THIS COULD NOT HAVE BEEN THE INTENTION OF THE LEGISLATURE. EXPLANATION (BAA) IS RELATABLE ONLY TO CLAUSE (A) O F SECTION 80HHC(3) AND NOT TO CLAUSE (B) THEREOF. THESE OPERATE IN DIS TINCT AREAS AND NO INTER-MIXING IS CONTEMPLATED. HENCE THE WORD ''INTE REST' IN CLAUSE (BAA) TO THE EXPLANATION IN SECTION 80HHC IS INDICA TIVE OF 'NET INTEREST', I.E., GROSS INTEREST LESS THE EXPENDITUR E INCURRED BY THE ASSESSEE IN EARNING SUCH INTEREST. TO SUMMARISE THE CONCLUSIONS : (I) IN COMPUTING WHA T THE PROFITS DERIVED FROM EXPORTS FOR THE PURPOSES OF SECTION 80 HHC(1) READ WITH SECTION SOHHC(3) ARE, THE NEXUS TEST HAS TO BE APPL IED TO EXCLUDE THAT WHICH DOES NOT I PARTAKE OF PROFITS THAT CAN B E SAID TO HAVE BEEN DERIVED FROM THE BUSINESS OF EXPORTS, (II) IN THE S PECIFIC CONTEXT OF CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC, W HILE DETERMINING 13 THE 'PROFITS OF THE BUSINESS', THE ASSESSING I OFFI CER HAS TO UNDERTAKE A TWO-STEP EXERCISE IN THE FOLLOWING SEQUENCE. HE HAS I TO FIRST 'COMPUTE' THE PROFITS OF THE BUSINESS UNDER THE HEA D 'PROFITS AND GAINS OF BUSINESS OR PROFESSION.' IN OTHER WORDS, H E WILL HAVE TO COMPUTE BUSINESS PROFITS, IN TERMS OF THE ACT, BY A PPLYING THE PROVISIONS OF SECTIONS 28 TO 44 THEREOF. (HI) IN AR RIVING AT THE PROFITS OF THE BUSINESS BY THE ABOVE METHOD, THE ASSESSING OFFICER WILL EXCLUDE ALL SUCH INCOMES WHICH PARTAKE OF THE CHAR- I JETER OF 'INCOME FROM OTHER SOURCES' WHICH IN ANY EVENT ARE TREATED UNDER I SECTIONS 56 AND 57 OF THE ACT AND ARE THEREFORE NOT TO BE RECKO NED FOR THE PURPOSES OF SECTION 80HHC. (IV) WHERE SURPLUS FUNDS ARE PARKED WITH THE BANK I AND INTEREST IS EARNED THEREON IT CAN ON LY BE CATEGORISED AS INCOME FROM OTHER SOURCES. THIS RECEIPT MERITS SEPA RATE TREATMENT UNDER SECTION 56 OF THE ACT WHICH IS OUTSIDE THE RI NG OF PROFITS AND GAINS FROM BUSINESS AND PROFESSION. IT ENTIRELY OUT OF THE RECKONING FOR THE PURPOSES OF SECTION 80HHC. (V) EARNED ON FIXED DEPOSITS FOR THE PURPOSES OF AVAILING OF CREDIT FACILITIES THE BANK, DOES NOT HAVE AN IMMEDIATE NEXUS WITH THE EXPORT BUSINESS THEREFORE HAS TO NECESSARILY BE TREATED AS INCOME FROM OTHER SOURCES AND BUSINES S INCOME, (VI) ONCE BUSINESS INCOME HAS BEEN DETERMINED BY APPLYIN G ACCOUNTING STANDARDS AS WELL AS THE PROVISIONS CONTAINED IN TH E ACT, THE ASSESSEE WOULD BE PERMITTED, IN TERMS OF SECTION 37 OF THE A CT, TO CLAIM AS DEDUCTION, EXPENDITURE LAID OUT FOR THE PURPOSES OF EARNING SUCH BUSINESS (VII) IN THE SECOND STAGE, THE ASSESSING O FFICER WILL DEDUCT FROM THE OF THE BUSINESS COMPUTED UNDER THE HEAD 'P ROFITS AND GAINS OF BUSIER PROFESSION' THE FOLLOWING SUMS IN ORDER T O ARRIVE AT THE 'PROFITS OF THE BUSINESS' FOR THE PURPOSES OF SECTI ON 80HHC(3) : (A) 90 PER CENT, OF ANY SUM TO IN CLAUSES (IIIA), (IIIB) A ND (IIIC) OF SECTION 28, I.E., EXPORT INCENTIVES; (B) 90 PER CENT, OF ANY RE CEIPTS BY WAY OF BROKERAGE, INTEREST, RENT, CHARGES OR ANY OTHER REC EIPT OF A SIMILAR NATURE INCLUDED IN SUCH PROFITS; AND (C) PROFITS OF ANY BRANCH, OFFICE, WAREHOUSE OR ANY OTHER ESTABLISHMENT OF THE ASSESSE E SITUATE OUTSIDE INDIA, (VIII) THE WORD 'INTEREST' IN CLAUSE (BAA) O F THE EXPLANATION CONNOTES 'NET INTEREST' AND NOT 'GROSS INTEREST'. T HEREFORE, IN DEDUCTING SUCH INTEREST, THE ASSESSING OFFICER WILL TAKE INTO ACCOUNT THE NET INTEREST, I.E., GROSS INTEREST AS REDUCED B Y EXPENDITURE INCURRED FOR EARNING SUCH INTEREST, (IX) WHERE, AS A RESULT OF THE COMPUTATION OF PROFITS AND GAINS-OF BUSINESS AND PROFESSION, THE A SSESSING OFFICER TREATS THE INTEREST RECEIPT AS BUSINESS INCOME, THE N DEDUCTION SHOULD BE PERMISSIBLE, IN TERMS O/EXPLANATION (BAA) OF THE NET INTEREST I.E., THE GROSS INTEREST LESS THE EXPENDITURE INCURRED FO R THE PURPOSES OF EARNING SUCH INTEREST. THE NEXUS BETWEEN OBTAINING THE LOAN AND PAYING INTEREST THEREON (LAYING OUT THE EXPENDITURE BY WAY OF INTEREST) FOR THE PURPOSE OF EARNING THE INTEREST ON THE FIXE D DEPOSIT, TO DRAW AN 14 ANALOGY FROM SECTION 37, WILL REQUIRE TO BE SHOWN B Y THE ASSESSEE FOR APPLICATION OF THE NETTING PRINCIPLE. RANI PALIWAL V. CIT [2004] 268ITR 220 (P & H) DISSE NTED FROM . RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS, WE RESTORE THE ISSUE TO THE FILE OF THE AO TO DECIDE THE SAME AS P ER THE ABOVE DECISION. GROUND NO.3 IS ALLOWED FOR STATISTICAL PU RPOSES. 14 GROUND NO.4 RAISED BY THE ASSESSEE RELATING TO DEDUCTION OF UNABSORBED DEPRECIATION RS.1,05,000/- WAS NOT PRESSED BY THE LEARNED COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING. THEREFORE, THE SAME STANDS DISMISSED. 15 IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 09- 10-2009 SD/- SD/- (D C AGRAWAL) ACCOUNTANT MEMBER (MAHAVIR SINGH) JUDICIAL MEMBER DATE : 09-10-2009 COPY OF THE ORDER FORWARDED TO : 1. CHEMCRUX ENTERPRISE LTD. T-7, NATIONAL PLAZA, R C DUTT ROAD, BARODA 2. THE ACIT, CIRCLE-1(1), BARODA 3. THE CIT CONCERNED 4. THE CIT(A)-I, BARODA 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER /TRUE COPY/ DY.R/AR, ITAT, AHMEDABAD 15