Parikh Enterprises Pvt.Ltd., Ahmedabad V. The ACIT., Circle-5, Ahmedabad

ITA 2956/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5673 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 05-07-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 09-07-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: GAURAV BATHAM
• Assessee Lawyers: JYOTISH M SHAH
• Keywords: Business income; Validity of assessment
• Section: 80HHC; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD D BENCH BEFORE SHRI G.D. AGARWAL, VICE-PRESIDENT (AZ) AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.2956/AHD/2007 [ASSTT.YEAR: 2004-05] PARIKH ENTERPRISES PVT. LTD. -VS- INCOME TAX OFFICE R, WARD-5(3), PLOT NO.442, GIDC, IND. AHMEDABAD, ESTATE, ODHAV, AHMEDABAD PAN NO.AAACP9275D (APPELLANT) (RESPONDENT) REVENUE BY : SHRI GAURAV BATHAM, DR ASSESSEE BY: SHRI JYOTISH M SHAH, AR O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THIS APPEAL BY THE ASSESSEE IS ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-XI, AHMEDABAD IN APPEAL NO. CI T(A)-XI/268/2006-07 DATED 26-06-2007. THE ASSESSMENT WAS FRAMED BY THE ITO W ARD-5(3), AHMEDABAD U/S.143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) VIDE HIS ORDER DATED 26-12-2006 FOR ASSESSMENT YEAR 2004-05. 2. THE FIRST ISSUE IN THIS APPEAL OF ASSESSEE IS AS REGARDS TO VALIDITY OF ASSESSMENT. FOR THIS, ASSESSEE HAS RAISED THE GROUND NO.I :- I. INVALID AND BAD ORDER THE COMMISSIONER OF INCOME TAX (APPEALS)-XI, AHA ER RED IN NOT ACCEPTING THE CONTENTION THAT ORDER PASSED IS INVALID AND BAD IN LAW. THE COMMISSIONER OF INCOME TAX (APPEALS)-XI, A HA ERRED IN NOT CONSIDERING WRITTEN SUBMISSIONS IN ITS PROPER PERSP ECTIVE. ITA NO.2956/AHD/2007 A.Y. 2004-05 PARIKH ENTERPRISES PVT. LTD. V. ITO, WD-5(3) ABD PAGE 2 3. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE STAT ED THAT HE HAS INSTRUCTION FROM THE ASSESSEE NOT TO PRESS THIS ISSUE. HENCE, THE S AME IS DISMISSED AS NOT PRESSED. 4. THE SECOND ISSUE IN THIS APPEAL OF ASSESSEE IS A GAINST THE ORDER OF CIT(A) IN CONFIRMING THE ACTION OF ASSESSING OFFICER IN TREAT ING THE BANK INTEREST AS INCOME FROM OTHER SOURCES. FOR THIS, ASSESSEE HAS RAISED T HE FOLLOWING GROUND NO.II :- II. TREATING THE BANK INTEREST AS INCOME FROM OTHE R SOURCES THE COMMISSIONER OF INCOME TAX (APPEALS)-XI, AHMEDA BAD ERRED IN NOT ACCEPTING THE CONTENTION THAT FIXED DEPOSITS ARE BU SINESS FUNDS AND INCOME ON IT CANNOT BE CONSIDERED AS INCOME FROM OTHER SOU RCES. HOWEVER, ASSESSEE HAS NOT PRESSED THE GROUND REGARD ING DIVIDEND, PROFIT ON SALE OF MUTUAL FUND, INSURANCE RECEIPTS AND INCOME-TAX REFU ND TREATING THE SAME AS INCOME FROM OTHER SOURCES. ACCORDINGLY THE SAME IS DISMISS ED AS NOT PRESSED. 5. THE ONLY ISSUE NOW BEFORE US FOR CONSIDERATION I S WHETHER THE INTEREST RECEIVED ON FIXED DEPOSIT IS BUSINESS INCOME OR INC OME FROM OTHER SOURCES. WE FIND THAT ON QUERY FROM THE ASSESSING OFFICER, ASSESSEE STATED THAT THE AMOUNT WHICH IS KEPT AS FIXED DEPOSITS IS EARNED BY ASSESSEE AND RE TAINED IN THE BUSINESS IS PLOUGH BACK AND NOT DISTRIBUTED AS DIVIDEND. ACCORDING TO THE ASSESSEE, IT CANNOT BE TERMED AS INVESTMENT IN THE MEANING IN WHICH MEANING FUNDS ARE KEPT FOR THE DEVELOPMENT AND EXPANSION OF THE BUSINESS AND FUNDS ARE ALWAYS KEPT READY TO FACE ANY UNFORESEEN NECESSITY. ACCORDING TO THE ASSESSEE, TH E EXPORT TURNOVER HAS INCREASED AND THIS IS NOTHING BUT THE BUSINESS ACTIVITY. THE ASSESSEE HAS CLAIMED DEDUCTION U/S.80HHC ON OTHER INCOME I.E. RS.1,19,26,704/- WHI CH IS CONSISTING OF INTEREST OF RS.1,01,10,004 ON FIXED DEPOSITS WITH BANK. THE ASS ESSING OFFICER HAS NOT ADMITTED THE CLAIM OF THE ASSESSEE AND HELD THE INCOME AS IN COME FROM OTHER SOURCES BY STATING THAT, UNLESS THE ASSESSEE IS ABLE TO SHOW T HAT THE INCOME RECEIVED BY WAY OF INTEREST FROM THE FIXED DEPOSIT IS INCOME DERIVED F ROM THE EXPORT BUSINESS, IT WILL NOT BE ENTITLED TO CLAIM DEDUCTION U/S.80HHC. THE ASSES SEES BUSINESS IS EXPORT BUSINESS, PROFITS AND GAINS ARE WELL UNDERSTOOD TO MEAN ONLY THE BUSINESS INCOME, AND NOT ANY OTHER INCOME. SO LONG AS THE COMPANY HA S NO BUSINESS OF LENDING MONEY AND SO LONG AS THE ADMITTED CASE OF THE COMPA NY IS THAT THE INCOME DERIVED IS ONLY ON ACCOUNT OF INTEREST ON FIXED DEPOSIT WIT H THE BANK. THEREFORE, THE INCOME ITA NO.2956/AHD/2007 A.Y. 2004-05 PARIKH ENTERPRISES PVT. LTD. V. ITO, WD-5(3) ABD PAGE 3 RECEIVED BY THE ASSESSEE AS INTEREST FROM THE FIXED DEPOSITS WITH THE BANK IS NOT BUSINESS INCOME, BUT ONLY INCOME FROM OTHER SOURCES . AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A). 6. THE CIT(A) REJECTED THE CLAIM OF THE ASSESSEE BY GIVING FOLLOWING FINDING IN PARA-4.2 OF HIS APPELLATE ORDER:- 4.2.1 IT MAY BE SEEN THAT THE A.O HAS EXCLUDED THE 90% OF INTEREST INCOME FOR THE PURPOSE OF COMPUTING DEDUCTION U/S.80HHC OF I.T. ACT. IN THIS REGARD IT IS TO BE MENTIONED THAT THE A.O HAS TO TAKE NET OF THE INTEREST INCOME AND 90% OF SUCH INCOME ONLY TO BE EXCLUDED TO ARRIVE TO TAL PROFIT. THE A.O IS REQUIRED TO SET OFF INTEREST PAYMENTS AGAINST INTER EST RECEIPTS AND NET INTEREST INCOME ONLY TO BE TAKEN AND THEREAFTER 90% OF SUCH INTEREST INCOME TO BE REDUCED TO ARRIVE TOTAL PROFIT. THEREFORE, THE A.O IS DIRECTED TO VERIFY THE SAME AND COMPUTE TOTAL PROFIT ACCORDINGLY. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. ON QUERY FROM THE BENCH, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THESE FIXED DEPOSITS, ON WHICH INTEREST INCOME IS EARNED BY THE ASSESSEE, ARE NOT UTILIZED FOR THE PURPOSES OF OBTA INING CREDIT LIMIT OR IS USED FOR THE PURPOSES OF MARGIN MONEY FOR LETTER OF CREDIT. ONC E THESE FDRS ARE MADE OUT OF IDLE FUNDS, THE INTEREST OUT OF THE SAME CANNOT BE HELD TO BE INCOME FROM BUSINESS. ON THE ISSUE RELATING TO THE DETERMINATION OF NATURE O F INTEREST INCOME THE CONTENTION WAS THAT EVEN THE INTEREST EARN ON SURPLUS FUND BY THE EXPORTERS IN FIXED DEPOSIT WOULD BE BUSINESS INCOME AND FOR THIS THE FOLLOWING CONTENTIONS WERE MADE:- I) WHEN THERE IS NO QUARREL WITH THE PROPOSITION T HAT THE INTEREST INCOME IN QUESTION SHOULD BE COMPUTED UNDER THE HEAD INCOME FROM OTHER SOURCES, THE REAL ISSUE IS TO FIND OUT THE NATURE OF THE INTEREST INC OME IN QUESTION. II) IN CASE INTEREST INCOME IS ASSESSED UNDER THE H EAD INCOME FROM BUSINESS, IN THAT CASE THE INTEREST INCOME IS SEEN TO HAVE AR ISEN FROM A BUSINESS ACTIVITY OR IN OTHER WORDS, IT HAS A CLOSE NEXUS WITH THE BUSINESS CARRIED ON BY THE ASSESSEE THEN IT WILL BEAR THE IMPRINT OF OR HAVE THE QUALITY OF BUSINESS INCOME FOR LIMITED PURPOSES. FOR THIS WE HAVE TO PLACE RELIANCE ON THE JUDGMENT OF HOBLE DELHI HIGH COURT IN THE CASE OF SUNAM PROGETTI S.P.A. V. ADDL. CIT (1981) 132 ITR 70 (DELHI), WHICH HAS BEEN UPHELD BY HONBLE SUPREME COURT BY THE DISMISS AL OF THE SPECIAL LEAVE PETITION IN[1991] 189 ITR (ST.) 116(SC), WHEREIN IT WAS HELD THAT THE QUESTION TO BE EXAMINED IS WHETHER THE INTEREST INCOME WAS DERIVED FROM WHA T MAY BE DESCRIBED AS A ITA NO.2956/AHD/2007 A.Y. 2004-05 PARIKH ENTERPRISES PVT. LTD. V. ITO, WD-5(3) ABD PAGE 4 BUSINESS ACTIVITY AND IF IT IS SO DERIVED THEN THE MERE FACT THAT IT IS TAXED UNDER DIFFERENT SECTION WILL MAKE NO DIFFERENCE. IT WAS H ELD THAT IN THAT CASE THE INCOME EARNED BY WAY OF INTEREST FROM DEPOSITS WHICH REPRE SENTED THE SPARE FUNDS OF THE ASSESSEE, WOULD NEVERTHELESS CONSTITUTE BUSINESS IN COME. III) FURTHER, RELIANCE WAS PLACED ON THE CENTRAL BO ARD OF DIRECT TAXES CIRCULAR NO.564 DATED JULY 5, 1990 [1991] 184 ITR (ST.) 137, WHICH EXPLAINS THAT THE DEDUCTION COULD BE OF THE PROFITS OF THE BUSINESS EVEN THOUGH IT COULD CONTAIN ELEMENTS WHICH WERE NOT STRICTLY PROFITS DERIVED FR OM THE EXPORT OF GOODS. THIS WAS FURTHER ACCEPTED BY THE SPECIAL BENCH OF THE TRIBUN AL IN RAJEEV ENTERPRISES V. ASSESSING OFFICER (2003) 261 ITR (AT) 34 (JAIPUR). IV) FURTHER INVESTMENT OF SURPLUS FUNDS MAY NOT BE BUSINESS INCOME IN SOME CASES, BUT WHERE MONEY NECESSARILY HAS TO BE INVEST ED FOR THE SAKE OF CARRYING ON BUSINESS, AND INCOME, IF EARNED WOULD BE BUSINESS I NCOME. 8. IN REPLY THE LEARNED COUNSEL FOR THE ASSESSEE ST ATED THAT WHEN TWO HIGH COURTS DIFFER ON THE SAME ISSUE, THE BENEFICIAL VIE W SHOULD BE TAKEN IN FAVOUR OF THE ASSESSEE. HE STATED THAT HONBLE DELHI HIGH COURT I N THE CASE OF CIT V. SHRI RAM HONDA POWER EQUIP (2007) 289 ITR 475 (DELHI) HAS ALLOWED THE CLAIM O F THE ASSESSEE AS REGARD TO NETTING OF INTEREST ON THE AL LOWANCE OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. 9. WE FIND FROM THE FACTS OF THIS CASE, THAT A QUES TION ARISES IS THAT WHERE ON ACCOUNT OF THE CONDITIONALITIES IMPOSED BY THE BANK ER ON THE ASSESSEE FOR THE PURPOSES OF OBTAINING LETTERS OF CREDIT, BANK GUARA NTEES AND OVERDRAFT FACILITIES FOR THE PURPOSES OF ITS EXPORT BUSINESS IS CONTAINED TO KEE P MONIES IN FIXED DEPOSIT THEN THE INTEREST EARNED ON SUCH FIXED DEPOSITS, SHOULD ALSO BE TREATED AS BUSINESS INCOME. IN OTHER WORDS, THAT IF IT CAN BE DETERMINED WHETHE R IN FACT THE PLACING OF THE AMOUNTS IN FIXED DEPOSIT BEARS A CLOSE PROXIMITY OR IS IMME DIATELY PRECEDING THE AVAILING OF FACILITIES FROM THE BANK FOR THE PURPOSES OF EXPORT BUSINESS, THEN THE NEXUS BETWEEN THE PLACING OF SUCH FIXED DEPOSIT AND THE EXPORT BU SINESS IS CLEARLY ESTABLISHED AND IN SUCH EVENT, THERE IS NO JUSTIFICATION TO HOLD SU CH INCOME AS INCOME FROM OTHER SOURCES. TURNING TO THE SUBMISSIONS IN THE PRESENT CASE, AS REGARDS THE PARKING OF SURPLUS FUNDS, THERE SHOULD BE NO DIFFICULTY AT ALL . IN VIEW OF THE LARGE NUMBER OF THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CONTE XT OF SECTION 56 AND SECTION 57 ITA NO.2956/AHD/2007 A.Y. 2004-05 PARIKH ENTERPRISES PVT. LTD. V. ITO, WD-5(3) ABD PAGE 5 AND THOSE OF THE KERALA HIGH COURT IN THE CONTEXT O F SECTION 80HHC ITSELF, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE ASSESSEE BAS ED ON SUNAM PROGHETTI (1981) 132 ITR 70 (DELHI) THAT INTEREST EARNED ON PARKED S URPLUS FUNDS SHOULD QUALIFY AS BUSINESS INCOME. CLEARLY, SNAM PROGHETTI (1981) 132 ITR 70 (DELHI) WAS NOT RENDERED IN THE CONTEXT OF SECTION 80HHC AND CANNOT BE CONFINED TO THE FACTS OF THE CASE. CIRCULAR NO.564, DATED JULY 5, 1990, [1990] 1 84 ITR (ST. 137), CAN ALSO NOT HELP IN INTERPRETING SECTION 80HHC WHICH IS A STAN D ALONE PROVISION. WE ARE, THEREFORE, OF THE VIEW THAT WHERE SURPLUS FUNDS ARE PARKED WITH THE BANK AND INTEREST IS EARNED, IT CAN ONLY BE CATEGORIZED AS INCOME FRO M OTHER SOURCES. THIS RECEIPT MERITS SEPARATE TREATMENT UNDER SECTION 56 OF THE A CT WHICH IS OUTSIDE THE AMBIT OF PROFIT AND GAINS FROM BUSINESS AND PROFESSION AND I T GOES ENTIRELY OUT OF THE RECKONING, FOR THE PURPOSES OF SECTION 80HHC. 10. WE FIND THAT THE ISSUE HAS BECOME CLEAR AFTER T HE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. ASIAN STAR CO. LTD. IN ITA NO.200 OF 2009 (BOM), WHEREIN, HONBLE BOMBAY HIGH COURT OBSERVED THAT EX PLANATION (BAA) TO S. 80HHC REQUIRES THAT NINETY PER CENT OF RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARGES OR ANY OTHER RECEIPT OF A SIMILAR NAT URE HAVE TO BE REDUCED FROM THE PROFITS. THE REASON WHY ITEMS LIKE BROKERAGE ETC HA VE TO BE EXCLUDED IS BECAUSE THEY DO NOT POSSESS ANY NEXUS WITH EXPORT TURNOVER AND THEIR INCLUSION IN PROFITS WOULD RESULT IN A DISTORTION OF THE FIGURE OF EXPOR T PROFITS. HOWEVER, AS SOME EXPENDITURE MIGHT HAVE BEEN INCURRED IN EARNING THE SE INCOMES, AN AD HOC DEDUCTION OF TEN PER CENT FROM SUCH INCOME IS ALLOW ED. IT WAS FURTHER OBSERVED BY THE HONBLE HIGH COURT THAT ONCE PARLIAMENT HAS LEGISLA TED BOTH IN REGARD TO THE NATURE OF THE EXCLUSION AND THE EXTENT OF THE EXCLUSION, I T WOULD NOT BE OPEN TO THE COURT TO ORDER OTHERWISE BY REWRITING THE LEGISLATIVE PROVIS ION. THE TASK OF INTERPRETATION IS TO FIND OUT THE TRUE INTENT OF A LEGISLATIVE PROVISION AND IT IS CLEARLY NOT OPEN TO THE COURT TO LEGISLATE BY SUBSTITUTING A FORMULA OR PROVISION OTHER THAN WHAT HAS BEEN LEGISLATED BY PARLIAMENT. IT IS NOT OPEN TO SAY THAT SOMETHING MORE THAN THE 10% STATUTORILY PROVIDED SHOULD ALSO BE ALLOWED. HONBLE HIGH COURT FURTHER HELD THAT IN CIT V. SHRI RAM HONDA POWER EQUIP , (2007)289 ITR 475 (DEL), THE DELHI HIGH COURT HA S NOT ADEQUATELY EMPHASIZED THE ENTIRE RATIONALE FOR CONF INING THE DEDUCTION ONLY TO THE EXTENT OF NINETY PER CENT OF THE EXCLUDIBLE RECEIPT S AND IT CANNOT BE FOLLOWED. AS REGARDS THE JUDGEMENT OF THE SPECIAL BENCH IN LALSONS ENTERPRISES , HONBLE HIGH ITA NO.2956/AHD/2007 A.Y. 2004-05 PARIKH ENTERPRISES PVT. LTD. V. ITO, WD-5(3) ABD PAGE 6 COURT HELD THAT WE ARE AFFIRMATIVELY OF THE VIEW THAT THE TRIBUNA L HAS TRANSGRESSED THE LIMITATIONS ON THE EXERCISE OF JUDICIAL POWER A ND . HAS IN EFFECT LEGISLATED BY PROVIDING A DEDUCTION ON THE GROUND OF EXPENSES OTH ER THAN IN THE TERMS WHICH HAVE BEEN ALLOWED BY PARLIAMENT. THAT IS IMPERMISSIBLE. 11. WE FIND THAT THE HONBLE BOMBAY HIGH COURT IN T HE CASE OF ASIAN STAR CO. LTD. (SUPRA) HAS CONSIDERED THE DELHI HIGH COURT JUDGMEN T IN THE CASE OF SHRI RAM HONDA POWER EQUIP (SUPRA) AS WELL THE CASE OF SPECIAL BENCH OF THIS TRIBUNAL IN LALSON ENTERPRISES AND HELD THAT 90% OF RECEIPTS BY WAY OF INTEREST HA VE TO BE REDUCED FROM THE BUSINESS PROFITS WHILE COMPUTING D EDUCTION U/S.80HHC OF THE ACT UNDER CLAUSE (BAA). RESPECTFULLY FOLLOWING HONBLE BOMBAY HIGH COURT IN ASIAN STAR CO. LTD. (SUPRA), WE UPHOLD THE ORDER OF CIT(A) AND THIS IS SUE OF THE ASSESSEES APPEAL IS DISMISSED. 12. IN THE RESULT, APPEAL OF ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THIS DAY OF 9 TH JULY,2010 SD/- SD/- ( G.D.AGARWAL ) ( MAHAVIR SINGH ) (VICE PRESIDENT) (JUDICIAL MEMBER) AHMEDABAD, DATED : 09/07/2010 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)-XI, AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD