DCIT, New Delhi V. M/s Taj International Jewellers, New Delhi

ITA 3032/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4325 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-04-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 04-04-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 15-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: K SAMPATH ADV SHRI K SAMPATH
• Keywords: Business expenditure; Question of law; Capital expenditure
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH H : NEW DELHI) (DELHI BENCH H : NEW DELHI) (DELHI BENCH H : NEW DELHI) (DELHI BENCH H : NEW DELHI) BEFORE SHRI A.D. JAIN , JUDICIAL MEMBER AND BEFORE SHRI A.D. JAIN , JUDICIAL MEMBER AND BEFORE SHRI A.D. JAIN , JUDICIAL MEMBER AND BEFORE SHRI A.D. JAIN , JUDICIAL MEMBER AND SHRI K.D. RANJAN, ACCOUNTANT MEMBER SHRI K.D. RANJAN, ACCOUNTANT MEMBER SHRI K.D. RANJAN, ACCOUNTANT MEMBER SHRI K.D. RANJAN, ACCOUNTANT MEMBER I.T.A. 3032/DEL./2010 I.T.A. 3032/DEL./2010 I.T.A. 3032/DEL./2010 I.T.A. 3032/DEL./2010 (ASSESSMENT YEAR : 2007 (ASSESSMENT YEAR : 2007 (ASSESSMENT YEAR : 2007 (ASSESSMENT YEAR : 2007- -- -08) 08) 08) 08) DCIT, CIRCLE 33(1), DCIT, CIRCLE 33(1), DCIT, CIRCLE 33(1), DCIT, CIRCLE 33(1), VS. VS. VS. VS. M/S TAJ INTERNATIONAL JEWELLER M/S TAJ INTERNATIONAL JEWELLER M/S TAJ INTERNATIONAL JEWELLER M/S TAJ INTERNATIONAL JEWELLERS SS S NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. 16/7 WEA, KAROL BAGH, 16/7 WEA, KAROL BAGH, 16/7 WEA, KAROL BAGH, 16/7 WEA, KAROL BAGH, NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. (PAN/GIR NO. : AACFT2729F) (PAN/GIR NO. : AACFT2729F) (PAN/GIR NO. : AACFT2729F) (PAN/GIR NO. : AACFT2729F) (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) ASSESSEE BY : SHRI K. SAMPATH, ADV. ASSESSEE BY : SHRI K. SAMPATH, ADV. ASSESSEE BY : SHRI K. SAMPATH, ADV. ASSESSEE BY : SHRI K. SAMPATH, ADV. REVENUE BY : SHRI K. RAVI RAMA CHANDRAN, SR.DR REVENUE BY : SHRI K. RAVI RAMA CHANDRAN, SR.DR REVENUE BY : SHRI K. RAVI RAMA CHANDRAN, SR.DR REVENUE BY : SHRI K. RAVI RAMA CHANDRAN, SR.DR ORDER ORDER ORDER ORDER PER A.D. JAIN, JM THIS IS DEPARTMENTS APPEAL FOR ASSESSMENT YEAR 2007-08 CONTENDING THAT THE CIT(A) HAS ERRED IN ALLOWING THE BENEFIT OF NETTING OF INTEREST PAID BY THE ASSESSEE ON BORROWINGS FOR BUSINESS PURPOSES AGAINST THE INTEREST INCOME ON FDRS WHICH FALLS UNDER T HE HEAD INCOME FROM OTHER SOURCES. 2. THE ASSESSEE FIRM IS A 100% EXPORT ORIENTED UNIT ENGA GED IN THE BUSINESS OF MANUFACTURE AND EXPORT OF GOLD AND DIAMOND JEWELLERY. THE DEDUCTION U/S 10B OF THE I.T. ACT HAS BEEN CLAIME D IN RESPECT OF ITS EXPORT OPERATION FROM ASSESSMENT YEAR 2004-05 ONWARDS DU RING THE ASSESSMENT PROCEEDINGS. DURING THE YEAR UNDER CONSIDERATI ON, THE AO OBSERVED THAT THE ASSESSEE HAD SHOWN INCOME OF `79,17,223 AS INCOME FROM OTHER SOURCES, ON ACCOUNT OF NET INTEREST INCOME RECEIVED ON FDRS AFTER ALLOWING THE INTEREST ON BORROWINGS MADE FOR THE PURPOSES OF FDRS AND THE INTEREST INCOME PAID TO BAN AG AINST THE CREDIT FACILITIES PROVIDED TO THE ASSESSEE FOR BUSINESS PUR POSES. THE AO OBSERVED THAT THE ASSESSEE HAD DEDUCTED BUSINESS EXPENSES AGA INST I.T.A. NO.3032/DEL./2010 (A.Y. : 2007-08) 2 INTEREST INCOME ON FDRS WHEREAS THE LATTER WAS CHARGEAB LE AS INCOME FROM OTHER SOURCES. THE ASSESSEE WAS AS SUCH, ASKED TO EXPL AIN AS TO WHY THE GROSS INTEREST INCOME TO BE TREATED AS INCOME F ROM OTHER SOURCES AND THE DEDUCTION FOR INTEREST BE NOT ALLOWED UNDER THE HEAD INCOME FROM OTHER SOURCES. 3. THE ASSESSEE SUBMITTED THAT HE FDRS WERE PURELY FOR TH E PURPOSE OF THE ASSESSEES BUSINESS, WITH THE AIM TO FACILITA TE BUSINESS AND NOT TO EARN INTEREST; THAT SINCE THE INTEREST INCO ME HAD ALREADY BEEN OFFERED FOR TAXATION AT THE TIME OF SURVEY, ONL Y NET INTEREST BE TAXED AS INCOME TAXABLE IN THE HANDS OF THE ASSESSEE AS I NCOME FROM OTHER SOURCES. THE ASSESSEE RELIED ON THE DECISION OF HO NBLE DELHI HIGH COURT IN THE CASE OF SHRI RAM HONDA EQUIPMENT V S. CIT, 289 I.T.R. 475 AND THE DECISION OF THE MUMBAI BENCH OF THE TRIB UNAL RENDERED ON 12.5.2009, IN I.T.A. NO.187/MUM./2007 IN THE CASE OF LIVINGSTONES JEWELLERY PVT. LTD. VS. DCIT. 4. RELYING ON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07, THE AO DISAGR EED WITH THE SUBMISSION OF THE ASSESSEE. THE AO FURTHER RELI ED ON M/S CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD. VS. CIT, 113 I.T.R. 84 (SC), CIT VS. STERLING FOODS, 237 I.T.R. 579 (SC) AND HI NDUSTAN LEVER LTD. VS. CIT, 239 I.T.R.297 (SC). IT WAS HELD THAT SINCE THE TERM DERIVED FROM IS MUCH NARROWER THAN THE TERM ATTRIBUTABLE T O, DEDUCTION U/S 10B OF THE ACT WAS ALLOWABLE ONLY ON THE ELIGIBLE PR OFITS OF THE EXPORT BUSINESS. THE AO ALSO OBSERVED THAT THE GROSS INTEREST IN COME CANNOT BE ALLOWED DEDUCTION IN RESPECT OF THE INTEREST EXPEN SES INCURRED RELATING TO FDRS, WHICH WERE ACQUIRED FOR THE PURPOSE S OF AVAILING CREDIT FACILITIES, SINCE THERE WAS NO NEXUS BETWEEN THE EARNING OF THE INTEREST AND THE INTEREST EXPENDITURE, AS THE BORROWIN GS WERE NOT MADE FOR THE PURPOSE OF INVESTING IN FDRS, BUT FOR AVA ILING THE CREDIT FACILITIES, FOR WHICH, THE FDRS WERE MANDATORY AND AS SUCH, THE MAIN I.T.A. NO.3032/DEL./2010 (A.Y. : 2007-08) 3 PURPOSE WAS EARNING OF INTEREST. THEREFORE, THE AO DI D NOT ALLOW THE CLAIM OF INTEREST EXPENDITURE U/S 57 OF THE ACT AGAIN ST THE GROSS INTEREST INCOME RECEIVED BY THE ASSESSEE ON FDRS. 5. BY VIRTUE OF THE IMPUGNED ORDER, THE CIT(A) FOLL OWING THE DECISION PASSED BY THE DELHI BENCH OF THE TRIBUNAL IN THE ASSESSEE S OWN CASE FOR ASSESSMENT YEARS 2005-06 AND 05-06 HELD, INTER ALIA , THAT THE AO OUGHT TO HAVE ALLOWED THE INTEREST EXPENSES AGAINST THE INTEREST INCOME, SO FAR AS THEY WERE INCURRED FOR MAKING AND E ARNING THE INTEREST INCOME AND THAT AS SUCH, THE BENEFIT OF NETTI NG SHOULD BE ALLOWED WHILE TAXING THE INTEREST INCOME UNDER THE H EAD INCOME FROM OTHER SOURCES. 6. AGGRIEVED, THE DEPARTMENT IS IN APPEAL. 7. CHALLENGING THE IMPUGNED ORDER, THE LD.DR HAS ARG UED THAT THE CIT(A) HAS ERRED IN ALLOWING THE BENEFIT OF NETTING OF INTEREST PAID BY THE ASSESSEE ON BORROWINGS FOR BUSINESS PURPOSES AGAINST THE I NTEREST INCOME ON FDRS; THAT THE INTEREST INCOME ON FDRS COMES UNDER THE HEAD INCOME FROM OTHER SOURCES; THAT THE CIT(A) HAS ERRED IN FAILING TO CONSIDER THE CASE LAWS CITED IN THE ASSESSMENT ORDER. 8. ON THE OTHER HAND, LD.COUNSEL FOR THE ASSESSEE HAS PLA CED RELIANCE ON THE JUDGMENT DATED 13.12.2010, PASSED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF THE ASSESSEE, FOR ASSESSMENT YEAR 2005-06. 9. IN THE AFORESAID JUDGMENT, THEIR LORDSHIPS HAVE OBSE RVED AS UNDER: THE ASSESSEE HEREIN IS IN THE BUSINESS OF EXPORT OF JEWELL ERY. IN THESE TWO ASSESSMENT YEARS NAMELY 2005-06 AND 2006-07, IT WAS FOUND BY THE ASSESSING OFFICER THAT THE ASSESSEE HAD TA KEN A HUGE AMOUNT AS LOAN ON WHICH INTEREST WAS PAID. IT W AS ALSO FOUND THAT THE ASSESSEE HAD CONVERTED THE SAID LOANS IN T HE FDRS AND INTEREST WAS RECEIVED ON THE SAID FDRS. IT SO HAPPEN ED THAT I.T.A. NO.3032/DEL./2010 (A.Y. : 2007-08) 4 THE INTEREST EARNED ON THE FDRS WAS MORE THAN THE INTE REST WHICH THE ASSESSEE PAID ON THE LOANS. THE ASSESSEE HAD SHOWN THE INTEREST EARNED ON FDRS AS 'INCOME FROM OTHER SOURC ES'. HOWEVER, AT THE SAME TIME, THE INTEREST WHICH WAS PAID BY THE ASSESSEE TO THE BANK ON THE LOANS WAS REDUCED FROM THE I NTEREST EARNED ON THE FDRS. IN THIS MANNER, NETTING OF THE IN TEREST WAS DONE BY THE ASSESSEE AND THE INCOME SHOWN UNDER TIHE HEA D 'INCOME OTHER SOURCES'. THE ASSESSING OFFICER, HOWEVER, DISALLOWED THE INTEREST PAID BY THE ASSESSEE TO THE BANKS ON THE BORROWED AMOUNT ON THE GROUND THAT THE 1OAN WAS BOR ROWED FOR BUSINESS PURPOSE AND INTEREST PAID THEREON SHOULD NOT BE NETTED AGAINST THE INTEREST EARNED ON THE FDRS BUT SHOULD BE A LLOWED AS DEDUCTION WHILE COMPUTING THE INCOME FROM THE HEAD OF 'INCOME FROM BUSINESS'. THE ASSESSEE FILED AN APPEAL AGAINST THIS OR DER BEFORE THE CIT (A) WHICH DELETED THE ADDITION AND. ALLOWED THE DEDUCTION OF INTEREST PAID BY THE ASSESSEE TO THE BANK O N THE BORROWED FUNDS UNDER SECTION 57 (III) OF THE INCOME- TAX ACT. THIS ORDER OF THE CIT (A) HAS BEEN AFFIRMED BY THE TRIBUN AL. 2. IN ORDER TO DEAL WITH THIS ISSUE ONE WILL HAVE TO GO IN THE PECULIAR NATURE OF TRANSACTION ENTERED INTO BY THE A SSESSEE. THE ASSESSEE HAD GIVEN ITS DETAILED EXPLANATION TO THE ASSESSING OFFICER, INTER ALIA, STATING THAT IT HAD BORROWED A SUM OF ` 35.34 CRORES DIRECTLY FROM THE BANKS TO MAKE THE FDRS I.E. T O SAY ON THE ONE HAND, AND BANK ADVANCED LOAN TO THE ASSESSEE AN D ON THE OTHER HAND, THE SAME AMOUNT WAS CONVERTED INTO FD RS. THE ASSESSEE HAD FURTHER EXPLAINED THAT IT DID NOT INVEST FR ESH CAPITAL IN THE YEARS IN QUESTION. MORE SO, THE ACTIVITY OF IMP ORT OF GOLD ON 360 DAYS CREDIT AGAINST LETTER OF CREDIT WAS PERMITTED BY THE GOVERNMENT OF INDIA AS PER IMPORT & EXPORT POLICY FO R THE BENEFIT OF EXPORTERS. THE EXPORTERS WERE BENEFITED BY SCHEME P URELY ON THE FACTS THAT THERE WAS A DIFFERENCE OF RATE OF INTE REST IN INDIA AS AGAINST INTEREST RATE OUTSIDE INDIA WHICH WAS PAYABLE I .E.LIBOR RATE (LONDON INTER BANK RATE). IT WAS BECAUSE OF THIS PECULIAR NATURE OF THE TRANSACTION AND THE SCHEME OF GOVERNMEN T OF INDIA FOR THE BENEFIT OF EXPORTERS THAT THE ASSESSEE EARNED MO RE INTEREST ON THE FDRS THAN THE INTEREST PAYABLE TO THE BANK ON THE BORROWED FUNDS. IT IS NOT IN DISPUTE THAT THE ASSESSEE INT ENDS TO PAY THE TAX ON THE EXTRA INTEREST EARNED ON THE SAID FDRS, WHAT THE ASSESSEE WANTED TO ADJUST THERE FROM THE INTEREST PAI D BY IT TO THE BANK AGAINST THE BORROWED FUNDS. SECTION 57 (I III) OF THE ACT READS AS UNDER:- 'ANY OTHER EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME' . I.T.A. NO.3032/DEL./2010 (A.Y. : 2007-08) 5 3. THE CIT (A) AS WELL AS ITAT HAVE RECORDED A FINDI NG OF FACT THAT THERE WAS A CLEAR NEXUS BETWEEN THE INTEREST EARN ED ON THE FDRS AND THE INTEREST PAID ON LOANS UTILIZED FOR PURC HASE OF FDRS AND THE INTIMATE CONNECTION BETWEEN THE RECEIPT AND PAYMENT OF INTEREST STAND ESTABLISHED. IT IS NOT IN DISPUTE THAT TH E ENTIRE MONEY WAS BORROWED WITH THE SOLE PURPOSE OF CONVERTING THE SAME INTO FDRS AND THAT WAS ACTUALLY DONE AS WELL. IN T HESE CIRCUMSTANCES, WE ARE AGREED WITH THE OPINION OF THE AUTHORITIES BELOW. THE INTEREST PAID HAD TO BE ALLOWED UNDER THE PROVISIONS OF SECTION 57 (III) OF THE ACT AS THE AMOUNT WAS BORR OWED FOR MAKING AND EARNING INCOME, TAKING ADVANTAGE OF THE EXIM POLICY OF THE GOVERNMENT OF INDIA AS WELL AS IOWER LIBOR INT EREST RATE. 4. THEREFORE, WE ARE OF THE VIEW THAT NO SUBSTANTIAL QUESTION OF LAW ARISES IN THE AFORESAID BACKGROUND AND THESE APP EALS ARE ACCORDINGLY DISMISSED. 10. FOR ASSESSMENT YEAR 2005-06, BY VIRTUE OF THEIR ORD ER DATED 13.12.10 (SUPRA), THE HONBLE DELHI HIGH COURT, IT I S SEEN HAS HELD THAT SINCE A CLEAR NEXUS HAS BEEN FOUND BY THE TRIBUNAL BET WEEN THE INTEREST EARNED ON THE FDRS AND THE INTEREST PAID ON T HE LOANS UTILIZED FOR PURCHASE OF FDRS AND THE INTIMATE CONNECTION BETW EEN THE RECEIPT AND PAYMENT OF INTEREST STOOD ESTABLISHED; AND THAT IT WAS NOT DISPUTED THAT THE ENTIRE MONEY WAS BORROWED FOR THE SO LE PURPOSE OF CONVERTING THE SAME INTO FDRS AND THAT THIS WAS WHAT AC TUALLY HAD BEEN DONE, INTEREST PAID HAD TO BE ALLOWED U/S 57(III ) OF THE ACT. SINCE, THE AMOUNT WAS BORROWED FOR MAKING AND EARNING INCOM E, TAKING ADVANTAGE OF THE EXIM POLICY OF THE GOVT. OF INDIA AS WELL AS LOWER LIBOR INTEREST RATE. 11. THE FACTS IN THE YEAR UNDER CONSIDERATION, IT IS SE EN, ARE NO DIFFERENT FROM THOSE BEFORE THE HONBLE HIGH COURT F OR ASSESSMENT YEAR 2005-06. THEREFORE, FINDING NO MERIT IN THE GRIEVA NCE SOUGHT TO BE RAISED BY THE DEPARTMENT BY WAY OF THE GROUND OF APP EAL RAISED, THE SAME IS HEREBY REJECTED. I.T.A. NO.3032/DEL./2010 (A.Y. : 2007-08) 6 11. IN THE RESULT, THE APPEAL FILED BY THE DEPARTMEN T IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 04.04.2011. SD/- SD/- [K.D. RANJAN] [A.D. JAIN] ACCOUNTANT MEMBER JUDICIAL MEMBER DATE APRIL 04, 2011. SKB COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A)-XXVI, NEW DELHI. 5. CIT( ITAT) DEPUTY REGISTRAR, ITAT, DELHI BENCHES