M/s. SITEL INDIA P. LTD., MUMBAI V. DCIT RG 8(3), MUMBAI

ITA 3110/MUM/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54912 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 27-07-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 07-05-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: SUNIL LALA
• Keywords: Business income; Business expenditure; Question of law; Capital expenditure
• Section: 80HHC; 115JB

Judgement Text

1 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI I BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI P M JAGTAP, AM & SHRI VIJAY PAL RAO, JM ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) M/S SITEL INDIA P LTD 4A PARKE DAVIS COMPLEX (MAIN) SAKINAKA ANDHERI (E) MUMBAI 2 VS THE INCOME TAX OFFICER WARD 8(3)(2), MUMBAI (APPELLANT) (RESPONDENT) PAN NO. AAAFCS1297M ASSESSEE BY SHRI SUNIL LALA REVENUE BY SHRI SUNIL KUMAR SINGH DT.OF HEARING 27.7.2011 DT OF PRONOUNCEMENT 12 TH AUG 2011 ORDER PER VIJAY PAL RAO, JM THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST THE RESPECTIVE ORDERS OF THE CIT(A) FOR THE ASSESSMENT YEARS 2002-03 AND 200 3-04. 2 THE ASSESSEE HAS RAISED VARIOUS GROUNDS IN THESE APPEALS, SOME OF WHICH ARE COMMON IN BOTH THESE APPEALS. HOWEVER, THE FOLLOWIN G COMMON ISSUES ARISE FROM THE GROUNDS OF APPEAL: I) WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CAS E, THE CIT(A) IS JUSTIFIED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER WHEREB Y THE INTEREST ON TERM DEPOSIT HAS BEEN ASSESSED AS INCOME FROM OTHER SOURCE S AS AGAINST THE CLAIM OF THE ASSESSEE AS PROFIT AND GAINS OF THE BUSINESS AND CONSEQUENTLY ELIGIBLE FOR DEDUCTION U/S 10A OF THE I T ACT. II) WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE C ASE, EVEN ASSUMING THE INTEREST ON TERM DEPOSIT AS INCOME FROM OTHER SOURCES, THE CIT(A) IS JUSTIFIED IN REJECTING THE CONTENTION OF THE ASSESSEE THAT THE NE T RECEIPT OF INTEREST (INTEREST RECEIPT INTEREST PAID) SHOULD BE TAKEN INTO ACCOUNT. 2 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) III) WHETHER IN THE FACTS AND CIRCUMSTANCE OF THE CA SE, THE CIT(A) IS JUSTIFIED IN HOLDING THAT THE FOREIGN EXCHANGE RATE DIFFERENCE ON OPENING DEBTORS CANNOT BE REGARDED AS INCOME DERIVED FROM EXPORT ACTIV ITY. 2.1 FOR THE ASSESSMENT YEAR 2003-04, THE ASSESSEE H AS ALSO RAISED THREE MORE GROUNDS AS UNDER: A) WHETHER THE CIT(A) IS JUSTIFIED IN UPHOLDING TH E COMMON GROUND OF DEDUCTION U/S 10A IN RESPECT OF SALE OF SCRAP OF RS . 11,944/-. B)THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF SOFTWARE EXPENSES TO THE EXTENT OF RS. 34,37,478/- AS CAPITAL EXPENDITURE. C)THE CIT(A)OUGHT TO HAVE HELD THAT THE COMPUTATION OF BOOK PROFIT U/S 115JB OF THE ACT AN AMOUNT OF RS. 76,99,25,000/- OUGHT TO HAVE BEEN REDUCED UNDER CLAUSE (II) OF THE EXPLANATION TO SEC. 115JB O F THE ACT. D) THE CIT(A) ERRED IN UPHOLDING THE INCREASING OF B OOK PROFITS OF THE APPELLANT BY THE AMOUNT OF PROVISION OF LEAVE ENCASH MENT OF RS. 26,39,000/- 3 AT THE TIME OF HEARING, THE LD AR OF THE ASSESSEE HAS STATED THAT THE ASSESSEE DOES NOT PRESS THE COMMON GROUND NO.(III) REGARD ING FOREIGN EXCHANGE RATE DIFFERENCE AND GROUND NOS (A) TO (D) RAISED IN THE ASSESSMENT YEAR 2003-04 AND THE SAME MAY BE DISMISSED AS NOT PRESSED. ON THE OTHER HAND, THE LD DR HAS NO OBJECTION, IF THESE GROUNDS OF APPEALS ARE DISMISSE D AS NOT PRESSED. 4 ACCORDINGLY, THE COMMON GROUNDS REGARDING FOREIGN EXCHANGE RATE DIFFERENCE ON OPENING DEBTS AND GROUND IN ASSESSMEN T YEAR 2003-04 REGARDING DEDUCTION IN RESPECT OF SCRAP SALE AND SOFTWARE EXP ENSES FOR COMPUTING BOOK PROFIT ARE DISMISSED AS NOT PRESSED. 5 THE ISSUE NO.(I) IS REGARDING INTEREST ON TERM D EPOSIT. THE ASSESSEE IS A PRIVATE LIMITED COMPANY AND ENGAGED IN THE BUSINESS OF CALL CENTRE. THE ASSESSEE CLAIMED DEDUCTION U/S 10A OF THE IT ACT OF RS. 47,54,672/-. THE ASSESSEE, IN THE YEAR RECEIVED 3 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) OTHER INCOME INCLUDING INTEREST INCOME ON TERMED DE POSIT OF RS. 28,20,208/. THOUGH, THE ASSESSEE IN THE COMPUTATION OF INCOME HAS OFFER ED INTEREST ON TERM DEPOSIT TO TAX AS INCOME FROM OTHER SOURCES; HOWEVER, IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE CLAIMED THAT THE DEDUCTIO N U/S 10A SHOULD ALSO BE ALLOWED ON THE INTEREST ON TERM DEPOSIT OF RS. 28, 20,208/-. THE ASSESSEE PLEADED BEFORE THE ASSESSING OFFICER THAT THE INTEREST RECE IPT AND PAYMENTS WERE INCIDENTAL TO THE BUSINESS AND THE SAME WERE HAVING CLOSE NEXU S WITH THE INDUSTRIAL UNDERTAKING OR EXPORT BUSINESS; THEREFORE, THE SAME SHOULD BE TREATED AS PART OF ELIGIBLE PROFIT FOR DEDUCTION. THE ASSESSING OFFIC ER DID NOT ACCEPT THE CONTENTION AND EXPLANATION OF THE ASSESSEE AND TREATED THE INT EREST INCOME FROM FIXED DEPOSIT AS INCOME FROM OTHER SOURCES. 5.1 ON APPEAL, THE ASSESSEE HAS CITED VARIOUS DECI SION AND CONTENDED BEFORE THE CIT(A THAT THE TERM DEPOSITS FROM WHICH INTERE ST INCOME WAS EARNED, IS INCIDENTAL TO THE BUSINESS OF THE SEEPZ UNDERTAKING AND EXPORT BUSINESS AND THEREFORE, SHOULD BE REGARDED AS PROFITS OF THE BU SINESS OF THE UNDERTAKING WHICH IS THE REQUIREMENT U/S 10A(4) OF THE ACT. THE ASSESS EE MAINLY CONTENDED BEFORE THE CIT(A) THAT THE TERM PROFIT OF THE BUSINESS OF TH E UNDERTAKING USED IN SUB.SEC.(4) OF SEC 10A IS WIDER THAN SIMPLY PROFIT OF UNDERTAKING S AND WHATEVER INTEREST IS RECEIVED SHOULD NECESSARILY RELATE TO SUCH UNDERTAKINGS. THE CIT(A) DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND UPHELD THE ACTION OF THE ASSESSING OFFICER IN TREATING THE INTEREST INCOME AS INCOME FROM OTHER SOURCES. 6 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITTE D THAT THE ASSESSEE IS A 100% EXPORT ORIENTED UNIT. HE HAS REFERRED SUB.SEC. (4) OF SEC. 10A OF THE I T ACT AND 4 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) SUBMITTED THAT POST AMENDMENT SEC 10A IS NO MORE A N EXEMPTION BUT IS IN THE NATURE OF DEDUCTION. HE HAS FURTHER CONTENDED THA T SUB.SEC.4 MENTIONS THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUT ER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS OF THE U NDERTAKING IN PROPORTION TO EXPORT TURNOVER IN RESPECT OF THE TOTAL TURNOVER OF THE BU SINESS CARRIED BY THE UNDERTAKING. THE LD AR OF THE ASSESSEE, THUS, SUBMITTED THAT THE TERM PROFIT OF THE BUSINESS OF THE UNDERTAKING IS SEPARATE AND DIFFERENT FROM THE PRO FIT DERIVED FROM THE EXPORT OF ARTICLE OR THINGS. THE ASSESSEE DEPOSITED THE SURP LUS FUNDS IN THE FIXED DEPOSITS INSTEAD OF RE PAYMENT OF THE BORROWED FUNDS. WHILE DOING SO, THE ASSESSEE REDUCED THE INTEREST LIABILITY/EXPENDITURE, WHICH IS OTHERW ISE ALLOWABLE DEDUCTION. THUS, THE LD AR HAS SUBMITTED THAT THE INTEREST EARNED ON THE FD SHALL BE TREATED AS PROFIT OF BUSINESS OF THE UNDERTAKING, WHICH IS DISTINCT FROM THE PROFIT DERIVED FROM EXPORT OF ARTICLES OR THINGS. 6.1 HE HAS FURTHER SUBMITTED THAT THE CIT(A), IN PR INCIPLES, HAS ACCEPTED THAT THE INTEREST INCOME IS ASSESSABLE AS BUSINESS INCOME BU T HE HAS HELD THAT THE SAME HAS NOT BEEN DERIVED FROM THE ACTUAL CONDUCT OF BUSINE SS OF THE UNDERTAKING. HE HAS REFERRED PAGE 7 OF THE ORDER OF THE CIT(A) AND SUBM ITTED THAT ONCE THE INTEREST INCOME HAS BEEN ACCEPTED AS BUSINESS INCOME, THEN, THE SAME SHOULD BE TREATED AS PROFIT OF BUSINESS AS REFERRED IN SUB.SEC. (4) O F SEC. 10A OF THE ACT. THE LD AR THEN REFERRED TO THE ASSESSMENT ORDER FOR THE ASSESSMEN T YEAR 2003-04 AND SUBMITTED THAT THE ASSESSING OFFICER HAS ALSO ACCEPTED THIS F ACT THAT THE INTEREST INCOME ATTRIBUTABLE TO THE INDUSTRIAL UNDERTAKING BUT DEN IED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE SAME IS NOT DERIVED FROM THE E XPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE. THE ASSESSING OFFICER TRIED TO DISTINGUISH THE TERMS DERIVED FROM AND ATTRIBUTABLE TO. THE LD AR HAS RELIED UPON TH E DECISION OF THE JURISDICTIONAL HIGH 5 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) COURT IN THE CASE OF CIT VS SOCIEDADE DE FOMENTO I NDUSTRIAL LTD REPORTED IN 9 TAXMAN 113(BOM) AND SUBMITTED THAT IN THE SAID DECI SION, THE QUESTION BEFORE THE HONBLE HIGH COURT WAS INTEREST RECEIVED FROM THE BANK AS WELL AS FROM INTER- CORPORATE DEPOSITS EARNED OUT OF SURPLUS FUNDS BY T HE ASSESSEE FOR THE PURPOSE OF COMMUTING DEDUCTION U/S 80HHC. THE LD AR HAS SUBMI TTED THAT THE JURISDICTIONAL HIGH COURT HAS HELD THAT THE INTEREST RECEIVED BY T HE ASSESSEE IS PART OF BUSINESS PROFIT AND AS SUCH THE SAME CANNOT BE EXCLUDED FROM THE BUSINESS PROFIT WHILE COMPUTING THE DEDUCTION U/ 80HHC. 6.2 THE LD AR HAS FURTHER SUBMITTED THAT AS A PRUDE NT BUSINESSMAN, THE ASSESSEE KEPT THE FUNDS IN THE FD TO MAINTAIN LIQUIDITY AND TO REDUCE THE TAX LIABILITY. THE LOWER AUTHORITIES HAVE DECLINED THE CLAIM OF THE AS SESSEE BY FOLLOWING THE DECISION OF NON- JURISDICTIONAL HIGH COURT THAT TOO RELATES TO PRE-AMENDMENT PROVISIONS OF SEC. 10A. HE HAS SUBMITTED THAT WHEN THE DECISION OF TH E JURISDICTIONAL HIGH IS IN FAVOUR OF THE ASSESSEE, THEN, THE CLAIM SHOULD NOT BE DECLINE D. HE HAS RELIED UPON THE FOLLOWING DECISIONS: I) CIT VS LOK HOLDINGS 308 ITR 356(BOM) II) CIT VS PARAMOUNT PREMISES P LTD 190 ITR 259 (B OM) III) CIT VS NAGPUR ENGG CO 245 ITR 806 (BOM) IV) CIT VS INDO SWISS JEWELS LTD & ANR 284 ITR 389 (BOM) V) CIT VS PUNIT COMMERCIALS LTD 245 ITR 550 (BOM) VI) CIT VS TAMIL NADU DEVELOPMENT CORPN LTD 175 IT R 361 (AP) VII) CIT VS AP INDUSTRIAL INFRASTRUCTURE CORPN LTD 175 ITR 361(AP) VIII) CIT VS TIRUPATI WOOLEN MILLS LTD 193 ITR 252 (CAL) IX) SNAM PROGETTI SAP V ACIT 132 ITR 70(DEL) X) EVERYDAY INDUSTRIES INDIA LTD V CIT 323 ITR 312 (CAL) XI) CIT VS PRODUCIN P LTD 290ITR 598(KAR) 6 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) 6.3 ON THE OTHER HAND, THE LD DR HAS SUBMITTED THAT IN THE RETURN OF INCOME, THE ASSESSEE ITSELF HAS OFFERED TO TAX THE INTEREST INC OME AS INCOME FROM OTHER SOURCES AND THEREAFTER THE ASSESSEE CLAIMED THAT THE SAME S HOULD BE TREATED AS BUSINESS INCOME OF THE ASSESSEE, ELIGIBLE FOR DEDUCTION U/S 10A. HE HAS REFEREE THE ASSESSMENT ORDER AS WELL AS THE IMPUGNED ORDER OF T HE CIT(A) AND SUBMITTED THAT THE EXPRESSION USED IN SEC. 10A DERIVED FROM WHIC H IS NARROWER IN MEANING THAN THE EXPRESSION ATTRIBUTABLE AND INCIDENTAL TO. THE ASSESSEE EARNED INTEREST INCOME OUT OF SURPLUS FUNDS AVAILABLE WITH THE ASSE SSEE; THEREFORE, BY NO STRETCH OF IMAGINATION, INTEREST EARNED ON DEPOSIT ON SURPLUS FUNDS IN THE BANK CAN BE TREATED AS PROFITS OF BUSINESS OF THE ASSESSEE. HE HAS REL IED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA REPORTE D IN 317 ITR 218 AND SUBMITTED THAT THE DECISIONS RELIED UPON BY THE ASSESSEE ARE PRIOR TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA (SUPRA); THEREFORE, THESE DECISIONS ARE NOT APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE. HE HAS ALSO RELIED UPON THE ORDERS OF THE LOWER AUTHORITIES. 7 WE HAVE CONSIDERED THE RIVAL CONTENTION AND PERUS ED THE RELEVANT MATERIAL ON RECORD. UNDISPUTEDLY, THE INTEREST EARNED BY TH E ASSESSEE IS ON THE DEPOSIT OF SURPLUS FUND IN THE BANK FD. IT IS NOT THE CASE OF THE ASSESSEE THAT THE DEPOSITS WERE MADE AS MANDATORY REQUIREMENT OR IN CONNECTION WITH THE BUSINESS ACTIVITY OF THE ASSESSEE. THE LD AR OF THE ASSESSEE HAS STRONGLY R ELIED UPON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF SOCIEDADE DE FOMENTO INDUSTRIAL LTD (SUPRA). IN THE SAID DECISION, THE JURISDICTIONAL HIGH COURT AFTER NOTING DOWN THE FACT THAT THE MAIN OBJECT OF THE ASSESSEE COMPANY IS TO EXTRACT I RON ORE AND EXPORT THE SAME, YET THE ASSESSEE COMPANY WAS NOT BARRED FROM CARRYING ON ACTIVITY LIKE PLACING 7 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) VARIOUS DEPOSITS AND EARNING INTEREST ON THE SAME. THE RELEVANT PORTION OF THE ORDER OF THE JURISDICTIONAL HIGH COURT READ AS UNDER: 6. HAVING HEARD THE LEARNED COUNSEL FOR THE APPELLANT AND THE RESPONDENT AND ON PERUSAL OF RECORDS, WE FIND THAT THE CIT (A) HAS HELD AT PARA 14.8 THAT THOUGH THE MAIN OBJECT OF THE COMPANY IS TO EXTRACT IRON ORE AND EXPORT THE SAME, YET THE ASSESSEE COMPANY IS NOT BARRED FROM CA RRYING ON ACTIVITY LIKE THE PRESENT ONE. IN SUCH A SITUATION, IT CANNOT BE SAID THAT THE ASSESSEE HAS NOT CARRIED ON BUSINESS OF PLACING VARIOUS DEPOSITS AND EARNING INTEREST FROM THE SAME. THE ACTIVITY CARRIED ON CAN BE DEFINITELY HELD AS BUSINESS ACTIVITY AND HENCE ANY INCOME EARNED THEREOF IS TO BE TAXED A S BUSINESS INCOME ONLY. THIS SHOWS THAT THE AUTHORITIES BELOW ON THE B ASIS OF THE EVIDENCE ON RECORD HAVE HELD THAT THE ACTIVITY CARRIED OUT BY THE RESPONDENT WAS A PART OF THEIR BUSINESS ACTIVITY. THIS CONCLUSION OF THE F ACT CANNOT BE INTERFERED BY THIS COURT IN AN APPEAL UNDER SECTION 260-A OF THE I NCOME TAX ACT. IN ANY EVENT, THE LEARNED COUNSEL APPEARING FOR THE APPELLAN T HAS FAILED TO ADVANCE ANY SUBMISSION TO THE EFFECT THAT THE SAID FINDINGS OF THE FACT ARE CONTRARY FROM THE EVIDENCE ON RECORD OR THAT THE SAME A RE IN ANY WAY PERVERSE. THE APEX COURT IN THE JUDGMENT REPORTED IN (2005) 2 SCC 324 IN THE CASE OF M. JANARDHANA RAO V/S JOINT COMMISSIONER OF INCOME TAX HAS HELD AT PARA 10 THUS : 10. SOME OF THE PROVISIONS OF SECTION 260-A ARE IN P ARI MATERIA WITH VARIOUS SUB-SECTIONS OF SECTION 100 CPC. THE PROVISIO NS ARE SECTIONS 260-A(1), 260-A(2)(C), 260-A(3), 260-A(4) OF THE AC T CORRESPONDING TO SECTIONS 100(1), 100(3), 100(4) AND 100(5) CPC. 7. HENCE, THE QUESTION OF FACT ARRIVED AT BY THE AUT HORITIES BELOW CANNOT BE INTERFERED WITH IN THE PRESENT APPEAL UNDER SECTION 260 -A OF THE SAID ACT AS NO PERVERSITY HAS BEEN SHOWN BY THE APPELLANT TO TH E SAID FINDINGS. 8. THE JUDGMENT OF THIS COURT IN THE CASE OF RAVI R ATNA EXPORTS ( SUPRA ) IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AS THE AUTHORITIES THEREIN HAD COME TO THE CONCLUSION THAT MONIES ON WHICH THE INT EREST WAS EARNED WAS NOT IN THE COURSE OF THE ASSESSEES BUSINESS. THIS IS NOT THE CASE IN THE PRESENT CASE. IN THE JUDGMENT RELIED UPON BY THE LEARNED COUN SEL APPEARING FOR THE RESPONDENT IN THE CASE OF ALFA LAVAL INDIA LTD. ( S UPRA ), THE DIVISION BENCH OF THIS COURT HAS HELD AT PARAS 15, 16 AND 17 THUS : 15. BEFORE US, MR. INAMDAR, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT FOR COMPUTATION OF DEDUCTION UNDER SEC TION 80-HHC WHAT IS RELEVANT IS THE PROFITS OF THE BUSINESS AS C OMPUTED UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION. IN TH E PRESENT CASE, THE INTEREST FROM CUSTOMERS, SALES TAX SET OFF, CLAIMS, REFUNDS, ETC. UNDER THE CAPTION OTHER INCOME HAVE BEEN ASSESSED UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION. ONCE THESE INCOME A RE TREATED AS PART OF BUSINESS INCOME AND COMPUTED UNDER THE HEAD PROFI TS & GAINS OF BUSINESS OR PROFESSION, THE SAME CANNOT BE EXCLUDED FROM THE BUSINESS PROFITS WHILE COMPUTING DEDUCTION UNDER SEC TION 80-HHC OF 8 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) THE ACT. RELYING UPON THE DECISION OF THIS COURT IN THE CASE OF (C.I.T. V. BANGALORE CLOTHING CO.)5, REPORTED IN 260 I.T.R. 371 ( BOM.), MR. INAMDAR SUBMITTED THAT THE AMOUNTS IN QUESTION BEING PART O F OPERATIONAL INCOME, THE SAME COULD NOT BE EXCLUDED FOR THE PURPOS ES OF DEDUCTION UNDER SECTION 80-HHC OF THE ACT. 16. MR. DESAI, LEARNED COUNSEL FOR THE REVENUE ON THE OTHER HAND SUBMITTED THAT THE INCOME SHOWN UNDER THE CAPTION O THER INCOME HAD NO NEXUS WITH THE BUSINESS OF THE ASSESSEE. HE SUBMITTED THAT THERE IS NOTHING ON RECORD TO SHOW THAT THE INCOME F ROM PORTFOLIO MANAGEMENT SHOWN UNDER CAPTION OTHER INCOME WAS REL ATED TO THE BUSINESS OF THE ASSESSEE. HE RELIED UPON THE DECISI ONS OF THIS COURT IN THE CASE OF SUDARSHAN CHEMICALS (SUPRA), S.G. JHAVER I CONSULTANCY LTD. (SUPRA) AND THE DECISION OF THIS COURT IN THE CA SE OF (C.I.T. V. K.K. DOSHI & CO.)6, REPORTED IN 245 I.T.R. 849 (BOM.) AN D SUBMITTED THAT THE AMOUNTS IN QUESTION WERE NOT PART OF THE OPERATIONAL INCOME AND HENCE NOT INCLUDIBLE FOR COMPUTING DEDUCTION UNDER S ECTION 80-HHC OF THE I.T. ACT. 17. IN OUR OPINION, THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE DESERVES TO BE ACCEPTED. IN THE PRESENT CASE, THE ASS ESSING OFFICER HAS COMPUTED THE INCOME BY WAY OF INTEREST FROM THE C USTOMERS, SALES TAX SET OFF, CLAIMS, REFUNDS, ETC. UNDER THE HEAD P ROFITS & GRAINS OF BUSINESS OR PROFESSION. TO PUT IT DIFFERENTLY, THE A .O. HAS NOT ASSESSED THE INTEREST INCOME FROM CUSTOMERS, SALES TAX SET OFF , ETC. UNDER THE HEAD INCOME FROM OTHER SOURCES OR UNDER ANY OTHER HEA D. HAVING ASSESSED THESE INCOME UNDER THE HEAD PROFITS AND GAI NS OF BUSINESS OR PROFESSION, IT WAS NOT OPEN TO THE A.O. TO TREAT T HESE INCOME AS IF ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES, SO AS TO EXCLUDE THE SAME FROM THE BUSINESS PROFITS WHILE COMPUTING TH E DEDUCTION UNDER SECTION 80- HHC OF THE I.T. ACT. PERUSAL OF TH E ASSESSMENT ORDERCLEARLY SHOWS THAT THE AMOUNTS IN QUESTION HAVE NOT BEEN ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES, B UT, THE SAME HAVE BEEN ASSESSED UNDER THE HEAD PROFITS & GRAINS OF BUSINESS OR PROFESSION. UNDER SECTION 80-HHC (3) RELEVANT TO AY 1989-90, THE DEDUCTION WAS TO BE COMPUTED WITH REFERENCE TO THE P ROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS & GRAINS OF BUSINESS OR PROFESSION. IN THE PRESENT CASE, THE INTEREST INCOM E FROM CUSTOMERS AND SALES TAX SET OFF HAVE BEEN COMPUTED AND ASSESS ED UNDER THE HEAD PROFITS & GRAINS OF BUSINESS OR PROFESSION AS PART OF THE OPERATIONAL INCOME AND NOT UNDER THE HEAD INCOME FR OM OTHER SOURCES. THEREFORE, THE SAID INCOME COULD NOT BE DED UCTED FROM THE BUSINESS PROFITS WHILE COMPUTING THE DEDUCTION UNDER SECTION 80-HHC OF THE I.T. ACT. THE DECISIONS RELIED UPON BY THE TR IBUNAL HAVE BEEN DISTINGUISHED IN THE CASE OF BANGALORE CLOTHING CO. (SUPRA). IN THE CASE OF BANGALORE CLOTHING CO. (SUPRA), IT IS HELD THAT THE A.O. MUST ASCERTAIN THE NATURE OF RECEIPT IN EACH CASE INDEPEN DENTLY. INTEREST INCOME MAY OR MAY NOT BE OUT OF BUSINESS ACTIVITY. I F IT IS NOT PART OF OPERATIONAL BUSINESS INCOME, THEN, THE A.O. WOULD H AVE BEEN JUSTIFIED IN EXCLUDING THE SAME FOR THE PURPOSE OF DEDUCTION UN DER SECTION 80- 9 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) HHC OF THE ACT. HOWEVER, IN THE PRESENT CASE, THE A .O. HAS ACCEPTED THAT THE INTEREST INCOME RECEIVED FROM CUSTOMERS AS W ELL AS SALES TAX SET OFF ARE ASSESSABLE UNDER THE HEAD PROFITS & GRAINS OF BUSINESS OR PROFESSION. THEREFORE, HAVING ACCEPTED THAT THE SAI D INCOME AS PART OF THE BUSINESS PROFIT, THE SAME COULD NOT BE EXCLUD ED FROM BUSINESS PROFITS WHILE CALCULATING DEDUCTION UNDER SECTION 8 0- HHC OF THE ACT. 9. THE SAID JUDGMENT OF THE DIVISION BENCH OF THIS COURT WAS CHALLENGED BEFORE THE HONBLE APEX COURT AND THE APPEAL CAME T O BE DISMISSED BY ORDER DATED 1ST NOVEMBER, 2007 REPORTED IN (2007) 29 5 ITR 451 (SC). IN THE PRESENT CASE, THE AUTHORITIES BELOW HAVE HELD THAT THE INCOME FROM THE INTEREST RECEIVED BY THE RESPONDENT IS A PART OF THE BUSINESS PROFIT AND AS SUCH IN VIEW OF THE SAID JUDGMENT IN THE CASE OF AL FA LAVAL INDIA LTD. ( SUPRA ), THE SAME CANNOT BE EXCLUDED FROM THE BUSINESS PROFIT WHILE CALCULATING THE DEDUCTION UNDER SECTION 80HHC OF THE SAID ACT. AS SU CH THERE IS NO INFIRMITY COMMITTED BY THE CIT (A) WHILE PASSING THE IMPUGNED JUDGMENT. THE SUBSTANTIAL QUESTION OF LAW IS ANSWERED ACCORDINGLY. 8 IT IS TO BE NOTED THAT THE JURISDICTIONAL HIGH C OURT HAS FOLLOWED THE DECISION OF THE DIVISIONAL BENCH IN THE CASE OF ALFA LAVAL IND IA LTD VS DCIT REPORTED N 133 TAXMAN 740(BOM). IN THE CASE OF ALFA LAVAL INDIA L TD (SUPRA), THE INTEREST INCOME WAS RECEIVED BY THE ASSESSEE FROM THE CUSTOMERS AND IN THOSE FACTS, IT WAS HELD THAT THE INTEREST INCOME WAS ELIGIBLE FOR DEDUCTION U/S 80HHC. AS IT IS HELD BY THE HONBLE HIGH COURT AND OTHERWISE THERE IS NO DISPUT E THAT THE INTEREST FROM THE CUSTOMERS IS PART AND PARCEL OF THE SALE RECEIPTS A ND THEREFORE, THE SAME IS ASSESSABLE UNDER THE HEAD PROFITS AND GAINS OF THE BUSINESS OR PROFESSION. SIMILARLY, IN THE CASE OF SOCIEDADE DE FOMENTO INDUSTRIAL LTD (SU PRA), THE VARIOUS DEPOSITS BY THE ASSESSEE WAS TREATED AS PART OF BUSINESS ACTIVITY A ND THEREFORE, THE INTEREST INCOME WAS HELD AS PART OF BUSINESS PROFIT. 9 IN THE CASE IN HAND, UNDISPUTEDLY THE ASSESSEE I S NOT IN REGULAR BUSINESS OF LACING VARIOUS DEPOSITS AND THEREFORE, THE INTEREST INCOME HAS NO DIRECT OR LIVE CONNECTION WITH THE BUSINESS UNDERTAKING OF THE ASS ESSEE AND PARTICULARLY, THE EXPORT ARTICLES OR THINGS AND COMPUTER SOFTWARE. T HE DECISION RELIED UPON BY THE LD 10 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) AR OF THE ASSESSEE ARE ON THE FACTS WHEN THE INTERE ST EARNED ON THE DEPOSITS MADE IN CONNECTION WITH THE BUSINESS OF THE ASSESSEE. T HEREFORE, IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY IN DIA (SUPRA), THE RECEIPTS SHOULD COME WITHIN FIRST DEGREE OF SOURCE AS TO FALL UNDER THE WORDS DERIVED FROM. THE HONBLE SUPREME COURT HAS OBSERVED IN PARA 14 AS UN DER: 14 ANALYSING CHAPTER VI-A, WE FIND THAT SECTION 80- IB/80-IA ARE A CODE BY THEMSELVES AS THEY CONTAIN BOTH SUBSTANTIVE AS WELL AS PROCEDURAL PROVI- SIONS. THEREFORE, WE NEED TO EXAMINE WHAT THESE PROVI SIONS PRESCRIBE FOR COMPUTATION OF PROFITS OF THE ELIGIBLE BUSINESS . I T IS EVIDENT THAT SECTION 80-IB PROVIDES FOR ALLOWING OF DEDUCTION IN RESPECT OF PROFI TS AND GAINS DERIVED FROM THE ELIGIBLE BUSINESS. THE WORDS DERIVED FROM ARE NARROWER IN CONNOTATION AS COMPARED TO THE WORDS ATTRIBUTABLE TO . IN OTHER WORDS, BY USING THE EXPRESSION DERIVED FROM , PARLIAMENT INT ENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGREE. IN THE PRESENT BATCH OF CASES, THE CON- TROVERSY WHICH ARISES FOR DETERMINATION IS : WHETHER THE DEPB CRE DIT/DUTY DRAWBACK RECEIPT COMES WITHIN THE FIRST DEGREE SOURCES ? ACCO RDING TO THE ASSESSEE(S), DEPB CREDIT/DUTY DRAWBACK RECEIPT REDUCES THE VALUE O F PUR- CHASES (COST NEUTRALIZATION), HENCE, IT COMES WITHIN FIRST DEGRE E SOURCE AS IT INCREASES THE NET PROFIT PROPORTIONATELY. ON THE OTHER HAND, ACCORD ING TO THE DEPARTMENT, DEPB CREDIT/DUTY DRAWBACK RECEIPTS DO NOT COME WITHI N FIRST DEGREE SOURCE AS THE SAID INCENTIVES FLOW FROM THE INCENTIVE SCHEM ES ENACTED BY THE GOVERNMENT OF INDIA OR FROM SECTION 75 OF THE CUSTOMS ACT, 1962. HENCE, ACCORDING TO THE DEPARTMENT, IN THE PRESENT CASES, T HE FIRST DEGREE SOURCE IS THE INCENTIVE SCHEME/PROVISIONS OF THE CUSTOMS ACT. IN THIS CONNECTION, THE DEPARTMENT PLACES HEAVY RELIANCE ON THE JUDGMENT OF THIS COURT IN STERLING FOODS [1999] 237 ITR 579. THEREFORE, IN THE PRESENT CASES, IN WHICH WE ARE REQUIRED TO EXAMINE THE ELIGIBLE BUSINESS OF AN IND USTRIAL UNDERTAKING, WE NEED TO TRACE THE SOURCE OF THE PROFITS TO MANUFAC TURE. (SEE CIT V. KIRLOSKAR OIL ENGINES LTD. REPORTED IN [1986] 157 ITR 762.) 10 THUS, IN VIEW OF THE DECISION OF THE HONBLE SUP REME COURT IN THE CASE OF LIBERTY INDIA (SUPRA), WE HOLD THAT INTEREST EARNED BY THE ASSESSEE ON SURPLUS FUNDS DEPOSIT IN THE BANK DOES NOT COME UNDER THE FIRST D EGREE OF SOURCE OF PROFIT DERIVED FROM PROFIT OF BUSINESS OF UNDERTAKING. ACCORDINGL Y, THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 11 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) 11 NEXT ISSUE RELATES TO NETTING OF INTEREST. 12 WE HAVE HEARD THE LD AR OF THE ASSESSEE AS WELL AS THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AS WE HAVE DISCU SSED THE RELEVANT FACTS AND LEGAL PROPOSITION WHILE DECIDING THE ISSUE IN GROUND NO(I ). THE ASSESSEE IN THIS CASE HAS NOT MADE THE FD IN CONNECTION WITH THE BUSINESS ACTIVIT Y OR REQUIREMENT OF THE BUSINESS. SINCE IT WAS SURPLUS FUNDS DEPOSITED IN THE BANK; T HEREFORE, EARNING OF INTEREST ON THE FD IN THE BANK HAS NO DIRECT NEXUS OR EARNING WITH RESPECT TO THE INTEREST BEARING BORROWED FUNDS. IT IS NOT THE CASE OF FURNISHING F D FOR AVAILING CREDIT FACILITY OR LETTER OF CREDIT OR OTHER FINANCE BUSINESS REQUIREMENT. TH EREFORE, WHEN THE INTEREST RECEIPT HAS NO CONNECTION WITH THE BUSINESS EXPENDITURE, TH EN, THE CLAIM OF NETTING OF INTEREST CANNOT BE ALLOWED. THE JURISDICTIONAL HIGH COURT IN CASE OF CIT VS ASIAN STAR CO LTD REPORTED IN 326 ITR 56 HAS HELD AS UNDER: BEFORE CONCLUDING, IT WOULD BE NECESSARY TO NOTE T HAT THE DELHI HIGH COURT AFFIRMED THE JUDGMENT OF A SPECIAL BENCH OF IN COME-TAX APPELLATE TRIBUNAL IN THE CASE OF LALSONS. THE TRIBUNAL IN THE COURSE OF ITS DECISION, ADVERTED TO THE DEDUCTION OF TEN PER CENT. ALLOWED B Y PARLIAMENT IN EXPLANATION (BAA) WHILE LEGISLATING THAT ONLY NINET Y PER CENT. OF THE RECEIPTS UNRELATED TO EXPORT TURNOVER WOULD BE EXCLUDED FROM THE PROFITS OF BUSINESS. THE TRIBUNAL, OBSERVED THAT THE ALLOWANCE O F TEN PER CENT. HAD BEEN MADE BY PARLIAMENT ONLY FOR MEETING COMMON EXP ENSES, ACCORDING TO CIRCULAR 621 DATED DECEMBER 19, 1991* OF THE CENTRA L BOARD OF DIRECT TAXES. IN LALSONS, THE TRIBUNAL OBSERVED THAT IN AD DITION TO SUCH COMMON EXPENSES, THERE MAY BE OTHER EXPENSES WHICH HAVE A DIRECT BEARING ON EXCLUDIBLE RECEIPTS. THE TRIBUNAL HELD THAT IF SUC H RECEIPTS WERE TO BE TAKEN OUT OF THE BUSINESS PROFITS ON THE FOOTING THAT THE Y HAD NO CONNECTION WITH THE BUSINESS PROFITS OR TURNOVER, IT WOULD ONLY BE REA SONABLE TO HOLD THAT EXPENDITURE HAVING NEXUS WITH SUCH RECEIPTS SHOULD A LSO BE TAKEN OUT OF THE BUSINESS PROFITS ON THE SAME FOOTING. THE TRIBUNA L NOTED THAT THE USE OF THE WORD 'RECEIPTS' WOULD NOT REFER TO GROSS RECEIPTS BECAUSE THE LEGISLATURE HAD NOT USED THE WORDS 'GROSS' NOR 'NET'. WE ARE AFFIRMATIVELY OF THE VIEW THAT IN ITS DISCUSSION ON THE ISSUE OF NET TING, THE TRIBUNAL IN ITS SPECIAL BENCH DECISION IN LALSONS HAS TRANSGRESSED TH E LIMITATIONS ON THE EXERCISE OF JUDICIAL POWER. THE TRIBUNAL HAS IN EFFEC T, LEGISLATED BY PROVIDING 12 ITA NO. 6395/MUM/25 (ASSESSMENT YEAR 2002-03) ITA NO. 3110/MUM/2008 (ASSESSMENT YEAR 2003-04 ) A DEDUCTION ON THE GROUND OF EXPENSES OTHER THAN IN T HE TERMS WHICH HAVE BEEN ALLOWED BY PARLIAMENT. THAT IS IMPERMISSIB LE. IN THE PRESENT CASE, IT IS NECESSARY TO EMPHASIZE THAT THE QUESTION BEFORE THE COURT RELATES TO THE DEDUCTION UNDER SECTION 80HHC. AN ASS ESSEE MAY WELL BE ENTITLED TO A DEDUCTION IN RESPECT OF THE EXPENDITU RE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS IN THE COMP UTATION OF THE PROFITS AND GAINS OF BUSINESS OR PROFESSION. HOWEVER, FOR THE PURPOSES OF COMPUTING THE DEDUCTION UNDER SECTION 80HHC, THE P ROVISIONS WHICH HAVE BEEN ENACTED BY PARLIAMENT WOULD HAVE TO BE COMPLIE D WITH. A DEDUCTION IN EXCESS OF WHAT IS MANDATED BY PARLIAME NT CANNOT BE ALLOWED ON THE THEORY THAT IT IS AN INCENTIVE PROVIS ION INTENDED TO ENCOURAGE EXPORT. THE EXTENT OF THE DEDUCTION AND THE CONDITIONS SUBJECT TO WHICH THE DEDUCTION SHOULD BE GRANTED, ARE MATTE RS FOR PARLIAMENT TO LEGISLATE UPON. PARLIAMENT HAVING LEGISLATED, IT W OULD NOT BE OPEN TO THE COURT TO DEVIATE FROM THE PROVISIONS WHICH HAVE BEE N ENACTED IN SECTION 80HHC. ACCORDINGLY, THIS ISSUE IS DECIDED AGAINST THE ASSE SSEE. 13 IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED ON THE 12 TH ,DAY OF AUG 2011. SD/- SD/- ( P M JAGTAP ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 12 TH , AUG 2011 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI