Asstt.Commissioner of Income Tax, Circle-3(1)(1), Ahmedabad V. M/s. Priyal International P.Ltd., Ahmedabad

ITA 3115/AHD/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 4112 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 04-11-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LALIT P JAIN
• Assessee Lawyers: MEHUL K PATEL
• Keywords: Business income
• Section: 56; 143(3); 10AA; 80HHC; 14A; 10B; 205; 195

Judgement Text

, B IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER ./ I.T.A. NO. 3115/AHD/2015 ( ASSESSMENT YEAR: 2011-12) ADD. CIT, RANGE-5, AHMEDABAD / VS. M/S PRIYAL INTERNATIONAL PVT. LTD. 3 RD FLOOR, LANDMARK HOUSE MITHAKHALI SIX ROADS NAVRANGPURA, AHMEDABAD- 380009 ./ ./ PAN/GIR NO. : AAECP4640A ( APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : LALIT P. JAIN, SR. DR / RESPONDENT BY : MEHUL K PATEL, AR DATE OF HEARING 17/12/2018 !'# / DATE OF PRONOUNCEMENT 15/02/2019 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE REVENUE AGAINST THE ORDER OF THE CIT(A)-09, AHMEDAB AD (CIT(A) IN SHORT), DATED 14.08.2015 ARISING IN THE ASSESSMENT ORDER DATED 31.01.2014 PASSED BY THE ASSESSING OFFICER (AO) UND ER S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) CONCERNING A.Y. 2011-12. 2. THE SUBSTANTIVE GROUNDS OF APPEAL RAISED BY THE REVENUE READS AS UNDER:- ITA NO.3115/AHD/2015 [ADD. CIT VS. PRIYAL INTERNATIONAL PVT. LTD.] A.Y. 2011-12 - 2 - 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT INTEREST ON BANK FDRS OF RS. 9,61,73,903/- ARE TAXA BLE UNDER THE HEAD PROFIT AND GAINS OF BUSINESS AND NOT UND ER HEAD INCOME FROM OTHER SOURCE AS HELD BY THE AO AND TH EREBY DELETING THE DISALLOWANCE OF DEDUCTION U/S 10AA OF RS. 1,98,09,720/-. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS BY NOT APPRECIATING THAT INTEREST INCOME ON FIXED DEPOSITS WITH BANK HAS NO FIRST DEGREE OF NEXUS WITH THE ELIGIBLE ACTI VITY AND HENCE THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION U/ S 10AA OF THE INCOME TAX ACT. 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE U/S 14A OF RS. 2,07,682/-. 4. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF INTEREST ON ADVANCE GIVEN FOR PURCH ASE OF IMMOVABLE PROPERTY OF RS. 4,83,675/-. 3. GROUND NO. 1 AND 2 CONCERNS ELIGIBILITY OF DEDU CTION OF INTEREST ON FIXED DEPOSIT AMOUNTING TO RS. 9,61,73,903/- FOR TH E PURPOSES OF SECTION 10AA OF THE ACT. THE ASSESSEE COMPANY IS E NGAGED IN THE BUSINESS OF TRADING IN BULLION COMMODITIES ETC. TH E RETURN FILED BY THE ASSESSEE COMPANY WAS SUBJECTED TO SCRUTINY ASSESSME NT. IN THE COURSE OF THE SCRUTINY ASSESSMENT, THE ASSESSING OFFICER ( AO) NOTICED THAT THE ASSESSEE HAD INTER ALIA CLAIMED DEDUCTION UNDER SECTION 10AA AT RS. 1,98,09,720/- FOR A UNIT AT SEZ. IT WAS FURTHE R NOTICED THAT THE ASSESSEE HAD ALSO INCLUDED INTEREST ON FIXED DEPOSI TS RS. 9,61,73,903/- AS PROFITS OF THE BUSINESS OF SEZ UNIT AND CONSIDER ED IT AS INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS AND PROFESSION FOR THE PURPOSES OF THE COMPUTATION OF DEDUCTION UNDER SECTION 10AA OF THE ACT. IT WAS THUS NOTICED THAT T HE ASSESSEE HAS EVENTUALLY CLAIMED DEDUCTION UNDER SECTION 10AA ON THE PROFITS OF SEZ BUSINESS AFTER INCLUDING INTEREST ON FIXED DEPO SITS. 3.1. THE AO TOOK A VIEW THAT INTEREST ON FIXED DE POSITS IS NOT AKIN TO PROFITS DERIVED AS LAID DOWN IN SECTION 10AA (7) OF THE ACT AND CONSEQUENTLY SUCH INTEREST INCOME DO NOT FORM PART OF THE BUSINESS ITA NO.3115/AHD/2015 [ADD. CIT VS. PRIYAL INTERNATIONAL PVT. LTD.] A.Y. 2011-12 - 3 - OPERATION OF THE SEZ UNIT. THE ASSESSEE, IN RESPON SE, CONTENDED BEFORE THE AO THAT THE FIXED DEPOSITS HAVE BEEN MAD E WITH THE BANK TO CATER TO THE CREDIT FACILITY ENJOYED BY THE ASSESSE E FROM THE BANK AS MARGIN MONEY TO ENABLE ITS SUPPLIERS TO OBTAIN PAYM ENT FROM BANK AGAINST THE GOODS IMPORTED BY THE ASSESSEE. THE AS SESSEE ACCORDINGLY CONTENDED THAT FIXED DEPOSITS PLACED BY THE ASSESSE E ARE INTEGRAL PART OF THE BUSINESS OPERATION OF SEZ UNITS. THE AO HOW EVER RELIED ON CERTAIN CASE LAWS AND HELD THAT WHERE SUCH INTEREST INCOME EARNED BY THE ASSESSEE DO NOT HAVE ANY FIRST DEGREE OF NEXUS WITH THE ELIGIBILITY BUSINESS ACTIVITY SUCH INTEREST INCOME OUT OF PURVI EW OF DEDUCTION AVAILABLE UNDER SECTION 10AA OF THE ACT. THE AO ACC ORDINGLY HELD THE INCOME TO BE INCOME FROM OTHER SOURCES AND DENIED THE CLAIM OF DEDUCTION ON INTEREST INCOME FROM FIXED DEPOSIT AND CONSEQUENTLY INCREASED THE TAXABLE INCOME OF THE ASSESSEE BY RS. 1,98,09,270/- BEING THE POSITIVE INCOME FROM SEZ UNIT. 3.2. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFOR E THE CIT(A) AND SUBMITTED THAT THE AO HAS MISDIRECTED ITSELF IN LAW AND ON FACTS IN DENYING DEDUCTION ON INTEREST GENERATED FROM FDR WH ERE THE FDRS HAVE BEEN OBTAINED TO AVAIL CREDIT FACILITY FOR SEZ BUSINESS. IT WAS SUBMITTED ON FACTS THAT THE GOODS ARE IMPORTED BY T HE ASSESSEE FOR WHICH BUYERS CREDIT IS OBTAINED FOR A CREDIT PERIOD OF 360 DAYS FROM FOREIGN BRANCH OF AN INDIAN BANK AS WELL AS A FOREI GN BANK. THE PAYMENTS TO FOREIGN BRANCH OF INDIAN BANK/ FOREIGN BANK ARE MADE AFTER 360 DAYS BY BANKERS OF SEZ UNIT. FOR THIS PU RPOSE, THE SEZ UNIT HAS OBTAINED LETTER OF UNDERTAKING (LOU) AND BUYERS CREDIT FACILITIES WITH THEIR BANKERS. THE SEZ UNIT HAS TO MAKE FIXED DEPOSITS (MARGIN MONEY) FOR EQUIVALENT OF MATURITY VALUE OF 100 PER CENT LOU AMOUNT. AFTER THE END OF 360 DAYS, THE BANKER MAKES THE PAY MENT DIRECTLY TO THE FOREIGN BRANCH OF INDIAN BANK/FOREIGN BANK BY L IQUIDATING THE BANK FDRS. THE SEZ UNIT HAS INCIDENTALLY EARNED INTERES T ON SUCH BANK FDRS. THE ASSESSEE THUS MADE DETAILED SUBMISSION O N BUSINESS CYCLE ITA NO.3115/AHD/2015 [ADD. CIT VS. PRIYAL INTERNATIONAL PVT. LTD.] A.Y. 2011-12 - 4 - AS REPRODUCED IN THE ORDER OF THE CIT(A) AND ESSENT IALLY SUBMITTED THAT WHILE THE SALES ARE MADE ON SPOT, THE PURCHASE S ARE OBTAINED ON CREDIT WITH THE HELP OF THE FIXED DEPOSITS PLACED W ITH THE BANK AS MARGIN MONEY AGAINST SUCH PURCHASES. THE ASSESSEE ACCORDINGLY SUBMITTED BEFORE THE CIT(A) THAT IN THE FACTS AND T HE CIRCUMSTANCES OF THE CASE WHERE THE FIXED DEPOSITS WERE KEPT OWING T O MANDATE OF THE BANK TO GET LETTER OF CREDIT TO AVAIL CREDIT PERIOD ON PURCHASES, THE INTEREST INCOME ON SUCH FIXED DEPOSITS IS DIRECTLY AND INEXTRICABLY LINKED WITH THE BUSINESS OF THE ASSESSEE. THE CIT( A) EXAMINED THE SUBMISSIONS MADE BY THE ASSESSEE AS WELL AS LONG LI NE OF JUDICIAL PRECEDENTS AND CONCLUDED THAT THE FIXED DEPOSITS IN THE INSTANT CASE ARE INTEGRAL PART OF THE BUSINESS OPERATIONS OF THE SEZ UNIT AND CONSEQUENTLY THE INCIDENTAL INTEREST INCOME ARISING FROM SUCH FIXED DEPOSITS ARE NOTHING BUT BUSINESS INCOME. FOR THI S PROPOSITION THE CIT(A) TOOK NOTE OF SEVERAL DECISIONS OF THE HONBL E GUJARAT HIGH COURT. 3.3. THE CIT(A) ACCORDINGLY HELD THAT THE AO WAS NO T JUSTIFIED IN EXCLUDING THE INTEREST INCOME EARNED FROM FIXED DEP OSITS BUT IN THE NATURE OF BUSINESS INCOME FOR THE PURPOSES OF COMPU TATION OF DEDUCTION UNDER SECTION 10AA OF THE ACT. THE RELEV ANT OPERATIVE PARA OF THE ORDER OF CIT(A) IN THIS REGARD IS REPRODUCED HERE UNDER:- 5. I HAVE PERUSED THE ORDER U/S. 143(3) THE SUBMISS IONS MADE IN THIS REGARD AND VARIOUS JUDGMENTS CITED BY THE A.O. AND ALSO BY THE APPELLANT. THE BASIC CONTROVERSY IS WITH R EGARD TO THE HEAD OF INCOME UNDER WHICH INTEREST INCOME FROM FDRS WITH THE BANK IS TO BE TAXED. THESE FDRS ARE CREATED AS A SECURITY FOR MARGIN MONEY FOR AVAILING BUYERS CREDIT FACILITY IN THE COURSE OF B USINESS. THE A.O. IS OF THE VIEW THAT THE INTEREST EARNED FROM THE BANK ON FDRS CANNOT BE TREATED AS INCOME DERIVED FROM EXPORT ACTIVITY OF SEZ UNIT. THE A.O. IS ALSO OF THE VIEW THAT SINCE THE APPELLANT IS NO T IN THE BUSINESS OF BANKING OR FINANCE, THEREFORE, THE INTEREST INCOME CANNOT BE SAID TO BE HAVING DERIVED FROM THE EXPORT ACTIVITY. IN TH E ORDER U/S 143(3), NUMBER OF CASE LAWS HAVE BEEN CITED BY THE AO TO S TRESS THAT SUCH INTEREST INCOME IS TO BE ASSESSED UNDER THE HEAD I NCOME FROM OTHER SOURCES AND THUS TO DENY DEDUCTION U/S. 10AA ON TH E INTEREST INCOME EARNED ON SUCH FDRS WHICH IS APPROXIMATELY RS. 9,6 1,73,903/-. THE ITA NO.3115/AHD/2015 [ADD. CIT VS. PRIYAL INTERNATIONAL PVT. LTD.] A.Y. 2011-12 - 5 - A.O IS OF THE VIEW THAT THERE IS NO DIRECT NEXUS B ETWEEN THE INTEREST INCOME EARNED FROM FDR AND THE EXPORT ACTIVITY CAR RIED ON BY THE APPELLANT. 5.1 THE APPELLANT HAS CONTENDED THAT TO CARRY OUT PURCHASE OF GOLD, BULLION ETC ON CREDIT AGAINST LETTER OF CRED IT OR BUYER'S CREDIT THE BANKS COMPULSORILY REQUIRED DEPOSIT OF MARGIN MONEY IN THE FORM OF FIXED DEPOSIT. AFTER A CYCLE OF 30 DAYS / 90 DAYS THESE FDRS AUTOMATICALLY GETS LIQUIDATED IN FAVOUR OF THE SEL LER. THE INTEREST ON THESE FDRS IS EARNED FOR THE INTERVENI NG PERIOD OF 30 / 90 DAYS, THE PERIOD FOR WHICH THE FDR IS HELD WITH THE BANK, WHICH SUBSEQUENTLY GETS CREDITED IN THE APPELLANT'S BANK ACCOUNT. THE APPELLANT FUNDAMENTALLY STRESSED THIS ASPECT THAT FDRS ARE NOT CREATED OUT OF THE SURPLUS FUNDS OR FREE FUNDS BUT CREATED AS A SECURITY TO THE SELLERS WERE PROVIDED GOLD BULLION ETC. TO THE APPELLANT. IT WAS ALSO EMPHASIZED THAT THERE IS C OMPULSION TO MAKE A FIXED DEPOSIT IN THE FORM OF FD IN MARGIN MONEY. 5.2 THE APPELLANT ALSO POINTED THE MODE OF DEDUCTI ON TO BE COMPUTED U/S. 10AA WHICH IS PROVIDED IN THE I.T. A CT IN SECTION 10AA(7). THIS FORMULA WHICH READS AS UNDER :- (7) FOR THE PURPOSES OF SUB-SECTION (1), THE PROFI TS DERIVED FROM THE EXPORT OF ARTICLES OR THINGS OR SERVICES (INCL UDING COMPUTER SOFTWARE) SHALL BE THE AMOUNT WHICH BEARS TO THE P ROFITS OF THE BUSINESS OF THE UNDERTAKING, BEING THE UNIT, THE S AME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THINGS OR SERVICES BEARS TO THE TOTAL TURNOVER OF THE BUSINE SS CARRIED ON 16[BY THE UNDERTAKING]: PROFIT DERIVED FROM EXPORT = PROFIT OF BUSINESS UN DERTAKING EXPORT TURNOVER OF UNDERTAKING THE APPELLANT, THUS, STRESSED THE POINT THAT THE W ORD 'DERIVED' FROM IS MISSING WHILE COMPUTING DEDUCTION U/S. 10AA WHICH IS PART OF COMPUTATION FOR DEDUCTION U/S 80HHC AND 80HH ETC. 5.3 AT THE VERY OUTSET IT CAN BE SAID THAT THE AS SESSEE'S IS ELIGIBILITY FOR DEDUCTION U/S. 10AA IS NOT DISPUTE D. THE ASSESSEE HAD JUSTIFIED ITS CLAIM FOR DEDUCTION U/S. 10AA DU RING THE COURSE OF ASSESSMENT BY PRODUCING RELEVANT DOCUMENTS, APP ROVALS WHICH ARE REQUIRED TO THE SEZ UNDERTAKING. THE ONLY DIS PUTE IS WITH RESPECT TO THE INTEREST INCOME FROM BANK FDRS AS A MARGIN MONEY FOR THE PURPOSES OF BUSINESS. I HAVE PERUSED THE VARIOUS CASE LAWS CITED BY THE A.O. IN THE ORDER U/S.143(3) AND I FIND THAT MOST OF THE JUDGMENTS CITED BY THE A.O. EITHER PERTAINS TO OLD SEC.10A,10B,HHC OR 80HH/80I. THE OLD SECTION 10A AND 10B HAVE BEEN SUBSTANTIALLY BEEN MODIFIED WITH EFFECT FROM 01.04.2001 WITH AN INSERTION OF SPECIFIC FORMULA TO COMPUTE D EDUCTION. ACCORDINGLY, I AM OF THE VIEW THAT THESE JUDGMENTS DOES NOT APPLIED TO THE NEW PROVISION AND THE FACTS OF THIS CASE. I MAY ALSO ADD THAT ITA NO.3115/AHD/2015 [ADD. CIT VS. PRIYAL INTERNATIONAL PVT. LTD.] A.Y. 2011-12 - 6 - JUDGMENTS RELATING TO 80HHC, 80HH OR 80I MAY NOT A LSO BE APPLIED IN THE INSTANT CASE AS THE LANGUAGE USED IN THIS S ECTION IS ALTOGETHER DIFFERENT FROM SEC. 10AA OF THE I.T. ACT. IN SEC. 8OHHC, 80HH AND 80I THERE IS AMPLE DISCUSSION BY VARIOUS JUDGMENTS ON THE WORD 'INCOME DERIVED FROM. HOWEVER, I AM COMPELLED TO ADD THAT THE WORD 'DERIVED CANNOT BE JUXTAPOSE OF SEC. 10AA AS 10AA( 7) WHICH CLEARLY LAID DOWN METHODOLOGY TO COMPUTE THE ELIGIBLE DEDU CTION U/S. 10AA'. ALSO TO POINT OUT SPECIFICALLY, THE WORD 'DERIVED FROM' IS MISSING IN THE NUMERATOR OF THE FORMULA WHICH IS REPRODUCED A BOVE. I ALSO AGREE WITH THE CONTENTION OF THE APPELLANT THAT JUDGMENT S CITED BY THE AO IN ORDER U/S 143(3) ARE OUTDATED JUDGMENTS AND DOE S NOT APPLY HERE. 5.4 FURTHER, IT MAY BE POINTED OUT THAT SECTION-5 OF THE I.T. ACT LEVIES A CHARGE OF TAX ON THE TOTAL INCOME OF ASSESSEE. PROVISIONS RELATING TO COMPUTATION OF INCOME ARE P RESCRIBED IN CHAPTER-IV OF THE I.T. ACT. FOR THIS PURPOSE SEC- 14 CLASSIFIES INCOME UNDER FIVE KNOWN HEADS. OUT OF THE 5 HEADS , THERE IS A RESIDUARY HEAD NAMELY INCOME FROM OTHER SOURCES. IT MAY BE POINTED OUT THAT THESE HEADS OF INCOME ARE ONLY THE PARTIC ULAR CLASS OF INCOME AND THEY ARE NOT WATER TIGHT DIVISION FOR V ARIOUS SOURCE OF INCOME, TO PUT IT IN OTHERWISE, AN INCOME FROM SAME SOURCE CAN FALL UNDER ONE OR MORE HEADS DEPENDING UPON THE FA CTS AND CIRCUMSTANCES OF THE CASE. IN DETERMINATION THE HE AD OF INCOME UNDER WHICH A PARTICULAR INCOME FALLS ONE HAS TO REFER TO THE CHARGING SECTION UNDER EACH HEAD. IF SPECIFICALLY COVERED BY A CHARGING SECTION, THE INCOME CANNOT BE TAXED IN AN Y OTHER HEAD [REFER CIT VS SMT T.P. SIDHWA 133 ITR 840]. THE H ONBLE APEX COURT IN THE CASE OF NALINIKANT AMBALAL MODI VS CI T 61 ITR 428 HAVE HELD THAT IN CASE INCOME SEEMS TO FALL UNDER TWO O R MORE HEADS, ONE HAS TO DECIDE THE ISSUE BASED ON COMMERCIAL NO TIONS OF A PRACTICAL MANNER. A SIMILAR VIEW WAS ALSO TAKEN B Y HON'BLE SUPREME COURT IN CONTINENTAL CONSTRUCTION LTD VS C IT 195 ITR 81 WHEREIN SUCH OBSERVATION WAS MADE IN PAGE 109 OF T HE ORDER BY THE HON'BLE SUPREME COURT. 'BUT WE ARE UNABLE TO AGREE WITH HIM THAT THERE IS AN ANTITHESIS BETWEEN THE CATEGORIES OF INCOME SO SPECIFIED AND THE EXPRESSION 'PROFITS AND GAINS'. IT IS NO DOUBT TRUE THAT, WH EREVER THE STATUTE REFERS TO THE 'PROFITS AND GAINS' OF A BUSINESS, I T HAS IN MIND THE INCOME CHARGEABLE UNDER THE ACT UNDER THAT HEAD - HEAD 'D' SPECIFIED IN SECTION 14 OF THE ACT - BUT THE OTHER CATEGORIES OF INCOME REFERRED TO IN THE VARIOUS SECTIONS ARE NOT CORRELATED TO THE HEAD-WISE CLASSIFICATION OF SECTION 14. IT IS WELL KNOWN THAT ITEMS OF INTEREST, DIVIDENDS AND OTHER ITEMS OF RE MUNERATION ARE NOT ALWAYS REFERABLE TO ANY PARTICULAR HEAD. THEY MAY BE ASSESSABLE AS 'BUSINESS' INCOME OR INCOME FROM OTHER SOURCES. I N PARTICULAR, THE RECEIPTS BY WAY OF ROYALTY, FEE, COMMISSIONS AND S IMILAR PAYMENTS MAY BE DERIVED IN THE COURSE OF A BUSINESS OR PROF ESSION AND CONSTITUTE PART OF THE PROFITS AND GAINS OF SUCH B USINESS OR PROFESSION.' ITA NO.3115/AHD/2015 [ADD. CIT VS. PRIYAL INTERNATIONAL PVT. LTD.] A.Y. 2011-12 - 7 - 5.5 TO PROCEED FURTHER, I FIND THAT IN THE INSTAN T CASE THE APPELLANT PRIMARILY HAS CREATED THESE FDRS AS A MA RGIN MONEY FOR ITS SUPPLIER. ESSENTIALLY THE SUPPLIERS ENCAS H THESE FDRS AFTER THE SPECIFIED PERIOD OF 30 DAYS / 90 DAYS DEPENDIN G UPON THE TERMS AND CONDITIONS, NECESSARY DOCUMENTS INCLUDING THE LETTER OF CREDIT AND THE DOCUMENTS FROM THE BANKS WERE FILED IN PAP ER BOOK, SAMPLE OF WHICH WERE PERUSED BY ME. I FIND THAT CREATING AN FDR AS A MARGIN MONEY IS NOT RANDOM PRACTICE BUT A UNIFORM PRACTICE FOR ALL THE SUPPLIERS WITH WHICH THE APPELLANT HAS MADE P URCHASES IN THE RELEVANT ASSESSMENT YEAR. I ALSO FIND THAT THE AP PELLANT WAS UNDER COMPULSION TO CREATE THESE FDRS AS MARGIN MONEY WH ICH ACTED AS A SECURITY FOR ITS SUPPLIERS. I HAVE NO HESITATION IN CONCLUDING THAT THE APPELLANT WAS COMPELLED TO CREATE THESE FDRS AND H AD NO FREE WILL IN NOT CREATING FDR WHILE MAKING PURCHASE FOR ITS GOL D, BULLION ETC. CREATION OF THE FDR IS THUS ESSENTIAL TO CARRY OUT THE BUSINESS AND EXPORT ACTIVITY OF THE APPELLANT. 5.6 IT WAS POINTED OUT THAT THERE ARE CERTAIN DECI SIONS OF HON'BLE GUJARAT HIGH COURT WHERE THE HON'BLE COURT HAS DISCUSSED THE ISSUE OF TAXABILITY OF INTEREST INCO ME FROM FDR AS BUSINESS INCOME WHERE THERE WAS A COMPULSION FOR M AKING FIXED DEPOSITS WITH BANKS. THE HON'BLE HIGH COURT OF GU JARAT IN EMPIRE PUMPS LTD VS ACIT 90CCH 196 (GUJ.) HAVE HELD A SIM ILAR VIEW. FURTHER IN SHIPRA SHIP BUILDERS PVT. LTD. VS ACIT TAX APPEAL NO.1281 OF 2006 THE HON'BLE HIGH COURT OF GUJARAT HAS RE- INFORCED THIS VIEW. 5.8 AFORESAID CONCLUSION IS RE-INFORCED BY THE FA CT THAT SUCH FDRS ARE CREATED UNDER THE COMPULSION AS A BUSINES S NEED OR BUSINESS EXPEDIENCY ON THE APPELLANT. I HAVE ALRE ADY POINTED OUT THAT SUCH FDRS ARE NOT OUT OF FREE OR SURPLUS FUND S AVAILABLE WITH THE APPELLANT. I AM INCLINED TO CONCLUDE THAT SUC H INTEREST INCOME HAS A VERY DIRECT NEXUS WITH THE BUSINESS CARRIED ON BY THE APPELLANT. UNDER NO STRETCH OF IMAGINATION SUCH N EXUS COULD BE SAID TO BE A REMOTE NEXUS OR NEXUS OF SECOND OR THIRD D EGREE TO THE BUSINESS CARRIED ON BY THE APPELLANT. I AM OF THE VIEW THAT SUCH INTEREST INCOME IS TO BE TAXED UNDER THE HEAD 'BUS INESSAND PROFESSION' BECAUSE OF SPECIFIC FACTS AND CIRCUMST ANCES OF THIS CASE. THIS IS CONFORMITY TO THE JUDGMENT OF HON'B LE SUPREME COURT AS HIGHLIGHTED ON PAGE 11 AND ALSO DECISIONS OF HO N'BLE GUJARAT HIGH COURT IN EMPIRE PUMPS & SHIPRA BUILDERS. 5.9 CONSIDERING ALL THE ABOVE, I AM OF THE VIEW T HAT A.O. IS NOT JUSTIFIED IN MAKING A DISALLOWANCE OF RS. 1,98 ,09,270/-. THE A.O. IS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSE E U/S. 10AA AMOUNTING TO RS. 1,98,09,270/-. FURTHER, SINCE DE DUCTION U/S. 10AA IS FULLY ALLOWED, THIS DEDUCTION SHALL BE RED UCED BY RS.5,L7,104/- AS HELD BY THE A.O. IN PARA-4 OF HIS ORDER U/S.143(3). GROUND NO. 3 IS THEREFORE DISMISSED. ITA NO.3115/AHD/2015 [ADD. CIT VS. PRIYAL INTERNATIONAL PVT. LTD.] A.Y. 2011-12 - 8 - THE CIT(A) ACCORDINGLY ALLOWED DEDUCTION UNDER SEC TION 10AA AS PER THE MODE OF COMPUTATION PROVIDED IN SUB SECT ION 7 TO SECTION 10AA OF THE ACT. 3.4. AGGRIEVED, THE REVENUE PREFERRED APPEAL BEFORE THE TRIBUNAL. 3.5 THE LEARNED DR FOR THE REVENUE RELIED UPON THE ORDER OF THE AO. 3.6. THE LD. AR FOR THE ASSESSEE, ON THE OTHER HAND , RELIED UPON THE ORDER OF THE CIT(A) AND ALSO THE DECISION OF FULL B ENCH OF KARNATAKA HIGH COURT IN CIT VS HEWLETT PACKARD GLOBAL SOFT LT D. (2017) 87 TAXMANN.COM 182 (KARNATAKA)(FB) AND THE DECISION OF THE COORDINATE BENCH IN DCIT VS AUSOM ENTERPRISE LTD. ITA NO. 1519 /AHD/2016 ORDER DATED 15/10/2018 FOR THE PROPOSITION THAT INT EREST FROM BANK FDR KEPT AS MARGIN MONEY IS REQUIRED TO TREATED AS BUSINESS INCOME AND CONSEQUENTLY ELIGIBLE FOR DEDUCTION UNDER SECTI ON 10AA OF THE ACT AS PER STATUTORY FORMULA PROVIDED UNDER SECTION 10A A(7) OF THE ACT. 4. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND PERUSED ORDERS OF THE AUTHORITIES BELOW AS WELL AS CASE LAW S CITED. THE SUBSTANTIVE QUESTION RAISED BEFORE THE TRIBUNAL IS WHETHER INTEREST FROM FIXED DEPOSITS COULD BE TREATED AS THE ASSESSEE AS BUSINESS INCOME OF THE ASSESSEE IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND WHETHER SUCH INTEREST INCOME CAN BE HELD TO BE DERIVED FRO M ELIGIBLE BUSINESS OF THE ASSESSEE FOR THE PURPOSES OF CLAIMING DEDUCT ION UNDER SECTION 10AA OF THE INCOME TAX ACT, 1961. THE ASSESSEE IN THE INSTANT CASE HAS ESTABLISHED A UNIT IN THE SPECIAL ECONOMIC ZONE (SEZ). FOR ITS IMPORTS OF GOODS IN SEZ UNIT, THE ASSESSEE HAS OBTA INED CERTAIN BUYERS CREDIT FACILITIES FROM BANKS FOR PAYMENT TO THEIR F OREIGN SUPPLIERS. FOR THIS PURPOSE, IT HAS PLACED FIXED DEPOSITS WITH BAN KS AS MARGIN MONEY ON WHICH IT HAS EARNED INTEREST (INTEREST ON FDRS). THE ASSESSEE HAS INCLUDED SUCH INTEREST ON FDRS AS PROFITS OF THE B USINESS OF SEZ UNIT AND CONSIDERED IT HAS TAXABLE UNDER THE HEAD PROFI TS AND GAINS OF ITA NO.3115/AHD/2015 [ADD. CIT VS. PRIYAL INTERNATIONAL PVT. LTD.] A.Y. 2011-12 - 9 - BUSINESS AND PROFESSION. THE ASSESSEE HAS THUS CL AIMED DEDUCTION UNDER SECTION 10AA ON THE PROFITS OF SEZ BUSINESS A FTER INCLUDING THE INTEREST ON FDRS. THE ASSESSEE HAS CLAIMED THAT AS PER THE WORDINGS OF SECTION 10AA(7) READ WITH SECTION R.W.S. 10AA(7) , THE DEDUCTION IS AVAILABLE ON PROFITS DERIVED FROM THE SEZ UNIT. W HAT IS PROFITS DERIVED HAS BEEN PRESCRIBED IN SECTION 10AA(7) OF THE ACT. AS PER SECTION 10AA(7), THE PROFITS DERIVED IS EQUIVALENT TO PROFITS OF THE BUSINESS OF SEZ UNIT. FOR SUCH ACTION, THE ASSESS EE HAS RELIED UPON THE DECISION OF HEWLETT PACKARD (SUPRA) AND THE DEC ISION OF THE COORDINATE BENCH IN AUSOM ENTERPRISES IN ADDITION T O THE ELABORATE FINDINGS OF THE CIT(A). WE NOTICE FROM THE ASSESSME NT ORDER THAT THE AO HAS DISPUTED THIS POSITION TAKEN BY THE ASSESSEE AND HELD THAT THE INTEREST INCOME ON FDRS CANNOT BE REGARDED AS INCOM E DERIVED FROM SEZ UNIT OR HAVING THE FIRST DEGREE OF NEXUS WITH T HE ELIGIBLE UNIT. THE CIT(A), ON THE OTHER HAND, HAS FOUND MERIT IN T HE PLEA OF THE ASSESSEE THAT INTEREST ON FDR IS TO BE REGARDED AS BUSINESS INCOME IN VIEW OF THE DIRECT UTILITY OF THE FDRS FOR ITS BUSI NESS OPERATIONS. THE CIT(A) THEREAFTER CONCLUDED THAT THE ASSESSEE IS EL IGIBLE FOR DEDUCTION UNDER SECTION 10AA IN VIEW OF THE STATUTORY FORMULA PROVIDED UNDER SECTION 10AA(7) OF THE ACT. 4.1. AT THIS STAGE, WE TAKE NOTE OF SECTION 10AA(7) OF THE ACT WHICH EXPLICABLY EXPOUNDS THE PROFIT DERIVED FROM EXPOR T OF SUCH ARTICLES OR THINGS TO MEAN THE AMOUNT WHICH BEARS TO THE PR OFITS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TUR N-OVER BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE EL IGIBLE UNDERTAKING. THUS, WHAT IS REQUIRED TO BE DETERMINED IS WHETHER THE INTEREST INCOME QUALIFIES AS THE PROFITS OF THE BUSINESS OF THE UN DERTAKING IN CONTRAST TO WHETHER IT IS PROFIT DERIVED FROM THE BUSINESS . IN OTHER WORDS, FOR DETERMINING THE SCOPE OF SECTION 10AA(7), THE REFER ENCE TO THE EXPRESSION DERIVED FROM IS NOT MATERIAL. TO EXPO UND FURTHER PROFITS OF THE BUSINESS OF THE UNDERTAKING IS WIDER THAN PROFITS AND GAINS ITA NO.3115/AHD/2015 [ADD. CIT VS. PRIYAL INTERNATIONAL PVT. LTD.] A.Y. 2011-12 - 10 - DERIVED BY AN UNDERTAKING. IN SHORT, THE PROFITS DERIVED FROM EXPORT HAVE BEEN EQUATED WITH BUSINESS PROFITS OF THE UNDE RTAKING AS PER THE FORMULA LAID DOWN BY SECTION 10AA(7) OF THE ACT. T HUS, THE DIRECT NEXUS OR PROXIMITY OF BUSINESS INCOME WITH THE EXPO RT ACTIVITY IS NOT NECESSARY IN VIEW OF SECTION 10AA(7) OF THE ACT. I N VIEW OF THE AFORESAID DISCUSSION THE CIT(A), IN OUR VIEW, HAS R IGHTLY TREATED THE INTEREST INCOME TO BE ELIGIBLE FOR DEDUCTION UNDER SECTION 10AA OF THE ACT AS PER THE FINDINGS NOTED IN EARLIER PARAGRAPHS . 4.2. WE ALSO FIND SUBSTANTIAL MERIT IN THE ACTION O F THE CIT(A) IN HOLDING THE INTEREST INCOME FROM FDRS TO BE BUSINE SS INCOME OF SEZ UNIT CONSISTENT WITH THE POSITION TAKEN BY THE ASSE SSEE IN VIEW OF THE PURPOSE AND UTILIZATION OF FDRS FOR ITS BUSINESS OP ERATION. AT THIS STAGE, WE PROFITABLY REFER TO THE DECISION OF THE H ONBLE KARNATAKA HIGH COURT IN HEWLETT PACKARD (SUPRA) WHEREIN IT WA S HELD THAT INTEREST INCOME EARNED BY THE ASSESSEE ON THE DEPOS ITS PLACED BY IT WITH BANKS IN THE ORDINARY GOODS OF ITS BUSINESS WO ULD NOT BE TAXABLE AS INCOME FROM OTHER SOURCE UNDER SECTION 56 OF T HE ACT AND IS REQUIRED TO BE TREATED AS BUSINESS INCOME OF THE AS SESSEE REGARDLESS OF THE FACT THAT ASSESSEE IS NOT ENGAGED IN ANY BANKIN G/FINANCIAL ACTIVITY. THE INTEREST INCOME THUS IS ELIGIBLE FOR DEDUCTION UNDER SECTION 10AA OF THE ACT ON SUCH INCOME ONCE IT FALLS IN THE AMBI T OF THE BUSINESS INCOME. WE ALSO TAKE NOTICE OF THE DECISION OF THE COORDINATE BENCH IN AUSOM ENTERPRISE WHERE, IN THE SIMILAR CIRCUMSTANCE S, THE INTEREST FROM BANK FDR KEPT AS MARGIN MONEY WAS TREATED AS B USINESS INCOME BY RELYING UPON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF HARI ORGOCHEM PVT. LTD. IN TAX APPEAL NO. 2 56 AND 205 OF 2000. THUS THE CIT(A) IN OUR CONSIDERED VIEW HAS R IGHTLY HOLD INTEREST INCOME FROM FDRS TO BE BUSINESS INCOME A ND CONSEQUENTLY ELIGIBLE FOR DEDUCTION UNDER SECTION 10AA OF THE AC T IN TERMS OF FORMULA PROVIDED UNDER SECTION 10AA(7) OF THE ACT. WE THUS FIND NO ITA NO.3115/AHD/2015 [ADD. CIT VS. PRIYAL INTERNATIONAL PVT. LTD.] A.Y. 2011-12 - 11 - INFIRMITY IN THE CONCLUSION DRAWN BY THE CIT(A). W E THUS DECLINE TO INTERFERE. 5. IN THE RESULT GROUND NO. 1 AND 2 OF THE REVENUES APPEAL ARE DISMISSED. 6. GROUND NO. 3 CONCERNS DISALLOWANCE OF RS. 2,07,6 82/- UNDER SECTION 14A OF THE ACT. THE CIT(A) GRANTED RELIEF TO THE ASSESSEE FROM SUCH DISALLOWANCE ON THE GROUND THAT THE INTER EST FREE FUNDS AT THE DISPOSAL OF THE ASSESSEE IS IN EXCESS OF THE CO RRESPONDING INVESTMENTS YIELDING TAX FREE INCOME. ON SUCH FACT S, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE AFORESAID FINDINGS IN VIEW OF THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN CIT V S SUZLON ENERGY LTD.215 TAXMAN 272 (GUJ.) AND CIT VS GIDC 218 TAXMA N 142 (GUJ.) AND OTHER JUDICIAL PRECEDENTS. 7. GROUND NO.4 CONCERNS DISALLOWANCE OF INTEREST ON ADVANCE GIVEN FOR PURCHASE OF IMMOVABLE PROPERTY AMOUNTING TO RS. 4,83,675/-. THE PERUSAL OF THE ORDER OF THE CIT(A) SHOWS THAT THE A SSESSEE HAD DEMONSTRATED BEFORE THE FIRST APPELLATE AUTHORITY T HAT THE ADVANCES GIVEN FOR PURCHASES OF IMMOVABLE PROPERTY IS FAR IN EXCESS OF THE INTEREST FREE FUNDS. THE RELEVANT OPERATIVE PARA O F THE ORDER OF THE CIT(A) IS REPRODUCED HEREUNDER FOR READY REFERENCE: - DECISION 9. WITH RESPECT TO GROUND NO. 4 RELATING TO DISAL LOWANCE OF RS. 4,83,675/- VIS--VIS THE ADVANCES GIVEN FOR PURCHA SES OF IMMOVABLE PROPERTY, THE APPELLANT HAS SUBMITTED A SIMILAR AR GUMENT THAT SUFFICIENT INTEREST FREE FUNDS WERE AVAILABLE, AS WAS OBSERVE D BY THE AO HIMSELF. THE APPELLANT ALSO RELIED ON THE FOLLOWING JUDGMEN T BY THE HONBLE GUJARAT HIGH COURT NAMELY (A) CIT VS GSFC LTD. 358 ITR 0323(GUJ) (B) CIT VS GUJARAT NARMADA VALLEY FERTILIZERS COL. LTD. 221 TAXMAN 479 (C) CIT VS RAGHUVIR SYNTHETICS 354 ITR 222. (D) CIT VS RELIANCE UTILITIES & POWER LTD. 313 ITR 340 ITA NO.3115/AHD/2015 [ADD. CIT VS. PRIYAL INTERNATIONAL PVT. LTD.] A.Y. 2011-12 - 12 - 9.1 THE FUNDAMENTAL PRINCIPLE HIGHLIGHTED IN THESE JUDGMENTS, AS POINTED OUT BY APPELLANT, IS THAT IF THERE ARE FUN DS AVAILABLE, BOTH INTEREST FREE AND OVERDRAFT OR LOANS, THEN THE PRESUMPTION WOULD ARISE THAT THE INVESTMENTS WOULD BE OUT OF INTEREST FREE FUNDS AV AILABLE WITH THE APPELLANT, IF THE INTEREST FREE FUNDS WERE SUFFICI ENT TO MAKE SUCH INVESTMENTS. FURTHER IT IS NOT EVIDENT FROM THE O RDER U/S. 143(3) THAT SUCH INVESTMENT IN TWO HOUSE PROPERTIES IS OUT OF THE I NTEREST BEARING FUNDS. SINCE SUBSTANTIAL INTEREST FREE FUNDS WERE AVAILAB LE AS POINTED OUT ABOVE AND ALSO ON PAGE-13 OF THE AOS ORDER, I AM OF THE VIEW THAT THE DISALLOWANCE OF INTEREST AT THE RATE OF 1.227%, WO RKED OUT BY THE A.O. IS NOT TENABLE. THE A.O. IS THEREFORE DIRECTED TO DE LETE THE ADDITION OF RS. 4,83,675/-. THIS GROUND OF APPEAL IS ALLOWED. 7.1. IN VIEW OF THE FACTS NARRATED BY THE CIT(A) TO WARDS AVAILABILITY OF INTEREST FREE FUNDS IN EXCESS OF INTEREST BEARIN G LOANS FOR TOWARDS ADVANCES IMMOVABLE PROPERTY, WE DO NOT SEE ANY REAS ON TO INTERFERE WITH THE ORDER OF THE CIT(A) WHICH IS SYNC WITH THE JUDICIAL PRECEDENCE PREVAILING IN THIS REGARD. 7.2. WE THUS DECLINE TO INTERFERE. 8. IN THE RESULT GROUND NO. 4 OF THE REVENUES APPEA L IS DISMISSED. 9. RESULTANTLY, APPEAL OF THE REVENUE IS DISMISSED. SD/- SD/- (MAHAVIR PRASAD) (PRADIP KUMA R KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: DATED 15/02/2019 TANMAY !'#' / COPY OF ORDER FORWARDED TO:- &. / REVENUE 2. / ASSESSEE (. )*+ , / CONCERNED CIT 4. ,- / CIT (A) /. 012 33*+4 *+#4 56) / DR, ITAT, AHMEDABAD 7. 289 : / GUARD FILE. BY ORDER / 4 /5 *+#4 56) THIS ORDER PRONOUNCED IN OPEN COURT ON 15/02/ 2019