ACIT 8(1), MUMBAI V. ENCUBE ETHICALS P. LTD, MUMBAI

ITA 4464/MUM/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62262 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 17-04-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 03-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P C MAURYA
• Keywords: Business income
• Section: 80HHC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M.JAGTAP (A.M) & SHRI N.V.VASUDEVAN( J.M) ITA NO. 4464/MUM/11(A.Y.2007-08) THE DCIT 8(1), ROOM NO.210, 2 ND FLOOR, AAYKAR BHAVAN, MK ROAD, MUMBAI - 400 020. (APPELLANT) VS. M/S. ENCUBE ETHICALS PVT. LTD., UNIT NO.24, 2 ND FLOOR, STEEL MADE INDL. ESTATE, MAROL VILLAGE, ANDHERI (EAST), MUMBAI 400 059. (RESPONDENT) APPELLANT BY : SHRI P.C.MAURYA RESPONDENT BY : SHRI PARESH SHAPARIA DATE OF HEARING : 17/04/2012 DATE OF PRONOUNCEMENT : 25 /04/2012 ORDER PER N.V.VASUDEVAN, J.M THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 3/3/2011 OF CIT(A) 16, MUMBAI RELATING TO ASSESSMENT YEAR 2007- 08. 2. GROUNDS OF APPEAL RAISED BY THE REVENUE READ AS FOLLOWS: (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD CIT(A) ERRED IN HOLDING THAT GROSS INTEREST INCO ME OF RS.31,67,359/- WAS THE INCOME FROM BUSINESS & PROFESSION AND IS ELIGIBLE FOR DEDUCTION U/S.801B, WITHOUT APPRECIATING THE DECISI ON OF HONBLE APEX COURT IN THE CASE OF LIBERTY INDIA LTD. (317 ITR 21 8). (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE L1D. CIT(A) ERRED IN HOLDING THAT EVEN THE NET INTE REST WAS NOT REQUIRED TO BE EXCLUDED WHILE COMPUTING INCOME OF 801B UNITS , WITHOUT APPRECIATING THE DECISION OF HONBLE BOMBAY HIGH CO URT IN THE CASE OF CIT VS. ASIAN STAR CO. LTD. (326 ITR 56). ITA NO. 4464/MUM/11(A.Y.2007-08) 2 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING OF DERMATOLOGICAL, PHARMACEUTICAL AND THERAPEUTIC P REPARATIONS, PATENT MEDICINES, DRUGS ETC. THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION UNDER SECTION 80 IB OF THE INCOME TAX ACT, 1961 (THE ACT ) IN RESPECT OF THE MANUFACTURING ACTIVITIES. WHILE CLAIMING THE DEDUC TION UNDER SECTION 80 IB OF ACT THE ASSESSEE EXCLUDED RS. 2,64,436/- FROM TH E PROFITS OF THE BUSINESS. THE INTEREST INCOME SO EXCLUDED WAS THE DIFFERENCE BETWEEN THE INTEREST INCOME IT RECEIVED NAMELY RS. 31,67,359/- (RS. 31 ,15,529 INTEREST RECEIVED ON BANK FD + RS. 51,830 INTEREST RECEIVED FROM RE LIEF PHARMACEUTICALS) AND THE INTEREST THAT THE ASSESSEE PAID ON OVER DRAFT F ACILITIES TAKEN BY THE ASSESSEE FROM BANK WHICH WAS UTILIZED FOR THE INDUS TRIAL UNIT. THE ASSESSEE SUBMITTED BEFORE THE AO THAT INTEREST PAID ON OVERD RAFT TO BANK AND INTEREST INCOME RECEIVED HAD A DIRECT NEXUS AND, THEREFORE, THE ASSESSEE COULD SET OFF THE INTEREST INCOME AGAINST THE INTEREST EXPENSES A ND EXCLUDE ONLY THE NET INTEREST INCOME FROM THE PROFITS ELIGIBLE FOR DEDUC TION UNDER SECTION 80 IB OF THE ACT. THE AO HOWEVER REJECTED THE CONTENTION OF THE ASSESSEE. HE HELD THAT THE ASSESSEE WAS NOT IN THE BUSINESS OF MONEY LENDING AND, THEREFORE, INTEREST INCOME CANNOT BE ASSESSED UNDER THE HEAD I NCOME FROM BUSINESS. HE ALSO HELD THAT INTEREST PAID CANNOT BE SET OFF A GAINST INCOME FROM OTHER SOURCES BECAUSE THE ASSESSEE HAS ALREADY CLAIMED TH E INTEREST EXPENSES IN ITS P&L ACCOUNT. HE ALSO HELD THAT ALLOWING INTERE ST EXPENSES TO BE NETTED OF AGAINST INTEREST INCOME WILL AMOUNT TO ALLOWING DOU BLE DEDUCTION. THE AO, THEREFORE, EXCLUDED GROSS INCOME OF RS.31,15,529/- FROM THE PROFITS OF THE BUSINESS WHILE COMPUTING DEDUCTION UNDER SECTION 80 IB OF THE ACT. 4. ON APPEAL BY THE ASSESSEE THE CIT(A) FOLLOWING T HE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR A.Y 2001-02 IN ITA NO.58 91/M/05 DATED 23/1/2009 AND 2004-05 IN ITA NO.5628/M/07 DATED 19/ 3/2009, WHEREIN IT WAS HELD THAT INTEREST INCOME WAS BUSINESS INCOME AND ALLOWED THE APPEAL OF THE ASSESSEE. ITA NO. 4464/MUM/11(A.Y.2007-08) 3 5. THE LD. D.R SUBMITTED BEFORE US THAT THE DECISIO N OF THE CIT(A) IS CONTRARY TO THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF LIBERTY INDIA LTD., 317 ITR 218 (SC) AND THE HONBLE BOMBA Y HIGH COURT IN THE CASE OF ASIAN STAR COMPANY LTD., 326 ITR 56(BOM). IT WA S HIS SUBMISSION THAT IN THE LIGHT OF THE AFORESAID DECISION THE ORDER OF TH E CIT(A) HAS TO BE REVERSED. IN THIS REGARD IT WAS ALSO POINTED OUT THAT THE ORD ERS OF THE TRIBUNAL FOR THE EARLIER ASSESSMENT YEARS RELIED UPON BY THE CIT(A) HAVE TO BE CONSIDERED AS NOT LAYING DOWN CORRECT LAW IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT AND HONBLE BOMBAY HIGH COURT REFERRED TO EA RLIER. REFERENCE WAS ALSO MADE TO THE DECISION OF THE HONBLE BOMBAY HIG H COURT IN THE CASE OF SWANI SPICES 332 ITR 288 (BOM) WHEREIN IT WAS HELD THAT INTEREST ON FIXED DEPOSIT OF SURPLUS FUNDS HAS TO BE ASSESSED AS INC OME FROM OTHER SOURCES. 6. LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND, RELIED ON THE ORDER OF THE CIT(A) AND FURTHER SUBMITTED THAT THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ASIAN STAR COMPAN Y LTD.(SUPRA) IS NO LONER GOOD LAW IN VIEW OF THE DECISION OF THE HONBLE SUP REME COURT RENDERED IN THE CASE OF M/S. ACG ASSOCIATED CAPSULES PVT. LTD., VS. CIT, CIVIL APPEAL NO.1914 OF 2012 DATED 8/2/2012. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN AY 02-03, THE ISSUE AS TO WHETHER INTEREST INCOME IS TO BE TREATED AS INCOME FROM BUSINESS OR INCOME FROM OTHER SOURCES CAME UP FOR CONSIDERATION IN ASS ESSEES CASE BEFORE THE ITAT MUMBAI IN ITA NO.5891/MUM/2005 AND THIS TRIBUN AL BY ITS ORDER DATED 23.1.2009, FOLLOWING THE DECISION OF THE HON BLE DELHI HIGH COURT AND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ELTEK SGS PVT.LTD. 300 ITR 6 (DEL) AND INDO SWISS JEWELS LTD. 284 ITR 389 (BOM) HELD THAT INTEREST INCOME HAS TO BE TREATED AS INCOME FROM BUSINESS EL IGIBLE FOR DEDUCTION U/S.80-IB OF THE ACT. THIS ORDER OF THE TRIBUNAL W AS FOLLOWED IN ASSESSEES ITA NO. 4464/MUM/11(A.Y.2007-08) 4 OWN CASE IN AY 04-05 IN ITA NO.5628/MUM/07 BY ORDER DATED 19.3.2009. THE REASONING OF THE TRIBUNAL WAS THAT THE EXPRESSI ON USED IN SEC.80-IB WAS PROFITS AND GAINS DERIVED FROM THE BUSINESS OF AN INDUSTRIAL UNDERTAKING IN CONTRA DISTINCTION TO WORDINGS IN SEC.80-IA OR 80HH OF THE ACT WHICH USE THE WORDS PROFITS AND GAINS DERIVED BY AN INDUSTRIAL U NDERTAKING. SINCE THE WORDS USED ARE PROFITS DERIVED FROM THE BUSINESS OF AN INDUSTRIAL UNDERTAKING, EVEN INTEREST EARNED ON FIXED DEPOSITS WHICH WERE PLACED AS MARGIN MONEY FOR OBTAINING FACILITIES FROM BANK WAS TO BE REGARDED AS BUSINESS INCOME AND ANY INCOME FROM BUSINESS IS ELI GIBLE FOR DEDUCTION U/S.80-IB OF THE ACT. IT IS SEEN THAT THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA LTD. 317 ITR 218 (SC) HAS TAKEN A VIEW THAT DUTY DRAWBACK RECEIPTS AND DEPB BENEFITS DO NOT FORM PART OF THE NET PROFITS OF ELIGIBLE INDUSTRIAL UNDERTAKINGS FOR THE PURPOSE OF THE DEDU CTION UNDER SECTION 80-I / 80-IA / 80-IB OF THE INCOME-TAX ACT, 1961. THE I NCOME-TAX ACT,1961, BROADLY PROVIDES FOR TWO TYPES OF TAX INCENTIVES, V IZ., INVESTMENT-LINKED INCENTIVES AND PROFIT-LINKED INCENTIVES. CHAPTER VI -A OF THE ACT WHICH PROVIDES FOR INCENTIVES IN THE FORM OF DEDUCTIONS E SSENTIALLY BELONGS TO THE CATEGORY OF 'PROFIT-LINKED INCENTIVES'. THEREFORE, WHEN SECTION 80-IA / 80-IB REFERS TO PROFITS DERIVED FROM ELIGIBLE BUSINESS, I T IS NOT THE OWNERSHIP OF THAT BUSINESS WHICH ATTRACTS THE INCENTIVES : WHAT ATTRA CTS THE INCENTIVES UNDER SECTION 80-IA / 80-IB IS THE GENERATION OF PROFITS (OPERATIONAL PROFITS). IT IS FOR THIS REASON THAT PARLIAMENT HAS CONFINED DEDUCTION OF PROFITS DERIVED FROM ELIGIBLE BUSINESSES MENTIONED IN SUB-SECTIONS (3) T O (11A). EACH OF THE BUSINESSES MENTIONED IN SUB-SECTIONS (3) TO (11A) C ONSTITUTES A STAND-ALONE ITEM IN THE MATTER OF COMPUTATION OF PROFITS. SECTI ONS 80-IB AND 80-IA ARE A CODE BY THEMSELVES AS THEY CONTAIN BOTH SUBSTANTIVE AS WELL AS PROCEDURAL PROVISIONS. SECTION 80-IB PROVIDES FOR THE ALLOWIN G OF DEDUCTION IN RESPECT OF PROFITS AND GAINS DERIVED FROM THE ELIGIBLE BUSINES S. THE CONNOTATION OF THE WORDS 'DERIVED FROM' IS NARROWER AS COMPARED TO THA T OF THE WORDS 'ATTRIBUTABLE TO'. BY USING THE EXPRESSION 'DERIVED FROM' PARLIAMENT INTENDED ITA NO. 4464/MUM/11(A.Y.2007-08) 5 TO COVER SOURCES NOT BEYOND THE FIRST DEGREE. SECT IONS 80-I, 80-IA AND 80-IB ARE TO BE READ AS HAVING A COMMON SCHEME. SUB-SECTI ON (5) OF SECTION 80-IA (WHICH IS REQUIRED TO BE READ INTO SECTION 80-IB ) PROVIDES FOR THE MANNER OF COMPUTATION OF THE PROFITS OF AN ELIGIBLE BUSINESS. SUCH PROFITS ARE COMPUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. THEREFORE, DEVICES ADOPTED TO REDUCE OR INFLATE THE PROFITS OF THE ELIGIBLE BUSINESS HAVE TO BE REJECTED IN VIEW OF THE OVERRID ING PROVISIONS OF SECTION 80-IA(5). SECTIONS 80-I,80-IA AND 80-IB PROVIDE FOR INCENTIVES IN THE FORM OF DEDUCTIONS WHICH ARE LINKED TO PROFITS AND NOT INVE STMENT. ON ANALYSIS OF SECTIONS 80-IA AND 80-IB IT BECOMES CLEAR THAT ANY INDUSTRIAL UNDERTAKING WHICH BECOMES ELIGIBLE ON SATISFYING SUB-SECTION (2 ) WOULD BE ENTITLED TO DEDUCTION UNDER SUB-SECTION (1) ONLY TO THE EXTENT OF PROFITS DERIVED FROM SUCH INDUSTRIAL UNDERTAKING AFTER THE SPECIFIED DAT E. APART FROM ELIGIBILITY, SUB-SECTION (1) PURPORTS TO RESTRICT THE QUANTUM OF DEDUCTION TO A SPECIFIED PERCENTAGE OF THE PROFITS. THIS IS THE IMPORTANCE O F THE WORDS 'DERIVED FROM AN INDUSTRIAL UNDERTAKING' AS AGAINST 'PROFITS ATTR IBUTABLE TO AN INDUSTRIAL UNDERTAKING'. DEPB/DUTY DRAWBACK ARE INCENTIVES WH ICH FLOW FROM THE SCHEMES FRAMED BY THE CENTRAL GOVERNMENT OR FROM SE CTION 75 OF THE CUSTOMS ACT,1962. INCENTIVE PROFITS ARE NOT PROFITS DERIVED FROM ELIGIBLE BUSINESS UNDER SECTION 80-IB : THEY BELONG TO THE C ATEGORY OF ANCILLARY PROFITS OF SUCH UNDERTAKING. PROFITS DERIVED BY WAY OF INCE NTIVES SUCH AS DEPB/DUTY DRAWBACK CANNOT BE CREDITED AGAINST THE C OST OF MANUFACTURE OF GOODS DEBITED IN THE PROFIT AND LOSS ACCOUNT AND TH EY DO NOT FALL WITHIN THE EXPRESSION 'PROFITS DERIVED FROM INDUSTRIAL UNDERTA KING' UNDER SECTION 80-IB. 8. THE DECISION OF THE TRIBUNAL RENDERED IN ASSESS EES CASE WERE PRIOR TO THE DECISION OF THE HONBLE SUPREME COURT. THEREFORE T HE DECISIONS OF THE TRIBUNAL RENDERED IN ASSESSEES OWN CASE NEEDS TO B E CONSIDERED IN THE LIGHT OF THE LAW AS EXPLAINED BY THE HONBLE SUPREME COUR T IN THE CASE OF LIBERTY INDIA LTD. (SUPRA). ITA NO. 4464/MUM/11(A.Y.2007-08) 6 9. THE DECISION RENDERED IN THE CASE OF ASIAN STAR CO. LTD. (SUPRA) IS IN THE CONTEXT OF SEC.80-HHC OF THE ACT, WHERE THE EXPRESS ION PROFITS AND GAINS OF BUSINESS OR PROFESSION HAS BEEN SPECIFICALLY DEFIN ED IN EXPLN. (BAA) TO SEC.80-HHC OF THE ACT. IN ANY EVENT THAT DECISION NO LONGER HOLDS THE FIELD IN VIEW OF THE DECISION OF THE HONBLE SUPREME COUR T IN THE CASE OF M/S.ACG ASSOCIATED CAPSULES PVT.LTD. VS. CIT 2012 TIOL 13 - SC-IT. THE HONBLE SUPREME COURT HAS HELD IN THE AFORESAID DECISION TH AT ONLY THE NET INTEREST RECEIPTS AFTER SETTING OFF INTEREST EXPENSES HAVING NEXUS WITH THE INTEREST RECEIPTS SHOULD BE EXCLUDED FROM THE PROFITS AND GA INS OF BUSINESS AND NOT THE GROSS INTEREST. 10. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE HAS RELIED ON THE DECISION OF THE ITAT AHMEDABAD BENCH IN THE CASE OF ABM STEE LS PVT.LTD. VS. ITO ITA NO.176 & 177/AHD/2009 FOR AY 02-03 AND 04-05 ORDER DATED 8.4.2011. IN THIS CASE THE ITAT HAS IN THE CONTEXT OF SEC.80-IA OF THE ACT TAKEN THE SAME VIEW AS EXPRESSED BY THE HONBLE SUPREME COURT IN T HE CASE OF ACG ASSOCIATED CAPSULES PVT.LTD. (SUPRA). 11. IN THE CASE OF SWANI MILLS LTD. 332 ITR 288 (B OM), THE HONBLE BOMBAY HIGH COURT HELD IN THE CONTEXT OF SPECIAL DEDUCTION UNDER SECTION 80HHC AND COMPUTATION THEREOF THAT WHERE AN ASSESSEE CARR YING ON EXPORT BUSINESS UTILISED SURPLUS FUNDS FOR DISCOUNTING BILLS AND MA KING INTER-CORPORATE DEPOSITS AND INTEREST INCOME EARNED THEREFROM, THE SAME IS NOT BUSINESS INCOME FOR THE PURPOSE OF DEDUCTION U/S. 80HHC OF T HE ACT. IN THIS CASE THE ISSUE WAS REGARDING THE HEAD OF INCOME WHEREAS THE ISSUE BEFORE US REGARDING EXCLUDING NET INTEREST OR GROSS INTEREST FROM THE PROFITS OF THE BUSINESS AND AS TO WHETHER THE INTEREST EXPENDITURE HAS NEXUS WITH THE INTEREST INCOME. ITA NO. 4464/MUM/11(A.Y.2007-08) 7 12. IN THE PRESENT CASE INTEREST EARNED BY THE ASS ESSEE WAS RS.31,67,359. THE INTEREST EXPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT WAS RS.29,02,923/-. THE NET INTEREST RECEIVED WAS RS.2 ,64,436/-. THERE IS NO REFERENCE AS TO WHETHER THE INTEREST EXPENDITURE HA S ANY NEXUS WITH THE INTEREST RECEIPTS. IF THE INTEREST RECEIPT HAS SUCH DIRECT NEXUS THEN ONLY THE NET INTEREST INCOME HAS TO BE EXCLUDED FROM THE PRO FITS OF THE BUSINESS ELIGIBLE FOR DEDUCTION U/S.80-IB OF THE ACT. IT IS FUNDAMENTAL THAT THE INTEREST EXPENDITURE TO THE EXTENT THAT IT HAS NEXU S WITH THE INTEREST RECEIPTS CANNOT GO TO REDUCE THE PROFITS OF THE BUSINESS ELI GIBLE FOR DEDUCTION U/S.80- IB OF THE ACT. IT HAS BEEN THE STAND OF THE ASSESS EE THAT THE INTEREST INCOME HAS NEXUS WITH THE BUSINESS OF THE ASSESSEE AS THE FDS WERE MADE SO THAT THEY CAN REMAIN AS MARGIN MONEY FOR FACILITIES AVAI LED BY THE ASSESSEE IN CONNECTION WITH ITS BUSINESS. INTEREST EXPENDITURE WAS INCURRED IN RESPECT OF FACILITIES WHICH WERE AVAILED BY THE ASSESSEE FR OM THE BANK IN RESPECT OF ITS BUSINESS. THUS THE INTEREST EXPENDITURE AND TH E INTEREST INCOME HAD DIRECT NEXUS. THIS ASPECT REQUIRES VERIFICATION BY THE AO. WE THEREFORE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE ISSUE TO THE AO FOR FRESH CONSIDERATION IN THE LIGHT OF THE LAW AS EXPLAINED ABOVE. FOR STATISTICAL PURPOSES, THE APPEAL OF THE REVENUE IS TREATED AS A LLOWED. 13. IN THE RESULT THE APPEAL BY THE REVENUE IS TRE ATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON T HE 25 TH DAY OF APRIL 2012 SD/- SD/- (P.M.JAGTAP ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 25 TH APRIL 2012 ITA NO. 4464/MUM/11(A.Y.2007-08) 8 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM.