JEWELMARK INDIA P.LTD, MUMBAI V. ITO 8(2)(1), MUMBAI

ITA 5036/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75845 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 12-03-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 07-08-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: MRS AARTI VISSANJI
• Keywords: Business income; Business expenditure; Question of law
• Section: 80HHC; 10

Judgement Text

JEWELMARK INDIA P. LTD. 1 THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI NARENDRA KUMAR BILLAIYA, ACCOUNTANT MEMBER ITA NO. 5036/MUM/2012 ASSESSMENT YEAR. 2007-08 JEWELMARK INDIA P. LTD. 501, TOWER 11, SEEPZ, MIDC, MAROL, ANDHERI (E) MUMBAI 400 096. VS. INCOME TAX OFFICER 8(2)(1), AAYAKAR BHAWAN, CHURCHGATE, MUMBAI. PAN: AABCJ3769M APPELLANT RESPONDENT A SSESSEE BY MRS. AARTI VISSANJI RE VENUE BY SHRI MAURYA PRATAP ORDER PER VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 9.5.2012 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. THE ASSESEE HAS RAISED SOLITARY GROUND AS UNDER:- THE LD. ASSESSING OFFICER HAS ERRED IN CONSIDERING THE FOLLOWING INCOME AS INCOME FROM OTHER SOURCES AND HOLDING THA T THESE INCOME ARE NOT ENTITLED TO BE TREATED AS INCOME FROM BUSIN ESS FOR COMPUTING DEDUCTION U/S. 10A 1. BANK INTEREST RS. 1,02,022/- 2. JOB WORK CHARGES RS. 19,26,857/- 3. EXCHANGE DIFFERENCE ON LOANS RS. 18,62,865/- ----------------- RS. 38,91,744/- ------------------ DATE OF HEARING 12.03.2014 DATE OF PRONOUNCEMENT 21 - 03 - 2014 JEWELMARK INDIA P. LTD. 2 2. THE ASSESSEE IS HAVING A MANUFACTURING UNIT AT S EEPZ, MUMBAI FOR MANUFACTURING OF STUDDED JEWELLERY FOR EXPORT, THE ASSESSEE CLAIMED EXEMPTION U/S 10A IN RESPECT OF THE BUSINESS INCOME . THE AO DISALLOWED THE CLAIM OF EXEMPTION U/S 10A IN RESPECT OF FOLLOW ING INCOMES:- 1. BANK INTEREST RS. 1,02,022/- 2. JOB WORK CHARGES RS. 19,26,857/- 3. EXCHANGE DIFFERENCE ON LOANS RS. 18,62,865/- ----------------- RS. 38,91,744/- ------------------ 3. THE ASSESSEE CHALLENGED THE DISALLOWANCE MADE BY THE AO BEFORE CIT(A) BUT COULD NOT SUCCEED. 4. WE HAVE HEARD LD. AR AS WELL AS LD. DR AND CONSI DERED THE RELEVANT MATERIAL ON RECORD. THE FIRST ITEM OF DISALLOWANCE IS REGARDING BANK INTEREST OF RS. 1,02,022/-. THE LD. AR OF THE ASSESSEE SUBMI TTED THAT THE INTEREST EARNED HAD A DIRECT NEXUS WITH THE BUSINESS OF THE ASSESSEE AS THE FIXED DEPOSIT WERE KEPT UNDER LIEN WITH THE BANK FOR SANC TION OF LOANS. ALTERNATIVELY THE LD. AR OF THE ASSESSEE HAS SUBMIT TED THAT ONLY NET RECEIPT WAS TO BE DISALLOWED KEEPING IN VIEW THE DE CISION OF HONBLE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAPSULE S PVT. LTD. VS. CIT. WE NOTE THAT THE CIT(A) HAS ACCEPTED THE ALTERNATIV E PLEA OF THE ASSESSEE WHILE DECIDING THE ISSUE ON PARA 2.3 AS UNDER:- I HAVE EXAMINED THE ISSUE. AS FAR AS INTEREST INCO ME IS CONCERNED, I FIND THAT THIS ISSUE NOW STANDS COVERED IN FAVOUR OF REVENUE BY DECISION OF THE MADRAS JEWELMARK INDIA P. LTD. 3 HIGH COURT IN THE CASE OF CORNET INTERNATIONAL, 304 ITR 322, WHEREIN THE COURT HAS HELD THAT INTEREST INCOME HAS NO DIRECT NEXUS W ITH THE INDUSTRIAL UNDERTAKING AND HENCE, WAS NOT ELIGIBLE FOR DEDUCTION U/S 10A. THE MADRAS HIGH COURT HAS FOLLOWED ITS OWN JUDGMENT IN THE CASE OF MENON IMPE X PVT. LTD. 259 ITR 403. THIS ISSUE IS ALSO COVERED BY THE DECISION OF THE M UMBAI TRIBUNAL IN THE CASE OF TRICOM INDIA LTD, 36 SOT 302. HOWEVER, WITH REGARD TO THE CLAIM OF SETTING OFF EXPENSES AGAINST THE SAID INCOME, THE AO IS DIRECTE D TO FOLLOW THE RATIO OF DECISION OF THE SUPREME COURT IN THE CASE OF ACG AS SOCIATED CAPSULES P. LTD, CITED SUPRE, AND ALLOW INTEREST INCOME HAVING DIREC T NEXUS WITH THE INTEREST INCOME . 5. IT IS CLEAR FROM THE FINDING OF CIT(A) THAT THE AO WAS DIRECTED TO CONSIDER THE NETTING OF EXPENSES IN VIEW OF THE DEC ISIONS OF HONBLE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAPSUL ES VS. CIT (SUPRA), HENCE NO GRIEVANCE IS LEFT AGAINST THE ORDER OF CIT (A). 6. SECOND ITEM OF DISALLOWANCE IS JOB CHARGES OF RS . 19,26,857/-. 7. THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT TH E DISALLOWANCE OF JOB CHARGES SHOULD BE ON NET BASED AFTER CONSIDERIN G THE EXPENSES INCURRED BY THE ASSESSEE FOR EARNING THE JOB CHARGE S INCOME. THE LD. AR HAS RELIED UPON THE DECISION OF HONBLE KARNATAKA H IGH COURT IN THE CASE OF CIT VS. SILVER CREST CLOTHING PVT. LTD. IN INCOME TAX APPEAL NO. 1140 OF 2006 AND SUBMITTED THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY THE HONBLE KARNATAKA HIGH COURT WHEREIN THE AO WAS DIRECTED TO REDO THE ASSESSMENT TO EXCLUDE THE NET RECEIPT A ND NOT THE GROSS RECEIPT IN RESPECT OF JOB WORK. THOUGH ON PRINCIPLE THE ISS UE IS NOW COVERED BY THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CAS E OF CIT VS. SILVER CREST CLOTHING PVT. LTD. (SUPRA) HOWEVER THE QUESTION ARI SES IS THAT WHAT IS THE BASIS OF ALLOCATION OF JOB WORK EXPENSES. THE HONB LE HIGH COURT HAS DECIDED THIS ISSUE IN PARA 7 AND 8 AS UNDER:- JEWELMARK INDIA P. LTD. 4 7. THIS COURT IN THE CASE OF M/S MIANI PRECISION PRODUCTS PVT. LTD. L'S. JOINT COMMISSIONER' OF INCOME TAX, SPL. RANQE-I, BANQALORE IN ITA NO.S.52/2009 & 182-185/2009, DATED 18.08.2009 FOLLOWING THE DECISION OF THE SUPREME COURT IN RAVINDRNATHAN NAIR'S CASE HAS HELD THAT THE ENTIRE AMOUNT OF RECEIPT! TOWARDS JOB WORK IS TO BE EXCLUDED FROM THE NUMERATOR AS PER THE FORMULA. 8. THE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAPSULES PVT. LTD., VS. COMMISSIONER OF INCOME TAX, REPORTED IN (2012) 343 ITR 89 (SC) HAS HELD THAT WHILE INTERPRETING CLAUSE (1) OF EXPLANATION (BAA) TO ' SECTION 80HHC OF THE ACT HAS HELD THAT 'IT IS ONLY NET , AMOUNT THAT SHOULD BE EXCLUDED AND NOT T HE GROSS AMOUNT.' IT IS THE CONTENTION OF THE APPELLANT IN THE SAID DECI SION; QUESTION INVOLVED WAS GROSS RENT AND GROSS INTEREST OR NET -. RENT AND NET INTEREST AND NOT GROSS OR NET JOB WORK RECE IPTS THEREFORE, THE DECISION HAS NO APPLICATION. THIS COURT 111 THE CASE OF COMMISSIONER OF INCOME TAX AND ANOTHER VS M/S .RESONACE LABORATORIES IN ITA NOS. 793, 794, 796 & 796/2006, DATED 06.06.2012 HAS TAKEN INTO CONSIDERATION THE DECISION OF THE SUPREME COURT IN THE CASE OF M/S MIANI PRECISION PRODUCTS PVT. LTD. VS, THE JOINT COMMISSIONER OF INCOME TAX AND HAS HELD THAT WHAT IS :0 BE EXCLUDED IS NET RECEIPTS AND NET GROSS RECEIPTS. IN VIEW OF THE AFORE SAID DECISIONS, THE QUESTION OF LAW. IS ANSWERED IN FAVOUR OF THE REVENUE AND THE MATTER IS REMANDED BACK TO THE ASSESSING AUTHORITY TO REDO THE ASSESSMENT AS PER THE LAW LAID DOWN BY THE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAPSULES PVT. LTD. & COMMISSIONER OF INCOME TAX. ACCORDINGLY, THE APPEALS ARE DISPOSED OF. 8. FOLLOWING THE DECISION OF HONBLE HIGH COURT, WE DIRECT THE AO TO REDO THE ASSESSMENT BY CONSIDERING ONLY THE NET REC EIPT IN RESPECT OF JOB WORK. THE EXPENDITURE IN THIS RESPECT HAS TO BE WOR KED OUT ON THE BASIS OF EITHER MAN HOURS PUT IN THE JOB WORK IN COMPARISON TO THE OWN MANUFACTURING ACTIVITY OR ON THE BASIS OF OUTPUT R ATIO IN THE OWN MANUFACTURING ACTIVITY AND JOB WORK. THE ASSESSEE I S DIRECTED TO PRODUCE RELEVANT DETAILS FOR ALLOCATION OF THE EXPENDITURE REGARDING JOB WORK ACTIVITY. IF IT IS NOT POSSIBLE TO WORK OUT THE ALL OWABLE EXPENDITURE ON THE ABOVE SAID BASIS THEN THE AO SHOULD WORK OUT ON SOM E REASONABLE BASIS. JEWELMARK INDIA P. LTD. 5 9. THE THIRD ITEM OF DISALLOWANCE IS EXCHANGE DIFFE RENCE GAIN ON LOANS. 10. THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT T HE FOREIGN EXCHANGE GAIN IS IN RESPECT OF SHORT TERM LOAN TAKEN BY THE ASSESSEE AGAINST THE EXPORT BILLS, THEREFORE, LOAN WAS TAKEN ONLY FOR BU SINESS PURPOSE AND FOR WORK CAPITAL AND NOT FOR ACQUISITION OF ANY FIXED A SSET. FURTHER THE LD. AR HAS SUBMITTED THAT WHENEVER THERE IS A LOSS THE ASS ESSEE HAS TREATED THE SAME AS BUSINESS EXPENDITURE AND ACCORDINGLY HAS BE EN REDUCED FROM THE BUSINESS INCOME FOR THE PURPOSE OF DEDUCTION U/S 10 A. THUS THE LD. AR HAS URGED THAT WHEN THE LOSS HAS BEEN DEDUCTED AS EXPEN DITURE FROM THE BUSINESS INCOME FOR THE PURPOSE OF ALLOWING DEDUCTI ON U/S 10A THEN THE GAIN DUE TO FOREIGN EXCHANGE FLUCTUATION SHOULD BE ALLOWED FOR THE PURPOSE OF DEDUCTION U/S 10A. 11. ON THE OTHER HAND THE LD. DR HAS SUBMITTED THAT AS PER SCHEDULE 14 OF THE BALANCE SHEET, THE EXCHANGE DIFFERENCE HAS B EEN SHOWN ON LONG TERM LOAN, THEREFORE IT WAS NOT A SHORT TERM OR LOA N TAKEN FOR WORKING CAPITAL. 12. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND REL EVANT MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE IS HAVING TWO KIN DS OF LOAN ONE IS SHORT TERM LOAN AGAINST EXPORT BILLS WHICH IS CLEAR FROM THE SCHEDULE OF THE BALANCE SHEET AND OTHER IS TERM LOAN. EVEN IN THE S CHEDULE 4, THE ASSESSEE HAS SHOWN SECURED LOAN IN FOREIGN CURRENCY WHICH IS TERM LOAN AND FURTHER THE WORKING CAPITAL LOAN UNDER THE CATEGORY OF PECK ING CREDIT, POST SHIPMENT FOREIGN CURRENCY ACCOUNT. AS FAR AS THE WO RKING CAPITAL LOAN IS JEWELMARK INDIA P. LTD. 6 CONCERNED THE EXCHANGE GAIN ON SUCH LOAN SHOULD BE ALLOWED AS BUSINESS INCOME AND SO FAR AS THE EXCHANGE GAIN ON SECURED T ERM LOAN WHICH IS NOT FOR WORKING CAPITAL THE SAME CANNOT BE TREATED AS B USINESS INCOME FOR THE PURPOSE OF SECTION 10A. ACCORDINGLY WE DIRECT THE A O TO VERIFY THE EXACT DETAILS OF THE FOREIGN EXCHANGE GAIN IN RESPECT OF TWO KINDS OF LOAN AND THEN ALLOW THE CLAIM OF THE ASSESSEE WITH RESPECT T O THE WORKING CAPITAL LOAN. 13. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 /03/20 14 SD/- SD/- (N.K.BILLAIYA) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED 21 /03/2014 SKS SR. P.S COPY TO: THE APPELLANT THE RESPONDENT THE CONCERNED CIT(A) THE CONCERNED CIT THE DR, J BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI