The ACIT 10(2), Mumbai V. M/s. Lawkim Ltd., Mumbai

ITA 5376/MUM/2004

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48749 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-05-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 10-06-2010
• Assessment Year: 2001-2002
• Appeal Filed On: 13-07-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHRAVAN KUMAR
• Assessee Lawyers: P J PARDIWALLA
• Keywords: Notional interest
• Section: 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: MUMBAI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.5376/MUM/2004 (ASSESSMENT YEAR: 2001-02) THE ASSTT. COMMISSIONER OF INCOME TAX-10(2), ROOM NO.413, 4TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI -400 020 ..... APPELLANT VS M/S. LAWKIM LIMITED, FLAT NO.11, SECRETARIAT, 3RD FLOOR, PIROJSHA NAGAR, VIKHROLI (EAST), MUMBAI -400 059 .....RESPONDENT ITA NO.5540/MUM/2004 (ASSESSMENT YEAR: 2001-02) M/S. LAWKIM LIMITED, FLAT NO.11, SECRETARIAT, 3RD FLOOR, PIROJSHA NAGAR, MUMBAI -400 059 ..... APPELLANT VS THE ASSTT. COMMISSIONER OF INCOME TAX-10(2), ROOM NO.413, 4TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI -400 020 .....RESPONDENT PAN: AAACL 2462 N ASSESSEE BY: SHRI P.J. PARDIWALLA REVENUE BY: SHRI SHRAVAN KUMAR ITA 5736/M/2004 ITA 5540/M/2004 M/S. LAWKIM LIMITED 2 O R D E R PER R.S. PADVEKAR, JM THESE TWO CROSS APPEALS ONE BY THE REVENUE AND ANOT HER BY THE ASSESSEE ARE FILED CHALLENGING THE IMPUGNED ORDER O F THE LD. CIT (A) X MUMBAI DATED 27.05.2004 FOR THE A.Y. 2001-02. WE F IRST TAKE-UP THE REVENUES APPEAL BEING ITA NO.5376/MUM/2004. GROUN D NO.1 READS AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS IN LAW, THE LEARNED CIT (A) HAS ERRED IN DELETIN G THE ADDITION MADE BY THE ASSESSING OFFICER IN DETERMINI NG THE ANNUAL VALUE OF THE PROPERTY LET OUT ON ACCOUNT OF NOTIONAL INTEREST @ 18% ON INTEREST FREE SECURITY DEPOSITS O F RS 7,00,000/- TAKEN BY THE ASSESSEE COMPANY. 2. WE HAVE HEARD THE PARTIES. THE ASSESSEE-COMPANY IS IN THE MANUFACTURING AND SALE OF ELECTRICAL MOTORS ETC. T HE ASSESSEE COMPANY HAS A HOUSE PROPERTY IN PUNE, WHICH WAS LET OUT FOR THE PERIOD FROM 1.4.2002 TO 30.6.2000. AFTER CLAIMING VACANCY ALLOWANCE AND STATUTORY DEDUCTION U/S.24, THE ASSESSEE DECLAR ED THE NIL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THE A SSESSEE HAS TAKEN INTEREST-FREE SECURITY DEPOSIT OF RS 7,00,000/- FOR LETTING OUT THE SAID PROPERTY. THE A.O. MADE THE ADDITION OF 18% OF NOT IONAL INTEREST ON THE SAID INTEREST-FREE DEPOSIT AND MADE THE ADDITIO N OF RS 21,000/- TO THE GROSS RENT DECLARED BY THE ASSESSEE. THE ASSES SEE CHALLENGED THE SAID ADDITION BEFORE THE LD. CIT (A) WHO DELETED IT . WE FIND THAT NOW THIS ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE HIGH COURT OF DELHI (FULL BENCH) IN THE CAS E OF CIT VS. MANIKUMAR SUBBA AND ANOTHER 333 ITR 38(FB). WE, AC CORDINGLY, CONFIRM THE ORDER OF THE LD. CIT (A) AND DISMISS GR OUND NO.1. ITA 5736/M/2004 ITA 5540/M/2004 M/S. LAWKIM LIMITED 3 3. GROUND NO.2 READS AS UNDER:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS IN LAW, THE LEARNED CIT (A) HAS ERRED IN DIRECTI NG THE ASSESSING OFFICER TO TREAT THE INTEREST RECEIVED ON ADVANCE OF SUPPLIERS OF RS 1,54,318/- IN RESPECT OF SHINDEW ADI UNIT AND RS.6,00,000/- IN RESPECT OF DADRA UNIT AS INCOM E DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTA KING FOR THE PURPOSE OF COMPUTING DEDUCTION U/S.80IB OF THE I.T. ACT. 4. WE HAVE HEARD THE PARTIES. THE ASSESSEE HAD CLA IMED THE DEDUCTION U/S.80IB IN RESPECT OF SHINDEWADI UNIT AN D DADRA UNIT. IT WAS NOTICED BY THE A.O. THAT WHILE WORKING OUT THE PROFIT OF THE SHINDEWADI UNIT, THE ASSESSEE HAS INCLUDED THE FOLL OWING INTEREST ELEMENT:- (I) INTEREST ON CORPORATE DEPOSIT RS 24,46,489/- (II) INTEREST ON EQUIPMENT LOAN RS 15,483/- (III) INTEREST ON FIXED DEPOSIT RS 484/ - (IV) INTEREST ON ADVANCE TO SUPPLIERS RS 1,54,318/ - THE A.O. WAS OF THE VIEW THAT THE SAID INTEREST INC OME CANNOT BE CONSIDERED AS PART OF THE ELIGIBLE PROFITS FOR COMP UTING THE DEDUCTION U/S.80IB. HE, THEREFORE, REDUCE THE PROFIT FOR THE PURPOSE OF COMPUTING THE DEDUCTION U/S.80IB BY THE INTEREST IN COME OF RS 31,16,772/-. SAME WAY, IN RESPECT OF DADRA UNIT, T HE ASSESSEE HAS INCLUDED THE INTEREST INCOME IN RESPECT OF (I) INTEREST ON CORPORATE DEPOSIT RS 1,14,56,56 1/- (II) INTEREST ON ADVANCE TO SUPPLIERS RS 6,00, 000/- (III) INTEREST ON FIXED DEPOSIT RS 2,40 0/- ------------------------- TOTAL RS 1,20,56,980/- ================ ITA 5736/M/2004 ITA 5540/M/2004 M/S. LAWKIM LIMITED 4 THE A.O. REDUCED THE SAID AMOUNT FROM THE ELIGIBLE BUSINESS PROFITS FOR THE PURPOSE OF WORKING OUT THE DEDUCTION U/S.80 IB. IN CONSEQUENCE, THE DEDUCTION CLAIMED BY THE ASSESSEE WAS REDUCED. THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD. CIT ( A). THE LD. CIT (A) HELD THAT TO THE EXTENT OF THE INTEREST INCOME RECE IVED FROM THE CORPORATE DEPOSIT, FIXED DEPOSIT, EQUIPMENT LOAN FR OM THE SUPPLIERS ARE NOT DERIVED FROM THE ACTUAL CONDUCT OF BUSINESS OF THE ASSESSEES UNDERTAKING AND HENCE, WILL NOT QUALIFY FOR COMPUTI NG THE DEDUCTION U/S.80IB OF THE ACT. IN RESPECT OF THE INTEREST RE CEIVED FROM THE ADVANCES FROM THE SUPPLIERS, HE HELD THAT THE SAME IS TO BE TREATED AS DERIVED FROM THE BUSINESS OF THE UNDERTAKING AS IT HAS DIRECT NEXUS WITH THE ACTUAL CONDUCT OF THE ASSESSEES BUSINESS. THE LD. CIT (A), THEREFORE, DIRECTED THAT TO THE EXTENT OF INTEREST ON ADVANCES TO SUPPLIERS SHOULD NOT BE EXCLUDED. BEING AGGRIEVED NOW, THE REVENUE IS IN APPEAL BEFORE US. THE LD. D.R. ARGUED THAT T HE INTEREST INCOME CANNOT BE TREATED AS DERIVED FROM THE BUSINESS OF T HE UNDERTAKING. PER CONTRA, THE LD. COUNSEL ARGUES THAT INTEREST IN COME HAS DIRECT NEXUS WITH THE BUSINESS OF THE UNDERTAKING. ON THE PERUSAL OF THE FACTS, WE FIND THAT IN SECTION 80IB, THE LEGISLATUR E HAS USED THE WORD DERIVED FROM HAS BEEN EXPLAINED BY THE HONBLE SU PREME COURT IN THE CASE OF CIT VS. STERLING FOOD 237 ITR 579 AS WE LL AS IN THE RECENT DECISION IN THE CASE OF LIBERTY INDIA VS. CIT. SO FAR AS INTEREST ON THE ADVANCES OF THE SUPPLIERS ARE CONCERNED, IN OUR OPI NION, IT WILL NOT HIT BY THE PRINCIPLES LAID DOWN EITHER IN THE CASE OF S TERLING FOOD (SUPRA) OR LIBERTY INDIA (SUPRA), AS IT HAS DIRECT NEXUS WI TH THE ADVANCES MADE TO THE SUPPLIERS OF THE ALL MATERIALS TO THE ASSESS EES BUSINESS. TO THE EXTENT OF FINDING OF THE LD. CIT (A) THAT INTEREST RECEIVED ON THE ADVANCES IS DERIVED FROM THE BUSINESS OF THE INDUST RIAL UNDERTAKING. WE, ACCORDINGLY, CONFIRM THE ORDER OF THE LD. CIT ( A) ON THE GROUND TAKEN BY THE REVENUE. ACCORDINGLY, GROUND NO.2 IS DISMISSED. 5. GROUND NO.3 READS AS UNDER:- ITA 5736/M/2004 ITA 5540/M/2004 M/S. LAWKIM LIMITED 5 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS IN LAW, THE LEARNED CIT (A) HAS ERRED IN DIRECTI NG THE ASSESSING OFFICER NOT TO APPORTION THE HEAD OFFICE EXPENSES (EXCEPT ADVERTISEMENT EXPENSES) TO SHINDEWADI AND D ADRA UNITS WHILE WORKING OUT THE PROFIT OF THE ELIGIBLE UNDERTAKING FOR THE PURPOSE OF DEDUCTION U/S.80IB O F THE SAID ACT. 6. WE HAVE HEARD THE PARTIES. THE CONTROVERSY IS I N RESPECT OF THE APPORTIONMENT OF THE HEAD OF EXPENSES (EXCEPT ADVER TISEMENT EXPENSES) TO THE SHINDEWADI AND DADRA UNITS FOR WOR KING OUT THE ELIGIBLE PROFIT FOR THE PURPOSE OF DEDUCTION U/S.80 IB. IT WAS NOTICED BY THE A.O. THAT THE ASSESSEE HAS NOT ALLOCATED COMMON HEAD OFFICE EXPENSES WHILE WORKING-OUT THE PROFITS OF THE SHIND EWADI UNIT AS WELL AS DADRA UNIT. THE A.O., THEREFORE, ALLOCATED THE EXPENDITURE AS UNDER: A) OUT OF ADVERTISEMENT RS 38,283/- B) OUT OF SALARIES RS 8,05,071/- C) OUT OF FOREIGN TRAVEL RS 6,952/- D) OUT OF STAFF WELFARE EXPENSES RS 8,66,915/- E) 20% ALLOCATED RS 1,73,383/- --------------------- TOTAL RS 10,23,690/- ============= 7. THE A.O., THEREFORE, REDUCED ELIGIBLE PROFIT OF THE SHINDEWADI UNITS BY RS 10,23,690/-, REDUCING PRO RATA H.O. EXP ENSES TREATING IT ATTRIBUTABLE TO SAID UNIT. THE A.O. MADE THE ALLO CATION OF THE ABOVE THREE ITEMS I.E. (A) TO (C) ON THE RATIO OF THE SAL ES. SAME WAY, IN RESPECT OF DADRA UNIT, THE A.O. ALLOCATED THE COMMON EXPEND ITURE TREATING THE SAME AS ATTRIBUTABLE TO THE DADRA UNIT, WHICH WAS W ORKED OUT AS UNDER:- (A) ADVERTISEMENT RS 1,55,526/- ITA 5736/M/2004 ITA 5540/M/2004 M/S. LAWKIM LIMITED 6 (B) TELEPHONE, TELEX ETC. RS 1,29,435/- (C) FORMS, CHALLANS ETC. RS 1,63,740/- (D) COMPUTER EXPENSES RS 2,25,497/- (E) TRADE ASSOCIATION RS 40,779/- (F) PAGING CHARGES RS 10,600/- (G) SALARIES(BASED ON SALES) RS 32,70,600/- (H) FOREIGN TRAVEL RS 28,244/- (I) STAFF WELFARE EXPENSE RS 1,73,383/- ------------------- RS 41,61,804 =========== AND TO THAT EXTENT THE ELIGIBLE PROFIT FROM DADRA U NIT WAS REDUCED. THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD. CIT ( A). BEFORE THE LD. CIT (A) IT WAS PLEADED THAT EACH UNIT OF THE ASSESS EE-COMPANY PREPARES SEPARATE PROFIT AND LOSS ACCOUNT AND ALL E XPENSES AS WELL AS INCOME PERTAINING TO THE SAID UNIT ARE REFLECTED IN THE PROFIT AND LOSS ACCOUNT AND THERE IS NO NEED TO FURTHER ALLOCATE SO ME HEADS OF ITS EXPENSES TO THESE UNITS. THE LD. CIT (A) ACCEPTED THE PLEA OF THE ASSESSEE TO THE EXTENT OF THE ADVERTISEMENT EXPENSE S AND HE HELD THAT TO THE EXTENT OF THE APPORTIONMENT OF THE ADVT. EXP ENSES, THUS FULLY JUSTIFIED. THE LD. COUNSEL ARGUES THAT WHILE INTER PRETING ELIGIBILITY OF THE INCOME, THE EXPRESSION DERIVED FROM IS STRICT LY INTERPRETED AND INCOME, EVEN THOUGH ATTRIBUTABLE, IS EXCLUDED WHILE WORKING ALLOWABLW DEDUCTION. HE FURTHER PLEADS THAT ON THE SAME ANA LOGY, THE EXPENSES WHICH ARE NOT DIRECTLY RELATED TO THE UNIT SHOULD B E NOT BE REDUCED FROM THE ELIGIBLE PROFIT FOR WORKING OUT DEDUCTION. MERELY BECAUSE THE EXPENDITURE IS ATTRIBUTABLE TO THE UNIT THAT CANNOT BE THE GROUND FOR MAKING THE DISALLOWANCE. WE HAVE ALSO HEARD THE LD . D.R. 8. SO FAR AS THE ARGUMENT OF THE LD. COUNSEL ON INT ERPRETATION IS CONCERNED, THE SAME MAY BE CORRECT. BUT, SO FAR AS ON FACTS, IT CANNOT BE DENIED THAT EVEN NOT A SINGLE OPERATION OR TRANS ACTION IS CARRIED OUT FROM THE HEAD OFFICE PERTAINING TO THE ABOVE UNITS. MOREOVER, SALES ITA 5736/M/2004 ITA 5540/M/2004 M/S. LAWKIM LIMITED 7 OPERATIONS ARE HANDLED BY THE STAFF IN THE HEAD OFF ICE AND HENCE IS A PART OF THE PROFIT AND LOSS ACCOUNT FOR WORKING OUT THE PROFITS OF THE INDUSTRIAL UNDERTAKING. SO FAR AS THE SHINDEWADI U NIT IS CONCERNED, THE A.O. MADE ALLOCATION OF SOME OF THE HEAD OFFICE EXPENDITURE IN PROPORTION TO THE RATIO OF THE SALES. SO FAR AS DA DRA UNIT IS CONCERNED, WE FIND THAT ALLOCATION MADE BY THE A.O. IS REASONA BLE. WE, THEREFORE, REVERSE THE ORDER OF THE LD. CIT (A) ON THIS ISSUE AND RESTORE THE ORDER OF THE A.O. ACCORDINGLY, GROUND NO.3 IS ALLOWED 9. NOW WE TAKE-UP ASSESSEES APPEAL BEING ITA NO.5540/MUM/2004. GROUND NO.1 READS AS UNDER:- 1.0 THE LEARNED CIT (APPEALS) ERRED IN CONFIRMING THAT INTEREST ON CORPORATE DEPOSITS AND EQUIPMENT (STAFF) LOAN IS NOT DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTA KING AND HENCE DOES NOT QUALIFY FOR COMPUTATION OF DEDUC TION U/S.80IB OF THE ACT. 1.1 HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE PROVISIONS OF THE LAW, THE LEARNED CIT (APP EALS) OUGHT TO HAVE HELD THAT THE SAID RECEIPT OF INTERES T BE CONSIDERED FOR COMPUTATION OF THE DEDUCTION UNDER S ECTION 80IB OF THE ACT. 10. THE ISSUE IS IN RESPECT OF WHETHER THE INTEREST CAN BE CONSIDERED AS PART OF THE ELIGIBLE PROFITS FOR THE PURPOSE OF DEDUCTION U/S.80IB. 11. WE HAVE ALREADY DEALT, DISCUSSED AND DECIDED TH IS ISSUE IN DETAIL WHILE DEALING WITH THE REVENUES APPEAL. TH E GRIEVANCE OF THE ASSESSEE IS IN RESPECT OF THE INTEREST OTHER THAN T HE INTEREST RECEIVED ON THE ADVANCES TO THE SUPPLIERS. FOR AVOIDING THE REPETITION OF FACTS, WE ADOPT THE FACTS AND FIGURES MENTIONED IN REVENUE S APPEAL. IN OUR OPINION, THE INTEREST INCOME ON THE FACTS OF THE CA SE CANNOT BE HELD TO ITA 5736/M/2004 ITA 5540/M/2004 M/S. LAWKIM LIMITED 8 BE DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDE RTAKING. THE EXPRESSION DERIVED FROM HAS BEEN EXPLAINED BY THE HONBLE SUPREME COURT IN THE CASE OF STERLING FOOD (SUPRA) AND LIBE RTY INDIA (SUPRA). WE, THEREFORE, FOUND NO FAULT IN THE ORDER OF THE L D. CIT (A) AND CONFIRM THE SAME AND ACCORDINGLY, GROUND NO.1 IS DI SMISSED. 11. GROUND NO.2 IS IN RESPECT OF THE APPORTIONMENT OF THE ADVERTISEMENT EXPENSES. WE HAVE ALREADY DISCUSSED THIS ISSUE WHILE DECIDING THE REVENUES APPEAL. FOLLOWING OUR REASO NING IN THE REVENUES APPEAL, WE CONFIRM THE ORDER OF THE LD. C IT (A) ON THIS ISSUE AND ACCORDINGLY, GROUND NO.2 IS DISMISSED. 12. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOW ED AND ASSESSEES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 1 6 TH MAY 2011. SD/- SD/- ( J. SUDHAKAR REDDY ) ACCOUNTANT MEMBER ( R.S. PADVEKAR ) JUDICIAL MEMBER MUMBAI, DATE: 16 TH MAY 2011 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)X, MUMBAI. 4) THE CIT M.C. -X, MUMBAI. 5) THE D.R. A BENCH, MUMBAI. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN ITA 5736/M/2004 ITA 5540/M/2004 M/S. LAWKIM LIMITED 9 SR.N. EPISODE OF AN ORDER DATE INITIALS CONCERNED 1 DRAFT DICTATED ON 10.05.2011 SR.PS 2 DRAFT PLACED BEFORE AUTHOR 11.05.2011 SR.PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6 KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7 FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER