ITO 5(2)(2), MUMBAI V. JEWELLERY SOL;UTIONS P. LTD, MUMBAI

ITA 5766/MUM/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6190 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 25-11-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 29-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I MUMBAI BEFORE SHRI J. SUDHAKAR REDDY (AM) AND SMT. ASHA VI JAYARAGHAVAN (JM) ITA NO. 5766/MUM/2009 ASSESSMENT YEAR- 2005-06 THE ITO, 5(2)(2), AAYAKAR BHAVAN, MUMBAI-400 020 M/S. JEWELLERY SOLUTIONS PVT. LTD., PLOT NO. 118/119, ROAD NO. 18, MIDC, ANDHERI(E), MUMBAI-400 093 PAN-AAACJ 8708R (APPELLANT) VS. (RESPONDENT) APPELLANT BY: SHRI SANJEEV JAIN RESPONDENT BY: SHRI VIJAY MEHTA O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER DATED 26.8.2009 PASSED BY THE LD. CIT(A)-V FOR THE ASSESSMENT YEAR 2005-06. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A 100% EXPORT ORIENTED UNIT AT SEEPZ, ANDHERI AND IS IN THE BUSIN ESS OF MANUFACTURING AND EXPORT OF DIAMOND JEWELLERY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS DEBITED NET INTEREST INCOME OF RS. 42,69,264/- TO ITS PROFI T AND LOSS ACCOUNT. THE DETAIL OF THE NET INTEREST DEBITED TO THE PROFIT AN D LOSS ACCOUNT IS AS UNDER: BANK INTEREST PAID RS. 60,55,490/- LESS: INTEREST RECEIVED ON FIXED DEPOSIT RS. 17,86 ,226/- --------------------- RS. 42,69,264/- ============= ITA NO5766/M/09 2 3. THE ASSESSEE HAS RECEIVED INTEREST ON FIXED DEPO SITS WITH THE BANK. IT IS THE CLAIM OF THE ASSESSEE THAT IT HAS TO FURN ISH SECURITIES TO THE BANK FOR OBTAINING LETTER OF CREDIT FACILITIES, BANK GUA RANTEE FACILITIES, OVERDRAFT FACILITIES, CASH CREDIT FACILITIES, BILL DISCOUNTIN G FACILITIES AND PACKING CREDIT FACILITIES. ALL THESE FACILITIES WERE UTILI ZED BY THE ASSESSEE IN THE 100% EXPORT ORIENTED UNIT. SINCE THE INTEREST WAS EARNED DURING THE COURSE OF BUSINESS, IT IS INEXTRICABLY RELATED TO T HE PROCESS OF CARRYING OF EXPORT BUSINESS AND THEREFORE INTEREST EARNED IS TH E BUSINESS RECEIPT OF THE ASSESSEE LINKED TO ITS EXPORT ORIENTED UNIT AND THEREFORE THESE RECEIPTS WILL ALSO QUALIFY FOR DEDUCTION U/S. 10B O F THE I.T. ACT. HOWEVER, THE AO HELD THAT THE EXPLANATION OF THE ASSESSEE IS NOT ACCEPTABLE AS THERE IS NO DIRECT NEXUS ESTABLISHED BY THE ASSESSE E COMPANY BETWEEN THE INTEREST RECEIVED AND PAID. THE AO ALSO HELD T HAT INTEREST EXPENDITURE INCURRED BY THE ASSESSEE FOR CARRYING O UT OF BUSINESS ACTIVITY OF EXPORT OF DIAMOND JEWELLERY HAS NO RELATION TO T HE EARNING OF INTEREST ON FIXED DEPOSITS. ACCORDING TO THE AO, THE INTERE ST EARNED BY THE ASSESSEE ON FIXED DEPOSITS IS REQUIRED TO BE TREATE D AS INCOME FROM OTHER SOURCES AND SINCE THE ASSESSEE HAS NOT PAID ANY INT EREST FOR EARNING INTEREST INCOME, THE ENTIRE INTEREST RECEIVED BY TH E ASSESSEE IS REQUIRED TO BE TREATED AS INCOME UNDER THE HEAD INCOME FROM OT HER SOURCES. THE AO ALSO RELIED ON THE DECISION OF SUPREME COURT IN THE CASE OF CIT VS V.P. GOPINATHAN 248 ITR 449 AND ON THE CASE OF CIT VS DR. C. JOHN RAJAN (KERALA HIGH COURT) AND DECISION OF BOMBAY HI GH COURT IN THE CASE OF CIT VS SAMIR DIAMOND EXPORTS LTD. THE AO ALSO HELD THAT INTEREST INCOME OF THE APPELLANT IS NOT DUE TO INDUSTRIAL AC TIVITY AND THEREFORE THIS INCOME CAN AT THE BEST SAID TO BE ATTRIBUTABLE TO BUSINESS BUT NOT DERIVED FROM THE MANUFACTURING ACTIVITY. THE AO HELD THAT INTEREST INCOME IS NOT ELIGIBLE FOR DEDUCTION U/S. 10B OF TH E I.T. ACT. THE AO RELIED ON VARIOUS CASE LAWS, WHICH HAS BEEN MENTION ED AT PAGE 4,5 & 6 OF THE ASSESSMENT ORDER. ITA NO5766/M/09 3 4. THE ASSESSEE FURTHER SUBMITTED THAT EACH AND EVE RY TYPE OF INTEREST IS NOT ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. IT IS ONLY THE INTEREST EARNED ON SURPLUS FUNDS, WHICH IS NOT REQUIRED FOR THE PURPOSE OF BUSINESS, WHICH CAN BE TREATED AS INCOM E FROM OTHER SOURCES. THE ASSESSEE CLAIMED THAT IN ITS CASE TH ERE ARE NO SURPLUS FUNDS AND ONLY BUSINESS FUNDS HAS BEEN UTILIZED TO MAKE FIXED DEPOSIT RECEIPTS AND, THEREFORE, THIS INCOME CANNOT BE TREA TED AS INCOME FROM OTHER SOURCES. THE ASSESSEE FURTHER SUBMITTED THA T AO ERRED IN HOLDING THAT THE INCOME IS NOT DUE TO INDUSTRIAL UNDERTAKIN G, WHICH IS ELIGIBLE FOR DEDUCTION U/S. 10B OF THE I.T. ACT. THE ASSESSEE S UBMITTED THAT AS PER PROVISION OF SEC. 10B OF THE I.T. ACT AS SUBSTITUTE D BY THE FINANCE ACT 2000 ANY PROFITS AND GAINS DERIVED BY AN ASSESSEE FROM 100% EXPORT ORIENTED UNDERTAKING IS NOT TO BE INCLUDED IN THE T OTAL INCOME OF THE ASSESSEE. ASSESSEE FURTHER SUBMITTED THAT PRIOR TO THIS SUBSTITUTION DEDUCTION WAS ON PROFITS AND GAINS AS DERIVED BY 100% EXPORT ORIENTED UNDERTAKING FROM THE EXPORT OF ARTICLE OR THING OR COMPUTER SOFTWARE FOR A PERIOD OF 10 CONSECUTIVE ASSESSMENT YEARS. THE ASS ESSEE SUBMITTED THAT EXPRESSION USED IN PRESENT SEC. 10B IS SUCH PROFIT S AND GAINS AS ARE DERIVED BY 100% EXPORT ORIENTED UNDERTAKING FROM TH E EXPORT OF ARTICLE OR THING WHEREAS THE EXPRESSION USED IN EARLIER SECTI ON 10B(1) WAS ANY PROFIT AND GAINS DERIVED BY AN ASSESSEE FROM 100% E XPORT ORIENTED UNDERTAKING. THE ASSESSEE SUBMITTED THAT BY THE S UBSTITUTION OF PRESENT SECTION 10B BY THE FINANCE ACT, 2000 W.E.F. 1.4.2001, THE SCOPE OF SEC. 10B HAS BEEN ENLARGED SINCE THE WORD USED I N THE PRESENT SECTION IS DERIVED FROM WHEREAS WORD USED IN THE SUBSTITU TED SECTION WAS DERIVED BY AND, THEREFORE, FOR CLAIMING DEDUCTION U/S. 10B OF THE I.T. ACT, THERE NEED NOT BE ANY DIRECT NEXUS AND THE APP ELLANT RELIED ON THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF SUDITI INDUSTRIES LTD. IN I.T. ACT, 1961 NO. 3490/M/2000. THE APPELLANT ALSO RELIED ON THE DECISION OF DELHI HIGH COURT IN THE CASE OF ELTEK S GS PVT. LTD. 300 ITR 06. ITA NO5766/M/09 4 5. THE LD. CIT(A) HELD AS FOLLOWS: COMING BACK TO SEC. 10B, I FIND THAT SUB-SECTION (1 ) ALSO EMPLOYS THE EXPRESSION DERIVED FROM THE EXPORT OF A RTICLES. BUT IT IS NOT THE END OF THE MATTER. THE EXPRESSION PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE AS EMPLOYED IN SUB-SECTION (1) HAS BEEN GIVEN A SPECIFIC MEANING I N SUB-SECTION (4). THE SUB-SEC. (4) STATES THAT THE PROFITS DERIVED F ROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, T HE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF TH E BUSINESS CARRIED ON BY THE UNDERTAKING. BY PROVIDING FOR CONSIDERIN G THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, THE POSITION HAS BEEN MADE CLEAR THAT THE RESTRICTED GENERAL MEANING GIVEN TO ELIGIB LE PROFITS AS DERIVED FROM THE EXPORT OF ARTICLES IN SUB-SEC (1) HAS BEEN GIVEN BY SUB-SEC. (4) AND THE SCOPE OF THE BENEFIT HAS BEEN EXPANDED BY EXTENDING TO THE ALL PROFITS OF THE BUSINESS CARRIE D ON BY THE UNDERTAKING. ONCE THE EXPRESSION DERIVES FROM HAV ING RESTRICTED SCOPE HAS BEEN SPECIFICALLY DEFINED IN THE SAME SEC TION, THEN THE MEANING OF SUCH EXPRESSION AS UNDERSTOOD IN COMMON PARLANCE WILL NOT BE APPLICABLE. RATHER THE SPECIFIC MEANING GIV EN TO IT WILL COME INTO PLAY. I FURTHER NOTE THAT SUB SEC.(4) HAS BE EN WORKED ON THE PATTERN OF SEC. 80-IA PRIOR TO ITS SUBSTITUTION W.E .F. 1.4.2000 WITH REFERENCE TO PROFITS AND GAINS DERIVED FROM ANY BUS INESS OF AN INDUSTRIAL UNDERTAKING. IN THE CONTEXT OF SEC. 80 IA, THE AMRITSAR BENCH OF THE TRIBUNAL IN THE CASE OF DY. CIT VS CHA MAN LAL & SONS (2005) 3 SOT 333 HELD THAT IN SUCH A WORDED SECTION , THE BENEFIT OF DEDUCTION HAS TO BE MADE AVAILABLE IN RESPECT OF PU RCHASE AND SALE WHICH WAS PART AND PARCEL OF THE BUSINESS OF THE IN DUSTRIAL UNDERTAKING. THUS WHEN SUB-SECTION (1) OF SEC. 10A IS READ IN JUXTAPOSITION TO SUB-SECTION (4) IT IS DIFFICULT TO ACCEPT THAT ONLY THE PROFITS AND GAINS AS DERIVED BY THE UNDERTAKING FRO M THE EXPORT OF ARTICLES IS ELIGIBLE FOR DEDUCTION. ALL THE PROFIT S WHICH HAVE NEXUS WITH THE BUSINESS OF THE UNDERTAKING WILL QUALIFY F OR DEDUCTION. FROM THE FACTS OF THE INSTANT CASE IT IS NOTED THAT THE ASSESSEE HAD GIVEN FDRS TO THE BANK FOR OBTAINING CREDIT FACILIT Y. SUCH INTEREST INCOME HAS NEXUS WITH THE BUSINESS OF THE UNDERTAKI NG AND FALLS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION AS HAVING RELATION WITH THE CARRYING ON OF THE BUSINE SS. SIMILAR VIEW HAS BEEN TAKEN IN THE CASE OF MOTOROLA INDIA ELECTR ONICS (P) LTD. 114 ITD 387. IN VIEW OF THESE FACTS, AO WAS NOT JUSTIF IED IN TREATING THE INTEREST INCOME AS NOT DERIVED FROM THE EXPORT ACTI VITY. I, THEREFORE, HOLD THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION U/ S. 10A IN RESPECT OF THE INTEREST INCOME. THE RESULTANT DENIAL OF DE DUCTION U/S. 10A IS DELETED. THESE GROUND OF APPEALS ARE ALLOWED. ITA NO5766/M/09 5 6. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE RE VENUE PREFERRED AN APPEAL BEFORE US. 7. THE LD. DEPARTMENTAL REPRESENTATIVE SHRI SANJEE V JAIN RELIED ON THE DECISION IN THE CASE OF (1) 166 TAXMAN 337 (2)C IT VS RAM HONDA POWER EQUIPMENT (289 ITR 475) (3) 189 TAXMAN 71 AND (4) IN THE CASE OF LIBERTY INDIA LTD. VS CIT 317 ITR 218 (SC) 8. THE LD. COUNSEL FOR THE ASSESSEE SHRI VIJAY MEHT A ON THE OTHER HAND SUBMITTED THAT THE ISSUE IS COVERED BY THE DEC ISIONS IN THE CASES OF ACIT VS MOTOROLA INDIA ELECTRONICS PVT. LTD. 114 IT D 387 (BANG.), LIVINGSTONES JEWELLERY PVT. LTD. VS DCIT 31 SOT 323 (MUM) AND M/S. RAJESH EXPORTS LTD., VS ACIT IN ITA NO. 51/BANG/200 8. 9. WE HEARD BOTH THE PARTIES. IN THE CASE OF M/S. RAJESH EXPORTS LTD., VS ACIT IT HAS BEEN HELD AS FOLLOWS: INCOME TAX INTEREST EARNED ON FDS DEPOSITED AS MAR GIN MONIES WITH BANKS FOR OPENING LCS FOR IMPORT OF GOL D BULLION. THERE IS AN INEXTRICABLE LINK BETWEEN THE MARGIN MONIES A ND THE BUSINESS OF THE UNDERTAKING, BUT THERE IS ALSO A LINK BETWEE N THE INTEREST ARISING FROM THE MARGIN MONIES AND THE ASSESSEES B USINESS. THE EXPRESSION PROFITS OF THE BUSINESS OF THE UNDERTAK ING IN S. 10B(4) HAS TO BE CONSTRUED IN A WIDER SENSE THAN THE EXPRE SSION PROFITS AND GINS AS ARE DERIVED BY A HUNDRED PERCENT EXPOR T ORIENTED UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS I N S. 10B(1) OF THE ACT: INCOME EARNED BY WAY OF INTEREST THEREON IS EL IGIBLE FOR EXEMPTION U/S. 10B. 10. THE ITAT MUMBAI BENCH A HAS TAKEN A SIMILAR V IEW IN THE CASE OF LIVINGSTONES JEWELLERY PVT. LTD VS DCIT. RESPECTFU LLY FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH, WE DISMISS THE R EVENUES APPEAL AND CONFIRM THE ORDER OF THE LD. CIT(A). ITA NO5766/M/09 6 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 30 TH DAY OF NOVEMBER, 2010 SD/- SD/- (J. SUDHAKAR REDDY) (A SHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 30 TH NOVEMBER, 2010 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR I BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO5766/M/09 7 DATE INITIALS 1 DRAFT DICTATED ON: 24.11.2010 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 24.11.2010 ______ SR. PS/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: _________ ______