M/s Shivalik Exports, New Delhi V. ACIT, New Delhi

ITA 5945/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3465 (ITAT-DELHI)
• Duration Of Justice: 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 22-07-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 27-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S MOHANTY
• Keywords: Business income; Depreciation; Business expenditure
• Section: 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH G DELHI ] BEFORE THE HONBLE VICEPRESIDENT, SHRI G.E. VEERABHA DRAPPA, AND SHRI I. P. BANSAL, JUDICIAL MEM BER. I. T. APPEAL NO. 5945 (DEL) OF 2010 ASSESSMENT YEAR : 2004-05. M/S. SHIVALIK EXPORTS, ASSTT. COMMISSIONE R OF INCOME-TAX A 159, NEW FRIENDS COLONY, VS. CIRCLE : 22 (1), N E W D E L H I 110 065. N E W D E L H I. PAN / GIR NO. AABFS 3562Q. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI R. S. SINGHVI, C. A.; DEPARTMENT BY : MS. S. MOHANTY, SR. D. R. O R D E R. PER I. P. BANSAL, JM : THIS IS AN APPEAL FILED BY THE ASSESSEE. IT IS DI RECTED AGAINST THE ORDER PASSED BY THE LD. CIT (APPEALS) DATED 23 RD SEPTEMBER, 2010 FOR ASSESSMENT YEAR 2004-05. 2. GROUNDS OF APPEAL READ AS UNDER :- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT (A) WAS NOT JUSTIFIED IN HOLDING THAT INTEREST INCOME IS TO BE CONSIDERED UNDER THE HEAD OTHER SOURCES AND NOT UNDER THE HEAD BUSINESS AND T HEIR BY DENY THE BENEFIT OF NETTING OF INTEREST; 2 I. T. APPEAL NO. 5945 (DEL) OF 2010 THAT THERE BEING DIRECT NEXUS BETWEEN INTEREST PAI D AND INTEREST RECEIVED THE BENEFIT OF NETTING IS TO BE ALLOWED EVEN IF THE INTEREST IS CONSIDERED UNDER THE HEAD OTHER SOURCES. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF T HE CASE, THE CIT (A) WAS NOT JUSTIFIED IN SUSTAINING DISALLOWANCE TO THE EXT ENT OF 10 PER CENT IN RESPECT OF CLAIM OF TELEPHONE EXPENSES FOR PERSONAL USE; THAT TELEPHONE HAS BEEN USED FOR THE PURPOSE OF B USINESS AND THERE IS NO CASE OF ANY DISALLOWANCE FOR ALLEGED PERSONAL USE P ARTICULARLY WHEN THE SAME IS NOT IN CONFORMITY WITH PAST HISTORY OF THE CASE. 3. THAT FOR THE SIMILAR REASONS, DISALLOWAN CE OF 10 PER CENT OF THE CLAIM IN RESPECT OF VEHICLE RUNNING EXPENSES IS ALSO NOT SUSTAINABLE ON FACTS AND UNDER THE LAW; 4. THAT IN ANY CASE, THERE IS NO VALID BAS IS FOR DISALLOWANCE OF DEPRECIATION UNDER SECTION 38(2) AS CLAIM OF DEPRECIATION WAS IN ACCORDANCE WITH INCOME TAX RULES AND PROVISIONS OF SECTION 38 ARE NOT RELEVANT . 3. APROPOS GROUND NO. 1 THE ASSESSEE IS ELIGIBLE FO R DEDUCTION UNDER SECTION 80-HHC OF THE INCOME-TAX ACT, 1961 [ACT]. WHILE COMPUTING SUCH D EDUCTION THE ASSESSING OFFICER REDUCED THE INCOME OF THE ASSESSEE TO THE EXTENT OF RS.7,47,448 /- BEING INTEREST EARNED BY THE ASSESSEE ON FDRS. AND TREATED THE SAME AS INCOME FROM OTHER SOU RCES NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80-HHC OF THE ACT. BEFORE THE LD. CIT (APP EALS) IT WAS PLEADED THAT ASSESSEE HAD MADE FDR OF RS.21,92,700/- AGAINST WHICH INTEREST INCOME OF RS.8,00,931/- WAS RECEIVED. THE ASSESSEE HAS PAID INTEREST TO THE EXTENT OF RS.20,9 1,234/- AGAINST WHICH INTEREST INCOME OF RS.8,00,931/- HAS BEEN ADJUSTED. THE CLAIM OF THE ASSESSEE IS THAT INTEREST RECEIVED SHOULD BE ADJUSTED AGAINST THE INTEREST PAYMENT AS THE FDR HA S BEEN MADE FROM THE BORROWED FUND AND THERE IS DIRECT NEXUS BETWEEN THE FDRS. MADE AND TH E INTEREST PAYMENT AND THE NETTING SHOULD BE ALLOWED. THE LD. CIT (APPEALS) ON THESE SUBMISSION S OF THE ASSESSEE HAS OBSERVED THAT ASSESSING OFFICER HAS TAKEN INTEREST AT RS.7,47,448/-, BUT AS PER DETAILS SUBMITTED BY THE ASSESSEE, INTEREST INCOME IS OF RS.8,00,931/- AND HE DIRECTED THE ASSE SSING OFFICER TO VERIFY THE CORRECT INTEREST AND AFTER DOING SO THE CORRECT AMOUNT SHOULD BE CONSIDE RED FOR THE PURPOSE OF ADDITION AND DISALLOWANCE. BASED ON THESE FINDINGS THE LD. CIT (APPEALS) HAS HELD THAT INTEREST INCOME HAS RIGHTLY BEEN CONSIDERED TO BE INCOME FROM OTHER SOU RCES AND IS NOT ELIGIBLE UNDER SECTION 80- HHC OF THE ACT. HOWEVER, HE HAS DIRECTED THE ASSES SING OFFICER TO EXAMINE AND ALLOW 3 I. T. APPEAL NO. 5945 (DEL) OF 2010 EXPENDITURE UNDER SECTION 57 WHICH IS DIRECTLY ATTR IBUTABLE TO EARNING OF THIS INTEREST UNDER SECTION 56 OF THE ACT. 4. AFTER NARRATING THE FACTS IT WAS PLEADED BY THE LEARNED AR THAT THE FIXED DEPOSIT OBTAINED BY THE ASSESSEE WERE FOR EARNEST MONEY DEP OSITED TO APPAREL EXPORT PROMOTION COUNCIL [AEPC] FOR EXPORT QUOTA AND MARGIN MONEY GI VEN TO THE BANK FOR ISSUANCE OF BANK GUARANTEE GIVEN IN FAVOUR OF AEPC FOR EXPORT Q UOTA PERFORMANCE. HE, THEREFORE, SUBMITTED THAT THERE WAS A DIRECT CONNECTION OF THE INTEREST PAID ON BORROWED FUND AND INTEREST RECEIVED ON FDRS. AND ACCORDING TO THE DEC ISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. PAWAN KUMAR JAIN [2008] 170 TAXMAN 260 (DEL.) THE ASSESSEE IS JUSTIFIED IN CLAIMING THE NETTING OF THE INTEREST INCOME. 5. ON THE OTHER HAND, THE LD. SR. DR SUBMITTED THAT THE LD. CIT (APPEALS) HAS RIGHTLY HELD THAT INTEREST EARNED FROM FDRS. CANNOT BE TREATED A S INCOME FROM BUSINESS AND THE SAME IS INCOME FROM OTHER SOURCES, HENCE NOT ELIGIBLE FOR D EDUCTION UNDER SECTION 80-HHC OF THE ACT. SHE SUBMITTED THAT FOR NETTING THE LD. CIT (APPEALS ) HAS ALREADY GIVEN THE DIRECTIONS TO THE ASSESSING OFFICER AND, THEREFORE, THERE SHOULD NOT BE ANY GRIEVANCE TO THE ASSESSEE. 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS IN THE LIGHT OF MATERIAL PLACED BEFORE US. THAT IN THE DECISION WHICH HAS BEEN REL IED UPON BY THE LD. AR IN THE CASE OF CIT VS. PAWAN KUMAR JAIN (SUPRA), THE DEPARTMENT HAD AC CEPTED THE CLAIM OF THE ASSESSEE THAT INTEREST EARNED BY HIM WAS HIS BUSINESS INCOME. TH EREFORE, IT WAS HELD THAT THE INTEREST PAID BY THE ASSESSEE SHOULD HAVE BEEN ADJUSTED AGAINST THE INTEREST RECEIVED. IN THAT CASE HONBLE DELHI HIGH COURT HAS REFERRED TO ITS EARLIER DECISI ON IN THE CASE OF CIT VS. SHRI RAM HONDA POWER EQUIP [2007] 289 ITR 475 (DEL.) AND ALSO THE DECISIONS OF HONBLE KERALA HIGH COURT IN THE CASE OF NANJI TOPANBHAI & CO. VS. ACIT [2000] 2 43 ITR 192 (KER.), K. RABINDRANATHAN NAIR VS. DCIT [2003] 262 ITR 669 (KER.) AND URBAN S TANISLAUS CO. VS. CIT [2003] 263 ITR 10 (KER). REFERRING TO THE DECISIONS IN SHRI RAM HOND A POWER EQUIP. (SUPRA) IT WAS OBSERVED THAT THERE ARE TWO CATEGORIES OF FIXED DEPOSITS TAKEN BY THE ASSESSEE. THE FIRST CATEGORY IS TAKEN 4 I. T. APPEAL NO. 5945 (DEL) OF 2010 BY THE ASSESSEE FOR THE PURPOSE OF PARKING OF ITS S URPLUS FUNDS. THE SECOND CATEGORY IS FIXED DEPOSITS THAT HAVE BEEN TAKEN BY THE ASSESSEE FOR M ANDATORILY KEEPING THE MONIES WITH A BANK FOR THE PURPOSE OF AVAILING CREDIT FACILITIES ETC. FOR ITS EXPORT BUSINESS AND AFTER CONSIDERING ALL THESE DECISIONS, HONBLE DELHI HIGH COURT HAS H ELD THAT IN BOTH THE SITUATIONS THE INTEREST EARNED BY THE ASSESSEE ON THE FIXED DEPOSIT WOULD H AVE TO BE TREATED AS INCOME FROM OTHER SOURCES AND NOT BUSINESS INCOME. IF IT IS SO THEN EVEN IF THE ASSESSEE HAS OBTAINED FIXED DEPOSITS WITH A BANK FOR THE PURPOSE OF AVAILING CREDIT FACI LITIES FOR ITS EXPORT BUSINESS THEN ALSO THE INTEREST THEREON WILL BE TREATED AS INCOME FROM OTH ER SOURCES AND NOT BUSINESS INCOME. HONBLE DELHI HIGH COURT HAS ALSO NOTED THAT IN PARAGRAPH 3 7 A CAVEAT WAS ADDED TO THE ABOVE RULE TO THE EFFECT THAT IN CASES WHERE THE ASSESSING OFFICE R HAS GIVEN A SPECIFIC FINDING THAT THE INTEREST INCOME IS BUSINESS INCOME AND THAT FINDING HAS NOT BEEN CHALLENGED BY THE REVENUE, THE QUESTION THAT WHETHER THE INTEREST EARNED ON THE FI XED DEPOSIT IS BUSINESS INCOME OR INCOME FROM OTHER SOURCES WILL NOT BE RE-OPENED. THEREFOR E, TAKING RE-COURSE TO THE SAID OBSERVATIONS OF THE HONBLE DELHI HIGH COURT, IT WAS FOUND BY THE C OURT THAT THE DEPARTMENT ITSELF HAD ACCEPTED THE CLAIM OF THE ASSESSEE THAT INTEREST EARNED BY I T ON FIXED DEPOSIT WAS BUSINESS INCOME AND THE DEPARTMENT HAVING ACCEPTED SUCH INCOME AS BUSIN ESS INCOME, THE INTEREST HAS TO BE TREATED AS BUSINESS INCOME. THEREAFTER HONBLE DELHI HIGH COURT HAS CONSIDERED THE QUESTION THAT WHETHER OR NOT INTEREST PAID BY THE ASSESSEE COULD BE ADJUSTED AGAINST THE INTEREST RECEIVED ON FDRS. IN VIEW OF EXPLANATION (BAA) TO SECTION 80 -HHC OF THE INCOME-TAX ACT, 1961 AND AFTER CONSIDERING THE PROVISIONS AND RELYING UPON T HE AFORE-MENTIONED DECISION IN THE CASE OF CIT VS. SHRI RAM HONDA POWER EQUIP (SUPRA) IT WAS O BSERVED THAT THIS QUESTION HAS BEEN CONCLUDED IN THE EARLIER DECISION AS UNDER :- 8. IN PARAGRAPH (IX) OF THE DECISION RENDERED BY THIS COURT UNDER THE HEAD CONCLUSIONS, IT HAS BEEN HELD AS FOLLOWS :- WHERE, AS A RESULT OF THE COMPUTATION OF PROFITS AND GAINS OF BUSINESS AND PROFESSION, THE ASSESSING OFFICER TREATS THE IN TEREST RECEIPT AS BUSINESS INCOME, THEN DEDUCTION SHOULD BE PERMISSIBLE, IN TERMS OF E XPLANATION (BAA) OF THE NET INTEREST, I.E., THE GROSS INTEREST LESS THE EXPENDI TURE INCURRED FOR THE PURPOSES OF EARNING SUCH INTEREST. THE NEXUS BETWEEN OBTAINING THE LOAN AND PAYING INTEREST THEREON (LAYING OUT THE EXPENDITURE BY WAY OF INTER EST) FOR THE PURPOSE OF EARNING 5 I. T. APPEAL NO. 5945 (DEL) OF 2010 THE INTEREST ON THE FIXED DEPOSIT, TO DRAW AN ANALO GY FROM SECTION 37, WILL REQUIRE TO BE SHOWN BY THE ASSESSEE FOR APPLICATION OF THE NETTING PRINCIPLE. 9. ON READING OF THE AFORESAID CONCLUSION, IT IS CLEAR THAT A NEXUS HAS TO BE ESTABLISHED BETWEEN OBTAINING THE LOAN (AS IN TH E CASE OF THE ASSESSEE FROM THE BANK OF RAJASTHAN) AND PAYING INTEREST THEREON WITH THE PURPOSE OF EARNING INTEREST ON THE FIXED DEPOSITS WHICH HAVE BEEN PLED GED WITH THE BANK FOR THE PURPOSES OF OBTAINING THE LOAN. WHETHER THE NEXUS IS ESTABLISHED OR NOT IS THE QUESTION AND THAT HAS TO BE DETERMINED BY THE A UTHORITIES BELOW AS A QUESTION OF FACT. 7. AFTER CONSIDERING THE AFORE-MENTIONED DECISION A ND THE FACTS OF THE PRESENT CASE, WE FOUND THAT IN THE PRESENT CASE THE ASSESSING OFFICE R HAS TREATED THE INTEREST INCOME OF THE ASSESSEE AS INCOME FROM OTHER SOURCES AND NOT AS INCOME FROM BUSINESS. THEREFORE, THE INCOME OF THE ASSESSEE CANNOT BE TREATED AS BUSINESS INCOME. SEC ONDLY, FOR NETTING ALSO A NEXUS IS REQUIRED TO BE ESTABLISHED, AS HELD BY HONBLE DELHI HIGH COURT AND THE RELEVANT OBSERVATION HAS ALREADY BEEN RE-PRODUCED. IF IN VIEW OF THE AFORE-MENTIONE D POSITION THE FINDINGS OF THE LD. CIT (APPEALS) ARE CONSIDERED, THEN HE HAS ALREADY DIREC TED THE ASSESSING OFFICER TO EXAMINE AND ALLOW ANY EXPENDITURE UNDER SECTION 57 WHICH IS DIRECTLY ATTRIBUTABLE TO EARNING THIS INTEREST INCOME UNDER SECTION 56 OF THE ACT. WE FIND NO INFIRMITY IN SUCH FINDINGS RECORDED BY THE LD. CIT (APPEALS). HOWEVER, FOR THE SAKE OF BRINGING CLARI TY WE MODIFY THE DIRECTIONS GIVEN BY LD. CIT (APPEALS) TO ASSESSING OFFICER AND WE DIRECT THE AS SESSING OFFICER TO ALLOW INTEREST BORNE BY THE ASSESSEE ON THE FUNDS WHICH HAVE BEEN INVESTED BY T HE ASSESSEE TO OBTAIN FDRS ON WHICH INTEREST HAS BEEN EARNED BY THE ASSESSEE AND NEXUS IN THIS R EGARD HAS TO BE ESTABLISHED BY THE ASSESSEE. AFTER DETERMINING THE NET INTEREST IN THIS MANNER T HE ASSESSING OFFICER EXCLUDE THAT INTEREST ONLY FOR THE PURPOSES OF DEDUCTION UNDER SECTION 80-HHC. WITH THESE OBSERVATIONS, WE ALLOW GROUND NO. 1, FOR STATISTICAL PURPOSES. 8.1 APROPOS GROUND NO. 2, THE ASSESSING OFFICER FOU ND THAT THE ASSESSEE HAS INCURRED TELEPHONE EXPENSES OF RS.4,76,717/- AND HE FOUND TH AT TELEPHONE EXPENSES AT THE RESIDENCE OF 6 I. T. APPEAL NO. 5945 (DEL) OF 2010 THE PARTNERS AND MOBILE PHONES EXPENSES WERE CLAIME D AS PART OF BUSINESS EXPENSES. ACCORDING TO ASSESSING OFFICER THERE COULD BE USERS OTHER THA N WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND HE HAS DISALLOWED 1/5 TH OF THE EXPENDITURE AMOUNTING TO RS.95,343/- BEING 20 PER CENT OF THE TOTAL EXPENSES. THE LD. CIT (AP PEALS) HAS REDUCED THE SAME TO 10 PER CENT BY SUSTAINING THE DISALLOWANCE TO RS.47,672/-. THE LD. AR HAS SUBMITTED THE FOLLOWING DETAILS OF EXPENSES :- SL. NO . P A R T I C U L A R S . A M O U N T [RS.] 1. PAID TO MTNL FOR REGISTERED OFFICE. 53,859 2. PAID TO BSNL FOR FACTORY AT FARIDABAD, 2,14,056 HARYANA. 3. MOBILE PHONE EXPENSES FOR PARTNERS AND 2,08,802 EMPLOYEES. ------------------- TOTAL : 4,76,717 =========== 8.2 HE SUBMITTED THAT DISALLOWANCE, IF ANY, SHOULD HAVE BEEN RESTRICTED TO MOBILE PHONE EXPENSES OF PARTNERS AND EMPLOYEES AS OTHER PHONES ARE BEING USED EITHER AT REGISTERED OFFICE OF THE CONCERN OR AT THE FACTORY PREMISES OF THE CO NCERN. 8.3 ON THE OTHER HAND, IT WAS SUBMITTED BY THE LD. SR. DR THAT REASONABLE RELIEF HAS ALREADY BEEN GIVEN BY THE LD. CIT (APPEALS). THERE FORE, HIS ORDER ON THIS ISSUE SHOULD BE CONFIRMED. 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS IN THE LIGHT OF MATERIAL PLACED BEFORE US. AFTER CONSIDERING THE ENTIRETY OF FACTS , WE RESTRICT THE DISALLOWANCE TO RS.25,000/-. THE ASSESSING OFFICER WILL RE-WORK THE DISALLOWANCE ACCORDINGLY. 7 I. T. APPEAL NO. 5945 (DEL) OF 2010 10. APROPOS GROUND NO. 3, THE LEARNED AR OF THE ASS ESSEE HAS SUBMITTED THE FOLLOWING DETAILS :- SL. NO . P A R T I C U L A R S . A M O U N T [RS.] 1. EXPENSES FOR PETROL AND REPAIR 1,06,442 2. DEPRECIATION ON VEHICLE 6,70,578 3. INTEREST ON CAR LOAN. 1,25,386 . ------------------- TOTAL : 9,02,406 =========== 11. HE SUBMITTED THAT THE LD. CIT (APPEALS) HAS RES TRICTED THE DISALLOWANCE AT 10 PER CENT IN RESPECT OF THE ENTIRE EXPENSES. HE SUBMITTED THAT THE DISALLOWANCE COULD NOT BE EXTENDED TO DEPRECIATION OF VEHICLE AND INTEREST ON CAR LOAN. HE SUBMITTED THAT SECTION 38(2) OF THE ACT DOES NOT PERMIT FOR RESTRICTING THE DEPRECIATION ON CAPI TAL ASSETS. HE, THEREFORE, SUBMITTED THAT THE DISALLOWANCE TO THAT EXTENT SHOULD BE DELETED. 12. ON THE OTHER HAND, THE LD. SR. DEPARTMENTAL REP RESENTATIVE RELIED UPON THE ORDER OF THE LD. CIT (APPEALS). 13. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS IN THE LIGHT OF MATERIAL PLACED BEFORE US. WE FIND FORCE IN THE CLAIM OF THE ASSES SEE THAT THE DISALLOWANCE CANNOT BE MADE EITHER IN RESPECT OF DEPRECIATION OF VEHICLE OR INT EREST ON CAR LOAN. IF IT IS SO, THE DISALLOWANCE OF RS.90,240/- OUT OF EXPENSES OF RS.1,06,442/- WIL L BE ON VERY HIGHER SIDE. THE SAME IS RESTRICTED TO RS.20,000/-. THE ASSESSEE WILL GET R ELIEF ACCORDINGLY. 8 I. T. APPEAL NO. 5945 (DEL) OF 2010 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED, IN THE MANNER AFORESAID. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 29 TH JULY, 2011. SD/- SD/- [ G. E. VEERABHADRAPPA ] [ I. P. BANSAL ] VICE PRESIDENT. JUDICIAL MEM BER DATED : 29 TH JULY, 2011. *MEHTA * COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT. 9 I. T. APPEAL NO. 5945 (DEL) OF 2010