SARUDHA INUDSTRIES, MUMBAI V. ITO WD 19(1)(3), MUMBAI

ITA 6106/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0943 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 24-08-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 19-11-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Keywords: Business income
• Section: 80HHC; 191; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'E' BENCH, MUMBAI BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 6106/MUM/2009 (ASSESSMENT YEAR: 2004-05) M/S. SARUDHA INDUSTRIES INCOME TAX OFFICER - 19)1) (3) B-14, PATEL PARK, OPP. P&T QRS. MUMBAI NEHRU ROAD, SANTACRUZ (E) VS. MUMBAI 400029 PAN - AALFS 5973 K APPELLANT RESPONDENT APPELLANT BY: SHRI MADHUR AGARWAL RESPONDENT BY: SHRI A.K. NAYAK O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER OF THE CIT(A)- XX, MUMBAI DATED 03.08.2009. 2. ASSESSEE HAS RAISED THE FOLLOWING FIVE GROUNDS: - 1. THE CIT(A) ERRED IN TREATING INTEREST OF RS.4,7 4,538/- ON BANK FDS TAKEN OUT OF SALES REALISATION/DEPB PROCEEDS AS INC OME FROM OTHER SOURCES AND DISALLOWING THE NETTING OUT OF SUCH INT EREST FROM INDIRECT COST IN THE CALCULATION OF DEDUCTION U/S 8 0HHC. 2. THE CIT(A) ERRED IN HOLDING THAT THE AR HAS NOT OBJECTED TO THE AOS FINDING THAT THE FD INTEREST IS IN THE NATURE OF IN COME FROM OTHER SOURCES, WHICH FINDING IS CONTRARY TO THE FACTS ON RECORD. 3. THE CIT(A) ERRED IN NOT APPRECIATING THAT IN THE EARLIER YEAR I.E. AY 03/04, THE AO HAS HIMSELF ALLOWED THE REDUCTION OF INTEREST FROM BANK FDS FROM INDIRECT COSTS. 4. THE CIT(A) ERRED IN NOT FOLLOWING THE DECISION O F THE HON'BLE ITAT FOR A.Y. 01/02 IN THE APPELLANTS OWN CASE. 5. THE CIT(A) ERRED IN NOT ALLOWING DEDUCTION U/S 8 0HHC WITH RESPECT TO THE SALES TAX REFUND OF RS.4082. 3. WE HAVE HEARD THE LEARNED COUNSEL FOR THE ASSESSEE AND THE LEARNED D.R. IN THIS REGARD. ITA NO. 6106/MUM/2009 M/S. SARUDHA INDUSTRIES 2 4. GROUND NOS. 1 TO 4 PERTAINS TO THE ISSUE OF TREATIN G INTEREST OF RS.4,74,538/- ON BANK FDS TAKEN OUT OF SALES REALIS ATION/DEPB PROCEEDS AS INCOME FROM OTHER SOURCES AND DISALLOWING THE NETTI NG OUT OFF SUCH INTEREST FROM THE INDIRECT COST IN THE CALCULATION OF DEDUCT ION UNDER SECTION 80HHC. 5. DURING THE ASSESSMENT PROCEEDINGS THE A.O. WAS OF T HE VIEW THAT INTEREST EARNED BY THE ASSESSEE WAS ON ACCOUNT OF I TS SURPLUS MONEY KEPT IN THE SHAPE OF FDS, THEREFORE, RELYING ON THE DECISIO N OF THE HON'BLE KERALA HIGH COURT IN THE CASE OF CIT VS. JOSE THOMAS 253 I TR 533 AND THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. DR. V.P. GOPINATHAN 248 ITR 449 HELD THAT THE ENTIRE INTEREST INCOME OF RS. 4,74,538/- IS TO BE TREATED AS INCOME FROM OTHER SOURCES AND ACCORDINGLY THE AM OUNT ADJUSTED IN THE INDIRECT COST WAS WITHDRAWN AND ALLOWED ONLY THE AM OUNT OF RS.13,626/-, WHICH WAS INTEREST PAID OUT OF BORROWALS AS AN INDI RECT COST IN THE COMPUTATION. THE CIT(A) CONFIRMED THE SAME. 6. AFTER EXAMINING THE RECORD AND THE FACTS AND CONSID ERING THE ARGUMENTS OF THE LEARNED COUNSEL, WHO FAIRLY ADMITT ED THAT THE ISSUE IS HELD AGAINST THE ASSESSEE BY THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF SHAH ORIGINALS, THE ISSUE HAS TO BE DEC IDED AGAINST THE ASSESSEE. THE LEARNED COUNSEL, HOWEVER, SUBMITTED THAT THE AS SESSEE HAS IN FACT ADJUSTED THE INTEREST IN INDIRECT COST WORKING BY A DOPTING THE NETTING PRINCIPLE AND THE DECISION OF THE HON'BLE BOMBAY HI GH COURT IN THE CASE OF ASEAN STAR IS ALSO AGAINST THE ASSESSEE. 7. THE LAW ON THIS POINT HAS BEEN CRYSTALLISED NOW BY THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. KRA FT LAND INDIA 162 TAXMAN 123 IS ALSO ON SIMILAR FACTS WHERE THE HON'B LE DELHI HIGH COURT HAS HELD THAT INTEREST RECEIVED ON FDRS PLEDGED FOR OBT AINING SHIPPING LOAN/DEPOSITORY LOAN WAS NOT BUSINESS INCOME. SIMIL ARLY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RAVI RATNA EXPORTS (P.) LTD. 246 ITR 443 HELD THAT THE A.O. HAD RECORDED FINDING OF FACT THA T INTEREST INCOME FROM FIXED DEPOSIT WAS INCOME FROM OTHER SOURCES. HENCE, IT CANNOT BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION 80HHC. THE HON'BLE HIGH COURT HAS FURTHER DISCUSSED AS UND ER: - ITA NO. 6106/MUM/2009 M/S. SARUDHA INDUSTRIES 3 THIS APPEAL RELATES TO THE ASSESSMENT YEAR 1989-90 . IN THE SAID ASSESSMENT YEAR, THE ASSESSEE RECEIVED RS.35,000 AS INTEREST ON FIXED DEPOSITS. THE ASSESSEE CLAIMED INTEREST INCOME AND INCLUDED THE SAME IN BUSINESS PROFITS IN THE FOLLOWING FORMULA, VIZ., BUSINESS PROFITS X EXPORT TURNOVER TOTAL TURNOVER TO ARRIVE AT EXPORT PROFITS ON WHICH THE ASSESSEE C LAIMED DEDUCTION UNDER SECTION 80HHC OF THE ACT. THE DEPARTMENT TREA TED THE INCOME FROM INTEREST AS INCOME FROM OTHER SOURCES. HOWEVER, THE TRIBUNAL INCLUDED THE SAID INTEREST INCOME IN THE BUSINESS PROFITS. H ENCE, THE DEPARTMENT HAS COME IN APPEAL. BEFORE APRIL 1, 1992, DISTORTIO N AROSE IN DETERMINING EXPORT PROFITS. THE ASSESSEE USED TO INFLATE THE BU SINESS PROFITS IN THE ABOVE FORMULA BY INCLUDING RECEIPTS WHICH HAD NO RE LATION WITH EXPORT ACTIVITIES. IN CASES OF COMPOSITE BUSINESS, EVEN WH ERE THE COMPONENT OF LOCAL SALES FAR EXCEEDED SALE PROCEEDS FROM EXPORT ACTIVITY, RECEIPTS LIKE RENT, INTEREST, LABOUR COMMISSION WERE INCLUDED IN BUSINESS PROFITS IN THE ABOVE FORMULA. IN THE CASE OF CIT V. KANTILAL CHHOT ALAL [2000] 246 ITR 440 (BOM) (INCOME-TAX APPEAL NO. 533 OF 2000), THIS COURT HAS EXCLUDED SUCH RECEIPTS FROM BUSINESS PROFITS. FURTHER, THIS COURT HAS HELD THAT THE AMENDING LAW WHICH CAME INTO FORCE FROM APRIL 1, 19 92, BY WHICH CLAUSE (BAA) HAS BEEN INTRODUCED IN THE EXPLANATION TO SEC TION 80HHC, ALL SUCH RECEIPTS WHICH HAVE NO NEXUS WITH THE EXPORT ACTIVI TY, STAND EXCLUDED. THIS COURT HAS HELD THAT CLAUSE (BAA) IS CLARIFICAT ORY. HENCE, INTEREST INCOME FROM FIXED DEPOSIT CANNOT BE INCLUDED IN BUS INESS PROFITS. MOREOVER, IT MAY BE MENTIONED THAT IN THE CASE OF C IT V. SHIRKE CONSTRUCTION EQUIPMENTS LTD. [2000] 246 ITR 430 (BO M) (ITA NO. 133 OF 1999), THIS COURT HAS TAKEN THE VIEW THAT BUSINESS PROFITS WERE REQUIRED TO BE COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS WHICH, IN TURN, REFERS TO SECTION 28 TO SECTION 44D OF THE IN COME-TAX ACT. IN THE CASE OF CIT V. K.K. DOSHI AND CO. [2000] 245 ITR 849 (BO M) (ITA NO. 77 OF 2000), THIS COURT HAS ONCE AGAIN REITERATED THAT EV EN BEFORE APRIL 1, 1992, RECEIPTS WHICH DID NOT HAVE NEXUS WITH THE EX PORT ACTIVITY CANNOT BE INCLUDED IN BUSINESS PROFITS. IN THE PRESENT MAT TER, WE MAY MENTION THAT THE ASSESSING OFFICER HAS RECORDED A FINDING O F FACT THAT THE SAID INTEREST INCOME FROM FIXED DEPOSITS WAS INCOME FROM OTHER SOURCES. THE TRIBUNAL HAS NOT CONSIDERED THIS ASPECT. IN THE CAS E OF GODAVARI SUGAR MILLS LTD. (NO. 2) V. CIT [1991] 191 ITR 359, THE D IVISION BENCH OF THIS COURT TOOK THE VIEW, ON THE FACTS, THAT THE ASSESSE E HAD NO EVIDENCE TO SHOW THAT THE MONIES ON WHICH THE INTEREST WAS EARN ED WERE ADVANCED IN THE COURSE OF THE ASSESSEES BUSINESS AND, THERE FORE, THE DIVISION BENCH HELD THAT INTEREST INCOME WAS TAXABLE AS INCO ME FROM OTHER SOURCES. IN THIS MATTER, WE ARE CONCERNED WITH AN A PPEAL UNDER SECTION 260A. IN THIS MATTER, THE ASSESSING OFFICER HAS REC ORDED A FINDING OF FACT THAT INTEREST INCOME WAS TAXABLE AS INCOME FROM OTH ER SOURCES. IN THE CIRCUMSTANCES, SUCH INCOME CANNOT FALL UNDER THE HE AD PROFITS AND GAINS OF BUSINESS. HENCE, SUCH INCOME CANNOT BE IN CLUDED IN BUSINESS PROFITS IN THE ABOVE FORMULA. THEREFORE, ON BOTH CO UNTS, THE APPEAL STANDS ALLOWED. EVEN IF IT IS HELD THAT INTEREST IN COME WAS A BUSINESS ITA NO. 6106/MUM/2009 M/S. SARUDHA INDUSTRIES 4 INCOME, THE SAME WAS NOT INCLUDIBLE IN BUSINESS PRO FITS IN THE ABOVE FORMULA. ON THE OTHER HAND, AS STATED ABOVE, THE AS SESSING OFFICER HAS HELD THAT THE INTEREST INCOME WAS INCOME FROM OTHER SOURCES. IF THAT BE THE CASE, THEN SUCH AN INCOME CANNOT COME WITHIN TH E AMBIT OF SECTION 28 TO SECTION 44D OF THE INCOME-TAX ACT. IT CANNOT COME UNDER THE PROFITS AND GAINS OF BUSINESS. THEREFORE, LOOKING AT THIS M ATTER FROM EITHER POINT OF VIEW, THE APPEAL NEEDS TO BE ALLOWED. 8. SIMILAR VIEW WAS ALSO TAKEN BY THE HONBLE BOMBAY H IGH COURT IN THE CASE OF CIT VS. M/S. SHAH ORIGINALS ITA. 431 OF 2008 DATED 22-04-10 WHEREIN IT WAS HELD THAT THE INTEREST INCOME IS TO BE TREATED AS INCOME FROM OTHER SOURCES AND DEDUCTION UNDER 80HHC CANNOT BE ALLOWED. IN VIEW OF THE JUDGEMENTS OF THE HON'BLE BOMBAY HIGH C OURT AND THE JUDGEMENTS OF THE HON'BLE DELHI HIGH COURTS AND ALS O CASES RELIED UPON BY THE AUTHORITIES IT IS TO BE HELD THAT INTEREST I NCOME EARNED ON FIXED DEPOSITS WITH THE BANK FOR THE PURPOSE OF MARGIN MO NEY OR LETTER OF CREDIT CANNOT BE CONSIDERED AS PROFIT FROM BUSINESS AND HA S TO BE TREATED AS INCOME FROM OTHER SOURCES. 9. THE A.O. WAS CORRECT IN TREATING IT AS INCOME FROM OTHER SOURCES AND CONSEQUENTLY TAKING THE GROSS INTEREST RECEIVED OUT OF COMPUTATION OF DEDUCTION U/S 80HHC. IN VIEW OF THE ABOVE FACTS AND LEGAL PRINCIPLES, THE ORDER OF THE CIT(A) STANDS CONFIRMED. GROUNDS ARE R EJECTED. 10. GROUND NO. 5 PERTAINS TO THE ISSUE OF SALES TAX REF UND OF RS.4,083/-. 11. ASSESSEE HAS RECEIVED THE ABOVE AMOUNT ON SALES TAX AS REFUND AND ADJUSTED THE SAME IN THE COMPUTATION OF DIRECT AND INDIRECT COST WHICH THE A.O. TREATED AS INCOME NOT PERTAINING TO BUSINESS. THE CIT(A) ALSO UPHELD THE SAME HOLDING THAT SALES TAX REFUND PERTAINS TO DEPB LICENCE AND HENCE THE SAME CANNOT BE CONSIDERED AS PART OF EXPORT ACT IVITY. 12. THE LEARNED COUNSEL BROUGHT TO OUR NOTICE THE COMPU TATION OF INCOME IN EARLIER YEARS WHEREIN SALES TAX WAS CLAIMED AS P ART OF INDIRECT COST IN WORKING OUT DEDUCTION U/S 80HHC. IN A.Y. 2002-03 TH E AMOUNT CLAIMED WAS RS.16/-, IN A.Y. 2001-02 THE AMOUNT CLAIMED WAS RS.17,017/- AND IN A.Y. 2000-01 THE AMOUNT CLAIMED WAS RS.16,567/-. SI NCE THE ASSESSEE HAS CLAIMED SALES TAX AMOUNT AS EXPENDITURE IN EARLIER YEARS, THE REFUND OF THE ITA NO. 6106/MUM/2009 M/S. SARUDHA INDUSTRIES 5 SALES TAX AMOUNT ALSO HAS TO BE CONSIDERED AS PART OF THE DIRECT/INDIRECT COST AND TO BE ADJUSTED ACCORDINGLY. THE CIT(A) CON FIRMATION THAT THE REFUND PERTAINS TO DEPB LICENCE HENCE CANNOT BE ALLOWED IS NOT CORRECT AS THE AMOUNT OF DEPB LICENCE IS ALSO CONSIDERED FOR THE P URPOSE OF DEDUCTION UNDER SECTION 80HHC. CONSEQUENTLY THE REFUND NOW HA S TO BE GIVEN CREDIT. THE A.O. IS DIRECTED TO ADJUST THE AMOUNT AS PART O F BUSINESS INCOME. THIS GROUND IS ALLOWED. 13. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JULY 2010. SD/- SD/- (N.V. VASUDEVAN) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 30 TH JULY 2010 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XX, MUMBAI 4. THE CIT XIX, MUMBAI CITY 5. THE DR, E BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.