Vijai Electricals Ltd., Hyderabad V. ACIT, Hyderabad

ITA 742/HYD/2006

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53812 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 18-07-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 07-08-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V SRINIVAS
• Assessee Lawyers: S RAMA RAO
• Keywords: Capital asset; Revenue expenditure
• Section: 80HHC; 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 742/HYD/2006 ASSESSMENT YEAR : 2003-04 M/S. VIJAY ELECTRICALS LTD. HYDERABAD PAN: AAACV7259B VS. ACIT CIRCLE-3(3) HYDERABAD APPELLANT RESPONDENT APPELLANT BY: SHRI S. RAMA RAO RESPONDENT BY: SHRI V. SRINIVAS DATE OF HEARING: 0 3 .1 1 .2011 DATE OF PRONOUNCEMENT: 16.11.2011 O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE CIT(A)-IV, HYDERABAD DATED 15.6.2006 FOR THE AS SESSMENT YEAR 2003-04. 2. THE FIRST GROUND IN THIS APPEAL IS WITH REGARD TO D ISALLOWANCE OF INTEREST INCURRED ON THE CAPITAL BORROWED FOR AM ORPHOUS PROJECT 3. THE LEARNED DR STRONGLY RELIED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF APR LTD., SECUNDERABAD IN ITA NO. 68 9/HYD/2000 DATED 26.11.2007 WHEREIN THE TRIBUNAL HELD AS UNDER : '18. IN THE CASE BEFORE US, THE BORROWED FUNDS WER E ADMITTEDLY USED FOR PURCHASING NEW MACHINERIES AND REPLACEMENT OF EXISTING MACHINERIES. THEREFORE, TH ERE IS A DIRECT NEXUS BETWEEN THE BORROWED FUNDS AND THE UTILISATION/INVESTMENT. THE MATTER MAY BE ENTIRELY DIFFERENT, IN CASE THE BORROWED FUNDS WERE MIXED WI TH I.T.A NO. 742/HYD/2006 M/S. VIJAY ELECTRICALS LTD. =================== 2 ASSESSEE'S OWN FUNDS AND IT CANNOT BE FOUND OUT WHI CH FUNDS WERE USED FOR PURCHASING MACHINERIES. IN VIE W OF THE EXISTENCE OF NEXUS BETWEEN THE BORROWED FUND S AND THEIR INVESTMENT, IN OUR OPINION, THE CLAIM OF THE ASSESSEE CANNOT BE ALLOWED EITHER UNDER SEC. 36(1)( III) OR UNDER SEC. 37(1) OF THE INCOME-TAX ACT. MOREOVE R, THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF ACQUISI TION OR ESTABLISHING CAPITAL ASSET/PROFIT MAKING APPARAT US AND NOT IN THE PROCESS OF EARNING THE PROFIT. THER EFORE, THE CLAIM OF THE ASSESSEE CANNOT BE ALLOWED AS REVE NUE EXPENDITURE.' 4. HOWEVER, WE ARE NOT ABLE TO APPRECIATE THE ABOVE AR GUMENT OF THE LEARNED DR SINCE SIMILAR ISSUE WAS CONSIDERE D BY THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 809/HYD/ 2008 FOR A.Y. 2002-03. THE TRIBUNAL VIDE ORDER DATED 22 ND JULY, 2001 HELD AS FOLLOWS: '15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WHERE THE ASSESSEE BORROWS MONEY FOR EXPANSION OF ITS EXISTING BUSINES S THE INTEREST IS ALLOWABLE U/S. 36(1)(III) OF THE I. T. ACT. HOWEVER, WHEN THE MONEY IS BORROWED BESIDES EXISTIN G BUSINESS, MONEYS BORROWED FOR SETTING UP OF A NEW ACTIVITY OR UNIT, WE HAVE TO SEE WHETHER THE NEW AC TIVITY OR UNIT AND THE EXISTING BUSINESS CONSTITUTE THE S AME BUSINESS OR THEY ARE ENTIRELY SEPARATE AND DISTINC T BUSINESS ALTOGETHER. IF IT IS ENTIRELY SEPARATE AN D DISTINCT BUSINESS THE INTEREST IS NOT ALLOWABLE UNL ESS THE NEW UNIT GOES INTO PRODUCTION. IN THE PRESENT CASE ASSESSEE IS ENGAGED IN MANUFACTURING AND SALE OF AMORPHOUS AND CRGO TRANSFORMERS AND THEIR RELATED PRODUCTS. AMORPHOUS METAL IS ONE OF THE MAIN RAW MATERIAL FOR MANUFACTURING OF AMORPHOUS TRANSFORMER S, WHICH IS BEING IMPORTED. THE COMPANY IN THE PROCES S OF BACKWARD INTEGRATION COMMENCED THE SETTING UP OF THE PLANT FOR MANUFACTURING AMORPHOUS METAL FOR ITS CAPTIVE CONSUMPTION AT ITS EXISTING MANUFACTURING FACILITIES AT RUDRARAM, MEDAK DISTRICT. IN THE ASSESSMENT YEAR UNDER CONSIDERATION ASSESSEE BORROWED FUNDS IN THE NAME OF THE COMPANY FOR SETTI NG OF AN AMORPHOUS METAL PLANT. THE SETTING UP OF AMORPHOUS METAL PLAN CANNOT BE SAID THAT IT IS A I.T.A NO. 742/HYD/2006 M/S. VIJAY ELECTRICALS LTD. =================== 3 DIFFERENT UNIT FROM THE EXISTING UNIT. FURTHER, IN OUR OPINION, THE TEST FOR UNITY OF CONTROL AND COMMON MANAGEMENT IS EXISTING SINCE THE AMORPHOUS UNIT WAS CONTROLLED BY SAME MANAGEMENT. FURTHER THERE WAS INTERLACING AND INTERRELATED FUND AND ADMINISTRATIO N. 16. IN THE CASE OF STANDARD REFINERY & DISTILLERY L TD. (79 ITR 9) THE HONBLE SUPREME COURT HAS LAID DOWN THE PRINCIPLES WHICH SHOULD BE CONSIDERED IN DETERMININ G WHETHER TWO LINES OF BUSINESS CONSTITUTE THE SAME BUSINESS. THOSE PRINCIPLES ARE INTER-CONNECTION, INTERLACING, INTER-DEPENDENT AND UNITY FURNISHED BY THE EXISTENCE OF COMMON MANAGEMENT, COMMON BUSINESS ORGANISATION, COMMON ADMINISTRATION, COMMON FUND AND COMMON PLACE OF BUSINESS. IN THE PRESENT CASE THE AMORPHOUS METAL PLANT IS PART AND PARCEL OF SAME MANAGEMENT CONTROLLED BY SAME BOARD OF DIRECTORS AN D HEADED BY SINGLE MANAGING DIRECTOR. THE FUNDS FOR ALL THE DIVISIONS ARE COMMON. AS NARRATED BY THE LEARN ED AR, BUSINESS IS CARRIED ON AT COMMON PLACE AT PLOT NO. 28, IDA, BALANAGAR, HYDERABAD-500 037. THE PRODUC T MANUFACTURED BY AMORPHOUS METAL PLANT IS FOR CAPTIV E CONSUMPTION AT ITS EXISTING MANUFACTURING UNIT SINC E AMORPHOUS METAL IS ONE OF THE RAW MATERIALS FOR MANUFACTURING OF AMORPHOUS TRANSFORMERS. BEING SO, THIS IS NOTHING BUT ANCILLARY UNIT OF THE ASSESSEE FOR FACILITATING SMOOTH FUNCTIONING OF THE ASSESSEES U NIT. BEING SO, IT IS NOT POSSIBLE TO HOLD THAT AMORPHOUS METAL PLANT IS INDEPENDENT AND DISTINCT UNIT. IN O UR OPINION, THIS UNIT IS INTER-DEPENDENT WITH THE MAIN UNIT OF THE ASSESSEE AND IT IS TO BE TREATED AS AN EXTEN SION OF THE ASSESSEES EXISTING LINE OF BUSINESS AND AS A NEW UNIT. ACCORDINGLY, THE INTEREST INCURRED ON T HE BORROWING TO SET UP AMORPHOUS METAL PLANT IS TO BE ALLOWED AS REVENUE EXPENDITURE. THIS GROUND OF THE REVENUE IS DISMISSED.' 5. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL IN ASSES SEES OWN CASE, WE ARE INCLINED TO DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED. 6. THE NEXT GROUND IN THIS APPEAL IS THAT THE CIT(A) E RRED IN EXCLUDING THE FOLLOWING AMOUNTS : I.T.A NO. 742/HYD/2006 M/S. VIJAY ELECTRICALS LTD. =================== 4 S. NO. DESCRIPTION AMOUNT (RS.) 1. TESTING FEES 31,03,891 2. TESTING CHARGES RECEIVED 5,35,000 3. BALANCES WRITTEN BACK 11,563 4. JOB WORK CHARGES 1,03,23,300 5. TRANSFORMER REPAIR AND LABOUR CHARGES 19,98,274 6. BOND VIOLATION AMOUNT RECEIVED FROM EMPLOYEES 1,50,000 7. PENALTY RECEIVED 11,353 8. OTHERS 6,047 1,61,39,428 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON THIS ISSUE. THE ABOVE MENTIONED ITEMS CANNOT BE CONSIDERED AS INCOME OUT OF EXPORTS WHICH IS ENTITL ED FOR DEDUCTION U/S. 80HHC. CLAUSE (BAA) OF EXPLANATION TO SECTION 80HHC IS APPLICABLE IN RESPECT OF THE ABOVE ITEMS. BEING SO , THE LOWER AUTHORITIES ARE JUSTIFIED IN EXCLUDING THE ABOVE IN COME WHILE COMPUTING THE DEDUCTION U/S. 80HHC. OUR VIEW IS FO RTIFIED BY THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT VS . K. RAVINDRANATHAN NAIR (295 ITR 228) WHEREIN THE APEX COURT HELD AS UNDER: 'THE FORMULA IN SECTION 80HHC(3) PROVIDED FOR A FRACTION OF EXPORT TURNOVER DIVIDED BY THE TOTAL TU RNOVER TO BE APPLIED TO BUSINESS PROFITS CALCULATED AFTER DEDUCTING 90 PER CENT OF THE SUMS MENTIONED IN CLAU SE (BAA) OF THE EXPLANATION. PROFIT INCENTIVES LIKE R ENT, COMMISSION, BROKERAGE CHARGES, ETC., THOUGH THEY FORMED PART OF THE GROSS TOTAL INCOME, HAD TO BE EXCLUDED AS THEY WERE 'INDEPENDENT INCOME' WHICH HA D NO ELEMENT OF EXPORT TURNOVER. ALL THE FOUR VARIAB LES IN THE SECTION WERE REQUIRED TO BE KEPT IN MIND. IF A LL THE FOUR VARIABLES ARE KEPT IN MIND, IT BECOMES CLEAR T HAT EVERY RECEIPT IS NOT INCOME AND EVERY INCOME WOULD NOT NECESSARILY INCLUDE THE ELEMENT OF EXPORT TURNOVER. CLAUSE (BAA) OF THE EXPLANATION STATES THAT 90 PER CENT OF THE INCENTIVE PROFITS OR RECEIPTS BY WA Y OF I.T.A NO. 742/HYD/2006 M/S. VIJAY ELECTRICALS LTD. =================== 5 BROKERAGE, COMMISSION, INTEREST, RENT CHARGES OR AN Y OTHER RECEIPT OF LIKE NATURE INCLUDED IN BUSINESS P ROFITS HAVE TO BE DEDUCTED FROM BUSINESS PROFITS COMPUTED IN TERMS OF SECTIONS 28 TO 44D. IN OTHER WORDS, RECEI PTS CONSTITUTING INDEPENDENT INCOME HAVING NO NEXUS WIT H EXPORTS WERE REQUIRED TO BE DEDUCTED FROM BUSINESS PROFITS UNDER CLAUSE (BAA). A BARE READING OF CLAU SE (BAA)(1) INDICATES THAT RECEIPTS BY WAY OF BROKERAG E, COMMISSION, INTEREST, RENT CHARGES, ETC., FORMED PA RT OF THE GROSS TOTAL INCOME BEING BUSINESS PROFITS. BUT FOR THE PURPOSE OF WORKING OUT THE FORMULA AND IN ORDER TO AVOID DISTORTION IN ARRIVING AT THE EXPORT PROFITS CLAUSE (BAA) STOOD INSERTED TO SAY THAT ALTHOUGH INCENTIVE PROFITS AND' INDEPENDENT INCOMES' CONSTITUTED PART OF THE GROSS TOTAL INCOME, THEY HAD TO BE EXCLUDED FRO M GROSS TOTAL INCOME BECAUSE SUCH RECEIPTS HAD NO NEX US WITH THE EXPORT TURNOVER. PROCESSING CHARGES WHICH ARE PART OF GROSS TOTAL INCOME, FORM AN ITEM OF INDEPENDENT INCOME LIKE REN T, COMMISSION, BROKERAGE, ETC., AND, THEREFORE, 90 PER CENT OF THE PROCESSING CHARGES HAS ALSO TO BE REDUCED FR OM THE GROSS TOTAL INCOME TO ARRIVE AT THE BUSINESS PR OFITS AND, THEREFORE, IT HAS ALSO TO BE INCLUDED IN THE T OTAL TURNOVER IN THE FORMULA FOR ARRIVING AT THE BUSINES S PROFITS IN TERMS OF CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC(3). WHILE ARRIVING AT THE EXPORT PROFITS UNDER SECTION 80HHC(3) AS IT STOOD IN THE ASSESSMENT YEAR 1993-94 PROCESSING CHARGES ARE TO BE INCLUDED IN THE TOTAL TURNOVER.' 8. IN VIEW OF THE ABOVE JUDGEMENT OF THE SUPREME COURT , WE ARE INCLINED TO DECIDE THE ISSUE AGAINST THE ASSESSEE. 9. IN THE RESULT ASSESSEE'S APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH DECEMBER, 2011. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 16 TH DECEMBER, 2011 I.T.A NO. 742/HYD/2006 M/S. VIJAY ELECTRICALS LTD. =================== 6 COPY FORWARDED TO: 1. M/S. VIJAY ELECTRICALS LTD., C/O. M/S. PVRK NAGESWA RA RAO & CO., 109, METRO RESIDENCY, RAJBHANVANROAD, KHAIRATA BAD, HYDERABAD-500 082. 2. ASST. COMMISSIONER OF INCOME - TAX, CIRCLE - 3(3), HYDERABAD. 3. THE CIT(A) - IV , HYDERABAD . 4. THE CIT - I II , HYDERABAD. 5. THE DR A BENCH, ITAT, HYDERABAD TPRAO