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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: SHRI PRADIP KUMAR KEDIA & SHRI MAHAVIR PRASAD
PER PRADIP KUMAR KEDIA - AM:
The captioned appeal has been filed at the instance of the Revenue against the order of the CIT(A)-09, Ahmedabad (‘CIT(A)’ in short), dated 14.08.2015 arising in the assessment order dated 31.01.2014 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning A.Y. 2011-12.
The substantive grounds of appeal raised by the Revenue reads as under:-
ITA No.3115/Ahd/2015 [Add. CIT vs. Priyal International Pvt. Ltd.] A.Y. 2011-12 - 2 - “1. The Ld. CIT(A) has erred in law and on facts in holding that interest on bank FDRs of Rs. 9,61,73,903/- are taxable under the head ‘Profit and gains of Business’ and not under head ‘Income from Other Source’ as held by the AO and thereby deleting the disallowance of deduction u/s 10AA of Rs. 1,98,09,720/-. 2. The Ld. CIT(A) has erred in law and on facts by not appreciating that interest income on fixed deposits with bank has no first degree of nexus with the eligible activity and hence the assessee is not entitled for deduction u/s 10AA of the Income Tax Act. 3. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance u/s 14A of Rs. 2,07,682/-. 4. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of interest on advance given for purchase of immovable property of Rs. 4,83,675/-.”
Ground No. 1 and 2 concerns eligibility of deduction of interest on fixed deposit amounting to Rs. 9,61,73,903/- for the purposes of Section 10AA of the Act. The assessee company is engaged in the business of trading in bullion commodities etc. The return filed by the assessee company was subjected to scrutiny assessment. In the course of the scrutiny assessment, the Assessing Officer (AO) noticed that the assessee had inter alia claimed deduction under section 10AA at Rs. 1,98,09,720/- for a unit at SEZ. It was further noticed that the assessee had also included interest on fixed deposits Rs. 9,61,73,903/- as profits of the business of SEZ unit and considered it as income chargeable under the head ‘profits and gains of business and profession’ for the purposes of the computation of deduction under section 10AA of the Act. It was thus noticed that the assessee has eventually claimed deduction under section 10AA on the profits of SEZ business after including interest on fixed deposits.
3.1. The AO took a view that interest on fixed deposits is not akin to ‘profits derived’ as laid down in section 10AA (7) of the Act and consequently such interest income do not form part of the business
ITA No.3115/Ahd/2015 [Add. CIT vs. Priyal International Pvt. Ltd.] A.Y. 2011-12 - 3 - operation of the SEZ unit. The assessee, in response, contended before the AO that the fixed deposits have been made with the bank to cater to the credit facility enjoyed by the assessee from the bank as margin money to enable its suppliers to obtain payment from bank against the goods imported by the assessee. The assessee accordingly contended that fixed deposits placed by the assessee are integral part of the business operation of SEZ units. The AO however relied on certain case laws and held that where such interest income earned by the assessee do not have any first degree of nexus with the eligibility business activity such interest income out of purview of deduction available under section 10AA of the Act. The AO accordingly held the income to be ‘income from other sources’ and denied the claim of deduction on interest income from fixed deposit and consequently increased the taxable income of the assessee by Rs. 1,98,09,270/- being the positive income from SEZ unit.
3.2. Aggrieved, the assessee preferred appeal before the CIT(A) and submitted that the AO has misdirected itself in law and on facts in denying deduction on interest generated from FDR where the FDRs have been obtained to avail credit facility for SEZ business. It was submitted on facts that the goods are imported by the assessee for which buyers credit is obtained for a credit period of 360 days from foreign branch of an Indian bank as well as a foreign bank. The payments to foreign branch of Indian bank/ foreign bank are made after 360 days by bankers of SEZ unit. For this purpose, the SEZ unit has obtained Letter of Undertaking (LOU) and buyers credit facilities with their bankers. The SEZ unit has to make fixed deposits (Margin Money) for equivalent of maturity value of 100 per cent LOU amount. After the end of 360 days, the banker makes the payment directly to the foreign branch of Indian bank/foreign bank by liquidating the bank FDRs. The SEZ unit has incidentally earned interest on such bank FDRs. The assessee thus made detailed submission on business cycle
ITA No.3115/Ahd/2015 [Add. CIT vs. Priyal International Pvt. Ltd.] A.Y. 2011-12 - 4 - as reproduced in the order of the CIT(A) and essentially submitted that while the sales are made on spot, the purchases are obtained on credit with the help of the fixed deposits placed with the bank as margin money against such purchases. The assessee accordingly submitted before the CIT(A) that in the facts and the circumstances of the case where the fixed deposits were kept owing to mandate of the bank to get Letter of Credit to avail credit period on purchases, the interest income on such fixed deposits is directly and inextricably linked with the business of the assessee. The CIT(A) examined the submissions made by the assessee as well as long line of judicial precedents and concluded that the fixed deposits in the instant case are integral part of the business operations of the SEZ unit and consequently the incidental interest income arising from such fixed deposits are nothing but ‘business income’. For this proposition the CIT(A) took note of several decisions of the Hon’ble Gujarat High Court.
3.3. The CIT(A) accordingly held that the AO was not justified in excluding the interest income earned from fixed deposits but in the nature of business income for the purposes of computation of deduction under section 10AA of the Act. The relevant operative para of the order of CIT(A) in this regard is reproduced here under:-
“5. I have perused the order u/s. 143(3) the submissions made in this regard and various judgments cited by the A.O. and also by the appellant. The basic controversy is with regard to the head of income under which interest income from FDRs with the bank is to be taxed. These FDRs are created as a security for margin money for availing buyers credit facility in the course of business. The A.O. is of the view that the interest earned from the bank on FDRs cannot be treated as income derived from export activity of SEZ unit. The A.O. is also of the view that since the appellant is not in the business of banking or finance, therefore, the interest income cannot be said to be having derived from the export activity. In the order u/s 143(3), number of case laws have been cited by the AO to stress that such interest income is to be assessed under the head income from other sources and thus to deny deduction u/s. 10AA on the interest income earned on such FDRs which is approximately Rs. 9,61,73,903/-. The
ITA No.3115/Ahd/2015 [Add. CIT vs. Priyal International Pvt. Ltd.] A.Y. 2011-12 - 5 - A.O is of the view that there is no direct nexus between the interest income earned from FDR and the export activity carried on by the appellant.
5.1 The appellant has contended that to carry out purchase of gold, bullion etc on credit against letter of credit or buyer's credit the banks compulsorily required deposit of margin money in the form of fixed deposit. After a cycle of 30 days / 90 days these FDRs automatically gets liquidated in favour of the seller. The interest on these FDRs is earned for the intervening period of 30 / 90 days, the period for which the FDR is held with the bank, which subsequently gets credited in the appellant's bank account. The appellant fundamentally stressed this aspect that FDRs are not created out of the surplus funds or free funds but created as a security to the sellers were provided gold bullion etc. to the appellant. It was also emphasized that there is compulsion to make a fixed deposit in the form of FD in margin money.
5.2 The appellant also pointed the mode of deduction to be computed u/s. 10AA which is provided in the I.T. Act in section 10AA(7). This formula which reads as under :-
(7) For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on 16[by the undertaking]:
Profit derived from export = Profit of business undertaking Export turnover of undertaking
The appellant, thus, stressed the point that the word 'derived' from is missing while computing deduction u/s. 10AA which is part of computation for deduction u/s 80HHC and 80HH etc.
5.3 At the very outset it can be said that the assessee's is eligibility for deduction u/s. 10AA is not disputed. The assessee had justified its claim for deduction u/s. 10AA during the course of assessment by producing relevant documents, approvals which are required to the SEZ undertaking. The only dispute is with respect to the interest income from bank FDRs as a margin money for the purposes of business. I have perused the various case laws cited by the A.O. in the order u/s.143(3) and I find that most of the judgments cited by the A.O. either pertains to old Sec.10A,10B,HHC or 80HH/80I. The old section 10A and 10B have been substantially been modified with effect from 01.04.2001 with an insertion of specific formula to compute deduction. Accordingly, I am of the view that these judgments does not applied to the new provision and the facts of this case. I may also add that
ITA No.3115/Ahd/2015 [Add. CIT vs. Priyal International Pvt. Ltd.] A.Y. 2011-12 - 6 - judgments relating to 80HHC, 80HH or 80I may not also be applied in the instant case as the language used in this Section is altogether different from Sec. 10AA of the I.T. Act. In Sec. 8OHHC, 80HH and 80I there is ample discussion by various judgments on the word 'income derived from.’ However, I am compelled to add that the word 'derived cannot be juxtapose of Sec. 10AA as 10AA(7) which clearly laid down methodology to compute the eligible deduction u/s. 10AA'. Also to point out specifically, the word 'derived from' is missing in the numerator of the formula which is reproduced above. I also agree with the contention of the appellant that judgments cited by the AO in order u/s 143(3) are outdated judgments and does not apply here.
5.4 Further, It may be pointed out that Section-5 of the I.T. Act levies a charge of tax on the total income of assessee. Provisions relating to computation of income are prescribed in Chapter-IV of the I.T. Act. For this purpose Sec-14 classifies income under five known heads. Out of the 5 heads, there is a residuary head namely income from other sources. It may be pointed out that these heads of income are only the particular class of income and they are not water tight division for various source of income, to put it in otherwise, an income from same source can fall under one or more heads depending upon the facts and circumstances of the case. In determination the head of income under which a particular income falls one has to refer to the charging section under each head. If specifically covered by a charging section, the income cannot be taxed in any other head [refer CIT vs Smt T.P. Sidhwa 133 ITR 840]. The Hon’ble Apex court in the case of Nalinikant Ambalal Modi vs CIT 61 ITR 428 have held that in case income seems to fall under two or more heads, one has to decide the issue based on commercial notions of a practical manner. A similar view was also taken by Hon'ble Supreme Court in Continental Construction Ltd vs CIT 195 ITR 81 wherein such observation was made in page 109 of the order by the Hon'ble Supreme Court.
"But we are unable to agree with him that there is an antithesis between the categories of income so specified and the expression "profits and gains". It is no doubt true that, wherever the statute refers to the "profits and gains" of a business, it has in mind the income chargeable under the Act under that head - head "D" specified in Section 14 of the Act - but the other categories of income referred to in the various sections are not correlated to the head-wise classification of Section 14. It is well known that items of interest, dividends and other items of remuneration are not always referable to any particular head. They may be assessable as "business" income or income from other sources. In particular, the receipts by way of royalty, fee, commissions and similar payments may be derived in the course of a business or profession and constitute part of the profits and gains of such business or profession."
ITA No.3115/Ahd/2015 [Add. CIT vs. Priyal International Pvt. Ltd.] A.Y. 2011-12 - 7 - 5.5 To proceed further, I find that in the instant case the appellant primarily has created these FDRs as a margin money for its supplier. Essentially the suppliers encash these FDRs after the specified period of 30 days / 90 days depending upon the terms and conditions, necessary documents including the letter of credit and the documents from the banks were filed in paper book, sample of which were perused by me. I find that creating an FDR as a margin money is not random practice but a uniform practice for all the suppliers with which the appellant has made purchases in the relevant assessment year. I also find that the appellant was under compulsion to create these FDRs as margin money which acted as a security for its suppliers. I have no hesitation in concluding that the appellant was compelled to create these FDRs and had no free will in not creating FDR while making purchase for its gold, bullion etc. creation of the FDR is thus essential to carry out the business and export activity of the appellant.
5.6 It was pointed out that there are certain decisions of Hon'ble Gujarat High Court where the Hon'ble Court has discussed the issue of taxability of interest income from FDR as business income where there was a compulsion for making fixed deposits with banks. The Hon'ble High Court of Gujarat in Empire Pumps Ltd vs ACIT 90CCH 196 (Guj.) have held a similar view. Further in Shipra Ship Builders Pvt. Ltd. vs ACIT Tax Appeal No.1281 of 2006 the Hon'ble High Court of Gujarat has re- inforced this view.
5.8 Aforesaid conclusion is re-inforced by the fact that such FDRs are created under the compulsion as a business need or business expediency on the appellant. I have already pointed out that such FDRs are not out of free or surplus funds available with the appellant. I am inclined to conclude that such interest income has a very direct nexus with the business carried on by the appellant. Under no stretch of imagination such nexus could be said to be a remote nexus or nexus of second or third degree to the business carried on by the appellant. I am of the view that such interest income is to be taxed under the head 'Businessand Profession' because of specific facts and circumstances of this case. This is conformity to the judgment of Hon'ble Supreme Court as highlighted on page 11 and also decisions of Hon'ble Gujarat High Court in Empire Pumps & Shipra Builders.
5.9 Considering all the above, I am of the view that A.O. is not justified in making a disallowance of Rs. 1,98,09,270/-. The A.O. is directed to allow the claim of the assessee u/s. 10AA amounting to Rs. 1,98,09,270/-. Further, since deduction u/s. 10AA is fully allowed, this deduction shall be reduced by Rs.5,l7,104/- as held by the A.O. in para-4 of his order u/s.143(3). Ground no. 3 is therefore dismissed.”
ITA No.3115/Ahd/2015 [Add. CIT vs. Priyal International Pvt. Ltd.] A.Y. 2011-12 - 8 - The CIT(A) accordingly allowed deduction under section 10AA as per the mode of computation provided in sub section 7 to section 10AA of the Act.
3.4. Aggrieved, the Revenue preferred appeal before the Tribunal.
3.5 The learned DR for the Revenue relied upon the order of the AO.
3.6. The Ld. AR for the assessee, on the other hand, relied upon the order of the CIT(A) and also the decision of Full Bench of Karnataka High Court in CIT vs Hewlett Packard Global Soft Ltd. (2017) 87 taxmann.com 182 (Karnataka)(FB) and the decision of the coordinate bench in DCIT vs Ausom Enterprise Ltd. ITA No. 1519/Ahd/2016 order dated 15/10/2018 for the proposition that interest from bank FDR kept as margin money is required to treated as ‘business income’ and consequently eligible for deduction under section 10AA of the Act as per statutory formula provided under section 10AA(7) of the Act.
We have carefully considered the rival submissions and perused orders of the authorities below as well as case laws cited. The substantive question raised before the tribunal is whether interest from fixed deposits could be treated as the assessee as ‘business income’ of the assessee in the facts and circumstances of the case and whether such interest income can be held to be ‘derived from’ eligible business of the assessee for the purposes of claiming deduction under section 10AA of the Income Tax Act, 1961. The assessee in the instant case has established a unit in the Special Economic Zone (SEZ). For its imports of goods in SEZ unit, the assessee has obtained certain buyers credit facilities from banks for payment to their foreign suppliers. For this purpose, it has placed fixed deposits with banks as margin money on which it has earned interest (interest on FDRs). The assessee has included such interest on FDRs as ‘profits of the business’ of SEZ unit and considered it has taxable under the head ‘profits and gains of
ITA No.3115/Ahd/2015 [Add. CIT vs. Priyal International Pvt. Ltd.] A.Y. 2011-12 - 9 - business and profession’. The assessee has thus claimed deduction under section 10AA on the profits of SEZ business after including the interest on FDRs. The assessee has claimed that as per the wordings of section 10AA(7) read with section r.w.s. 10AA(7), the deduction is available on ‘profits derived from the SEZ unit’. What is ‘profits derived’ has been prescribed in section 10AA(7) of the Act. As per section 10AA(7), the profits derived is equivalent to ‘profits of the business’ of SEZ unit. For such action, the assessee has relied upon the decision of Hewlett Packard (supra) and the decision of the coordinate bench in Ausom Enterprises in addition to the elaborate findings of the CIT(A). We notice from the assessment order that the AO has disputed this position taken by the assessee and held that the interest income on FDRs cannot be regarded as income derived from SEZ unit or having the first degree of nexus with the eligible unit. The CIT(A), on the other hand, has found merit in the plea of the assessee that interest on FDR is to be regarded as business income in view of the direct utility of the FDRs for its business operations. The CIT(A) thereafter concluded that the assessee is eligible for deduction under section 10AA in view of the statutory formula provided under section 10AA(7) of the Act.
4.1. At this stage, we take note of section 10AA(7) of the Act which explicably expounds the ‘profit derived’ from export of such articles or things to mean the amount which bears to the ‘profits of the undertaking’, the same proportion as the export turn-over bears to the total turnover of the business carried on by the eligible undertaking. Thus, what is required to be determined is whether the interest income qualifies as ‘the profits of the business of the undertaking’ in contrast to whether it is ‘profit derived from the business’. In other words, for determining the scope of section 10AA(7), the reference to the expression ‘derived from’ is not material. To expound further ‘profits of the business of the undertaking’ is wider than ‘profits and gains
ITA No.3115/Ahd/2015 [Add. CIT vs. Priyal International Pvt. Ltd.] A.Y. 2011-12 - 10 - derived by an undertaking’. In short, the profits derived from export have been equated with business profits of the undertaking as per the formula laid down by section 10AA(7) of the Act. Thus, the direct nexus or proximity of business income with the export activity is not necessary in view of section 10AA(7) of the Act. In view of the aforesaid discussion the CIT(A), in our view, has rightly treated the interest income to be eligible for deduction under section 10AA of the Act as per the findings noted in earlier paragraphs.
4.2. We also find substantial merit in the action of the CIT(A) in holding the interest income from FDRs to be ‘business income’ of SEZ unit consistent with the position taken by the assessee in view of the purpose and utilization of FDRs for its business operation. At this stage, we profitably refer to the decision of the Hon’ble Karnataka High Court in Hewlett Packard (supra) wherein it was held that interest income earned by the assessee on the deposits placed by it with banks in the ordinary goods of its business would not be taxable as ‘income from other source’ under section 56 of the Act and is required to be treated as business income of the assessee regardless of the fact that assessee is not engaged in any banking/financial activity. The interest income thus is eligible for deduction under section 10AA of the Act on such income once it falls in the ambit of the business income. We also take notice of the decision of the coordinate bench in Ausom Enterprise where, in the similar circumstances, the interest from bank FDR kept as margin money was treated as business income by relying upon the decision of the Hon’ble Gujarat High Court in the case of Hari Orgochem Pvt. Ltd. in tax Appeal No. 256 and 205 of 2000. Thus the CIT(A) in our considered view has rightly hold interest income from FDRs to be ‘business income’ and consequently eligible for deduction under section 10AA of the Act in terms of formula provided under section 10AA(7) of the Act. We thus find no
ITA No.3115/Ahd/2015 [Add. CIT vs. Priyal International Pvt. Ltd.] A.Y. 2011-12 - 11 - infirmity in the conclusion drawn by the CIT(A). We thus decline to interfere.
In the result Ground No. 1 and 2 of the Revenues appeal are dismissed.
Ground No. 3 concerns disallowance of Rs. 2,07,682/- under section 14A of the Act. The CIT(A) granted relief to the assessee from such disallowance on the ground that the interest free funds at the disposal of the assessee is in excess of the corresponding investments yielding tax free income. On such facts, we do not see any reason to interfere with the aforesaid findings in view of the decision of the Hon’ble Gujarat High Court in CIT vs Suzlon Energy Ltd.215 taxman 272 (Guj.) and CIT vs GIDC 218 taxman 142 (Guj.) and other judicial precedents.
Ground No.4 concerns disallowance of interest on advance given for purchase of immovable property amounting to Rs. 4,83,675/-. The perusal of the order of the CIT(A) shows that the assessee had demonstrated before the first appellate authority that the advances given for purchases of immovable property is far in excess of the interest free funds. The relevant operative para of the order of the CIT(A) is reproduced hereunder for ready reference:-
Decision “9. With respect to ground no. 4 relating to disallowance of Rs. 4,83,675/- vis-à-vis the advances given for purchases of immovable property, the appellant has submitted a similar argument that sufficient interest free funds were available, as was observed by the AO himself. The appellant also relied on the following judgment by the Hon’ble Gujarat High Court namely (a) CIT vs GSFC Ltd. 358 ITR 0323(Guj) (b) CIT vs Gujarat Narmada Valley Fertilizers Col. Ltd. 221 Taxman 479 (c) CIT vs Raghuvir Synthetics 354 ITR 222. (d) CIT vs Reliance Utilities & Power Ltd. 313 ITR 340
ITA No.3115/Ahd/2015 [Add. CIT vs. Priyal International Pvt. Ltd.] A.Y. 2011-12 - 12 - 9.1 The fundamental principle highlighted in these judgments, as pointed out by appellant, is that if there are funds available, both interest free and overdraft or loans, then the presumption would arise that the investments would be out of interest free funds available with the appellant, if the interest free funds were sufficient to make such investments. Further it is not evident from the order u/s. 143(3) that such investment in two house properties is out of the interest bearing funds. Since substantial interest free funds were available as pointed out above and also on page-13 of the AOs order, I am of the view that the disallowance of interest at the rate of 1.227%, worked out by the A.O. is not tenable. The A.O. is therefore directed to delete the addition of Rs. 4,83,675/-. This ground of appeal is allowed.”
7.1. In view of the facts narrated by the CIT(A) towards availability of interest free funds in excess of interest bearing loans for towards advances immovable property, we do not see any reason to interfere with the order of the CIT(A) which is sync with the judicial precedence prevailing in this regard.
7.2. We thus decline to interfere.
In the result Ground No. 4 of the Revenues appeal is dismissed.
Resultantly, appeal of the Revenue is dismissed.
This Order pronounced in Open Court on 15/02/2019
Sd/- Sd/- (MAHAVIR PRASAD) (PRADIP KUMAR KEDIA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 15/02/2019 TANMAY आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।