C I T vs. M/S MALWA COTTON SPINNING MILLS

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ITA/392/2007HC Punjab & HaryanaPHHC01073091200714 May 2014Author: MR. JUSTICE SURINDER GUPTA,MR. JUSTICE RAJAN GUPTA12 pages
AI SummaryPartly Allowed

What did the High Court hold?

The High Court decided the appeal on all five questions. For question 1, it was held that the ITAT was correct in deleting the disallowance of interest on capital work-in-progress, following the Supreme Court's decision in DCIT v. Core Health Care Limited and a Punjab & Haryana High Court judgment in CIT v. Malwa Cotton Spinning Mills Limited. For question 2, the matter was referred back to the Assessing Officer for fresh determination, as the ITAT had done, in light of the Supreme Court's decision in S.A. Builders Limited v. CIT(A). For question 3, the High Court held that the ITAT was correct in directing the AO to compute relief under Section 80HHC without reducing deductions under Section 80IA/80IB, following the judgment in Friends Castings (P) Limited v. CIT. For question 4, the High Court upheld the ITAT's direction to recompute the deduction under Section 80HHC by not excluding the sum of ₹2,10,99,228/- from export turnover, as the Assessee had realized this amount within the extended period granted by the competent authority. For question 5, the High Court found no infirmity in the ITAT remitting the matter to the Assessing Officer to decide the issue of proportionate indirect costs in light of the Special Bench decision in Surendra Engg. Corporation v. ACIT, especially since the appeal against that decision was dismissed by the Bombay High Court.

What were the facts?

The Revenue appealed to the High Court against an order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2000-01. The ITAT had deleted disallowances made by the Assessing Officer (AO) concerning interest on capital work-in-progress, interest under Section 36(1)(iii), and had directed computation of relief under Section 80HHC without reducing deductions under Section 80IA/80IB. The ITAT also directed the AO to recompute export turnover for Section 80HHC by not excluding certain unrealized export proceeds and to compute indirect costs of the Barnala Unit proportionally. Initially, the High Court admitted the appeal only on one question, but later recalled its order on other questions upon review. The High Court then considered all questions.

What were the issues?

1. Whether the ITAT was correct in deleting the disallowance of ₹1,42,52,223/- on account of interest relatable to investment in capital work-in-progress, ignoring Explanation 8 to Section 43(1) of the Income Tax Act, 1961, which requires interest on borrowed capital to be treated as capital expenditure? The Revenue argued that interest on borrowed capital for capital work-in-progress should be capitalized. The Assessee's position was not explicitly recorded on this point, but the ITAT's deletion implies acceptance of the Assessee's claim. 2. Whether the ITAT was correct in deleting the disallowance of interest amounting to ₹87,80,214/- made under Section 36(1)(iii)? The Revenue's contention was not explicitly recorded, but the ITAT referred the matter to the AO for fresh determination, implying a potential issue with the disallowance. 3. Whether the ITAT was correct in directing the AO to compute relief under Section 80HHC without reducing the deduction eligible under Section 80IA/80IB, disregarding Section 80IA(9) read with Section 80IB(13)? The Revenue contended that deductions under Section 80IA/80IB should be reduced before computing Section 80HHC. The Assessee's argument was not explicitly recorded. 4. Whether the ITAT was correct in directing the AO for not excluding a sum of ₹2,10,99,228/- from the export turnover for computing the deduction under Section 80HHC? The Revenue argued that unrealized export proceeds beyond six months should be excluded. The Assessee argued that a portion was realized within an extended period granted by the competent authority. 5. Whether the ITAT was correct in directing the AO to compute indirect costs of the Barnala Unit in proportion of the export of trading goods to total turnover of the Barnala Unit, disregarding Explanation (e) to sub-section (3) of Section 80HHC? The Revenue's argument was not explicitly recorded. The ITAT relied on a Special Bench decision and remanded the matter.

Which sections of the Income-tax Act were involved?

Section 43(1),Section 36(1)(iii),Section 80HHC,Section 80IA,Section 80IB,Section 260A,Section 143(3)

AI-generated summary — verify with the full judgment below

ITA No.392 of 2007 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.392 of 2007 (O&M) Date of decision: 14.05.2014 The Commissioner of Income Tax III, Ludhiana -----Appellant Vs. M/s Malwa Cotton Spinning Mills Limited, IAA, Ludhiana ----Respondent CORAM:- HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON'BLE MR. JUSTICE JASPAL SINGH Present:- Mr. Rajesh Katoch, Advocate for the appellant. Mr. Sandeep Goyal, Advocate for the respondent. Ajay Kumar Mittal,J.

1.

This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 23.3.2007,Annexure A.3, passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'A', Chandigarh (in short, “the Tribunal”) in ITA No.1336/CHANDI/2004, for the assessment year 2000-01. 2. On 12.5.2010, the following order was passed by this Court:- “The revenue has approached this Court by filing the instant appeal under Section 260A of the Income Tax Act, 1961 challenging the order dated 23.3.2007 passed in ITA No.1336/CHANDI/2004 in respect of the assessment year 2000-01. The revenue has claimed the following substantial questions of law: Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

ITA No.392 of 2007 (O&M) 2 i) Whether on the facts and the circumstances of the case, the Hon'ble ITAT was correct in deleting of disallowance of ` 1,42,52,223/- made on account of interest relatable to investment in capital work in progress ignoring explanation 8 to section 43(1) of the I.T.Act, 1961 which requires the interest on borrowed capital to be treated as capital expenditure? ii) Whether on the facts and the circumstances of the case, the Hon'ble ITAT was correct in deleting of disallowance of interest amounting to ` 87,80,214/- made under section 36(1) (iii)? iii)Whether on the facts and the circumstances of the case, the Hon'ble ITAT was correct in law in directing the AO to compute relief under Section 80HHC without reducing the deduction eligible under Section 80IA/80IB disregarding the provision of section 80IA (9) read with section 80IB(13)? iv)Whether on the facts and the circumstances of the case, the Hon'ble ITAT was correct in law in directing the AO for not excluding a sum of ` 2,10,99,228/- from the export turnover for computing the deduction under section 80HHC? v) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was correct in law in directing the AO to compute indirect costs of Barnala Unit in proportion of the export of trading goods to total turnover of the Barnala Unit disregarding Explanation (e) to sub section (3) of section 80HHC of the I.T.Act, 1961?” Mr. Sethi, learned counsel for the revenue has fairly conceded that question No.1 stands answered against the revenue and in favour of the assessee by the Division bench judgment of this Court in ITA Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

ITA No.392 of 2007 (O&M) 3 No.396 of 2007 decided on 25.7.2008 (The Commissioner of Income Tax III, Ludhiana v. M/s Malwa Cotton spinning Mills Limited, Ludhiana). The aforesaid judgment is based on the view taken by the Supreme Court in the case of Deputy Commissioner of Income Tax v. Core Health care Limited, (2008) 298 ITR 194 (SC). Accordingly, the aforesaid question would not emerge for determination. With regard to second question, Mr. Sethi has stated that the Tribunal having regard to the view in S.A.Builders Limited v. Commissioner of Income Tax (Appeals) and another, (2007) 288 ITR 1 (SC) has referred the matter to the Assessing Officer for fresh determination. Accordingly, since the matter is pending before the Assessing Officer and judgment of the S.A.Builders covers the case against the revenue, therefore, the aforesaid question would also not arise for determination. Mr. Sehti has also stated with regard to question IV and V that both questions since stand referred to the Assessing Officer which are yet to attain finality, therefore, he has not pressed those questions. However, with regard to question No.3, learned counsel has stated that ITA No.371 of 2007 stands already admitted. In view of the above, we admit the appeal with regard to question No.3 only. (M.M.Kumar) Judge (Jitendra Chauhan) Judge” May 12, 2010 Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

ITA No.392 of 2007 (O&M) 4

3.

Thereafter, review petition was filed by the revenue. On 18.3.2011, the following order was passed:- “1. This is an application seeking review of our order dated 12.5.2010 in respect of question Nos.i, ii, v and iv.

2.

Notice of the application has been issued.

3.

Mr. Sandeep Goyal, learned counsel for the non applicant-respondent has put in appearance on behalf of the respondent. The prayer made in the application has been opposed by filing reply to the review application.

4.

After hearing learned counsel for the parties, we are of the view that there are sufficient grounds for accepting the review application in respect of question Nos. i, ii, v and iv.

5.

Mr. Dinesh Goyal, learned counsel for the review applicant has pointed out various objections made in the order of Tribunal, which shows to the contrary. Those paras have also been cited in the review application. There is no serious dispute with regard to the aforesaid factual position.

6.

In view of the above, we recall our order dated 12.5.2010 in respect of question Nos. i, ii, v and iv. Let the matter be listed for motion hearing as per roster. (M.M.Kumar) Judge (Jitendra Chauhan) Judge” March 18, 2011”

4.

On August 3, 2011, it was noticed that since the appeal has been admitted, therefore, all the issues will be considered at the Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

ITA No.392 of 2007 (O&M) 5 time of final hearing. Now we take up all the questions for adjudication.

5.

Before examining the questions, the facts necessary for adjudication of the controversy involved, as narrated in the appeal may be noticed. The respondent – a company derives income from manufacturing of various types of yarns. Return declaring loss of ` 19,40,69,964/- for the assessment year 2000-01 was filed on 22.10.2001. While completing the assessment, apart from other disallowances, the Assessing Officer also made certain additions/disallowances and framed the assessment under section 143 (3) of the Act on 31.3.2003, Annexure A.1 at an income of ` 2,32,77,971/-. The details of additions/disallowances relevant for adjudication of the present appeal are as under:- “i) Disallowance of `1,42,52,223/- on account of interest on investment in capital work-in-progress. ii)Deduction under Section 80HHC was computed on 'profits of business' after reducing the deduction allowable under section 80-IB of the Act. iii) ` 2,13,86,870/- being export sale proceeds not received in India within the period of six months were reduced from the export turnover for the year for calculating deduction under Section 80HHC. iv)In terms of the provisions of section 80HHC(iii), the respondent while computing indirect cost considered the indirect costs of Barnala Unit in proportion of the export of trading goods to total turn over of the Unit. The AO however considered the indirect costs of the entire business of the assessee for the said purpose.” Aggrieved by the order, the respondent preferred appeal before the Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

ITA No.392 of 2007 (O&M) 6 Commissioner of Income Tax (Appeals) II, Ludhiana [CIT(A)]. Vide order dated 25.8.2004, Annexure A.2, the CIT(A) partly allowed the appeal. Not satisfied with the order, the respondent filed appeal before the Tribunal. Vide order dated 23.3.2007, Annexure A.3, the Tribunal partly allowed the appeal. Hence the present appeal by the revenue.

6.

We have heard learned counsel for the parties and perused the record. Re: Q (i)

7.

The issue herein relates to whether the interest paid which was relatable to investment in capital work in progress was to be allowed or not. The Apex Court in Deputy Commissioner of Income Tax v. Core Health Care Limited, (2008) 298 ITR 194 had held that the provisions of Explanation 8 to Section 43(1) of the Act has no relevance in respect of Section 36(1) (iii) of the Act. It has also been held that Proviso to Section 36(1) (iii) of the Act inserted by Finance Act, 2003 w.e.f 1.4.2004 is only prospective and would not apply to the earlier assessment years. In view of the aforesaid judgment, the Tribunal has rightly decided the issue in favour of the assessee and against the revenue. Question No.(i) is, thus, answered against the revenue and in favour of the assessee. Re: Q (ii)

8.

Adverting to question No.(ii), the controversy herein relates to whether interest free loan given by the assessee to its sister concern was admissible as deduction under Section 36(1) (iii) of the Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

ITA No.392 of 2007 (O&M) 7 Act. The Tribunal had recorded the following finding:- “The plea of the assessee before the Assessing Officer was that no disallowance is called for since the assessee is recovering interest from its sister concern at the same rate, which it has paid on the borrowings. It is submitted that the interest @ 15.5% is charged from the sister concern, on this aspect there is no dispute. Simultaneously, the assessee canvassed that the average cost of borrowings to the assessee for the year was 15.5% and therefore, there did not remain any difference between the amount charged from the sister concern and the amount incurred by way of expenditure. The Assessing Officer has considered rate of 18.5% as interest paid by the assessee on its borrowings. It is evident from the reply of the assessee that the basis for the Assessing Officer to adopt rate of 18.5% is devoid of any factual support. The reply of the assessee was available to the Assessing Officer, yet the Assessing Officer in para 5 of the order observes that the interest paid by the assessee to the banks and financial institutions is 18.5%. We are unable to appreciate and neither is there any discussion by the Assessing Officer in this regard as to the basis of such a finding of the Assessing Officer. The said approach of the Assessing Officer to say the least, is arbitrary and unjustified. On the contrary, the stand of the assessee is also supported by the banker's certificate averring thereof that the cash credit limits of the assessee carried interest @ 13.26%. The said evidence has been rejected by the CIT(Appeals) for the reason that the assessee failed to justify reasons for its non production before the Assessing Officer. The approach of the CIT(Appeals) is unjustified and unreasonable. There is nothing on record to indicate that Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

ITA No.392 of 2007 (O&M) 8 subsequent to the submission of the assessee to Assessing Officer made vide communication dated 24.3.2003 the Assessing Officer confronted the assessee on this aspect. Therefore, there was no occasion for the assessee to submit the impugned evidence that the cost of funds was much below 18.5% assured by the Assessing Officer. Therefore, in our view the aforesaid evidence ought to have been considered by the CIT(Appeals).

19.

In terms of the facts and material available on record, it is abundantly clear that the plea of the Assessing Officer that the assessee has incurred expenditure on funds utilized for advancing loan to sister concerns higher than the amount of interest received from sister concern is not tenable. Therefore, the invoking of section 36(1) (iii) in the instant case, although justified in principle, would not result in any disallowance in the hands of the assessee. This is for the reason that the assessee has charged interest on loans to sister concern not below the interest paid on the funds utilized for the said purpose.”

9.

A perusal of the aforesaid shows that the Tribunal had come to the conclusion on the basis of material on record that the assessee had charged interest on loans to sister concern not below the interest paid on the funds utilized for the said purpose as the plea of the assessee was that it had been charging interest at the rate of 15.5% from its sister concern and average cost of borrowings to the assessee was also 15.5%. It was in these circumstances that the Tribunal deleted the addition made by the Assessing Officer by invoking section 36(1) (iii) of the Act. We do not find any justification to take a different view from the one taken by the Tribunal in the facts and circumstances of the case. This question is, thus, also answered Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

ITA No.392 of 2007 (O&M) 9 against the revenue. Re: Q.(iii)

10.

This question relates to whether deduction under Section 80HHC of the Act is to be restricted in view of Section 80IB(13) read with Section 80-IA(9) of the Act.

11.

It was not disputed between the parties that the issue stands concluded in favour of the revenue by the order dated 21.4.2011 passed by this Court in ITA No.371 of 2007 (Commissioner of Income Tax (Central) Ludhiana v. M/s Davinder Exports, Guru Nanak Dev Nagar, Rahon Road, Ludhiana), wherein it was held as under:- “Learned counsel for the appellant fairly states that the matter is covered against the assessee by order of this court dated 18.4.2011 in ITA No.469 of 2010 Asin Exim International v. Commissioner of Income tax, Jalandhar, Punjab wherein it was held that if deduction under section 80IA has been taken, deduction under section 80HHC was not admissible in view of Section 80IB(13) read with section 80-IA(9) of the Act, following earlier judgment of this court in Friends Castings (P) Limited v. Commissioner of Income Tax, (2011) 50 DTR Judgments 61.” The question is, thus, answered accordingly. Re: Q.(iv)

12.

Adverting to Question No.(iv), the issue herein relates to whether the outstanding amount of export sale proceeds which remained pending had to be disallowed for purposes of calculation of Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

ITA No.392 of 2007 (O&M) 10 benefit under Section 80HHC of the Act. The Tribunal had concluded as under:- “We have carefully considered the rival stand on this issue. The relevant provision in question is sub section 2 clause (a) of section 80HHC of the Act, which we reproduce hereinafter: '(2) (a) This section applies to all goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into, India by the assessee other than the supporting manufacturer in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.' Explanation – For the purpose of this clause, the expression 'competent authority' means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealing in foreign exchange.' Sub section (2) (a) prescribes that the sale proceeds of goods for merchandise exported out of India should be received or brought into India by the assessee within a period of six months from the end of the previous year or within such further period as the competent may allow in this behalf. It is further provided that the competent authority means the Reserve Bank of India or any such other authority as is authorized for regulating payments and dealings in foreign exchange. Evidently the assessee had outstanding export invoices even beyond six months from the end of the previous year in question. Such unrealised exports invoices were therefore liable to be excluded from the export turnover for the purposes of Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

ITA No.392 of 2007 (O&M) 11 computing relief under section 80HHC of the Act. So however the plea of the assessee is that it has realised certain portion within the period extended by the competent authority. The necessary certificate in this regard issued by the Bank is placed at page 143 of the paper book. In terms of the said certificate, out of the total outstanding export invoices of ` 2,13,86,870/- the assessee realized a sum of ` 2,10,99,228/- within the extended period. In view of the aforesaid in our view on facts it is evident that the competent authority has allowed the assessee to realise the outstanding export invoices.

Therefore in our view there is no justification for excluding a sum of ` 2,10,99,228/- from the export turnover for computing the deduction under section 80HHC of the Act. In the result we set aside the order of the CIT(A) and direct the Assessing Officer to recompute the deduction under section 80HHC accordingly. In the result on this ground the assessee partly succeeds.”

13.

From the perusal of the aforesaid, it comes out that the Tribunal had remanded the issue to the Assessing Officer for re- computing the amount which remained unrealised on account of export invoices even during the extended period from the export turnover for computing the deduction under Section 80HHC of the Act. Thus, no error could be found in the decision of the Tribunal. Re: Q (v)

14.

Taking up the last question, the matter herein relates to whether the assessee was entitled to claim proportionate indirect expenses only in respect of the unit which was carrying on export activity whereas the assessee was carrying business in two units i.e. Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

ITA No.392 of 2007 (O&M) 12 Barnala I and Barnala II. The Tribunal while adjudicating the issue had relied upon decision of the Special Bench of the Tribunal at Mumbai in the case of Surendra Engg. Corporation v. ACIT, 86 ITD 121 (MUM) (SB). Learned counsel for the revenue had produced a communication received from Commissioner of Income Tax III, Ludhiana dated 31.12.2012 wherein it was intimated to him that the appeal against the aforesaid decision relied upon had been dismissed by the Bombay High Court. The said communication is taken on record as Mark 'A'. The Tribunal had only remanded the matter to the Assessing Officer to decide the issue in the light of the aforesaid judgment. Learned counsel for the revenue did not make any meaningful argument to assail the findings of the Tribunal in this regard or to show that the decision of the Special Bench of the Tribunal in Surendra Engg. Corporation's case (supra) as affirmed by the Bombay High Court has been reversed. Accordingly, we do not find any infirmity in remitting the matter to the Assessing Officer for recomputation in the light of the decision of the Special Bench of the Tribunal at Mumbai.

15.

The appeal is disposed of in the manner indicated above.

(Ajay Kumar Mittal) Judge May 14, 2014 (Jaspal Singh) 'gs' Judge Singh Gurbax 2014.06.10 13:44 integrity of this document High Court Chandigarh

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