M/S KASHMIR ARTS vs. COMMISSIONER OF INCOME TAX VII

Whether the judgment should be reported in Digest? Yes : Dr. S. Muralidhar, J.

The facts relevant for the present appeal are that for the Assessment Year 1993-94 the Assessee, which is in the business of exporting carpets, filed a return on 12th October, 1993 showing an income of Rs.12,04,030/-. Later on 3rd September, 1995 the Assessee filed a revised return disclosing an income of Rs.12,82,976/-. The case was processed by the Assessing Officer ('AO') under Section 143 (1) (a) of the Act.

While the assessment proceedings were in progress, the Assessee by its letter dated 19th September, 1995 claimed deduction of Rs.3,62,76,246/- (revised) under Section 80HHC of the Act. In addition, the Appellant furnished 2007:DHC:1282-DB

The AO held that the Assessee's claim for a deduction of 10% of the receipts from the total indirect cost was not correct and disallowed the same. The AO further took the view that the Assessee had debited a sum of Rs.4,03,422/- to the Profit & Loss Account ('P&L Account') as interest on Fixed Deposit Receipts ('FDRs'). The details produced revealed that the Assessee had paid a sum of Rs.12,54,280/- as interest to the bank on the credit facilities enjoyed by it and received a sum of Rs.8,50,858/- as interest on FDRs kept as margin money with the bank. After ‘netting’ the interest earned against the interest paid, the difference was debited by the Assessee to the P&L account. The AO held that that the interest paid and the interest received were two separate transactions. Since the Assessee had utilised the loans from the bank for business purpose and the same not having used for making fixed deposits, there was no correlation between the loan taken by the Assessee from the bank and the fixed deposits kept with the bank. Accordingly the AO directed that the amount of Rs.8,50,858/- constituting the interest received on FDRs should be deducted from the profits and gains of the business in terms of Explanation (baa) (1) to sub Section (4A) of Section 80HHC.

Aggrieved by the order of the AO, the Assessee filed an appeal before the Commissioner of Income Tax (Appeals) ['CIT(A)']. The CIT(A) by his order dated 18th March, 1997 held that “since interest was paid and received from the same bank, the net amount of the two transactions has to be 2007:DHC:1282-DB

The Revenue then filed an appeal to the Tribunal. By an order dated 30th September, 2003 the Tribunal followed the dictum of the Kerala High Court in K.Ravindranathan Nair v. CIT 262 ITR 669 where in similar circumstances it was found that “the interest from short-term deposits received by the appellant was not the direct result of any export of any goods or merchandise” and that “the interest income received on the short term deposit though it could be attributed to the export business could not be treated as income derived from the export business.” Accordingly the appeal filed by the Revenue was allowed.

After the decision of the Special Bench of the Tribunal in Lalsons Enterprises v. Deputy CIT (2004) 89 ITD 25 (Del) [SB], the assessee filed an application before the Tribunal under Section 254 (2) of the Act for rectification stating that it was entitled to netting of interest in terms of that decision. By its order dated 7th October, 2004 the Tribunal dismissed the application on the ground that the judgment in Lalsons Enterprises had been rendered after the decision dated 30th September 2003 of the Tribunal in the Assessee’s appeal and that therefore this did not constitute a ground for rectification.

The learned counsel for the Assessee submitted that in view of the judgments of this Court in Commissioner of Income Tax v. Shri Ram Honda Power Equip [2007] 289 ITR 475 (Del) and CIT v. Punjab Stainless Steel 2007:DHC:1282-DB

We are unable to accept the submission made on behalf of the Assessee. We find that the decision of the Special Bench of the Tribunal in Lalsons Enterprises as explained and modified by this Court in Shri Ram Honda Power Equip does not help the Assessee at all. We may recall what was said in the said decision (ITR, p.506): “....we entirely agree with the following formulation of the Special Bench of the Tribunal in Lalsons (ITD, p. 62): “If the interest received is found to have a nexus with the business, still it remains to be excluded from the profits of the business by virtue of Explanation (baa) (1), but the claim is that the quantum of such interest income to be excluded must be determined in accordance with the computation provisions relating to business by allowing expenditure by way of interest which bears a nexus with the interest receipt. The computation provisions include Section 37 (1) under which any expenditure incurred or laid wholly and exclusively for the purpose of the business is to be allowed as a deduction. Therefore, any expenditure incurred which has a connection or nexus with the interest receipt has to be allowed as a deduction and only the balance can be excluded from business profits.” To the above, we may add a few lines by way of clarification. It will bear examination whether obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) was “wholly and exclusively” for the purpose of earning the interest on the fixed d it t d l f S ti 37 Thi ill h 2007:DHC:1282-DB

Turning to the case on hand, the first question is whether the interest earned by the Assessee on FDRs kept with the Bank for the purpose of margin money as a condition for availing credit facilities could be termed as business income? If the answer to this is in the affirmative the second question is whether netting is to be permitted? For the second question to be answered in the affirmative, the assessee will have to show that there is a nexus between the interest paid on the credit facilities availed from the Bank and the interest earned on the FDRs kept with the Bank. Nowhere in the Assessment Order has the AO found that the interest earned by the Assessee was business income.

The appeal is dismissed. S. MURALIDHAR, J MADAN B. LOKUR, J OCTOBER 12, 2007 dn 2007:DHC:1282-DB