EMGEE CABLES & COMMUNICATIONS LTD.,JAIPUR vs. DCIT, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh dqy Hkkjr] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 390/JP/2014 fu/kZkj.k o"kZ@Assessment Year : 2008-09

cuke M/s Emgee Cables & DY. Commissioner of Income Tax Central Circle-3, Jaipur Vs. Communications Ltd., Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACE3633Q vihykFkhZ@Appellant izR;FkhZ@Respondent vk;dj vihy la-@ITA No. 357/JP/2014 fu/kZkj.k o"kZ@Assessment Year : 2009-10

cuke Asstt. Commissioner of M/s Emgee Cables & Vs. Income Tax Communications Ltd., T-16, Central Circle-3, Jaipur 3rd Floor Alankar Plaza, Central Spine, Vidhyadhar Nagar, Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACE3633Q vihykFkhZ@Appellant izR;FkhZ@Respondent izR;k{ksi.k@C.O. No. 16/JP/2014 (Arising out of vk;dj vihy la-@ITA No. 357/JP/2014) fu/kZkj.k o"kZ@Assessment Year : 2009-10 cuke Asstt. Commissioner Vs. M/s Emgee Cables & of Income Tax Communications Ltd., Jaipur Central Circle-3, Jaipur.

2 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur LFkk;h ys[kk la-@thvkbZvkj la-/PAN/GIR No.: AAACE3633Q izR;k{ksid/Objector izR;FkhZ/Respondent jktLo dh vksj ls@ Revenue by : Shri S.R. Sharma & Shri Rajnikant Bhatra (CA) fu/kZkfjrh dh vksj ls@ Assessee by : Shri R.A.Verma (Addl. CIT) lquokbZ dh rkjh[k@ Date of Hearing : 28/01/2017 mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 31/03/2017 vkns'k@ ORDER PER SHRI VIKRAM SINGH YADAV, A.M.

These are appeals filed by the assessee as well as revenue against

the order of ld. CIT(A) Central, Jaipur, dated 28.02.2014 and dated

02.04.2014 relevant for the A.Y 2008-09 and 2009-10 respectively

involving common grounds of appeal. All these appeals are disposed of

by this consolidated order.

Grounds of Appeal in ITA No.390/JP/2014 for AY 2008-09 (Assessee)

“1. That on the facts and in the circumstances of the case the Ld. CIT(A) is wrong, unjust and has erred in law in not accepting the plea of the appellant that interest income of Rs. 5115618/- earned by the appellant during the course of carrying on business is assessable under the head ‘Income from Business’ instead of under the head ‘Income from other sources’ as held by the assessing officer.

3 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur against interest income by allegedly holding that there is no nexus between these two.”

Grounds of Appeal in ITA No. 357/JP/2014 for AY 2009-10 (Revenue)

Grounds of Appeal in CO. No. 16/JP/2014 for AY 2009-10 (Assessee)

ITA No. 357/JP/14 and assessee’s cross objection in ITA No. 16/JP/14.

action of ld. CIT(A) in directing to allow set off of unabsorbed

depreciation pertaining to A.Y. 2000-2001 and A.Y 2001-02 from income

4 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur under the head “income from other sources” pertaining to the year

under consideration in view of the amendment effected by the Finance

Act 2001 which has been stated to be applicable from A.Y. 2002-03 only.

3.1 It is noted that the provision of section 32(2) of the Act which

deals with the set off of unabsorbed depreciation has been subject to

several amendments in the past and the latest amendment which is in

consideration has been brought in by the Finance Act 2001. In the

instant case, the question that arises for consideration is how should the

provision of section 32(2) should be applied regarding set off of

unabsorbed depreciation pertaining to A.Y 2000-01 and AY 2001-2002

when the pre-amended law was applicable and which has now been

claimed to be set off at the point of time i.e. in A.Y 2009-10 when post

amendment law was applicable. The Assessing Officer has relied on the

decision of Special bench of ITAT in case of DCIT vs. Times Guaranty Ltd

for 4 ITR (Trib) 210 wherein the Special Bench has held as under:-

“amount of current depreciation for asst. yrs. 1997-98 to 2001-02 which cannot be so set off as per (ii) above shall be carried forward for a maximum period of eight assessment years from the assessment year immediately succeeding the assessment year for which it was first computed, to be set off only against the income under the head ‘Profits and gains of business or profession.’

5 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur 3.2 Subsequently, the matter came up for consideration before the Hon’ble Gujarat High Court in case of General Motors India Pvt. Ltd. 354 ITR 244 wherein the question for consideration before the Hon’ble

High Court was “whether unabsorbed depreciation pertaining to the A.Y

1997-98 could be allowed to be carried forward and set off after a period

of 8 years or would it be governed by the provisions of section 32(2) as

amended by the Finance Act 2001. The relevant finding of the Hon’ble

High Court of Gujarat are contained at para 35 to 38 of its order which

reads as under:-

”35. Section 32 (2) of the Act was amended by Finance Act, 2001 and the provision so amended reads as under:- “Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable for that previous year, owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be allowance of that previous year, and so on for the succeeding previous years.” 36. The purpose of this amendment has been clarified by Central Board of Direct Taxes in the Circular No. 14 of 2001. The relevant portion of the said Circular reads as under:-

6 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur “Modification of provisions relating to depreciation 30.1 Under the existing provisions of section 32 of the Income-tax Act, carry forward and set off of unabsorbed depreciation is allowed for 8 years. 30.2 With a view to enable the industry to conserve sufficient funds to replace plant and machinery, specially in an era where obsolescence takes place so often, the Act has dispensed with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The Act has also clarified that in computing the profits and gains of business or profession for any previous year, deduction of depreciation u/s 32 shall be mandatory. 30.3 Under the existing provisions, no deduction for depreciation is allowed on any motor car manufactured outside India unless it is used (i) in the business of running it on hire for tourists, or (ii) outside in the assessee’s business or profession in another country. 30.4 The Act has allowed depreciation allowance on all imported motor cars acquired on or after 1st April, 2001. 30.5 These amendments will take effect from the 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent years.” 37. The CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and accordingly the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow the unabsorbed depreciation allowance worked out in A.Y. 1997-98 only for eight subsequent assessment years even after

7 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur the amendment of section 32(2) of the Act, a purposive and harmonious interpretation has to be taken. While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to the assessee cannot be denied. However, Circular No. 14 of 2001 had clarified that under section 32(2), in computing the profits and gains of business or profession for any previous year, deduction of depreciation u/s 32 shall be mandatory. Therefore, the provisions of section 32(2) as amended by Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the A.Y. 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the A.Y. 2002-03 then it would be carried forward till the time it is set off against the profits and gains of subsequent years. 38. Therefore, it can be said that, current depreciation is deductible in the first place from the income of the business to which it relates. If such depreciation amount is larger than the amount of the profits of that business, then such excess comes for absorption from the profits and gains from any other business or business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during the year. In case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next succeeding year. Where there is current depreciation for such succeeding year the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year. We are of the considered opinion that any unabsorbed depreciation available to an assessee on 1st day of April 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No. 14 of 2001 clarified that the restriction of 8

8 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y. 1997- 98 upto the A.Y. 2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever.” 3.3 On perusal of the above decision, it is noted that the matter was

exhaustively examined by the Hon’ble High Court and it was held that any unabsorbed depreciation available to assessee on 1st, April, 2002

(A.Y 2002-03) will be dealt with in accordance with the provisions of

section 32 (2) as amended by the Finance Act 2001. It was further held

that amended provisions of section 32(2) by the Finance Act 2001 would

allow unabsorbed appreciation available in the A.Y 1997-98, 1999-2000,

2000-01 and 2001-02 to be carried forward to the succeeding years and

if unabsorbed appreciation or part thereof could not be set off till A.Y.

2002-03, then it would be carried forward till the time it is set off against

the profit gains of subsequently years. Following the said decision of the

Hon’ble High Court, a similar view has been reiterated by various

Coordinate Benches as referred by the assessee in its submissions

before us.

3.4. In view of subsequent decision of the Hon’ble Gujarat High Court

in case of General Motors (supra), the decision of Special Bench in case

9 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur of Times Guaranty (Supra) is no more a binding precedent. A similar

view has been taken by the various coordinate Benches. Further, no

contrary jurisdictional or other authority has been quoted before the

Bench. In view of the above and respectfully following the decision of

the Hon’ble Gujarat High Court, we are unable to agree to the

contention of the Revenue. In our view, it is the amended section 32(2)

of the Act that shall apply in relation to unabsorbed depreciation

pertaining to A.Y. 2000-01 and A.Y 2001-02 and the restriction of 8

years which was in force till the law was amended by the Finance Act

2001 does not apply. In the instant case, it is not in dispute that the

unabsorbed depreciation pertaining to A.Ys 2000-01 and 2001-02 have

not been set off in the earlier years and the same is being carried

forward to the year under consideration for being set off. In light of

above, ground taken by the Revenue is dismissed.

3.5 In ground No. 2 of the assessee’s cross objection, it cannot be

said that issue relating to set off of unabsorbed depreciation doesnt arise

from the assessment order. At the same time, as far as governing law

relating to set off for the year under consideration is concerned, the

same is allowed as we have held above that it is the amended section

10 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur 32(2) as amended by the Finance Act 2001 that will apply. In the result,

ground no. 2 of assesses’s cross objection is partly allowed.

the assessee has challenged the action of the ld CIT(A) in not accepting

its plea that interest income Rs. 4975203/- earned by the appellant

during the course of carrying on business is assessable under the head

‘Income from Business’ instead of income under the head ‘Income from

other sources’ held by the assessing officer.

4.1. The ld. AR has submitted that in the year under consideration the

assessee company paid total interest of Rs. 2,31,04,322/- (Rs.

1,83,93,641/- paid to Bank and Rs. 12,92,976/- to others) and received

interest of Rs. 49,75,203/- (Rs. 42170/- on FDR(s) and Rs. 49,33,033/-.

The interest is received from parties to whom advances were made by

company out of funds of C.C Limit of Bank and thus business funds were

advanced to reduce burden of interest payable to Bank and so the

interest receipts are business income required to be set off from interest

expenses of business. The said funds advanced were neither out of

share capital of company nor out of surplus funds of company and

therefore, same cannot be considered as income from other sources.

11 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur These advances were made in earlier years as is evidenced from copy of

accounts submitted herewith along with Bank statement showing source

of advance being from C.C A/c of Bank and thus they are not short term

advances but are long term advances. In all the earlier assessment

completed u/s 143(3) upto A.Y. 2006-07 & 2007-08 (order of CIT u/s

263 cancelled by ITAT) the interest receipts from these parties have

been treated as business income and thus rule of consistency also

applies and no different treatment can be accorded in this year. It is

evident from the Balance Sheet of assessee company placed in paper

book submitted that its share capital and Reserves and Surplus are

deployed in fixed assets of business, inventories and trade debtors and

there is no surplus fund with the company at any time. The copy of A/c

of each party to whom loan was advanced along with copy of Bank A/c

(s) of assessee company showing that loans were advanced from funds

of cc limit of bank and thus business funds were advanced are placed.

In Tirupati Woolen Mills Ltd. (1992) 193 ITR 252 (Cal.) it was held that

interest earned from utilization of commercial asset would be income

from business. The Supreme Court in CIT Vs. Calcutta National Bank

Ltd. (1959) 37 ITR 171 held that “business” is a word of very wise

connotation with the result that income of interest in course of carrying

12 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur on business should ordinarily be treated as business income, except

where the investment are independent of business made out of surplus

funds in long term deposits. The Ld. A.O has referred a few judgments

in its order but they pertain to investment of surplus funds or idle funds

in business of short term loans, interest on fixed deposits etc. where

interest income was held to be assessable under the head ‘other

sources’. The judgment in case of Tuticorin Alkali & Chemicals referred

by A.O. is on interest received on share capital before commencement of

business and hence not applicable. Thus the receipt of interest is rightly

assessable as income from business and not from income from other

sources. The ld. CIT(A) has wrongly held that the assessee company

has failed to establish that the loans were given for business purposes.

As submitted the assessee company earned interest income from

making advances out of its current business funds available in Bank

A/c(s) including O.D. A/c(s) as is evident from details placed at Paper

book. Thus the interest receipts of assessee as business receipts for set

off from interest expenses of assessee company which both are to

considered under the head business after netting and interest receipts

alone cannot be said to be assessable under the head ‘other sources.’

13 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur The ld. CIT(A) disallowed the claim of assessee in view of he held

that interest income is assessable as income from other sources and so

cannot be allowed to set off which is not correct in law.

4.2. In this regard, the relevant finding of the ld. CIT(A) is contained at

Para 5 and 6 of his order which is reproduced as under:-

“5. Now, so far as the interest income amounting to Rs. 49,75,203/- is concerned, it is seen that this income has been received from various parties to whom advances were made by the appellant company. The contention of the appellant is that these advances were neither out of share capital nor out of the surplus funds of the company. It is, however, noted that the appellant has not furnished any evidence to show that these advances were not from the surplus funds. The appellant has also failed to establish business nexus with the persons to whom the money was advanced. It is apparent from the balance sheet of the appellant that its funds have been applied towards loans and advances as well. It is further noted that decision of the Apex Court in the case of Calcutta National Bank Ltd. (supra0 relied upon by the appellant is on different facts inasmuch as it pertained to an assessee whose business was to advance loans. In the instant case, the appellant is not engaged in the business of money lending. The ratio of the decision of the Apex Court is, therefore, not applicable in this case. It is further noted that the advances have been given to various persons with whom the appellant has failed to show any business transaction. Hence, as held by the Hon’ble Bombay High Court in the case of Godavari Sugar Mills (191 ITR 359), interest received on loans and advances where there was no evidence that the loans were advanced in the course of assessee’s business has to be taxed as income from other sources. In the present case, the appellant has failed to establish that the loans were given for business purposes. It is, however, noted from the details that the interest received by the appellant also includes an amount of Rs. 42,170/- from Dena Bank CC a/c 563. Since, this amount has been received by the appellant is connected with its business activity, this amount is treated as business income. The treatment of the rest of the

14 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur interest received by the appellant as income from other sources is confirmed. Coming to the issue of set off of interest expenses against interest income, it is noted that the appellant has shown total outgo of Rs. 2,31,04,322/- on account of interest which includes Rs. 1,83,93,641/- paid to banks and Rs. 12,92,976/- to others. The interest paid to banks was clearly for business purposes and, hence, it cannot be set off against the interest income under the head income from other sources. The balance amount has been paid to other persons. The appellant has failed to show any nexus between the interest paid to others and the interest earned by it. In order to claim set off against interest income, the appellant has to show that the amount was paid wholly and exclusively to earn interest income, which it has failed to do. Hence, the set off of interest expenses cannot be allowed against the interest income u/s 57(iii).” 4.3. We have heard the rival contentions and perused the material

available on record. The ld. CIT(A) has stated that the assessee has

failed to establish necessary business nexus with the persons to whom

the money was advanced. The assessee has submitted that the

business funds out of CC limit of bank were advanced to various parties

to reduce the burden interest payable to Bank and so the interest

receipts are business receipts required to be set off from interest

expenses of business. In our view, what is relevant to examine is

whether advancing of funds by way of interest bearing loan is one of the

activities which has been regularly carried by the assessee as part of its

business activities or not. And where such activities are not part of the

regular business activities carried on by the assessee, what is the

15 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur business expediency of advancing funds to the third parties. The next

question that arise for consideration is the funds that have been

advanced and whether the same have been advanced from borrowed

funds as claimed by the appellant or internal surplus funds as available

with the assessee and how the necessary nexus is established between

the two. The ld AR has submitted that these advances were made in

earlier years as is evidenced from copy of accounts submitted herewith

along with Bank statement showing source of advance being from C.C

A/c of Bank and thus they are not short term advances but are long

term advances. There is no such finding of fact by the lower authorities

in this regard. In our view, these are the matters which required further

examination and we deem it fit to set aside the matter to the file of the

AO to examine the same afresh. In the result, ground no. 1 of the

assessee’s cross objection is allowed for statistical purposes.

objection is partly allowed for statistical purposes.

ITA No. 390/JP/2014

thereto are pari materia to the ground No. 2 taken by the assessee in its

16 ITA No. 390/JP/2014, ITA No. 357/JP/2014 & C.O. No. 16/JP/2014 M/s Emgee Cables & Communications Ltd. Vs. DCIT, Jaipur cross objection for A.Y 2009-10. Our findings and directions contained in assessee’s cross objection for AY 2009-10 shall apply mutatis- mutandis to this appeal. In the result, the grounds taken by the assessee is allowed for statistical purposes.

Sd/- Sd/- ¼dqy Hkkjr ½ ¼foØe flag ;kno½ (Kul Bharat) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 31 March, 2017 *Ganesh आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- M/s Emgee Cables Ltd., Jaipur 2. izR;FkhZ@ The Respondent- DCIT Central Circle-3, Jaipur 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZ QkbZy@ Guard File (ITA No. 390/JP/2014,ITA No. 357/JP/2014 & CO 16/JP/2014) vkns'kkuqlkj@ By order,

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