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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri N.V.Vasudevan & Shri Waseem Ahmed
आदेश /O R D E R PER Waseem Ahmed, Accountant Member:- The assessee has filed this appeal disputing the order of Pr. Commissioner of Income Tax-2, Kolkata passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 14.03.2017 by which Ld. Pr. CIT set aside the assessment order dated 31.12.2014 passed u/s 143(3) of the Act with a direction re-do the assessment in respect of issue mentioned therein pertaining to assessment year 2012-13. Shri S.M. Surana, Ld. Advocate appeared on behalf of assessee and Md. Usman, Ld. Departmental Representative appeared on behalf of Revenue. 2. The assessee has raised the following grounds of appeal:-
1. For that the order of the Ld. Pr. CIT is arbitrary, illegal and bad in law.
M/s Darjeeling Orgnic Tea Estates Pvt. Ltd. vs. DCIT, Cir;4(1)Kol. Page 2 2. For that the Ld. Pr. CIT erred in exercising the jurisdiction u/s. 263 when the order passed by the AO u/s 143(3) wherein the interest income was not excluded for the purpose of rule 8 was not found to be erroneous nor any such finding is recorded and no reasons has been give for not accepting the submissions of the assessee.
3. For that the Ld. Pr CIT erred in exercising the jurisdiction u/s. 263 simply because the conclusion arrived at by the AO and the submissions made before him by the assessee were not acceptable to him when it was demonstrated that he AO has correctly assessed the income by applying rule 8.
For that the Ld. Pr CIT erred in setting aside the assessment order as a whole and further directing the AO to exclude interest income from the composite income for the purpose of applying Rule 8 of the Income Tax Rule when the fixed deposits on which the interest was earned was made from the cash credit account and deposited to the same account on maturity, the FDs were made for higher sanction of cash credit facility which fact has not been disputed and therefore interest income was to be excluded from the interest paid resulting that the same cannot be separately taken.
5. For that on the facts and circumstances of the case the order of the Pr. CIT be cancelled.
6. For that the assessee craves leave to add, alter or amend any ground before or at the time of hearing.”
Though the assessee has raised as many as six grounds of appeal
, however, as per our considered view the sole and substantial ground of appeal, is that Ld. Pr. CIT erred in holding the assessment order passed by Assessing Officer u/s. 143(3) of the Act as erroneous and in so far as prejudicial to the interest of Revenue under the provision of Section 263 of the Act.
4. Briefly stated facts are that assessee is a private limited company and engaged in cultivation and manufacturing of tea leaf. The assessee for the year under consideration filed its return of income declaring total income of ₹1,11,23,085/- under normal computation of income and declared profit of ₹2,32,50,384/- under the provision of Minimum Alternate Tax (MAT for short). Subsequently case was selected under scrutiny and accordingly notices u/s 143(2) /142(1) of the Act were served upon the assessee. The assessment was framed u/s 143(3) of the Act after making various disallowances / additions to the total income of assessee. The taxable income was determined under normal computation of income at ₹1,54,73,800 only.
M/s Darjeeling Orgnic Tea Estates Pvt. Ltd. vs. DCIT, Cir;4(1)Kol. Page 3 Subsequently, Ld. Pr. CIT observed that assessee has shown interest income of ₹3,09,81,406/- only and tax on such interest income was computed after applying the provision of Rule 8 of Income Tax Rules, 1962 by treating the same as composite income from agricultural operation. As per the Ld. Pr CIT the impugned interest income has no connection with the agricultural operation of the assessee. Therefore, Rule 8 of the IT Rules cannot be applied. Thus, the Ld. Pr. CIT was of the view that the order passed by AO is erroneous in so far as prejudicial to the interest of revenue as the interest income brought to tax as per the provision of Rule 8 of IT Rules. On being confronted for the above stated issue, the assessee submitted that no part of interest income can be treated as independent income and the interest receive should be telescoped with the interest paid. However Ld. Pr. CIT disregarded the contention of assessee by observing as under:- “… … argument of the assessee regarding interest income is not acceptable. As mentioned earlier, sum of Rs.3,09,81,406 is credited in P/L account which cannot come under purview of composite income for the purpose of applying Rule 8. The assessment order is therefore set side with the direction to exclude interest income for applying Rule 8. After conducting the inquiries & verification as directed above, the AO should pass a speaking order, providing adequate opportunity of being heard to the assessee. The impugned order u/s. 143(3) 31.12.2014 is accordingly, set aside and assessment should be done as per above directions.” Aggrieve by this, the assessee has come up in appeal before us.
Ld. AR before us submitted that the interest income was earned on Fixed Deposit (FD) which was made out of cash credit account. On maturity of FD the amount was transferred to the cash credit account only. As such, FDs were made in order to get the higher cash credit limit from the banker. It was the requirement of the bank to maintain the FD in order to enjoy the benefit of cash credit facilities. Thus, interest income shown by the assessee was directly linked with the agricultural operation of the assessee. Thus, the impugned interest income should be treated as composite income as per the provision of Rule 8 of the IT Rules, 1962.
M/s Darjeeling Orgnic Tea Estates Pvt. Ltd. vs. DCIT, Cir;4(1)Kol. Page 4 Ld AR for the assessee also submitted that the interest expense was exceeding the interest income and therefore, there was no interest income as such, from other source. Accordingly, the impugned interest income cannot be treated as independent income without considering the interest expenses. He also submitted that various courts have held that interest income if directly linked with agricultural operation should be treated as composite income. In this regard Ld. AR for assessee relied on the order of this co-ordinate Bench of Tribunal in the case of Somnath Roy Choudhury in order dated 20.01.2016. Ld. AR for the assessee further submitted that in the subsequent assessment year 2014-15 the impugned issue was decided by the ld. CIT(A) in favour of assessee by directing to tax interest income as per the provision of Rule 8 of IT Rules, 1962. Thus, it is a settled law where two views are possible then the view adopted by the Assessing Officer cannot be set erroneous and prejudicial to the interest of revenue. Ld. AR in support of his claim relied on the judgment of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. reported in 243 ITR 83 wherein it was held as under :- “when an ITO adopts one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law.” Ld. AR also placed the copy of the AO order pertaining to the Assessment Year 2014-15 which is placed on record. On the other hand, Ld. DR submitted that there is no whisper in the order of AO suggesting that impugned interest income is directly linked with the operation of agricultural operation of assessee. Thus there was no application of mind of the AO during assessment proceedings on the impugned issue of interest. The amount of interest expenses is very high exceeding ₹10 crores but the order of AO is silent on the issue. Ld. DR further stated that AO has not established any nexus between interest income vis-à-vis interest expenses as claimed by the assessee in its return of M/s Darjeeling Orgnic Tea Estates Pvt. Ltd. vs. DCIT, Cir;4(1)Kol. Page 5 income. In the above proposition, Ld. DR submitted that the issue of interest receive need to be further examined by the AO in the light of above observation of Pr. CIT u/s. 263 of the Act. He vehemently relied on the order of Ld. Pr. CIT. In rejoinder Ld. AR submitted that all the details were duly filed by assessee before Ld. Pr. CIT vide letter dated 23.02.2017 but Ld. Pr.CIT without considering the same and pointing out any defect has held order of AO as erroneous in so far as prejudicial to the interest of revenue.
We have heard the rival submissions of both the parties. We have also examined the orders passed by the Authorities Below and the judgements / orders cited by the representatives of both the parties. In the instant case the assessee has shown interest income of ₹3,09,81,406/- on which the tax was computed in the manner as provided under Rule 8 of the IT Rules, 1962. However the Ld. Pr CIT was of the view that this interest income is outside the purview of composite income as specified under Rule 8 of IT Rules. But AO has allowed the same. Thus, there was an error committed by the Assessing Officer in taxing the interest income in the manner as specified under Rule 8 of IT Rules, 1962 which is causing prejudice to the interest of revenue.
6.1 On perusal of order of Ld. Pr CIT we note that Ld. Pr. CIT has held the order of AO as erroneous in so far as prejudicial to the interest of revenue without considering the submission made by assessee before him during the proceedings. The submission made by assessee vide letter dated 23.02.2017 reads as under:- “with regard to the assessment of the interest income on Fixed Deposit, it has been stated by your honour that interest income should not have been assessed by the Ld. AO as composite income. On first look your honour’s assertion may be correct. However, if your honour will kindly appreciate the facts, it will be evident that the Fixed Deposits were made from out of the cash credit account and on maturity, the fixed deposit was transferred to the same very cash credit account. Fixed deposit had to be made for the purpose of sanction of higher cash credit by the banker and the fixed deposit was made in the same bank granting cash credit. It was statutory requirement for the M/s Darjeeling Orgnic Tea Estates Pvt. Ltd. vs. DCIT, Cir;4(1)Kol. Page 6 banks to maintain fixed deposit of the required amount to enjoy the cash credit facility which was part of the agreement with the bank. If your honour will kindly look into the balance sheet of the company it will be evident that the loan from the bank was more than 28 crores as at the end of the assessment year in question and more than 53 crores as at the beginning of the year. It may also be noted that there was no net interest income since interest paid on the cash credit as per balance sheet was over Rs. 10 crores which included over Rs.5 crores against the cash credit account. Therefore no part of the interest received can be treated as independent income but interest received should be telescoped with the interest paid. In fact it was the requirement of the bank to maintain particular amount of fixed deposit as per the terms of cash9 credit account. In fact this issue was also raised by the AO when required documents were produced in this connection it is further submitted that in view of the following judgements interest on fixed deposited cannot be separately taken as income from other sources when the assessee is enjoying the cash credit facility against the same FD and FD was also made from the cash credit account. Reference in this connection is invited to the decision of ITAT in the case of Somnath Roy Choudhury in dated 20.1.2016 vide para 5(1) of the said order.” From the above, we observe that ld. Pr. CIT u/s 263 of the Act has not pointed out any defect in the submission filed by assessee before him during proceedings. The assessee before Ld. Pr. CIT has made the submission that amount of interest income is directly linked with the agricultural operation of assessee. Therefore, the same has to be included in the composite income as specified under Rule 8 of IT Rules, 1962. We find force in the advanced argument placed by Ld. AR for the assessee as the impugned interest income is directly linked with the agricultural operation of assessee. In holding so, we find support and guidance from the judgment of Hon'ble jurisdictional High Court in the case of Eveready Industries India Ltd. v. CIT & Anr. reported (2010) 323 it 312 (Cal) wherein the Hon'ble court has held:- 39. As we have already narrated above that the assessee in this case procured loans from banks and other financial institutions for its tea growing and manufacturing business and part of such funds remain temporarily unutilized. The assessee, instead of keeping the amount idle, invested the surplus funds in short-term interest bearing fixed deposits and earned interest. The main activity of the assessee is growing, manufacturing and selling of teas and not that of earning interest by investing in short-term fixed deposits. The assessee earned interest on such short-term fixed deposits made out of the business funds available with the assessee before they were utilized for actual business and, therefore, the same was incidental to the business activity of the assessee-company and interest on such short-term deposit must be treated as business income. The assessee, a tea growing and M/s Darjeeling Orgnic Tea Estates Pvt. Ltd. vs. DCIT, Cir;4(1)Kol. Page 7 manufacturing company, was left with surplus funds. The assessee invested such surplus funds in short-term deposits to exploit the business funds of the company and earned interest. Therefore, the interest income of the assessee is business income and not income from other sources.
We are, therefore, of the opinion that the Income-tax Appellate Tribunal and the Commissioner of Income-tax substantially erred in law in directing the Assessing Officer to revise the assessments of the aforementioned assessment years by treating the income earned by the assessee from such short-term investments as 100 per cent, (hundred) per centum assessable treating the same as income from other sources.
We hold that, in the facts and circumstances of the case, the Assessing Officers were right in treating the interest income earned by the assessee by investing surplus fund of the business in short-term deposits as business income and rightly applied the tests as provided in sub-rule (1) of rule 8 of the said Rules while making the assessments in relation to the income of the assessee.
6.2 We also find support and guidance from the judgment of Hon'ble jurisdictional High Court in the case of Warren Tea Ltd. vs. CIT & Anr. reported (2015) 374 ITR 6 (Cal), wherein the Hon'ble jurisdictional High Court has held:- “The funds may not always be necessary or may not always be blocked. Therefore, the funds which were surplus at any point of time were fruitfully invested in short-term fixed deposits and the assessee thus earned interest which in a way has reduced its burden on account of interest as would appear from the two figures indicated above. It is, therefore, not possible to hold that the interest earned was not a business income. When the assessee has paid interest of nearly Rs. 2.66 crores and has earned interest of nearly Rs. 1.88 crores, the effective debit on that side is less than Rs. 1 crore.
We are, as such, unable to see any reason why it can be said that the interest earned by the assessee should not be treated as the business income for the purpose of the benefit under section 33AB. The two judgments, cited by Mr. Majumdar, also support the contentions of the assessee. Another reason why the views expressed by the Tribunal cannot be accepted is that the benefit under section 33AB can be obtained provided the assessee has made the deposits with the national bank. Such deposits are not interest-free deposits. Interest also accrues from such deposits. If the intention of the Legislature was that income arising out of interest is to be excluded then a specific provision in that regard would have been made in the section itself.
For the aforesaid reasons, the impugned judgment and order passed by the learned Tribunal is set aside. The questions framed above are answered in favour of the assessee and the appeal is allowed.”