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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
ON THE 22ND DAY OF NOVEMBER, 2018
BEFORE THE HON'BLE MR. JUSTICE RAVI MALIMATH
AND
THE HON'BLE MR. JUSTICE K. NATARAJAN
INCOME TAX APPEAL NO.3 OF 2010 AND INCOME TAX APPEAL NO.117 OF 2010
BETWEEN:
M/S. KAYPEE EXPORTERS 429, 1ST CROSS, 12TH MAIN HAL II STAGE, INDIRANAGAR BENGALURU-560 008 REPRESENTED BY ITS PARTNER Sri K. PALANISWAMY.
... APPELLANT
(BY SRI A. SHANKAR, SR. COUNSEL A/W. SRI M. LAVA, ADVOCATE)
AND:
THE ASSISTANT COMMISSIONER OF INCOME – TAX CENTRAL CIRCLE-1(2) QUEENS ROAD, C.R.BUILDING BENGALURU-560 001.
... RESPONDENT
(BY SRI JEEVAN J. NEERALGI, ADVOCATE)
THESE INCOME TAX APPEALS ARE FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 11.09.2009 PASSED IN I.T.A. NO.849- 850/BNG/2009, FOR THE ASSESSMENT YEARS 2002-2003 AND 2003-2004, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE I.T.A.T., BANGALORE IN I.T.A. NO.849 TO 850/BNG/2009, DATED 11.09.2009, IN THE INTEREST OF JUSTICE AND EQUITY.
THESE INCOME TAX APPEALS COMING ON FOR HEARING THIS DAY, RAVI MALIMATH, J., DELIVERED THE FOLLOWING:
J U D G M E N T
The assessee is a company engaged in the export of textiles. It filed its returns of income for the assessment years 2002-2003 and 2003-2004 disclosing the total income of `.23,98,815/- and `.78,030/- respectively. The returns were processed. It was selected for scrutiny which is now under issue.
The Assessing Officer, computed the assessment under Section 143(3) of the Income Tax Act, 1961 (the ‘Act’ for short) without considering the interest earned on deposits for working out the
partners remuneration to an extent of `.32,38,664/- and treated the same under the head ‘income from other sources’, instead of treating it as ‘business income’. Aggrieved by the order of the Assessing Officer, an appeal was filed before the Commissioner of Income-Tax (Appeals)-VI, Bengaluru (the ‘CIT’ for short). The appeal was dismissed. Aggrieved by the same, the assessee preferred an appeal before the Tribunal. The Tribunal, by the order dated 11.09.2009 rejected the same. Hence, Income Tax Appeal Nos.3 of 2010 and 117 of 2010 are filed in respect of assessment years 2002-2003 and 2003-2004 respectively. Hence, the appeals are taken up for consideration together.
Initially, the appeals were admitted to consider five substantial questions of law. Thereafter, on a memo filed by the counsel for the appellant, the same was considered by this Court and by its order
dated 02.06.2016, the substantial questions of law were re-framed. Therefore, the appeals are to be considered on the following three substantial questions of law: “1. Whether the Tribunal was correct in law in holding that for the purpose of computing book profit under section 40(b) of the Act, interest income earned from fixed deposits is to be reduced from the net profit as shown in the profit and loss account and without prejudice, Whether the Tribunal ought to have held that the net interest income ought to have been reduced on the facts and circumstance of the case?
Whether the Tribunal is justified in law in holding that interest income is to be assessed as income from other sources and without prejudice, whether the Tribunal erred in not holding that the proportionate interest cost ought to have been allowed as deduction against the interest income assessed as ‘income from
other sources’ on the facts and circumstances of the case?
Whether the Tribunal erred in not holding that the interest income is to be assessed as business income in computing the deduction u/s. 80HHC and without prejudice, what is to be excluded is only 90% of the net interest income and not the entire gross interest income on the facts and circumstances of the case?”
Sri A. Shankar, learned Senior Counsel appearing for the Counsel representing the appellants contends that the impugned order is erroneous and is liable to be set aside. That the Assessing Officer has committed an error in coming to the conclusion that the interest income is to be considered as ‘income from other sources’ and not as ‘business income’. That the justifications made by the assessee were wrongly not accepted. That the Assessing Officer has committed an error in relying on the various decisions which are not
germane to the case of the assessee. He further pleads that the Assessing Officer also committed an error in wrongly applying the methodology for quantifying the allowable deduction. That in specific, he relies upon Section 40(b), Explanation-3 of the Act, which indicates that the computation is to be done in the manner as laid down in Chapter IV-D of the Act. But, he has not done so.
On the other hand, Sri Jeevan J. Neeralgi, learned counsel for the respondent-Revenue disputes the same. He contends that the findings recorded by the Assessing Officer are just and appropriate. That the findings recorded by the Assessing Officer is based on the material produced by the assessee himself. That the assessee being in the business of export is not earning interest from any amount. Therefore, any income derived from the bank as interest is rightly considered as ‘income from other sources’ and it could
never constitute ‘business income’. Therefore, he pleads that the appeals be dismissed.
Heard learned counsels.
We have considered in detail the order of the Assessing Officer. The plea of the assessee that the interest income earned by it is to be considered as ‘business income’ was negated by the Assessing Officer. The contention of the assessee was negated on the ground that, since the assessee is in the business of exports and is not in the business to earn profit out of deposits, the claim cannot be accepted. That the deposits made by the assessee are in various banks wherein, it does not have a regular day-to-day business. Therefore, it supports the reasoning that investments have been made in these banks only to earn interest.
The learned counsel for the appellant with regard to his contention on Section 40 of the Act, places reliance on the judgment of the High Court of Culcutta in the case of MD. SERAJUDDIN & BROS. v. COMMISSIONER OF INCOME-TAX reported in [2012] 210 TAXMAN 84/24 with regard to Paragraph No.24 therein, which reads as follows: “The said chapter nowhere provides that method of accounting for the purpose of ascertaining net profit should be the only income from business alone and not from other sources. Section 29 provides how the income from profits and gains of business or profession should be computed and this has to be done as provided under Section 30 to 43D. By virtue of Section 5 of the said Act that total incomes of any previous years includes all income from whatever source derived. Thus for the purpose of Section 40(b)(v) read with Explanation there cannot be separate method of accounting for ascertaining net profit and/or book- profit. The said section nowhere provides as rightly pointed by Mr. Khaitan, learned Senior Advocate that the net profit as shown in the profit and loss account
not the profit computed under the head ‘profit and gains of business or profession.”
He also relies on the judgment of the High Court of Gujarat in the case of COMMISSIONER OF INCOME-TAX v. J.J. INDUSTRIES reported in [2013] 358 ITR 531, with reference to Paragraph No.7 wherein, the Assessing Officer accepted the plea of the assessee that the interest income derived by the assessee from the bank was ‘business income’. His further contention is that, the interest income is to be considered under the head ‘income from other sources’. To this effect, he also relies on the judgment in the case of M/S. A.C.G. ASSOCIAED CAPSULES PVT. LTD. v. THE COMMISSIONER OF INCOME TAX, CENTRAL-IV, MUMBAI reported in [2012] 343 ITR 89.
Therefore, we are of the view that these are questions of fact with regard to whether the interest earned on deposits is to be considered as a
‘business income’ or ‘income from other sources’ which would have to be specifically answered by the Assessing Officer and a specific finding would have to be recorded by him. In fact, in some of the judgments relied upon by the Assessing Officer, it is seen that surplus funds were part of the income of the assessee and therefore, the interest earned thereon was treated as ‘income from other sources’.
To this effect, counsel for the revenue places reliance on the findings of the Assessing Officer at Annexure-F, Paragraph No.2(v). However, having considered the same, we do not find any specific finding of fact that is recorded by the Assessing Officer that the interest has been earned out of surplus funds. Primarily, we are of the view that, it is necessary to ascertain whether the interest income is to be considered as ‘business income’ or ‘income from other sources’, if it is the regular interest that is earned by
the assessee or on the contrary, if the interest is earned out of surplus fund, then the interpretation would be totally different since surplus funds are not linked to business. However, the answer to this question is in the hands of the Assessing Officer himself. In the absence of he recording any finding on such a question of fact, we are of the considered view that the matter is to be reconsidered afresh by the Assessing Officer. That the issues pertaining to the nature of investment made, mode of computation under Section 40 of the Act as well as whether the interest earned is to be considered as gross interest or net interest, are all factors to be determined by the Assessing Officer. Therefore, we are of the view that the entire matter requires to be reconsidered by the Assessing Officer. 12. Consequently, we set aside the order of the Assessing Officer, the Commissioner of Income Tax (Appeals)-VI as well as the Tribunal. The matter is
remitted to the Assessing Officer for a fresh consideration. All contentions are kept open.
The appeals are disposed off accordingly.
SD/-
SD/- JUDGE
JUDGE