DCIT, CC-XI, KOLKATA, KOLKATA vs. M/S HIMALAYA GRANITES PVT. LTD., KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “C”, BENCH KOLKATA BEFORE SHRI N.V.VASUDEVAN, JM & DR. A.L.SAINI, AM ITA No.1280, 1281 & 1283/Kol/2014 (�नधा�रण वष� / Assessment Years :2002-03, 2003-04 & 2006-07) DCIT, CC-XI, Room Vs. M/s Himalaya Granites Pvt. No.311,3rd Fl. Aayakar Ltd. 16A, Shakespeare Sarani, Bhawan Poorva, 110- Kolkata-700071 Shantipally, Kolkata- 700107 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAACH 5121 L .. (अपीलाथ� /Appellant) (��यथ� / Respondent) राज�व क� ओर से /Revenue by : Shri Rajat Kumar Kureel, JCIT(DR) �नधा�रती क� ओर से /Assessee by : A.K. Tulsyan, AR सुनवाई क� तार�ख / Date of Hearing : 06/04/2017 घोषणा क� तार�ख/Date of Pronouncement 26/04/2017 आदेश / O R D E R Per Dr. Arjun Lal Saini, AM: These three captioned appeals filed by the Revenue, pertaining to Assessment Years 2002-03, 2003-04 and 2006-07, are directed against orders passed by the ld. Commissioner of Income Tax (Appeals) Central- III, Kolkata, in appeal No.167 & 168 & 166/CC-II/CIT(A) C-III/2008-09/ Kolkata, dated 31.03.2014, 07.04.2014 & 07.04.2014, which in turn arise out of assessment orders passed by the Assessing Officer u/s.147/263/143(3) of the Income Tax Act 1961, (hereinafter referred to as the ‘Act’), all dated 31.12.2008. 2. These appeals relate to same assessee, pertaining to different assessment years and common issues involved therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. Appeal of Revenue in ITA No. 1281/K/2014 is taken as a lead case.

2 ITA No.1280/1281/1283/Kol/2014 M/s Himalaya Granites Pvt. Ltd. 3. The facts of the case is that the assessee company is engaged in the

business of manufacturing of granite monuments, mining of granite blocks

and processing of dimensional granite blocks. The Company also does

export of goods and claims deductions under section 80HHC. The

company have fixed assets, by name, Quarry Land & Development and

claims depreciation thereon. The Assessing disallowed the depreciation

on Quarry Land & Development based on the comment given by the Tax

Auditor in Tax audit Report. The Tax Auditor stated that creation of block

of assets is not in conformity with the provisions of section 2(11) on the

Income Tax Act, 1961 therefore, the depreciation allowable to the

company is not in accordance with Section 32 of the Act and based on

these comments the Assessing Officer held that assessee company is not

entitled to claim the depreciation on Quarry and Land Development. The

Assessing Officer also disallowed the claim of the assessee under section

80HHC stating that different High Courts have given different views on the

same issue and the law is not settled on the issue.

assessee filed appeal before the ld. CIT(Appeals), who has deleted the

addition made by the Assessing Officer. In respect of the addition made

by the Assessing officer on account of deduction under section 80HHC,

the ld. CIT(Appeals) held that the Explanation (baa) to section 80HHC

implicitly implies “Net of interest”, therefore he directed the Assessing

Officer to take the “net of interest” to compute the deduction under

section 80HHC. The ld. CIT(Appeals) observed that if borrowed money is

3 ITA No.1280/1281/1283/Kol/2014 M/s Himalaya Granites Pvt. Ltd. utilized for making advances on which interest is received, then interest

paid on such borrowing should be reduced from interest received and

from the resultant amount, being net interest, 90% is to be reduced as per

Explanation (baa) to section 80HHC(4B) for working out deduction. The

Explanation (baa) provides for reduction of 90% of receipt by way of

interest included in such interest, therefore, one has to consider only such

receipt by way of interest, which is included in profit. If the contention of

the revenue that 90% of gross receipt was to be considered ignoring

‘interest payment’, was accepted, the words ‘included in such profit’ would

be redundant. Moreover, if profit was computed as pleaded by the

Revenue, it would give a distorted feature of export profit. Therefore, only

‘net interest’ can be disallowed and not ‘gross interest’. Based on this, the

ld. CIT(Appeals) directed the Assessing Officer to take into account the

‘net interest’.

& Development, the ld. CIT(Appeals) observed that as per books of

account the asessee has been maintaining for the depreciation in the

accounting manner of Group depreciation method/declining balance

method. Considering the nature of the business, this would have been the

appropriate accounting method to provide for the depreciation in the

books of account. But for income-tax purposes, for computing the

depreciation allowance, the different class of assets comprised in the

Project, i.e. Quarries, has to be rearranged as per the Block of Assets and

the appropriate depreciation rate allowable as per the depreciation table

4 ITA No.1280/1281/1283/Kol/2014 M/s Himalaya Granites Pvt. Ltd. in the Income Tax Rules. The ld. CIT(Appeals) observed that the

depreciation upon grouping the respective assets under the respective

block of asset and compared with original claim in income tax return, the

assessee has rearranged under the appropriate block of asset for all the

five Quarries (at Sendur, Titlagarh, Jagalpet, Charanadaspuram &

Gourala). The ld. CIT(Appeals) satisfied with the arrangement of the

different intangible assets under the appropriate Block of Assets and the

applicable rate of depreciation as per the Income Tax Rules done by the

assessee. However, the ld. CIT(Appeals) observed that there is a slight

variation as regards ‘Lease Premium of Quarries’, which is a intangible

asset being in the nature of license for commercial right, and for which the

prescribed rate of depreciation as per the Income Tax Rules is at 25%.

However, the assessee has claimed at much lesser allowance by

adopting the lease years duration periods as basis. The ld. CIT(Appeals)

considered the said method adopted by the assesese as an appropriate

method considering the nature of the long lease periods. The ld.

CIT(Appeals) also observed that the Assessing Officer has disallowed

depreciation claimed on the Quarry Land & Development, mainly based

on the tax audit report, which is totally wrong. The Tax auditor did not put

any remark in the Tax Audit Report that the assessee is not eligible to

claim depreciation. Therefore, the end –note remark of the Tax Auditor is

not so much in the context that the claim is wrong in toto but that the

manner of presentation as a separate Block of Assets is not in conformity

with section 2(11), which requires that the block of assets be Buildins,

5 ITA No.1280/1281/1283/Kol/2014 M/s Himalaya Granites Pvt. Ltd. Maxhinery , Plant and Furniture. There is no dispute about the existence

of the assets, depreciation will have to be allowed. The issue was simply,

considering the very nature of the business of quarries, to rearranging the

different assets as per the appropriate Class of Assets, and Block of

Assets as per the Income Tax Rules. Based on the above findings, the ld.

CIT(Appeals) had directed the Assessing Officer to allow the depreciation

claim of the assessee at Rs.28,70,141/-.

Revenue is in appeal before us and has taken the following grounds of

appeal:-

(i) That on the facts and circumstances and in law ld. CIT(A) has erred in deleting the disallowance of depreciation on Quarry land & Development amounting to Rs.29,42,646/- made by the Assessing Officer in accordance with the provisions of section 32 of I.T. Act.

(ii) That on the facts and circumstances and in law ld. CIT(A) has erred in deleting the disallowance of deduction u/s 80HHC of I.T. Act made by the Assessing Officer in accordance with the provisions of the I.T. Act.

(iii) That on the facts and circumstances of the case, the order of the ld. CIT(A) be vacated and the order of the Assessing officer be restored.

depreciation on Quarry Land & Development amounting to

Rs.29,42,646/-.

6 ITA No.1280/1281/1283/Kol/2014 M/s Himalaya Granites Pvt. Ltd. 7.1. The ld. D.R. for the Revenue has primarily reiterated the stand

taken by the Assessing Officer, which we have already noted in our earlier

para, and is not being repeated for the sake of brevity.

7.2. The ld. A.R. for the assessee has submitted that the Assessing

Officer disallowed the claim of depreciation on Quarry Land &

Development based on the clarification of the Tax Audit Report, which is

entirely wrong. The Tax Auditor in his Tax Audit Report do not say

anything that the assessee is not eligible to claim the depreciation, he has

just explained that there is no block for such asset in the Income Tax Act

to claim depreciation U/s 32 of the Act. The ld. A.R. further explained the

nature of ‘premium for quarry’ is that, the assessee makes the payment

to the Government and the Government allows the assessee to exploit

the natural resource of Granite for some period. It may be noted that

under the Constitution, all natural wealth belongs to the Republic and no

individual or company can hold any right to own them, but the company

can acquire right to use these natural wealth and pays license fee to the

government and after the expiry of the period of mining granted to the

asessee, the land reverts back to the Government/owner. So the premium

which purchases a commercial right extinguishes after lapse of a period.

Therefore, the right to explore depreciates and depreciation is allowable

only on the same right in terms of section 2(11)(b) of the Income Tax Act,

1961 read with section 32(1)(ii) and Rule 5(1) of the Income Tax Rules.

On such assets, the Income Tax Rules provides the depreciation rate of

25%. The ld. A.R. also submitted that the Quarry Land & Development

7 ITA No.1280/1281/1283/Kol/2014 M/s Himalaya Granites Pvt. Ltd. are intangible assets being the nature of license for commercial right and

for which the prescribed rate of depreciation as per the Income Tax Rules

is at 25%. However, the assessee has claimed at much lesser allowance

by adopting the lease years duration periods as basis.

7.3. Having heard the rival submissions, perused the relevant material

available on record, we noticed that quarry land & development is an

intangible asset being in nature of license for commercial right and for

which the prescribed rate of depreciation as per the Income Tax Rules is

at 25%. The assessee has submitted before the Assessing Officer as well

as before the ld. CIT(Appeals) the various charts of depreciation

explaining the provision on the amount of depreciation claimed by the

assessee. Therefore, considering the nature of the business, we are of

the view that the method adopted by the assessee to compute the

depreciation on Quarry Land & Development is appropriate and,

therefore, we confirm the order passed by the ld. CIT(Appeals).

7.4 In the result, Ground No. 1 of the Revenue’s appeal stands

dismissed.

7.5. The issue involved in Ground No. 1 in ITA No. 1283/KOL/2014 is

identical with the Ground No. 1 in ITA NO. 1281/KOL/2014. As we have

already decided the Ground No. 1 in ITA No. 1281/KOL/2014 in favour of

the assessee, the Ground No. 1 of ITA NO. 1283/KOL/2014 raised by the

Revenue is also dismissed.

8 ITA No.1280/1281/1283/Kol/2014 M/s Himalaya Granites Pvt. Ltd. 8. Ground No. 2 raised by the Revenue relates to the

disallowance of deduction under section 80HHC of the Income Tax

Act, 1961.

8.1. The ld. D.R. for the Revenue has submitted before us that the

assesee-company had earned interest of Rs.45,52,146/- and paid interest

expenditure of Rs.1,49,83,526/-. The assessee-company has not

considered the interest income of Rs.45,52,146/- while computing the

profit of the business for the purpose of section 80HHC. As per

Explanation (baa) below sub-section (4C) of section 80HHC, 90% of any

receipt by way of brokerage, commission, interest, rent, charges of any

other receipt of a similar nature included in the profit of the business is to

be excluded from the profit of the business to arrive at the eligible profit of

the business for deduction under section 80HHC. As per explanation

(baa) of section 80HHC, the assessee has not reduced the interest

income at Rs. 45,52,146/- while computing the profit of the business for

the purpose of section 80HHC. The ld AR explained that the main issue

in this appeal is that the assessee took the Net of interest, whereas the

contention of the Assessing Officer was that it should be Gross interest.

8.2. The ld. A.R. for the assessee has further submitted that the issue

regarding Explanation (baa) to section 80HHC gives controversy about

net profit or gross profit. The plain meaning of the words “profits and gains

of business or profession” implies that it has to be ‘Net profit’. The

computation of the profits and gains of business is always ‘net’ as it is the

Net Profit of the Profit & Loss Account. The majority of the judicial

9 ITA No.1280/1281/1283/Kol/2014 M/s Himalaya Granites Pvt. Ltd. pronouncements which advocating that it should be ‘Net Profit’. The

assessee, while making submissions before ld CIT(A), relied on the

following judgments:

(i) S. Damanjit Singh –vs.- ACIT (2002) 121 Taxman 303 (Delhi((Mag.); (ii) Pink Star –vs.- DCIT (2002) 72 ITD 137 (Mum.); (iii) Honda Steel Power Products Limited –vs.- DCIT (2000) 69 TTJ (Del.) 97 (iv) Hindustan Gum & Chemicals Ltd. –vs.- ITO (2008) 23 SOT 143 (Kol.); (v) ACIT –vs.- Arun Puri (2008) 23 SOT 380 (Delhi) ; (vi) Priyanka Gems –vs.- ACIT (2005) 3 SOT 817 (Ahm.).

All these judgments hold that the word “interest” in clause (baa) of the

Explanation connotes “net interest” and not “gross interest”. Therefore,

the Assessing officer will have to take into account the net interest, i.e.

gross interest as reduced by expenditure incurred for earning such

interest. In view of the above, the assessee submitted that in calculating

deduction under section 80HHC, the ‘net interest’ has to be considered

which is in ‘such profit’ as referred in Explanation (baa). Therefore, where

the interest income is inextricably connected with the business of the

assesese, then for determining the profit and gains of business as per

Explanation (baa) to section 80HHC(4B) the ‘net interest income’ should

be considered instead of the ‘gross interest receipt’.

8.3 Having heard the rival submissions, perused the relevant material

available on record, we are of the view that there is merit in the

10 ITA No.1280/1281/1283/Kol/2014 M/s Himalaya Granites Pvt. Ltd. submisisns of the assesee, as propositions canvassed by the ld. A.R. for

the assessee are supported by the judgments cited(supra). We notice that

various Hon’ble High Courts have explained the terminology that

Explanation (baa) to section 80HHC implicitly implies ‘Net interest’ and not

the ‘gross interest’. We, therefore, confirm the order of the ld.

CIT(Appeals).

8.4. In the result, the appeal filed by the Revenue being ITA NO.

1281/KOL/2014 is dismissed.

for Assessment Year 2002-03. This appeal is not maintainable because

of low tax effect. At the time of hearing, the ld. counsel for the assessee,

at the outset, has pointed out that the tax effect involved in this appeal of

the Revenue is less than the revised monetary limit fixed by the CBDT

vide Circular No. 21/2015 dated 10th December, 2015 at Rs.10,00,000/-

for filing the appeal by the Revenue before the Tribunal and this position

clearly evident from the grounds raised by the Revenue in this appeal is

not disputed even by the ld. D.R. In Circular No. 21/2015 (supra) issued

by the CBDT, the monetary limit for filing the appeals by the Revenue

before the Tribunal has been increased to Rs.10,00,000/- and as clarified

in the said Circular, the said monetary limit is applicable retrospectively

even to the appeals pending before the Tribunal. The CBDT has also

instructed that such pending appeals below this specified tax limit of

Rs.10,00,000/- may be withdrawn/ not pressed. Keeping in view the

instruction given by the CBDT vide Circular No. 21/2015 dated

11 ITA No.1280/1281/1283/Kol/2014 M/s Himalaya Granites Pvt. Ltd. 10.12.2015, which is squarely applicable in the present case, the appeal

filed by the Revenue in this case is treated as withdrawn/not pressed and

dismissed accordingly.

10 In the result, the appeal of the Revenue ( In ITA No.1280/Kol/2014), is dismissed. 11. To sum up, in the result, all the appeals filed by the Revenue are

dismissed.

Order pronounced in the open court on this 26/04/2017.

Sd/- Sd/- (N.V.VASUDEVAN) (DR. A.L.SAINI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; �दनांक Dated 26/04/2017 �काश �म�ा/Prakash Mishra,Sr.PS. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant-DCIT, Central Circle-XI, Kolkata 2. ��यथ� / The Respondent.-M/s Himalaya Granites Pvt. Ltd. 3. आयकर आयु�त(अपील) / The CIT(A), Kolkata. 4. आदेशानुसार/ BY आयकर आयु�त / CIT ORDER, �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 5. 6. गाड� फाईल / Guard file. स�या�पत ��त //True Copy// सहायक पंजीकार (Asstt. Registrar) आयकर अपील�य अ�धकरण, कोलकाता / ITAT, Kolkata