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Income Tax Appellate Tribunal, DELHI BENCH: ‘G’: NEW DELHI
Before: SH. I.C. SUDHIR & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: These appeals of the assessee are preferred against two separate orders dated 03/01/2013 and 20/11/2013 of the Ld. Commissioner of Income- tax(Appeals)-XXVIII, New Delhi for assessment years 2009-10 and 2010-11 respectively. The grounds raised in the both the appeals are common, and 2 & 480/Del/2014 therefore both the appeals are heard together and disposed of by this consolidated order. ITA No. 1211/Del/2013 for AY: 2009-10 2. Now we take up the appeal in ITA No. 1211/Del/2013. The grounds of appeal
raised are as under:
1. The Learned CIT (Appeals) imprecisely confirmed the order of Learned Assessing Officer is in mechanical manner, without even considering the submission made during the course of appeal by the appellant and is totally bad in law & wrong on facts. The CIT (Appeals) has only gone by surmises, conjectures and guess work in drawing inference and recording conclusion. In the absence of any cogent material to support findings, the same being based on conjuncture & surmises can't be upheld.
2. The Learned CIT (Appeals) has erred while confirming the disallowance of the deduction of interest income under section 80IC declaring that such income is not directly derived from the business. The interest received on FDR pertains to the interest on Fixed Deposit (With CITI Bank) made and kept as a security Deposit with the VAT Department (Himachal Pradesh) for getting the VAT Registration. Until and unless such sum (Fixed Deposit) is not kept under lien with VAT Department (Himachal Pradesh), the registration of VAT may never be granted and consequently no Business Operation. Hence interest so received is an income derived from the eligible Business.
3. The Learned CIT (Appeals) has erred in law and on facts in confirming the disallowance made by Learned Assessing Officer and adding back Rs. 86883.00 on account of Pre Operative Expenses written off during the year, in hypothetical manner and without any proper show cause and without providing reasonable opportunity of being heard and ignoring the provisions of Section 35D of the Income Tax Act, 1961.
4. The Learned CIT (Appeals) has erred in law and is wrong on the circumstances of the case to disallow and add back the amount of the Rs. 45.00 claimed under the short and excess head on the back of the assessee as the amount claimed under the head incidental to the business and it has occurred due to business once again ignoring the provisions of section 37 of Income Tax Act.
5. The CIT (Appeals) has erred in law and on facts in not allowing necessary additional deduction under section 80IC of Income Tax Act, 1961 on account of disallowance of amortization of Pre Operative Expenses under section 35D and disallowance of short arid excess expenses. Therefore, necessary directions are given to recompute the deduction under section 80IC of The Income Tax Act, 1961. (This ground of appeal is applicable only when our ground of appeal number 3 and 4 are not admitted, though the assessee is contesting over the same here before yours honor.)
2. The facts in brief are that the assessee, a partnership firm, was engaged in the business of manufacturing of printing machines, pads and plates from the factory located at Baddi, Himachal Pradesh. The unit of the assessee is located in a notified area, entitling the assessee to deduction under section 80IC of the 3 & 480/Del/2014 Income Tax Act, 1961 (for short the ‘ the Act’). In the scrutiny assessment completed for the year under consideration under section 143(3) of the Act on 12/12/2011, the Assessing Officer (AO) did not allow the deduction under section 80IC of the Act on the interest income of Rs. 14,135/-, holding the same as not the profit derived from the eligible business. The AO also disallowed the claim of pre-operative expenses of Rs. 86,883/- in absence of any details provided and amount of Rs. 45 claimed under the profit and loss account as ‘short and excess’ expenses. The assessee could not succeed before the learned Commissioner of Income-tax(Appeals). Aggrieved, the assessee is in appeal before the Tribunal.
At the outset, the learned Authorized Representative (AR) of the assessee submitted that ground No. 5 was a fresh ground which was not preferred before the learned Commissioner of Income-tax(Appeals) and therefore the assessee filed application under Rule 11 of the ITAT Rules for admission of fresh (additional) ground of appeal
on 09/04/2013. The learned AR supported his contention that the Tribunal had jurisdiction to examine a question of law which arose from the facts as found by the lower authorities and having a bearing on the tax liability of the assessee, with the judgment of the Hon’ble Supreme Court in the Case of National Thermal Power Company Limited Vs. CIT (1998) 229 ITR 383 (SC) and CIT Vs. Mahalaxmi Textile Mills (1967)
66. ITR 710 (SC). 4. 3.1 The Ld. Senior DR, on the other hand, did not oppose admission of the additional ground. 3.2 We have heard the rival submissions and perused the material on record. We find that the ground raised by the assessee is in the nature of a legal claim as an alternative to the other grounds raised by the assessee. In view of the judgments cited by ld. AR, it is settled law that legal grounds may be raised before any appellate authority for first time, we admit the additional ground raised by the assessee.
4 & 480/Del/2014 4. The ground No. 1 of the appeal is general in nature and not required to adjudicate upon by us.
In ground No. 2, the assessee has raised issue of disallowance of deduction of interest income of Rs. 14,135/- under section 80IC of the Act. The AO held that this interest income was not derived from the eligible business because for falling in the term “derived from” there should be first degree relations between the income and the source and if income slips from a first to second degree, income stands excluded from the scope of expression “derived from” and may fall within the purview of “attributable to”. In support of the finding, the AO relied on the judgment of the Hon’ble Supreme Court in the case of Liberty India Vs. CIT reported in (2009) 183 taxmann 349. The learned Commissioner of Income-tax(Appeals) affirmed the view of the AO. 5.1. Before us, the learned Authorized Representative (AR) of the assessee, referred to page 28 of the paper book, which is photocopy of the fixed deposit made with the Citibank and submitted that a fixed deposit of Rs. 2,25,000/- was made with the bank on 21/12/2005 and pledged as a security deposit with the VAT Department of Himachal Pradesh government being a prerequisite for getting the VAT registration. The learned AR further submitted that in the case of liberty India Vs. CIT (supra) the issue of duty drawback/DEPB benefit were claimed as receipts derived from the business, which were held by the Hon’ble Supreme Court as incentive profits not part of profit derived from the eligible business and they belong to category of ancillary profits of the undertaking, whereas in the case of present assessee registration with the VAT Department, Himachal Pradesh was inevitable for carrying out the activities, incapable being avoided or evaded conditions under which the FDR was made and pledged as security deposit on which the assessee received the interest. The ld. AR submitted that interest on capital being an inevitable one, may be allowed the deduction, the interest on FDR kept as security deposit to get the VAT registration must also be understood as inevitable and coupled with the main 5 & 480/Del/2014 object of the business and consequently must be understood “derived from the business”. Further, the Ld. AR relied on the judgment of the Hon’ble Gauhati High Court in the case of CIT Vs. Meghalaya Steels Ltd. (2013) 34 taxmann.com 34 (Gauhati) wherein the transport subsidy, power subsidy, interest subsidy and insurance subsidy, which goes to reduce the cost of production of an industrial undertaking were held as part of the profit of the eligible undertaking and deduction under section 80IB and 80IC was accordingly allowed. He further submitted that the SLP filed with the Revenue against the said judgment of the High Court was dismissed recently on 09/03/2016 in civil appeal No. 7622/2014. The Ld. AR further relied on the judgment of the Hon’ble High Court of Gauhati in the case of CIT versus Universal Pipes Private Limited (2012) 28 taxmann 131 (Gauhati) wherein interest received for delay in payment by creditor was held as business income eligible under section 80IC of the Act. 5.2 On the other hand, the Ld. Senior Departmental Representative (DR) relying on the findings of the authorities below submitted that though the FDR was made as a requirement of VAT registration, but the immediate source of interest income is the FDR and not the eligible business of the assessee and therefore there is no first degree nexus between the interest income and the eligible business of the assessee and at maximum the interest income may be attributable to the business of the assessee but not income derived from the eligible business of the assessee. The Ld. DR further submitted that in the case of CIT Vs. Meghalya Steels Ltd. (supra) the receipt in question were subsidies which went to reduce the cost of production of the assessee and, therefore, held as incentives as part of profit of the eligible business, whereas in the case of the assessee in hand, the interest income earned on FDR was not part of the cost of production and therefore the ratio of that case was not applicable over the facts of the case of the assessee. Further, she also submitted that in CIT Vs. Universal Pipes Private Limited (supra) also the interest was received from trade debtors 6 & 480/Del/2014 for delay in payment was integral part of the business because that also goes to reduce the cost of production of the assessee, and therefore the facts of the cited case are distinguishable from the case in hand. 5.3 We have heard the rival submissions and perused the material on record including the paper book containing pages 1 to 47. The only controversy is whether the interest received on the fixed deposit (FDR) pledged with the VAT Department of Himachal Pradesh Government was an income derived from the eligible business or not. The FDR in question was made in the year 2005 and during the year interest of Rs. 14,135/- was received by the assessee. It is argued on behalf of the assessee that making the FDR was prerequisite for getting VAT registration and therefore it was being essential for business, the interest income is also derived from the eligible business of the assessee. In the case of CIT Vs. Sterling Foods , 237 ITR 579, the Hon’ble Supreme Court has held that for the profit to be derived from the eligible business there should be nexus of first- degree between the profit and the eligible business. The relevant para of the judgment is as under:
“9. We do not think the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can in the circumstances, only be said to be the export promotion scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the export promotion scheme applies. There under, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee’s industrial undertaking.” 5.4 In our opinion, the source of interest income is not the eligible business but the fixed deposit which was made as a requirement of VAT registration and which is not having a first degree nexus with the eligible business but only incidental and thus it may be attributable to the business of the assessee.
7 & 480/Del/2014 5.5 Further, we find that the issue involved in the case of Meghalya Steels Ltd. (supra), the SLP filed against which by the Revenue has been dismissed, was of subsidies of the nature which went to reduce the cost of production, deduction in respect of such subsidies was held to be allowable under section 80IC of the Act. The facts of the assessee in hand are distinguishable from the facts of the cited case.
5.6 The claim of the assessee is also not getting support from the finding of the Hon’ble High Court of the Gauhati in the case of CIT versus universal pipes private limited (supra) because in that case also the interest received was in respect of delay in payment by trade debtors, which being part of the business activity, held as allowable for deduction under section 80 IC of the Act. The relevant findings of the Hon’ble High Court are as under:
7. Upon hearing the learned counsel for the parties and on a consideration of the pleaded facts as well as the findings arrived at by the learned Tribunal on the analysis thereof, we are constrained to sustain the plea raised on behalf of the respondent- assessee. Not only, the learned counsel for the Revenue in course of the arguments could controvert the correctness of the finding of the learned Tribunal, inter alia on the aspect of the eligibility of the respondent-assessee for availing the benefit of deduction under section 80 IC of the Act in terms of sub-section (2) (b) (iii) thereof, no relevant legal provision or any decision of any court of law was cited to construe the amount as not derived by it from it's business. In Commissioner of Income Tax, Orissa Vs. Govinda Choudhury & Ors., Gosaninuagaon, Orissa, (Supra), the Hon'ble Apex Court held that the interest awarded to the respondent-assessee therein in an arbitration proceeding for delayed payments under a contract executed by him was to be recorded as business income and could not be treated as income from other source". Various High Courts of the country, as has been referred to by the learned Tribunal have held the similar view.” 5.7 In background of the above discussion, respectfully following the ratio laid down by the Hon’ble Courts in the judgments cited above, we are of the opinion that the interest income earned from the fixed deposit pledged with VAT Department was not having any first degree nexus with the eligible business of the assessee and therefore not a profit derived from the eligible business and accordingly not entitled for deduction under section 80 IC of the Act. Thus, this ground of the appeal is dismissed.
8 & 480/Del/2014 6. In ground No. 3 the assessee has challenged the confirmation of the disallowances of preoperative expenses of Rs. 86,883/- written off during the year. In subsequent assessment year i.e. AY 2010-11, the assessee submitted details of expenses incurred and amount amortized during the year and claimed for deduction, the detail of which is as under: Assessment Amount. amortized during Cumulative amount of Expenses during the Incurred the Previous year relevant preoperative expenses Previous year Year to the respective carried over at the end of relevant to the Assessment year relevant previous year. respective Assessment Year 2004-05 Rs. 56,104.00 Rs. 56,104.00 2005-06 Rs. 43,055.10 Rs. 99,159.10 2006-07 Rs. 1,138.23 Rs. 1,00,297.33 2007-08 Rs. 577.58 Rs. 1,00,874.91 2008-09 Rs. 3,33,540.00 Rs. 43,442.00 Rs. 3,90,972.91 2009-10 Nil Rs. 86,883.00 Rs. 3,04,089.91 2010-11 Nil Rs. 86,883.00 Rs. 2,17,206.91 6.1 It has been further claimed by the assessee that these preoperative expenses were incurred by the assessee from the date of formation of the partnership firm to the date of starting a business activities which included, preparation of the feasibility report and project report, conducting market survey necessary for the business of the assessee, engineering services related to the business of the assessee, legal charges for drafting agreements etc., however, the Assessing Officer in the assessment order held that no satisfactory details or explanation was furnished by the assessee in respect of the claim of Rs. 86,883/- claimed as preoperative expenses written off. The learned Commissioner of Income-tax(Appeals), upheld the finding of the AO with following remarks: “5. The ground against disallowance of Rs. 86,883/-. The Assessing Officer has made the disallowance in the absence of details supporting the claim of pre-operative expenses written off. It is the duty of the assessee to furnish the details as and when required for assessment of the income. There is no option if such details are not furnished, but to disallow the claim. I have no reason to interfere with the order of the assessment on this issue. Ground raised in appeal is dismissed.
9 & 480/Del/2014 6.2 Before us, the Ld. AR submitted that the assessee was entitled for amortization of the preoperative expenses at the rate of 20% as laid down in section 35D of the Act. 6.3 The ld. Departmental Representative, on the other hand, relied on the orders of the authorities below and submitted that in absence of any details provided by the assessee, the disallowance was rightly made. 6.4 We have heard the rival submissions and perused the material on record. The issue in dispute arose mainly due to non-furnishing of details of the expenses before the AO. In our opinion, there is no doubt that the assessee is entitled for deduction for the preoperative expenses amortized at the rate of 20% as per section 35D of the Act, but it is the responsibility of the assessee to furnish the details and bills and vouchers of the expenses before the Assessing Officer in scrutiny proceedings, therefore, we find it appropriate to restore the issue back to the file of the Assessing Officer and direct the assessee to produce the details and bills/vouchers in respect of the preoperative expenses and the Assessing Officer is directed to decide the deductibility of the expenses in accordance to law. We also direct the Assessing Officer to provide sufficient opportunity of hearing to the assessee. Accordingly this ground of the assessee is allowed for statistical purpose.
Ground No. 4 is in respect of a small amount of Rs. 45/-, debited in the profit and loss account as short and excess expenses, which was not pressed by the Ld AR, and therefore, the ground is dismissed as infructuous.
In ground No. 5, the assessee has raised as an alternative plea of allowing deduction under section 80IC of the Act, if the disallowance of preoperative expenses is sustained. We find that the issue of allowance of amortization of preoperative expenses, has already been restored to the file of the Assessing Officer for deciding in accordance to law, the ground raised by the assessee does not survive, and accordingly this ground of the appeal is dismissed as rendered infructuous.
10 & 480/Del/2014 9. In the result, the appeal of the assessee is partly allowed for statistical purpose. AY: 2010-11 10. Now we take up the appeal of the assessee in ITA No. 480/Del/2014. The grounds raised by the assessee are as under:
1. The Learned CIT (Appeals) imprecisely confirmed the order of the Learned Assessing Officer is in mechanical manner, without even considering the submission made during the course of appeal by the appellant and is totally bad in law & wrong on facts. The CIT (Appeals) has only gone by surmises, Conjectures and guess work in drawing inference and recording conclusion. In the absence of any cogent material to support his findings, the same being based on conjuncture and surmises cannot be upheld.
2. The Learned CIT (Appeals) has erred in law and on facts in confirming the disallowance made by the Learned Assessing Officer and adding back Rs. 86883.00 on account of Pre Operative Expenses written off during the year, without examining the detailed submission of the assessee.
3. The Learned CIT (Appeals) has erred while confirming the disallowance made by the Learned Assessing officer on account of the interest income while calculating the deduction under section 80IC stating that such income is not directly derived from the business. The interest received on FDR pertains to the interest on Fixed Deposit (With CITI Bank) made and kept as a security Deposit with the VAT Department (Himachal Pradesh) for getting the VAT Registration. Until and unless such sum (Fixed Deposit) is not kept under the lien of VAT Department (Himachal Pradesh) the registration of VAT may never be granted consequently no Business Operation may be carried on. Hence interest so received is an income (First Degree Income) derived from the eligible Business.
4. The CIT (Appeals) has erred in law and on facts, in not allowing necessary additional deduction under section 80IC of Income Tax Act, 1961 on account of disallowance of amortization of Pre Operative Expenses under section 35D. Therefore, necessary directions are to be given to recompute the deduction under section 80IC of The Income Tax Act, 1961. (This ground of appeal is applicable only when our ground of appeal number 2 is not admitted, though the assessee is contesting over the same here before yours honor.)
5. The Appellant carves leave to add, alter or amend any/all the grounds of appeal before or during the course of appeal
11. We find that grounds of appeal raised are identical to the grounds of appeal raised in ITA No. 1211/Del/2013, therefore, the grounds of the present appeal are also decided mutatis mutandis.