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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM
Assessee by: Shri M. Subramanian Department by: Smt. Pooja Swaroop सुनवाई क" तार"ख / Date of Hearing: 22.04.2016 घोषणा क" तार"ख /Date of Pronouncement: 20.07.2016 आदेश / O R D E R PER AMARJIT SINGH, JM:
The revenue has filed the present appeal against the order dated 10.11.2004 passed by the Commissioner Of Income Tax (Appeals) XVIII, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2001-02. 2. The revenue has raised the following grounds of appeal:- A.Y.2001-02 “(i) Directing to treat amounting to Rs.37,16,803 as business profit eligible for deduction u/s.80HHC ignoring that the receipt of interest is not derived from export of goods;
(ii) Directing to treat Sales tax refund of Rs.51,100/- as business profit eligible for deduction u/s.80HHC ignoring that the Sales tax refund cannot be said to be derived export sale proceeds in foreign exchange and hence not eligible for deduction u/s.80HHC;
(iii) Holding that the interest on FDR is to be netted off against the interest payment expenses ignoring that there is no nexus between interest expenditure and interest on FDR;
(iv) Holding that the interest on FDR is to be netted off against the interest payment expenses ignoring that any receipts not forming part of sale proceedings relating to export cannot be considered as business profits eligible for deduction u/s.80HHC;
(v) Directing to treat interest income as business income without appreciating that financing is not the business of the appellant and the same cannot be netted off against the interest payments allowable as business expenditure u/s.36 of the Income Tax 1961;
(vi) Directing to treat interest on FDR as business income eligible for deduction u/s.80HHC ignoring that interest income does not form part of sale proceedings relating to export for the purpose of deduction u/s.80HHC;
(vii) Ignoring the jurisdictional High Court decisions in A.K.Doshi in 249 ITR 849 Kantila Chotalal in 246 ITR 439, Ravi Exports in 246 ITR 443 and Pravin M. Mehta in 246 ITR 445 holding that interest on FDR in income from other sources and not export income eligible for deduction u/s.80HHC;
(viii) Directing to allow deduction u/s.80HHC without appreciating that the assessee has no positive income from A.Y.2001-02 export of 90% of incentives and other income are reduced from profit of the business; (ix) Holding that the appellant is entitled for deduction u/s.80HHC ignoring that the interest income is to be considered per Explanation (baa) to Section 80HHC (3) a of the Income Tax Act 1961; (x) Directing to allow 10% of expenditure on export incentives of Rs.1,22,88,256/- as indirect cost without appreciating the facts that there are no provisions in Section 80HHC to allow such ad-hoc expenditures; (xi) Directing to deleted the addition of Rs.2,37,57,005/- holding that the purchases are fully explained per books of accounts ignoring that the suppliers are untraceable, transactions through books and in cash, details furnished by the brokers not relevant; (xii) Deleting the addition of Rs.2,37,57,005/- being unproved purchases ignoring the facts that M/s. K.G.Denim Ltd. denied any transaction with the appellant.”
3. The brief facts of the case are that the assessee firm has filed the return of income on 30.10.2001 declaring total income to the tune of Rs. Nil and declaring 20% of amount of deduction u/s.80HHC of the Income Tax Act, 1961( in short “the Act”) claimed on Rs.22,33,208/- as taxable income. The return is accompanied by Audit Report as required u/s.44AB of the Act in Form No. 3CB and 3CD. The case was selected for scrutiny and notices u/s.143(2) and 142(1) of the Act were issued and served upon the assessee. Thereafter, the Assessing Officer concluded the assessment of the assessee declaring total income to the tune of Rs.3,51,23,045/-. The A.Y.2001-02 assessee filed an appeal before the CIT(A) and the CIT(A) allowed the 10% of the expenditure on export incentive of Rs.1,22,88,256/- and also deleted the addition of Rs.2,37,57,005/-, therefore the revenue has filed the present appeal before us.
ISSUE NO.1, 3, 4, 5, 6 & 7:-
Issue no.1, 3, 4, 5, 6 & 7 are interconnected, therefore are being taken up together for adjudication. Under these issues the revenue has challenged the non taxability of the gross interest of Rs.37,16,803 on the FDR held by the CIT(A). The finding of the CIT(A) is hereby mentioned below.
“3.1 The first point of dispute concerns the taxability of gross interest of Rs.37,16,803/- on the FDRs. In this regard, the appellant has filed before me not only a copy of the order of the ITAT, Mumbai ‘F’ Bench referred to in para 2.21 of this order, but has also filed copies of orders of CIT(A)-XVII (A.Y.1992-93) dtd.28.04.1997, CIT(A)XLVII (A.Y.1997-98) dtd. 16.01.2001, CIT(A)- XVIII for A.Y.s 1998-99 & 1999-2000, dtd. 21.02.2002 & 26.06.2002, respectively wherein it has been uniformly held that in the facts and circumstances of the case, interest received is to be considered as income from business and also that interest received and interest paid A.Y.2001-02 will have to be netted off. Following the earlier decisions, with which I am in full agreement, I hold that the gross interest cannot be taxed by itself. The interest paid in this case is Rs.59,29,103/-, which is much higher than the interest received. After netting off, the balance interest as debited to the P & L Account will have a normal effect on the profits of the business. The netting off method of taxation of interest will, therefore, come into play for computing the eligible deduction u/s.8HHC, if any. The A.O. is directed not to tax the Gross Interest.
3.1.1 Even on the merits of the case, I have examined the matter in the light of the decision of the Hon’ble ITAT Mumbai – ‘C’ Bench in the case of DCIT Vs. Diamond Creel (2001) (82 ITD 291), wherein the Hon’ble Tribunal held that where there is a direct nexus between the borrowings of an assessee utilized for business purpose, and the funds kept as FDRs by way of security, margin money etc., then interest, if any received on such FDRs will have to be netted off while considering and calculating deduction u/s.80HHC. In the instant appellant’s case, it is seen that all the FDRs are acquired from the funds taken from the O.D. account with IOB and thus, on facts also there is a direct nexus. This point, A.Y.2001-02 therefore, goes in favour of the appellant. The appellant has furnished a certificate from the bank, certifying that the FDRs were all acquired by debiting the O.D. account. It is also seen that the O.D. balances, both at the beginning and at the end of the year, far exceed to aggregate of the FDRs.”
The CIT(A) has decided these issues on the basis of the finding in the assessee’s own case in for the A.Y.1992- 93 decided on 23.06.2004. No distinguishable material has been placed on record. Moreover, the CIT(A) has also rendered the finding in the appeal of the assessee for the A.Y.1998-99, 1999-2000 and 1997-98. No finding contrary to the present finding is on record. We found no reason to interfere with the finding of the CIT(A) on record, therefore these issues are decided in favour of the assessee against the revenue ISSUE NO.2:-
Under this issue the revenue has challenged the finding of CIT(A) on account of treating the sale tax refund of Rs.51,100/- as allowable u/s.80HHC of the Act. The CIT(A) has decided the said issue on the basis of decision in case of Alfa Level Ltd. Vs. CIT 266 ITR 418. It has been held that the sales tax refund is to be assessed as part of business profit under the head profit and gains of business and A.Y.2001-02 the same could not be excluded while calculating deduction u/s.80HHC of the Act. The appellant is a 100% exporter therefore the sales tax refund was considered as a part of profit on business for computing deduction u/s.80HHC of the Act. No distinguishable facts came into notice before us to which it can be assume that the CIT(A) has arrived at wrong conclusion. The finding of the CIT(A) is based upon the decision of Income Tax Appellate Tribunal in the case of Alfa Level Ltd. Vs. CIT (Supra), therefore, in the said circumstances we are of the view that the CIT(A) has decided this issue judiciously and correctly which does not require to be interfere with at this appellate stage.
ISSUE NO.8, 9 & 10:-
Issue no.8, 9 and 10 are interconnected therefore, are being taken up together for adjudication. Under these issues the matter of controversy is that whether the appellant is entitled to deduction u/s.80HHC of the Act in view of the finding of the Assessing Officer that the assessee has no positive income from the export of 90% of incentives and other income, are reduced from profit of the business. Before going further it is necessary to advert the finding of the CIT(A) on record:-
3.3 The next issue to be dealt with is whether the appellant is entitled to deduction u/s.80HHC at all in view of the finding of A.Y.2001-02 the A.O. that if the export incentives are excluded, there is a negative profit. In this regard, after careful consideration of the rival submissions, I am of the clear and firm opinion that the Assessing Officer has come to a wrong conclusion that the appellant firm has not derived any profits from the export business. While coming to this wrong conclusion, the A.O. has reduced the Gross export incentives of Rs.1,23,88,256/- from the Net profit of Rs.1,11,66,040/-. Since this gives a minus figure, he concluded that the appellant has incurred loss in the export incentives and other receipts. It is generally an accepted fact that 10% of the amounts included in export incentives and other receipts, should be considered as expenditure incurred for earning the said export incentive and other receipts. This is also clear from the decision of the Honorable ITAT, Mumbai Hon’ble Special Bench in the case of Surendra Eng. Corpn. Vs. ACIT (2003) 78 ITJ 347, wherein it was held that what relates to exports is 90%, as 10% clearly is the expenditure for earning other income. It is also of importance to note that while computing deduction u/s.80HHC, one has to proceed in accordance with the provisions laid down in the Income Tax Act. The export profit is to be computed under Clause (a), (b) or (c) of Sub Section (3) of Section 80HHC. Only if this figure is negative then the appellant can be denied deduction u/s.80HHC.
A.Y.2001-02 “3.3.1 In the instant appellant’s case the working would be below:-
Net Profit as per P & L A/c. Rs.1,11,66,040 Less: 90% of the receipts being Interest(Net) Rs. NIL Export Incentives (i) Duty Drawback Rs.87,51,735/- (ii) Entitlement Rs.35,30,613/- (iii) Quota premium Rs. 1,05,908 Rs.1,23,88,256 90% thereof Rs.1,11,49,430 Profits of Business (+) Rs. 16,610 Prof rata Export Profits (Refer 80 HHC(3)(a) Rs. 16,610 3.3.2 Thus, since the profits derived from the export activity is a positive figure, the appellant is eligible for deduction u/s.80HHC. The A.O. is directed to re-compute and grant deduction u/s.80HHC in accordance with law. In this regard, it is noteworthy that even the recent decision of the Hon’ble ITAT ‘F’ bench, Mumbai in the case of M/s. Mangalya Trading & Investment Ltd. Vs. DCIT, Spl. Rg. 20 in for A.Y.1995-96 will not come in the way of the appellant getting the benefit of deduction u/s.80HHC, as there is a positive profit after reducing 90% of the export incentives. Also in view of the decision of the ITAT, Mumbai ‘H’ Special Bench in the case of M/s. Surendra Engineering A.Y.2001-02 Corpn. (supra), the A.O. is directed to reduce 10% of the export incentives while calculating Indirect Cost.”
Not distinguishable facts were placed on record by the revenue to which it can be assumed that the finding given by the CIT(A) is wrong against law and facts. The CIT(A) has passed the order on the basis of order passed by the ITAT, Mumbai ‘H’ Special Bench in the case of M/s. Surendra Engineering Corpn. (supra). Finding no contrary view taken by any other court of law, we are of the view that the CIT(A) has passed the order judiciously and correctly which does not require to be interfere with at this appellate stage. Accordingly, these issues are decided in favour of the assessee against the revenue.
ISSUE NO.11 & 12:-
Under the above said issues the revenue has challenged the deletion of the addition to the tune of Rs.2,37,57,005/- by holding that the purchases are fully explained in the books of account whereas the supplier were not traceable. The finding of the CIT(A) is hereby reproduced below.
5.1 I have duly considered the submissions and arguments of the ld. A.R. I am, however, unable to agree that there was some compulsion on the appellant in making the payments for the purchase of fabric in cash. After examining all aspects of the matter, I find that the A.Y.2001-02 aforesaid payments do not fall under any of the exemptions provided under fule6DD. I, therefore, hold that 20% of the aggregate cash payments of Rs.2,98,38,205/- (Rs.2,39,57,005/- added back by the A.O. u/s.69A + Rs.58,81,200/- considered as satisfactorily explained by the A.O.) will have to be disallowed u/s.40A(3). The disallowance thus comes to Rs.59,67,641/-. However, I find considerable merit in the arguments of the ld. A.R. that if the above disallowance is made, the cost of purchases decreases to the same extent and the appellant being a 100% exporter, the consequent ‘profits of business’ increases by a like amount. Correspondingly, the direct costs would go down and deduction u/s.80HHC would stand enhanced. The net result would be that 80% of the addition of Rs.59,67,641/- would have to be allowed as a deduction u/s.80HHC leaving only the balance 20% amounting to Rs.11,93,528. Consequently, while stating the quantum of relief given by virtue of this order, in para 4.2., I have directed that relief of Rs.2,27,63,475/- would be available to the appellant out of the addition of Rs.2,39,57,005/- made in the assessment order. This direction is however subject to the A.O. carrying out a verification of the allowable deduction u/s.80HHC while giving effect to A.Y.2001-02 this order. He may recomputed 80HHC deduction in the light of my directions.
These issues have been remanded by the CIT(A) to the Assessing Officer for the verification of the allowable deduction u/s.80HHC of the Act while giving effect to the order of CIT(A). The representative of the department has raised the question of verification while in this regard the CIT(A) has already directed the Assessing Officer to verify the claim of the assessee in view of the directions as desired by the CIT(A) while deciding this issue. No justifiable facts have been placed on record to take the contrary view of the said finding. Moreover these issues are based upon the facts of the case which can be verified by the Assessing Officer in accordance with law. On appraisal of the above said order we find no reasons to interfere with in the order passed by the CIT(A) in question. These issues are decided in favour of the assessee against the revenue.
In the result, the appeal filed by the revenue is hereby dismissed.
Order pronounced in the open court on 20th July, 2016. (R.C.SHARMA) (AMARJIT SINGH) लेखा सद"य / ACCOUNTANT MEMBER "या"यक सद"य/JUDICIAL MEMBER मुंबई Mumbai; "दनांक Dated :20th July, 2016 MP MP MP MP A.Y.2001-02