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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
PER SAKTIJIT DEY, J.M.
The aforesaid appeal of the assessee is directed against the order dated 18th August 2010, passed by the learned Commissioner (Appeals)–16, Mumbai, for the assessment year 2005–06.
In the memorandum of appeal, assessee has raised five grounds.
Grounds no.4 and 5 being general in nature, do not require specific adjudication.
2 M/s. Duflon Polymers Pvt. Ltd.
Thus, the effective grounds raised by the assessee are as under:–
“1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in denying deduction of interest expenditure of ` 25,27,399 by making prorate allocation of expenditure for the e–learning activity and thereby erroneously invoking the proviso to section 36(1)(iii) of the Act. 2. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in treating the interest income of ` 14,09,124 as income from other sources and excluding it from the profits eligible for exemption under section 10B. 3. The learned Commissioner (Appeals) has erred in law, facts and circumstances of the case by initiating interest under section 234B and 234C.
Besides the above mentioned grounds, the assessee vide letter dated 2nd May 2016, has raised the following additional grounds:–
In the facts and circumstances of the case the learned CIT(A) erred in not allowing netting of interest income earned amounting to ` 14,09,124 against interest paid amounting to ` 1,40,46,118 (net ` 1,26,36,994).
However, at the time of hearing, assessee did not press the aforesaid additional ground. Hence, the additional ground is dismissed as not pressed.
Insofar as ground no.1 is concerned, brief facts are, the assessee a company filed its return of income on 27th Oct 2005, for the year under consideration declaring total income of ` 32,82,900. In the
3 M/s. Duflon Polymers Pvt. Ltd.
course of assessment proceedings, the Assessing Officer, on a perusal of the Balance Sheet noticing that the assessee has shown capital work–in–progress of ` 9,32,38,381, but has not capitalized proportionate interest expenditure, called upon the assessee to explain why proportionate disallowance out of the total interest expenditure should not be made towards utilization of funds for capital work–in– progress. In response to the show cause notice, though, it was submitted by the assessee that no part of borrowed funds were utilised towards the e–learning division, which is not a 10B unit and the entire investment / expenditure towards that unit was from internal accruals, but, the Assessing Officer rejecting the claim of the assessee disallowed the amount of ` 25,27,399, out of the interest expenditure under section 36(1)(iii) of the Act. Being aggrieved of such disallowance, assessee challenged the same before the learned Commissioner (Appeals). However, the learned Commissioner (Appeals) also confirmed the disallowance alleging that the assessee neither before the Assessing Officer nor before him has furnished any fund flow statement or bifurcation to show that borrowed funds were not utilised for the purpose of its new division i.e., e–learning division.
Learned Authorised Representative submitted, assessee has not obtained any fresh loan during the previous year relevant to the impugned assessment year. He submitted, the loan was carried
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forward from the preceding assessment year and while deciding similar dispute of disallowance of interest expenditure towards utilization of funds for e–learning division, the issue has been decided by the Tribunal in assessee’s own case for the assessment year 2004–05 by holding that no disallowance can be made.
Learned Departmental Representative relied upon the order of the Assessing Officer and the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record. As could be seen, the assessee has two units, one of which is engaged in the manufacture of export of Teflon products and is a 100% export oriented unit enjoying exemption under section 10B of the Act. However, the assessee established a new division i.e., e–learning division which undertakes developing e–learning products and models for providing e–learning at class room and home. This unit is not exempt under section 10B. It is evident on record right from the stage of assessment proceedings, the assessee has contended that the entire investment in e–learning division was from internal accruals and loans obtained from State Bank of India was entirely utilised towards the activities of its export unit. However, the claim of the assessee has been brushed aside by the Departmental Authorities in a perfunctory manner. It is not disputed
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that the assessee in the impugned assessment year has not obtained any fresh loan. The loan obtained from State Bank of India was in the preceding assessment year and utilised towards working capital of its export oriented unit. Moreover, in the immediately preceding assessment year, i.e., assessment year 2004–05, the Assessing Officer made similar disallowance of interest expenditure by apportioning part of it towards e–learning division. When the assessee agitated the matter in appeal, the Tribunal in ITA no.6637/Mum./2009, dated 10th August 2012, held as under:–
“10. We have considered the rival contentions. On perusal of the records available before us, it is seen that the term loan which have been taken by the assessee have been specifically earmarked for the purpose of manufacturing unit at Mahad. This is evident from the documents available at Pages-46 to 50 of the paper book. As per Schedule-C forming part of balance sheet as at 31st March 2004, it is seen that the term loan taken from SICOM is against plant and machinery, factory building and was specifically for Mahad unit. The assessee has taken working capital loan taken from State Bank of India as cash credit account after hypothecation of raw materials, goods in process and finished goods. For other unsecured loan, the assessee has not paid any interest which is evident from the fact that the entire interest liability is for term loan taken from SICOM and working capital loan from the State Bank of India. Only a sum of ` 93,624, has been paid towards unsecured loan. Thus, the contentions of the assessee that the loan was taken only for manufacturing unit at Mahad and not for E- learning division, appears to be correct. However, the break-up of expenditure of capital work-in-progress given at Page-84 of the paper book which gives the details for expenditure which have been capitalized since last three years, it is seen that most of the expenditures are common which have been accepted by the Department in the earlier years. No interest has been shown as capitalized in the capital work-in-progress. Simply because the assessee has not furnished cash flow fund to prove that funds utilized for capital work–in-progress for E-learning division and were not out of borrowed funds, the contentions of the assessee
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cannot be brushed aside. There has to be something on record to show that the borrowed funds taken for different units have been diverted to E-learning division. Thus, the findings given by the Assessing Officer as well as Commissioner (Appeals) are totally germane from the facts and material on record. Once we find that no borrowed funds have been utilized for E-learning division or for its expenditure, the judgment relied upon by the Commissioner (Appeals) in Varchaman Polytex Ltd. (supra) does not apply. Thus, the proportionate disallowance of interest made by the Assessing Officer and confirmed by the Commissioner (Appeals) cannot be sustained. Consequently, we set aside the impugned order passed by the Commissioner (Appeals) and allow the ground raised by the assessee.”
There being no material difference in facts brought to our notice by the learned Departmental Representative, respectfully following the decision of the co–ordinate bench, we delete the addition made by the Assessing Officer by disallowing a part of the expenditure claimed by the assessee.
In ground no.2, the assessee has challenged the disallowance of exemption under section 10B in respect of interest earned on fixed deposit by treating it as income from other sources.
Brief facts are, during the assessment proceedings, the Assessing Officer while examining assessee’s claim of exemption under section 10B, noticed that as per TDS certificate attached with the return of income, it has received interest of ` 14,09,124 from bank which has been credited to Profit & Loss account as business income. When the Assessing Officer called upon the assessee to justify his claim of
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exemption under section 10B, on the interest income, it was stated by the assessee that as the fixed deposits are kept towards margin money for opening letter of credit, the interest earned on such fixed deposit having nexus with the business of assessee should be treated as business income. The Assessing Officer, however, did not find merit in the submissions of the assessee. Relying upon certain decisions, he held that the interest earned on fixed deposit is to be treated as income from other sources and accordingly, excluded from the profits of business for computing exemption under section 10B. Though, the assessee challenged the aforesaid decision of the Assessing Officer before the first appellate authority, he also upheld the same. Being aggrieved, assessee is in appeal before us.
Learned Authorised Representative reiterating the stand taken before the authorities below submitted, as the fixed deposits were kept towards margin money with the banks for opening letter of credit for the purpose of assessee’s business of manufacture and export of products, the interest income is directly related to the business of the undertaking, hence, is eligible for exemption under section 10B. For such proposition, he relied upon the following decision.
i) Riviera Home Furnishing v/s ACIT, [2016] 65 Taxmann.com 287 (Del.); ii) CIT v/s Motorola India Electronics Pvt. Ltd., [2014] 46 Taxmann.com 167 (Kar.); and
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iii) Livingstones Jewellery Pvt. Ltd. v/s DCIT, [2009] 31 SOT 323 (Mum.).
Learned Departmental Representative relied on the order of the Assessing Officer and the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record. On a careful reading of the orders of the Assessing Officer and the learned Commissioner (Appeals) as well as other materials on record, it is evident that the Departmental Authorities do not dispute the fact that the fixed deposits from which the assessee earned interest income were kept as margin money with the banks for obtaining the letter of credit required for export of its manufactured products. Therefore, it is obvious that the assessee was compelled to invest in fixed deposit in the concerned banks for obtaining letter of credit. In other words, a part of the amount sanctioned by the banks towards letter of credit was retained as fixed deposit towards margin money. Thus, the above fixed deposits are having direct nexus with the business of the assessee, therefore, the income earned on such fixed deposit has to be treated as part of the income derived from the business of the undertaking. The decisions relied upon by the learned Authorised Representative clearly support this view. That being the case, we direct the Assessing Officer to allow
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assessee’s claim of exemption under section 10B, in respect of interest income of ` 14,09,124. Ground no2, is allowed.
Ground no.3 being on the issue of levy of interest under section 234B and 234C of the Act, we direct the Assessing Officer to give consequential effect while re–computing the income of the assessee keeping in view our findings given above and in accordance with the provisions of law.
In the result, appeal is partly allowed. Order pronounced in the open Court on 13.05.2016
Sd/- Sd/- SAKTIJIT DEY RAMIT KOCHAR ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 13.05.2016 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary (Dy./Asstt. Registrar) ITAT, Mumbai