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Income Tax Appellate Tribunal, DELHI BENCH:‘D’ NEW DELHI
Before: SHRI N.K. SAINI & SMT. BEENA PILLAI
ORDER PER BEENA PILLAI, JUDICIAL MEMBER:
These are cross appeals filed by the assessee as well as the Revenue arising out of the order passed by the CIT(A)’s-1, Dehradun dated 23/12/2011 for A.Y. 2009-10.
Brief facts of the case as recorded by the ld.AO are that the assessee filed its e-return on 27/09/2009 declaring NIL income. The & CO No. 197/D/2012 2 case was selected for scrutiny. The assessee is engaged in the manufacture of pre-engineered building and has manufacturing facility located at plot no. 2, sector-11, IIE, Sidcul, Hardwar. In the return filed by the assessee it had claimed a deduction u/s 80IC of the Act at an amount of Rs. 15,16,07,372/-. During the assessment proceedings, the ld.AO observed that several receipts does not have direct nexus with the manufacturing activities, which have been included for claiming deduction u/s 80IC of the Act. These are as under: i) Interest income amounting to Rs.34,08,028/- earned on FDRs which was created to pledge with the bank as margin money for opening of letter of credit (LC) or issuing of bank guarantee. ii) Miscellaneous income/provision return back amounting to Rs. 1,17,40,056/-.
The ld.AO made addition of the respective amount as not being eligible to be included for calculating the claim of deduction u/s 80IA of the Act. 4. Aggrieved by the order of the ld.AO, the assessee went into appeal before the ld. CIT(A) I. 5. The ld. CIT(A) after going through the arguments of the assessee observed that the interest on FDs given as security for LC’s, is eligible for deduction u/s 80IC. However, the interest on FDs on bank guarantee was held to be not eligible. In respect of the remaining addition made by the ld.AO, in lieu of the miscellaneous income, the ld. CIT(A) held that, the assessee had made the provision in respect of the business expenditure and there is no reason why the same should not be treated as anything but profit derived from business when part of such liability has been returned back as the same is not required any more. The ld. CIT(A), therefore, deleted the addition made in ITA No. 923/D/2012 & CO No. 197/D/2012 3 respect of the provision written off. In respect of foreign exchange gain on account of exchange fluctuation rate between the date of receipt of the imported material and the date of payment for the same. The ld. CIT(A) observed that exchange fluctuation is a part and parcel of international monitory system. As a result, there can be gain or loss in terms of the local currency, even though the value of the transaction in terms of the currency in which the contract was made remains the same. The ld. CIT(A) hence deleted the addition made by the ld. Assessing Officer in respect of foreign exchange fluctuation rate and held the gain to be eligible for deduction u/s 80IC of the Act.
Aggrieved by the order of the ld. CIT(A) the assessee as well as the Revenue is in appeal before us in respect of the respective confirmation of the addition/deletion made by the ld.CIT(A).
7. We shall first deal with the appeal filed by the Revenue in . The grounds of appeal
filed by the Revenue are as under: 1. “The ld. CIT(A) has erred in law and on facts in allowing claim of deduction u/s 80IC on income from interest, miscellaneous income and on account of provision written back in spite of clear cut finding given in the assessment order that these were not derived by the assessee from the manufacturing activity of the eligible business.
2. The ld. CIT(A) has erred in law and on facts by upholding the submission of the assessee ignoring the decision of the Hon’ble Apex Court in the case of Liberty India vs. CIT, 183 Taxmann 349 (2009).
3. The order of the ld. CIT(A) be set aside and that of the Assessing Officer be restored.”
The ld. DR relies upon the order passed by the ld. Assessing Officer in respect of the grounds raised in the Revenue’s appeal. & CO No. 197/D/2012 4
We have perused the records filed before us, the orders passed by the authorities below and the arguments by both the parties.
Section 80IC of the Act holds that income qualifying for deduction under this section should be derived from business of manufacture or production of article or thing which is eligible for deduction. The expression derived from in taxation loss means something which has direct or immediate nexus with the specified activity which in the present case means manufacture and sale of pre-engineered buildings. The expression “derived from” is a narrower expression, then the words “attributable to”, which includes direct as well as indirect receipts, which may not have immediate or direct nexus with the specified activity. In the present case, in view of the words derived from, we have to look at the immediate source which has generated or remitted in the said receipt/income. The meaning of “derive from” as explained by the Apex Court in the decision of Liberty India vs. CIT (2009) 317 ITR 218 also needs to be applied in the case of provisions for 80IC. 10. In the light of the above, we shall analyze the grounds raised
by the Revenue.
11. Ground no. 1 deals with the deletion of income from interest, miscellaneous income and income from foreign exchange fluctuation. Bank Interest: He ld.CIT(A) has observed that the assessee has to import raw materials for which it has to open letters of credit. Ld. CIT(A) in his order summarizes submissions of the assessee as under; The assessee has to import raw materials for which it has to open letters of credit(LC). The LC is an integral part of the business activity carried on by the assessee. Since pledging of FDR is necessary for drawing LC, the FDR is also an integral part of the business. The & CO No. 197/D/2012 5 ld.CIT(A) at para 1.4 of his order observes that such FD’s had to be made before the raw material could be imported and hence the FD’s were inextricable part o the assessee’s business. We, do not find any infirmity with the findings of the ld.CIT(A). We have upheld the action of the Ld.CIT(A) on identical ground for assessment year 2008-09 in ITA no. 923/D/2012. We therefore following the principle of consistency, uphold the action of the ld.CIT(A) in deleting the addition in respect of the miscellaneous income. Miscellaneous Income: An amount of Rs. 29,65,229/- representing recovery of cost from customers against supplies, which were subsequently cancelled by the customers, was shown as miscellaneous income by the assessee. Ld. CIT(A) in his order summarizes submissions of the assessee as under; The ld. CIT(A) observed that the amount received by the assessee against cancelled orders will be considered as part of the profit derieved from eligible business, for the purposes of deduction u/s.80 IC. We, do not find any infirmity with the findings of the ld.CIT(A). We have upheld the action of the Ld.CIT(A) on identical ground for assessment year 2008-09 in ITA no. 923/D/2012. We therefore following the principle of consistency, uphold the action of the ld.CIT(A) in deleting the addition in respect of the miscellaneous income. Ground no. 2: 12. Hon’ble Supreme Court in the case of Liberty India vs. CIT reported in (2009) 317 ITR 218 held as under; “Analysing Chapter VI-A, we find that section 80-IB/80-IA are a code by themselves as they contain both substantive as well as & CO No. 197/D/2012 6 procedural provisions. Therefore, we need to examine what these provisions prescribe for "computation of profits of the eligible business". It is evident that section 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words "derived from" are narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree.”
Hon’ble Supreme Court in a subsequent decision, in the case of Mepco Industries Ltd., Vs. CIT reported in (2009) 319 ITR 208, held that the nature of a subsidy ineach case, is separate and distinct and, therefore, the nature of subsidy has to be examined in each case independently. Hon’ble Supreme Court held as under; “Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 (SC) was a case which dealt with production subsidy, Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) dealt with subsidy linked to loan repayment whereas the present case deals with a subsidy for setting up an industry in the backward area. Therefore, in each case, one has to examine the nature of the subsidy. The judgment of this court in Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 was on its own facts ; so also, the judgment of this court in Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC). The nature of the subsidies in each of the three cases is separate and distinct. There is no strait jacket principle of distinguishing a capital receipt from a revenue receipt. It depends upon the circumstances of each case. As stated above, in Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 (SC), this court has observed that the production incentive scheme is different from the scheme giving subsidy for & CO No. 197/D/2012 7 setting up industries in backward areas. In the circumstances, the present case is an example of change of opinion. Therefore, the Department has erred in invoking section 154 of the Act.” (Emphasis supplied) 14. In the light of the decision of Mepco Industries Ltd.(supra), one can have no escape from the conclusion that the nature of the subsidy has to be examined by the Court, In each case, in order to determine if as assessee’s undertaking is entitled to a particular deduction under sec. 80 IC of the Act.
In the present case the issue is whether the interest income, miscellaneous expenses, foreign exchange fluctuation comes within the first degree.
In the light if the above discussion, we are therefore of the considered opinion that the decision of the Ld.CIT(A) in deleting the addition made by the ld.AO in respect of Bank Interest and Miscellaneous expenses, do not suffer from any infirmity, legal or factual and can be said to have a direct nexes with the business activity carried on by the assessee.
Cross Objection No. 197/Del/2012: The ld. AR submits that there is a delay of 43 days in filing the cross objection. We have perused the affidavit dated 5.02.2013, filed by the Director of the assessee. We are of the considered opinion that, it was a bonafied mistake on behalf of the assessee, due to which the cross objection could not be filed in time. We are therefore the condone of delay of 43 days.
The ground raised
by the assessee is as under: 1. “The ld. CIT(Appeals)-1, Dehradun erred in law and in facts in holding that the interest income earned on fixed deposits made with the banks for providing guarantee to its customers, in lieu of performance guarantee or advance payments received from them, is not a profit derived from the & CO No. 197/D/2012 8 eligible business and consequently denying the benefit of deduction u/s 80IC of the Act on the said interest income.
2. The ld.CIT(A) erred in law and in fact in holding that miscellaneous income with respect to amount received against scrap tender charge, damage charges, insurance claim, etc., do not have any direct nexus with the manufacturing and supply of goods and consequentially, denying the benefit of deduction under section 80 IC of the Act on the said interest income. The Respondent craves for leave to add, amend, vary, omit or substitute any of the aforesaid grounds of cross objection at any time before or at the time of hearing of the appeal.”
Ground no. 1 19. Ld. CIT(A) in his order summarizes submissions of the assessee as under; The assessee had earned interest in the fixed deposits made with the banks for providing bank guarantee. That customers of the assessee, generally releases 90 to 95% of the sale value and retain the balance 5 to 10% as performance guarantee. This performance guarantee is often en-cashed by assessee by giving equivalent amount of bank guarantee. Sometimes assessee received advances from customers for which it has to give bank guarantee in favour of the letter. The ld.CIT(A) held that the interest on FD’s for the purposes of giving bank guarantee is not linked to the business activity of the assessee. The ld.AR placed reliance on page 104 of the Paper Book which is a purchase order, wherein the terms of the payment have been aggeed upon by the assessee. It is observed that the bank guarantee to an extent of 10% has to be given by the assessee in its due course of the business. The ld. CIT on one hand has observed that the letters of credit is an integral part of the assessee’s business. On the other hand he did not appreciate that the bank guarantee is also a part of the business activity carried on by the assessee. The terms of the & CO No. 197/D/2012 9 payment at page 105 of the PB is very clear that the assessee is necessarily to give the advance bank guarantee to its customers in the format as aggrieved upon between them.
We are therefore of the considered opinion that the bank guarantee is a part of the purchase process, and the income arising there from, has to be said to have been derived from the assessee’s business. We have deleted the addition confirmed by the ld.CIT(A) on identical ground for assessment year 2008-09 in CO no. 197/D/2012. We therefore following the principle of consistency, delete the addition made by the ld. Assessing Officer in respect of the interest earned from bank guarantee. Ground no.2: 21. The ld.CIT(A) in para 2.1 records that the assessee had funished details in respect of amount received against scrap tender charge, damage charges, insurance claim, cash received against plant light ballast by transporter driver, cash received against damage by driver etc. The ld.CIT(A) has also observed that these receipts have nothing to do with an order placed or subsequently cancelled by a customer. Further the ld.CIT has directed the assessee to file complete details along with documentary evidence before the ld.AO, who would be examining the same.
We observe that the ld.CIT (A) has set aside the issue to the ld.AO for verification. We do not find any infirmity with the findings of the ld.CIT(A) in this respect. We therefore uphold the order of the ld.CIT(A).
The cross objection of the assessee stands partly allowed in lieu of our above findings.
The assessee has filed an additional ground to the cross objection on 09/07/2013, wherein the following grounds have been raised: & CO No. 197/D/2012 10
Whether the Assessing Officer has erred in law and on facts of the case in not considering the net interest income on FDRs after setting off of bank charges for the purpose of computing taxable income of the appellant?”
The assessee submits that inadvertently the ground could not be raised in the cross objection.
As we have held that the interest income on FD made with the banks for providing bank guarantee has direct nexus with the business activity of the assessee, this ground of appeal
does not require any adjudication.