Income Tax Appellate Tribunal - Kolkata
Mcleod Russel India Ltd, Kolkata vs Department Of Income Tax on 11 February, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH: KOLKATA
[Before Shri P.K.Bansal, A.M. & Shri Mahavir Singh, J.M.]
I.T.A. No.288/Kol/2011 : Assessment Year 2007-08
DCIT, Circle-4, Kolkata -Vs- M/s. Mcleod Russel India Ltd.
4, Mangoe Lane,
Kolkata - 700 001
(Appellant) (Respondent)
Date of concluding the hearing : 11.02.2013
Date of pronouncing the Order : 15.02.2013
Appearances : For the Appellant : Shri A.K.Mahapatra
: For the Respondent : Shri A.K.Gupta
ORDER
Per Bench :
This appeal has been filed against the order of the CIT(A)-IV, Kolkata dated 24th April, 2010 for the assessment year 2007-2008 by taking the following effective grounds:
"1. That on the facts and circumstances of the case, Ld. CIT(A)-IV, Kolkata has erred in law in deleting the addition of 8,61,32,000/- on account of cess on green leaf without considering the fact that expenses on account of cess on green leaf is related to 100% agricultural operation and SLP is pending before the Hon'ble Supreme Court against the decision of Calcutta High Court in the case of AFT Industries Ltd.-vs-CIT (270 ITR 167) in the light of which Ld. CIT(A) decided the issue in favour of the assessee.
2. That on the facts and circumstances of the case, Ld. CIT(A)-IV, Kolkata has erred in directing the A.O. to allow the claim of the assessee of 4,50,62,522/- on account of depreciation since the amendment to section 43(6) was introduced in Parliament to show intention of legislature as clearly mentioned in Hon'ble finance Minister's speech in Parliament and accepting the decision will defeat the purpose of legislature.
3. That on the facts and circumstances of the case, Ld. CIT(A)-IV, Kolkata has erred in law in deleting the addition of 20,00,000/- incurred by the assessee on software development expense treating it as revenue 2 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 expenditure, without appreciating the fact that software development is not restricted to only one year and the assessee will get enduring benefit just like a capital goods.
4. That on the facts and circumstances of the case, Ld. CIT(A)-IV, Kolkata has erred in law in directing the A.O. to allow deductions of 3,82,45,000/- being provision for diminution in the value of investment and 1,35,78,000/- being provision for contingency written back to ascertain book profit u/s. 115JB without appreciating the fact that both the deductions are not admissible in computing Book Profit u/s. 115JB.
5. That on the facts and circumstances of the case, Ld. CIT(A)-IV, Kolkata has erred in law in directing the A.O. to consider interest receipt of 1,59,90,313/- as part of assessee's income of growing and manufacture of tea and taking 40% of such interest to tax for the purpose of Section 115JB without appreciating the fact that the interest income cannot be attributable to tea business, but which is clearly an income from other activities not remotely connected with the growing and manufacturing of tea."
2. There is a delay in filing the appeal by 125 days. Therefore, the Revenue has filed a petition for the condonation of the delay explaining that the delay has been caused due to the unavoidable circumstances as within a span of one week, this office has received 93 appealable orders from the office of the CIT(A) relating to several months apart from having 19 old appellate orders of which appeal scrutiny reports were being prepared and sent to the office of the CIT-II, Kolkata. Even though the ld. A.R. vehemently contended that delay is not to be condoned and for this he relied on the decision of the Hon'ble Supreme Court in the case of Chief Post Master General and Others -vs- Living Media India Ltd. and Another 348 ITR 7 (SC). We noted that in that case the delay was 427 days in filing the Special Leave Petition before the Hon'ble Supreme Court. The facts of that case are different in the case of the assessee. In that case, we noted that the department, in the affidavit, has mentioned that they were aware of the date of the judgment of the Division Bench of the High Court to be September 11,2009 but they applied for certified copy of this only on January 8,2010. The Hon'ble Supreme Court noted that no explanation for not applying for certified copy of the judgment on 3 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 September 11,2009, or at least within a reasonable time was given on behalf of the department. In view of this fact, the Hon'ble Supreme Court did not condone the delay. In this case, we noted that the department has given a plausible explanation which cannot be regarded to be the negligence or deliberate inaction on the part of the Revenue. We are, therefore, of the view that the decision of the Hon'ble Supreme Court in 348 ITR 7(SC) will not affect the assessee. We accordingly condone the delay and admit the appeal filed by the Revenue.
3. Ground no.1 relates to the deletion of addition on account of cess on green leaf. This issue is covered by the decision of the Hon'ble High Court in the case of AFT Industries Ltd. -vs- CIT 270 ITR 167 in favour of the assessee. The decision of the Hon'ble High Court is binding on us. In view of this fact, we dismiss the ground no.1 taken by the Revenue.
4. Ground no.2 relates to the claim of depreciation by the assessee. The AO refused to allow the assessee's claim on the ground that the entire depreciation at the relevant rate was allowed in computing the business income to which Rule 8 was applied. The AO even noted the decision of the Hon'ble Supreme Court in the case of CIT-vs- Doom Dooma India Ltd. 310 ITR 392 but observed that the section 43(6) was amended by the Parliament by Finance Act 2009 but the amendment was clarificatory in nature and therefore, he disallowed part of the depreciation claimed by the assessee. When the matter went in appeal before the CIT(A), the CIT(A) allowed the claim of the assessee by observing as under:
"5. I have considered the submissions of the A/Rs; perused the judgment of the Apex Court & the provisions of Sec. 43(6) as amended by Finance (No.2) Act 2006. In my opinion the amendment to Sec. 43(6) of the Act was not clarificatory in nature. Provisions of Finance (No.2) Bill 2009; Memorandum accompanying the Bill and the Board's Circular thereon clearly state that the amendment was applicable only from A.Y. 2010-11. The amendment affected the computation provisions of the Act & therefore the same could not be considered either as clarificatory or retrospective in operation. Rather the memorandum to Finance Bill specifically stated that the amendment was to come into effect only from 1st April 2010. Till 4 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 amended provisions of Sec. 43(6) came in force, decision of the Supreme Court in the case of CIT Vs Doom Dooma India Ltd (supra) was applicable. Respectfully following the decision of the Supreme Court, I direct the AO to allow depreciation for Rs.31,32,83,667/- as against Rs.26,82,21,145/- as allowed by him. The AO shall accordingly re-compute the depreciation and also the written down value of the depreciable assets."
5. We have heard the rival submissions and carefully considered the same. We noted that the case of the assessee in this ground is duly covered by the decision of the Hon'ble Supreme Court in the case of the CIT-vs- Doom Dooma India Ltd. 310 ITR 392 and therefore, no interference is called for in the order of the CIT(A). This ground no.2 of the Revenue stands dismissed.
6. Ground no.3 relates to the software development expenses. Brief facts relating to this ground are that the AO disallowed a sum of Rs.20 lakhs incurred by the assessee on software development to be of capital in nature but when the matter went before the CIT(A), the CIT(A) deleted the addition by holding as under:
"I have carefully considered the submissions of the A/Rs and find much force. I also find that even though the AO disallowed the appellant's claim holding the expenditure to be capital in nature, he did not grant depreciation allowance in respect of such expenditure considered by him to be capital in nature. Be the same as it may the question in the present case is whether expenditure incurred by the appellant on developing operating software was revenue or capital in nature. By AO's own admission the appellant is not in the business of developing software but it is engaged in growing, manufacture, sell and export of tea. The assessee owns 54 Tea Gardens situated in remote parts of North-Eastern India. The assessee's Head Quarters is located in Calcutta from where the operations at these tea gardens are controlled and managed. For the purpose of managing operations at the gardens the appellant adopts technological tools such as computers. The expenditure on developing computer software was incurred to enable the appellant to utilize its existing computer net-work more efficiently and effectively so that operational efficiencies could be improved. It is not the case of the AO that the assessee acquired and installed entirely new computer hardware and software. As claimed by the assessee it was already using computers at its Tea Gardens. The expenditure on computer software development incurred during the year enabled the appellant to co-5 I.T.A. No.288/Kol/2011
M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 ordinate networking of its existing computer operations at all gardens. The software merely coordinated operations of the Computers located in different gardens which were earlier working on stand alone basis & thereby improved the operational efficiency. The development of software was an on going process because the systems needed improvement & upgradation from time to time keeping in view the constant improvement in technology in the field of computer science. I also find force in the A/R's submission that by incurring expenditure on software development appellant had not acquired any capital asset nor any derived bcnefit of enduring nature but the expenditure merely improved the operational efficiency of the existing computer hardware network. The Special Bench of the ITAT, Delhi in the case of Amway India Enterprises Vs DCIT (111 ITD
112) had made following observations which have bearing on the question of allowability of expenditure on software development:
"56. For ascertaining as to whether expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee acquires right to use the software becomes relevant. Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. It is also evident from the amendment to the law w.e.f 1.4.2003 granting 60% depredation on computer software that even the legislature considers the life of computer software as about two years by providing the higher rate of depreciation @60% thereon so as to enable assessee to write off the same to the extent of 84% even when treated as capital asset within a period of two years. An assessee may own a software outright or be a licensee but the same may operate to confer benefit only in the revenue field and therefore is may have to be regarded as Revenue Expenditure. The decision of the Hon'ble Supreme Court, I the case of Empire Jute Co. Ltd. (supra) lays down that it is not every advantage of enduring nature acquired by an assessee that brings the case within she principle laid down in this test (enduring benefit test). What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee 's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for on indefinite future. In other words, the functional test would become material and if on application of the same it is found that the expenditure operates to confer benefit in the 6 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 revenue field, then the same would be revenue, irrespective of the duration of time for which the assessee acquires rights in a software. The period of advantage in the context of computer software should not be viewed from the point of view of different assets or advantage like tenancy or use of know-how because Software is a business tool enabling a businessmen's ability to run his business.
Whether the expenditure operates to add the profit earning apparatus of the assessee (Functional Test):
57. The advantage which an assessee derives has to be seen. The nature of advantage has to be seen in a commercial sense. If the advantage is in the capital field then the same would be capital expenditure. If the advantage consists merely in facilitating the assessee's trading operations, or enabling the management and conduct of assessee's business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account, however, if assets/advantage is part of profit earning apparatus, it is capital.
58. The following factors would be relevant to determine whether the advantage Operates in the capital field or revenue field.
(i) Nature of Business of the assessee. It is necessary to obtain an understanding of the business function or effect of a concern's software.
Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power and longevity of such a tool and its centrality to the functions of the business will all bear on its treatment.
In the case of M/s. SQL Star International Ltd one of the assesses in the cases referred to the Special Bench, the assessee company is engaged in the business of software development as well as running a training center to impart specialized training to the students in software technology. If the software were used in such business to impart training to the students, then the same would be part of the profit making apparatus of the assessee and consequently expenditure on software, capital.
Similarly, example of a travel agent can be cited here as an illustration wherein the expenditure incurred on acquisition of a software for the purpose of enabling the assessee to make booking of air tickets would be a capital expenditure because such a software certainly forms part of the profit-making apparatus of the travel agency business inasmuch as the business of air ticket booking is done with the help of that software.
7 I.T.A. No.288/Kol/2011M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 Another example which can be considered here is that of acquisition of Turbo Gold Software for Rs. 17.61 Lakhs by one of the assessee in the present case i.e. M/s. Amway India Enterprises. As submitted before us, the said software helps in compression of size of e-mails sent through the Lotus Notes Mailing System and it includes licenses for 150 users who are using Lotus Notes Mailing System and software license for running on its server. If use of this software in the business of the assessee is limited to facilitate merely an effective and fast communication in order to increase its organizational efficiency, the same cannot be treated as forming part of the profit-making apparatus of the assessee. On the other hand, if such software is being used by an assessee engaged in the business of placement agency where the applications from persons seeking jobs are invited through e-mail and are also forwarded to the concerned clients through e-mail, the same may form part of profit-making apparatus of the assessee's business of placement agency and can be treated as a capital asset.
(ii) As a general rule it may be stated that the more expensive the computer software the more it is likely to be a central tool of the business and the more enduring is likely to be its effect adding to the profit earning apparatus. If there are associated capital expenditure like purchase of new computer equipment for running the software developed under a project, then it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable but necessary for this purpose.
(iii) Degree of associated organizational change; similarly the degree of change intended in the way operations are carried out as a result of the Computer software, for example, savings in the number, and changes in the location, of staff used to provide services to customers will have a bearing. The more radical the changes, the more likely the expenditure will be capital. These changes are likely to be most radical when operations previously carried on manually are computerized.
(iv) It has to be borne in mind that computer software industry is of a fast changing nature. Therefore whatever software purchased by an assessee would become outdated much earlier than expected. The assessee has therefore to upgrade his software. An element of upgrading does not automatically make the expenditure capital. The presence of an element of upgrading, therefore, will not necessarily cause the expenditure in question to be capital.
8. In my opinion the decision of the Special Bench of the ITAT Delhi needs to be considered & applied in the present case. By incurring 8 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 expenditure on software development the assessee neither acquired capital asset nor acquired benefit of enduring nature. The software development merely facilitated carrying on assessee's existing business of growing and manufacture of tea more efficiently The software development improved existing computer systems installed at different gardens because the new software synchronized their operations by networking solutions. The expenditure of Rs. 20 Lacs on software development is therefore held to be revenue in nature. The AO will accordingly delete the said disallowance of Rs. 20 Lacs."
7. The ld. D.R. vehemently relied on the order of the AO as well as the order of the Delhi High Court in the case of Bharti Televentures Ltd. -vs- Additional/JCIT 29 Taxmann.com 326 (Delhi) has contended that the assessee has incurred the expenditure for the development of the software which consists of software as well as hardware and therefore, the expenditure so incurred are capital in nature. In this regard, the ld. D.R. relied on the decision of the ITAT Bangalore Bench 'B' in the case of Timken Engineering & Research India (P) Ltd. -vs- DCIT 28 Taxmann.com 81(Bang.) and contended that the software expenditure incurred by the assessee has to be examined by the AO in respect of each and every software independently on the basis of principles laid down in the case of Amway India Enterprises -vs- DCIT 111 ITD 112 (Delhi) (SB). Therefore, the matter should be sent back to the file of the AO.
8. The ld. A.R., on the other hand, contended that the assessee has 54 tea gardens situated in remote parts of north-eastern India. The assessee's headquarters is located in Kolkata from where the operations are controlled and managed. For the purpose of managing the gardens, the assessee adopts technological tools such as computers. The expenditure on developing computer network was incurred to enable the assessee to utilize its existing computer network more effectively so that there could be improvement in efficiency. The assessee has not acquired any capital asset nor any benefit of enduring nature. The assessee was already using the computer at its tea gardens. The expenses incurred 9 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 in the software development enabled the assessee to coordinate its existing computer operations at all tea gardens more effectively and efficiently. Development of the software is on going process because the system requires upgradation from time to time due to change and improvement in the technology. The expenses so incurred are merely the revenue expenses. In this regard, reliance was placed on the decision of Amway India Enterprises -Vs- DCIT 111 ITD 112 Delhi Special Bench. It was also pointed out that the decision of the Delhi Special Bench was confirmed by Hon'ble Delhi High Court in the case of CIT -vs- Amway India Enterprises 346 ITR 341.
9. We have heard the rival submissions and carefully considered the same. We noted that the assessee has incurred the expenses on the upgradation of the computer hardware and the software. The expenditure has not been incurred for starting new hardware or software. The upgradation of the computer will not make the expenditure to be capital in nature. The case of the assessee is duly covered by the decision of the ITAT Delhi Special Bench. The CIT(A), following the decision of the Special Bench of this Tribunal in the case of Amway India Enterprises -vs- DCIT 111 ITD 112 (Delhi)(SB), deleted the addition made by the AO. We have also noted the decision relied on by the ld. D.R. In our opinion, the decisions relied on by the ld. D.R. are not applicable in the case of the assessee. In the case of Timken Engineering & Research India (P) Ltd. -vs- DCIT 28 Taxmann.com 81(Bang.), this Tribunal has restored the matter to the file of the AO, as complete facts relating to the details of the software expenditure was not available and have not been examined by the AO. In this case, the AO has examined the expenditure and the facts were duly available on the file of the AO. The case of Bharti Televentures Ltd. -vs- Additional/JCIT 29 taxmann.com 326 (Delhi) will also not assist the Revenue. In that case, the assessee has to exploit software for the purpose of cellular services and for that purpose, he had to procure the hardware as well as the software. Thus, the assessee has incurred the expenses for promoting 10 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 the software and the hardware. The expenses were, therefore, held to be the capital expenditure. The expenses were not incurred for upgrading the software. In view of this fact, we do not find any illegality and infirmity in the order of the ld. CIT(A). In our opinion, the CIT(A) has rightly deleted the addition. We accordingly dismiss the ground no.3.
10. Ground no.4 relates to the decusion in respect of provision for diminution in the value of the investment and provision for contingency written back for ascertaining the book profit under section 115JB. The AO noted that the assessee has credited a sum of Rs.3,82,45,000/- and Rs.1,35,78,000/- for provision in diminution in the value of the investment and provision for contingency written back in the Profit & Loss a/c. The assessee asked for the deduction but the AO rejected the claim of the assessee. The assessee went in appeal before the CIT(A). The CIT(A) deleted the addition by observing as under:
"11. I have considered the submissions of the A/R's and have perused the copies of the Computation of total income, filed by M/s. Eveready Industries (India) Ltd & M/s. George Williamson (Assam) Ltd for the earlier years. The tea business of the appellant earlier belonged to Eveready Industries (I) Ltd. and it was transferred to the appellant consequent to sanction of the scheme of arrangement approved by the Calcutta High Court which came in force from 1.4.2004. M/s. George Williamson (Assam) Ltd was amalgamated with the appellant with effect from 1.4.2005 after obtaining approval from the Calcutta & Gauhati High Courts. It appeared from the information furnished by the A/R that Provision for Contingency was created by M/s. Eveready Industries (India) Ltd in its financial books for the year ended 31 March 2001. In the income tax return filed for the A.Y. 200 1- 02 in computing "book profit" u/s 115 JB M/s. Eveready Industries (India) Ltd did claim deduction for Provision for Contingency. In other words, the "book profit" of Eveready Industries (I) Ltd for A.Y. 2001-02 were assessed without allowing deduction for Provision for Contingency. Out of the Provision created in A.Y.2001-02 for which no deduction was allowed in arriving at book profit u/s 115 JB, the appellant wrote back Rs.1,35,78,000/- to its Profit & Loss A/c for the year ended 31.3.2007. As regards Provision for diminution in value of investment written back in the P & L A/c for the year ended 31st March 2007, it was noted that the amount was withdrawn from the provision which was created by M/s. George Williamson (Assam) Ltd. in its P & L A/c's for the accounting period 1998- 11 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 99 to 2004-05 M/s. George Williamson (Assam) Ltd [later on renamed as Williamson Tea (Assam) Ltd] got amalgamated with the assessee effective from 1st April 2005. At the time of amalgamation the balance in Provision for Diminution in value of Investment a/c in the books of the amalgamating company was Rs.2133.97 Lacs. Out of said provision the appellant wrote back Rs.3,82,45,000/- to its P & L A/c for F.Y. 2006-07. From the copies of the computations of total income filed for the A.Y. 1999-00 to 2005-06 of George Williamson Assam Ltd it was ascertained that the amalgamating company was not allowed deduction for the Provision for diminution in value of investment while assessing book profits for these years. In the circumstances, when the assessee wrote back and credited the amounts withdrawn from provisions created in the earlier years; the assessee was entitle & to claim deduction under Clause - (i) of Explanation to Sec. 115 JB of the Act. The documents on record established that deduction was not allowed in computing book profits of the years in which provision were created in the books of the respective companies & therefore the years in which part of the provisions were withdrawn and credited to the P & L A/c, the same could not be once again be included in the book profit u/s 115 JB of the Act. The AO is accordingly directed to exclude Rs.1,35,78,000/- withdrawn out of provision for contingency and Rs.3,82,45,000/- withdrawn from provision for diminution in value of investment from the book profit u/s 115 JB of the Act for the A.Y. 2007-08)."
11. We have heard the rival submissions and carefully considered the same. In our opinion, the case of the assessee is duly covered by Explanation 1(i) of section 115JB of the Income Tax Act. The CIT(A), after appreciating the documents, has given the clear-cut finding that both the provisions written off by the assessee were not allowed as deduction where determination in the book profit for the assessment year 2001-02 and in the hands of George Williamson (Assam) Ltd. over determining book profit for the assessment years 1999-2000 to 2005-06, no contrary evidence was brought to our knowledge which may compel us to take a view different from the CIT(A). In view of the Explanation 1(i) of section 115JB, in our opinion, no interference is called for in the order of the CIT(A). We accordingly, dismiss this ground no.4.
12. Ground no.5 relates to the deletion of interest receipt of Rs.1,59,90,313/- by the CIT(A), 40% of which was added by the AO as part of assessee's income of 12 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 growing and manufacturing of tea, while determining the profit under section 115JB. Brief facts of the case are that the assessee used part of the business funds, which was temporarrily surplus, in granting loans and deposits for which the assessee earned the interest income. In the Profit & Loss a/c., the assessee has debited gross interest paid on borrowed funds and separately credited gross interest received on the funds advanced. The AO did not agree with the assessee that as per Rule 8, the entire net profit as disclosed by the assessee in its Profit & Loss a/c. was to be apportioned in the ratio of 60:40 and only 40% of the net profit was to be considered as book profit under section 115JB of the Act. The AO further held that nowhere in section 2 of the Act, interest to be considered to be the agricultural income and to the income by way of interest and therefore the AO assessed the income credited in the Profit & Loss a/c. to be part of the book profit under section 115JB of the Act. The assessee went in appeal before the CIT(A). The CIT(A) deleted the addition by observing as under:
"14. I have carefully considered the submissions of the A/R and have perused the decision of the Jurisdictional High Court in the case of Eveready Industries (I) Ltd for the A.Y. 1991-92 & 1992-93. In the audited accounts for the year ended 31st March 2007 appellant had debited gross interest of Rs.43,44,53,000 lacs and separately credited Rs.1,64,65,000, out of which Rs.4,74,687 being exempt interest, i.e. Rs.1,59,90,313/- being gross interest received on loans and deposits. The net interest expenditure was therefore Rs.41,79,88,000/-. According to A.O. Rule-8 was not applicable to the interest received as it did not have any element of agricultural income. By the same logic, the entire interest debited in the Profit & Loss A/c also did not have element of expenditure incurred wholly & exclusively in relation to business of growing and manufacture of tea. In any business; fund position undergoes change on day-to-day & from moment to moment. Interest is a charge for use of funds. Interest income is a charge received for use of assessee's business funds by other persons. Similarly interest expenditure is a charge paid by the assessee for use of funds belonging to others. To determine the effective cost of borrowings; it is therefore necessary to set off the interest received against interest paid and only the net interest can be considered to be business expenditure for tax purposes. In the present case after setting off interest received against interest paid there was net interest expenditure of Rs.41,79,88,000/-. which was incurred in connection with business of growing and manufacture of tea to which 13 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 Rule - 8 was applicable. I do not find substance in the AO's hypothesis that gross interest paid represented expenditure of tea business to which Rule - 8 was applicable whereas gross interest received represented non agricultural income to which Rule - 8 was not applicable. Having regard to the nature of business and composite nature of funds deployed, the only correct method was to set off interest received against interest paid. This proposition is accepted by the Jurisdictional Calcutta High Court in the case of Eveready Industries (I) Ltd in 1TA Nos 123 of 2000 dated 22.12.2009. In that case also the assessee engaged in business of growing and manufacture of tea had derived interest income which was assessed subject to application of Rule-8. In the regular income tax assessments, the AO did not assess interest income separately but considered the interest to be part of the composite business of growing and manufacture of tea & thereby assessed only 40% of such income under central income tax assessment. The C I T in his order u/s 263 directed to AO to assess gross interest received as fully chargeable to tax under Central Income Tax. The Order of the CIT u/s 263 was upheld by the Tribunal. On further appeal, the Calcutta High Court however held that the interest income was rightly treated by the AO to be part of assessee's business of growing and manufacture of tea subject to Rule - 8 and therefore only 40% of interest income could be brought to Central Income Tax.
15. The decision of the Calcutta High Court squarely answers the question raised in Ground No. 6 of the present appeal. In appellant's case also after netting of interest received against interest paid there is net expenditure of Rs.41,79,88,000/- which could only be considered to be expenditure incurred in connection with assessee's business of growing and manufacture of tea. The AO could not treat interest paid and interest received of different footings. I therefore direct AO to consider interest receipt of Rs.1,59,90,313/- as part of assessee's income of growing and manufacture of tea and therefore in computing book profits only 40% of such interest could be brought to tax for the purposes of Sec. 115 JB of the Act. The AO shall accordingly re-compute the book Profits."
13. We have heard rival submissions and carefully considered the same. From Explanation 1(ii) to section 115JB it is apparent that the income to which any of the provisions of section 10 has to be reduced, while computing the book profit under section 115JB, the agricultural income is exempt under section 10(1) of the Income Tax Act. The assessee is engaged in the business of growing and manufacturing of tea. Rule 8 apportions the income derived by the assessee from 14 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 sale of tea into the business income as well as in agricultural income. Rule 8(1) is laid down as under:
"Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax."
14. The assessee has derived the interest income by investing the surplus funds by advancing the temporary loans and making the temporary deposits. Now the question arises, in view of Rule 8(1) whether that the said interest income can be regarded to be the income derived from sale of the tea grown and manufactured by the seller. From the reading of Rule 8, it is apparent that the income derived from the sale of the tea grown and manufactured by the seller has to be computed, as if it is an income derived from the business and 40% of such income shall be deemed to be the income liable to tax i.e. 60% of such income is regarded to be the agricultural income being exempt under section 10(1) of the Act. Now the question arises whether the interest income earned by the assessee can be regarded to be the income derived from the sale of tea grown and manufactured by the assessee. If it is regarded to be the income derived from the sale of tea grown and manufactured by the assessee, 60% of such interest income will be regarded to be the agricultural income and the assessee will be entitled for deduction, in view of Explanation 1(ii) to section 115JB.
15. The ld. D.R. before us vehemently relied that the interest income earned by the assessee on the surplus funds cannot be regarded to be the income derived from the sale of tea grown and manufactured. In this regard, he relied on the decisions of the Hon'ble Supreme Court in the cases of Liberty India -vs- CIT 317 ITR 218 as well as CIT-vs- Orchev Pharma (P) Ltd. 25 Taxmann.com 815(SC). The reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. -vs- CIT 262 ITR 278. We noted that the Hon'ble Supreme Court has noted in the case of Liberty India that the deduction available under section 80-IB for the assessment year 2001-02 with the word "derived from"
15 I.T.A. No.288/Kol/2011M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 is narrower in connotation as compared to the words "attributable to" in the case of Pandian Chemicals -vs- CIT 262 ITR 278, the Hon'ble Supreme Court has considered the word "derived from" when the question arises whether the interest earned by the assessee in respect of deposits made with the Electricity Board for supply of the electricity can be regarded to be the income derived from the eligible undertaking. The Hon'ble Supreme Court in that case has held as under:
"The words "derived from" in section 80HH of the Income-tax Act, 1961, must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking.
Held accordingly, that interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the special deduction under section 80HH.
CIT v. RAJA BAHADUR KAMAKHYA NARAYAN SINGH [1948] 16 ITR 325 (PC) and MRS. BACHA F. GUZDAR v. CIT [1955] 27 ITR 1 (SC) applied."
16. The Hon'ble Supreme Court had also the occasion to examine the meaning of the word "derived from" in the case of CIT-vs- Sterling Foods (S.C.) 237 ITR
579. In this case, the Hon'ble Supreme Court has stated that the word "derived from" is usually followed by the word "from" and it means "get, to trace from a source; arise from, originate in, show the origin or formation of". There must be a direct nexus between the profits and gains and the industrial undertaking so that it could be said to be the profit derived from the industrial undertaking. In this case, the question relates to whether the sale of import entitlements could be regarded to the income derived from the eligible industrial undertaking. The Hon'ble Supreme Court, after discussing the meaning of the word "derived from" took the view that the profit on sale of the import entitlement cannot be regarded to be the profit 16 I.T.A. No.288/Kol/2011 M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 derived from the industrial undertaking. We noted that under Rule 8(1), the income must be directly derived from the sale of tea grown and manufactured only, then the Rule 8(1) will apply. The Rule 8(1) does not talk of that the income derived from tea business will be apportioned into the agricultural income and income from business. The interest earned by the assessee on the investment, even if temporarily made out of the funds, in our opinion, cannot be regarded to be the income derived from the sale of tea grown and manufactured by the assessee. This income may be regarded to be the income derived from the business of the assessee but it does not have a direct linkage with the income derived from the sale of tea grown and manufactured. The ld. A.R., even though vehemently relied before us on the decision of the Hon'ble Kolkata High Court in the case of Eveready Industries India Ltd. in ITA No. 123 of 2000. In this case, we noted that the Hon'ble High Court has held at page 16 and 17 as under:
"As we have already narrated above that the assessee in this case procured loans from banks and other financial institutions for its tea growing and manufacturing business and part of such fund remain temporarily unutilized. The assessee, instead of keeping the amount idle, invested the surplus fund in short-term interest hearing fixed deposits and earned interest. The main activity of the assessee is growing, manufacturing and selling of teas and not that of earning interest by investing in short-term fixed deposits. The assessee earned interest on such short-term fixed deposits made out of the business fund available with the assessee before they were utilized for actual business and, therefore, the same was incidental to the business activity of the assessee-company and interest on such short-term deposit must be treated as the business income. The assessee, a tea growing and manufacturing company, was left with surplus funds. The assessee invested such surplus funds in short-term deposits to exploit the business funds of the company and earned interest. Therefore, interest income of the assessee is business income and not income from other sources.
We are, therefore, of the opinion that the Income Tax Appellate Tribunal and the Commissioner of Income-Tax substantially erred in law in directing the assessing officer to revise the assessments of the aforementioned assessment years by treating the income earned by the assessee from such short-term investments as 100% (hundred) per centum assessable treating the same as income from the other sources.17 I.T.A. No.288/Kol/2011
M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08 We hold that, in the facts and circumstances of the case, the assessing officers were right in treating the interest income earned by the assesse by investing surplus fund of the business in short-term deposits as business income and rightly applied the tests as provided in sub-rule (1) of Rule 8 of the said Rules while making the assessments in relation to the income of the assessee."
17. From the aforesaid finding of the Hon'ble High Court, it is apparent that the Hon'ble High Court has held that interest income of the assessee, by investing the surplus funds, is the business income and not income from the other sources. The Hon'ble High Court nowhere took the view that the interest income earned by the assessee by investing surplus funds is to be regarded to be the income derived from the sale of tea grown and manufactured by the seller in India. We also noted that the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. (supra) has categorically held that the interest income earned on the deposits made cannot be regarded to be the income derived from the industrial undertaking. In our opinion, the case of the assessee is duly covered by the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. (supra). We are bound to follow the decision of the Hon'ble Supreme Court as the decision of the Hon'ble Supreme Court is binding on all the judicial bodies, even the Jurisdictional High Court. We accordingly set aside the order of the CIT(A) and restore the order of the AO on this issue. Thus, the ground no.5 of the Revenue stands allowed.
18. In the result, the appeal filed by the Revenue is partly allowed.
This Order is pronounced in the Court on 15th February, 2013.
Sd/- Sd/-
(Mahavir Singh) (P. K. Bansal)
Judicial Member Accountant Member
Dated : 15th February, 2013
18 I.T.A. No.288/Kol/2011
M/s. Mcleod Russel India Ltd. :A.Y. : 2007-08
Copy of the order forwarded to:
1. M/s. Mcleod Russel India Ltd., 4, Mangoe Lane, Kolkata - 700 001 2 DCIT, Circle-4, Kolkata
3. The CIT(A), Kolkata
4. CIT, Kolkata
5. DR, Kolkata Benches, Kolkata True Copy, By order, Asstt. Registrar, ITAT, Kolkata Talukdar(Sr.P.S.)