Income Tax Appellate Tribunal - Chennai
Dollar Apparels vs Income Tax Officer on 15 February, 2005
Equivalent citations: (2005)95TTJ(CHENNAI)615
ORDER
Chandra Poojari, A.M.
1. In these appeals filed by the assessee and the miscellaneous petition filed by the Revenue where the issues are common, hence, these are clubbed together, heard together and are being disposed of by this common consolidated order for the sake of convenience. The common ground involved in these appeals relate to treatment of interest received on bank deposit as income from other source while computing deduction under Section 80HHC.
2. The brief facts of the case are that the assessee is an 100 per cent export-oriented unit and exporting entire goods manufactured to foreign countries without any local sales. All the exports were routed through Canara Bank, Perumanallore, Tirupur. The assessee has made deposits with Canara Bank out of export proceeds received from outside India. According to the assessee, it represents 5 per cent of the foreign exchange earned from export business which are deposited in Canara Bank as per the insistence of the bank and this deposit is not made out of surplus funds. According to the assessee, the interest income earned from the funds has direct nexus with the export business of the assessee. While framing assessment under Section 143(3) read with Section 148 for the asst. yrs. 1997-98, 1998-99 and under Section 143(3)(1) read with Section 144A for the asst. yr. 2001-02, the AO treated the income earned from these deposits as income from other sources as against the claim of the assessee that this income is not earned from business. The assessee questioned the legality of the assessment and also reopening of assessment and treatment of interest income as business income before the CIT(A). The CIT(A) confirmed the action of the AO. Aggrieved by this, the assessee is in appeal before us.
3. The learned counsel for the assessee questioned the reopening of assessment for the asst. yrs. 1997-98 and 1998-99 and submitted that the assessment was reopened only on the basis of changed opinion due to the observation of the audit party and the reasons for reopening were not communicated to the assessee and the assessee has discharged its duty in disclosing fully and truly the material facts necessary for the purpose of assessment and reasons for reopening were not communicated to the assessee. With regard to asst. yr. 2001-02, the learned Authorised Representative submitted that the AO has not followed the direction issued by the Jt. CIT, under Section 144A while passing assessment order and proper, opportunity to assessee has not been given by the AO.
4. On the other hand, learned Departmental Representative supported the reopening of assessment and also submitted that for the asst. yr. 2001-02 the Union Revenue Secretary stated in his speech that there would not be any scrutiny in the year 2001-02 and it does not mean that there should be no scrutiny for the asst. yr. 2001-02. The financial year of the asst. yr. 2001-02 is 2000-01. Regarding reopening, we are of the opinion that the reopening is validly done. The opinion of audit party could be the information for reopening of assessment. The assessments for the asst. yrs. 1997-98 and 1998-99 were completed under Section 143(1)(a) and thereafter, these assessments were reopened on the basis of audit observation. There is no dispute regarding issue of notice for reassessment. In our opinion, the reopening of assessment is valid for the reason that the Hon'ble Supreme Court in the case of ITO v. Biju Patnaik (1991) 188 ITR 247 (SC) has held that reopening is valid when the escapement of income was on account of omission or failure of the assessee to disclose the material facts fully and truly. The same view was taken by the Courts in the following cases :
(1) Ranchi Club Ltd. v. CIT (1996) 214 ITR 643 (Pat) (2) A. Pusalal v. CIT (1988) 169 ITR 215 (AP) (3) R.K. Malhotra, ITO v. Kastibhai Lalbhai (1977) 109 ITR 537 (SC).
5. The learned counsel for the assessee submitted that Section 80HHC(3)(a) is applicable to the assessee. The assessee is an 100 per cent export-oriented unit. As such, the entire business profits of the assessee are eligible for relief under Section 80HHC and relied on the judgment of Hon'ble Bombay High Court in the case of CIT v. Punit Commercial Ltd. (2000) 245 ITR 550 (Bom). He further submitted that from the point of view of applicability of Sections 80HH and 80-I, interest income derived from the deposit cannot be regarded as income derived from industrial undertaking. However, for the purpose of computation of relief under Section 80HHC, interest income derived from deposits which was made at the compulsion of the bank, that portion of interest should be treated as income from business. For this purpose, he relied on the judgment of Hon'ble jurisdictional High Court in the case of CIT v. NSC Shoes (2002) 258 ITR 749 (Mad) and the judgment of Lucknow Bench of the Tribunal in the case of Leatherage v. ITO (2003) 78 TTJ (Lucknow) 937 : (2003) 86 ITD 482 (Lucknow), and submitted that the deposit made by the assessee was not out of surplus funds but made at the instance of the bank and the bank has retained the earnings of the export business by 5 per cent and the assessee has no choice to make or not to make any deposits and the deposits were made before the proceeds of the export reached the hands of the assessee and it was made according to normal banking norms of the bank. He further submitted that there is a direct nexus between the export business of the assessee, money advanced by the bank and the deposit made by the assessee. As such, the direct nexus is established and hence, the income derived from such deposits should be treated as income from business. For this purpose, he relied on the judgment of Hon'ble jurisdictional High Court in the case of CIT v. A.S. Nizar Ahmed & Co. (2003) 259 ITR 244 (Mad). He also submitted that though this case was relied on by the assessee, this was decided against the assessee by the Hon'ble High Court because the assessee did not produce any evidence that the deposits were made at the instance or compulsion of the bank. But in the case of the assessee, there is clear insistence by the bank to make a deposit of 5 per cent as cut-back of export earnings by way of term deposit though it was not taken as a collateral security. For this purpose, the learned counsel for the assessee drew our attention to p. 4 of the second letter bearing No. MDUC/OBC:S-14:97:TVS, dt. 28th Dec., 1997. He also relied on the judgment of Hon'ble Supreme Court in the case of Vellore Electric Corporation Ltd. v. CIT (1997) 227 ITR 557 (SC) and submitted that interest received from bank should be set off against interest paid and there should be netting of income while computing business profit for the purpose of computing relief under Section 80HHC.
6. Moreover, the assessee was consistently following the method of netting up of interest and there was no change in the method of accounting. In spite of this, the Revenue has treated the interest paid to the banks as an expenditure while computing business income and, on the other hand, the interest received by the assessee on the deposits was treated as income from other sources. The Department has followed dual method, one for receipt of interest and the other for payment of interest. The Department must follow the principles of netting up of interest. For this purpose, he relied on the judgment of Special Bench of the Tribunal in the case of Lalsons Enterprises v. Dy. CIT (2004) 82 TTJ (Del)(SB) 1048 : (2004) 89 ITD 25 (Del)(SB) and Picric Ltd. v. Jt. CIT (2004) 84 TTJ (Del) 780 : (2004) 269 ITR 107 (Del)(AT). He vehemently argued that the interest paid should be treated as business expenditure and the interest received should be treated as business receipts. For this purpose, he relied on the judgment of Hon'ble Supreme Court in the case of CIT v. Govinda Choudhury & Sons (1993) 203 ITR 881 (SC) and submitted that interest can be assessed under the head 'Income from other sources' only if it cannot be brought within one or other of the specified head of charges. He also relied on the judgment of Hon'ble Supreme Court in the case of CIT v. B.N. Agarwal & Co. (2003) 259 ITR 754 (SC) for the same proposition.
7. The learned counsel for the assessee vehemently argued that in the case of few assessee's, the same appellate authority under the same circumstances and facts of the case, has assessed the income from interest and deposits as income from business and the CIT(A) cannot adopt different yardsticks to different assessee's according to his own will and wish, which is against the law of the land. But, such order of the CIT(A) was not challenged by the Revenue before any higher forum. For this purpose, he relied on the judgment of Hon'ble Supreme Court in the case of Berger Paints India Ltd. v. CIT (2004) 266 ITR 99 (SC).
8. For the asst. yr. 1997-98, the assessee has submitted that the bank has not credited any interest to the assessee's account or nor paid any interest. However, the AO has estimated the interest received at Rs. 10,99,993 and treated as income from other sources and without any evidence, the AO has estimated which is not proper. He submitted that for the asst. yr. 1998-99, the AO has estimated the interest income at Rs. 16,93,454 which is inclusive of Rs. 10,99,993 and without deducting this amount, he took it as Rs. 16,93,454 which amounts to double addition. He further submitted that for the asst. yr. 2001-02, the Revenue Secretary has made an announcement that for the asst. yr. 2002-03, there was no scrutiny. This was reported in 248 ITR Part III. In spite of this, the Department took the case for scrutiny for the asst. yr. 2001-02 which is against the principles of estoppel. For this purpose, he relied on the order of this Tribunal in the case of Smt. Nayana P. Dedhia v. Asstt. CIT (2004) 84 TTJ (Hyd) 233 : (2003) 86 ITD 398 (Hyd) and also in the case of Agarwal Farm Equipments v. ITO (2004) 85 TTJ (Ind) 723, and submitted that the case law relied upon by the learned Departmental Representative in the case of K. Ravindranathan Nan v. Dy. CIT (2003) 262 ITR 669 (Ker) is not applicable to the facts of the present case. This case is applicable to the assessee's who fall under the provisions of Section 80HHC(4A) of the Act, but this assessee is an 100 per cent EOU who is covered by the provision of Section 80HHC(3).
9. The learned Departmental Representative, on the other hand, submitted that the assessee has made deposits not for the purpose of getting bank facility. The business activity and earning interest are two different activities. The deposits are made in Indian currency after realising the foreign exchange and that too not in the course of export business and the end result of the export business was made as a deposit. Under the IT Act, there are different heads of income like business income, income from salary, income from other sources, income from capital gain, speculative income, income from house property, etc. Each head of income is separate. Suppose, a salaried person makes a deposit from his salary income and earns interest on that deposit, that interest income cannot be assessable under the head 'Income from salary'. The interest from deposit can only be assessed under the head income from other sources. Because the source of deposit was salary, it cannot be clubbed as income from salary. He further contended that if a salaried employee constructs a house from his salary savings and derives income from house property, the income from house property cannot be assessed under the head income from salary because the assessee has constructed the house out of his salary income.
10. In this case, the source of investment was not important, but the source of income was very important. Interest paid and claimed as deduction in the computation of profits and gains from business cannot be set off against interest from other sources. In this case, the AO clearly treated the income from deposits as income from other sources. There is no question of netting of interest paid out of interest received. For this purpose, he relied on the judgment of Hon'ble jurisdictional High Court in the case of K.S. Subbiah Pillai & Co. (India) (P) Ltd. v. CIT (2003) 260 ITR 304 (Mad). The interest income received by the assessee on deposits is not the direct result of any export activity and the fixed deposit was made according to the mutual agreement between the bank and the assessee. The agreement between the bank and the assessee cannot override the provisions of the IT Act. He further submitted that the interest derived from the deposit was not derived from the export business though it was made out of income from the export business. He also contended that the interest paid by the assessee to the bank was, no doubt, an item of expenditure in computation of business expenditure. However, the interest received by the assessee on deposit could not be taken as part of his business income. The deposit made by the assessee with the bank was for the convenience and benefit of it to earn interest though there was a requirement or condition by the bank to make deposits while sanctioning credit facilities. Further, the bank's decision to extend the facility is linked to the business of the assessee, its integrity and future prospects of the assessee and the assessee's net worth and interest income cannot be included as part of business income while computing relief under Section 80HHC. For this purpose, he relied on the judgment of Hon'ble jurisdictional High Court in the case of CIT v. Nizar Ahmed (supra). He also relied on the judgments in CIT v. Dr. V.P. Gopinathan (2001) 248 ITR 449 (SC) and South India Shipping Corporation Ltd. v. CIT (1999) 240 ITR 24 (Mad) and Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC), and the order of this Tribunal in the case of Sangam Knit Lands in ITA Nos. 685 and 686/Mad/2003, dt. 9th Aug., 2004, and submitted that interest paid on borrowed funds is deductible from the business profit because the funds have been used for the purpose of business and it is a business expenditure and the interest received cannot be set off from the interest paid by the assessee since the assessee has not paid such an interest for the purpose of earning the interest income. Further, he drew out attention to an affidavit filed in support of miscellaneous petition filed against granting stay of outstanding of demand of tax which reads as follows :
"1. M.S. Chandrasekaran son of Shri P.V. Subramaniam aged about 52 years with office at 67-cross Race Course Road, Coimbatore, do hereby solemnly affirm and state as follows :
2. The respondent's argument before the Tribunal, C Bench, in S P Nos. 256 to 258/Mad/2001 was that the deposits in the banks were made not out of surplus funds of the assessee and the bank had retained 5 per cent of the foreign exchange component of the export in accordance with the norms prescribed by the bank. For the asst. yr. 2001-02, this argument is factually incorrect. Further, for the asst. yr. 2001-02, fixed deposits made out of deduction of 5 per cent from the export profits was only to the extent of Rs. 11.44 lakhs, whereas the deposit made from the surplus funds during the year is to the tune of Rs. 401.55 lakhs. Besides this, renewal of deposits from the previous year is to the extent of Rs. 1,708.41 lakhs. Hence, out of the total deposits kept by the appellant with the Canara Bank for the relevant year of Rs. 2,121.41 lakhs only deposits of Rs. 11.44 lakhs were part of retention proceeds. For the subsequent assessment years, the deposits made out of 5 per cent of the export profits is nil. From the above, it is very clear that major part of the interest earned by the assessee from the bank deposits is voluntary in nature. Kindly refer to the banker's statement dt. 30th Nov., 2004.
3. Please refer CIT(A)-ITs order, dt. 9th July, 2004, on which the appellant has come to the Hon'ble Tribunal. The CIT(A) has clearly relied on the binding decision of the jurisdictional Madras High Court in the case of South India Shipping Corporation Ltd. v. CIT (1999) 240 ITR 24 (Mad) which held that interest derived from the bank deposits is to be treated as income from other sources. The same decision has been followed in line with the Hon'ble Supreme Court decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC). Similarly, the Hon'ble Madras High Court in the case of CIT v. A.S. Nizar Ahmed & Co. (2003) 259 ITR 244 (Mad) has held clearly that 'deposits kept by the assessee in the bank in larger sum were to the assessee's own advantage inasmuch as they provided returns @ 10 per cent. That was in the nature of an additional source of income to the assessee which was not in any way linked to the business that it was carrying on'. The facts of the case squarely fall in the above category.
Since for the asst. yr. 2001-02, the facts stated by the assessee are totally wrong, it is requested this miscellaneous petition may be admitted and the stay given for this year may be vacated."
11. We have heard the rival submissions and perused the material on record. The contention of assessee is that the interest income received on bank deposits is to be treated as income from business as the deposits were made out of export earnings at the insistence of the bank to grant credit facilities. To accept this contention, we have to see whether the interest is directly arising from the export of the goods and not incidental to the export business as this has to satisfy the condition laid down in Section 80HHC that the income derived from export of the goods is eligible for deduction. The income derived from the export business is only eligible for deduction under Section 80HHC and not the incidental income earned from export business. There should be direct nexus between export and income. Another contention of assessee is that the deposits were not made voluntarily but at the insistence or compulsion of the bank and bank has insisted to make deposit as a precondition to grant credit facility. We have carefully gone through the letters from Canara Bank, Perumanallur, dt. 27th Nov., 2004, and 30th Nov., 2004, wherein it was stated that deposits were made out of the export bills proceeds which is as per the mutual agreement between the bank and assessee as per terms of sanctioning of credit limits and also we have gone through the renewal of sanctioning of limit letter No. MDUC:OBC:S-14"97:TVS, dt. 28th Feb., 1997, and terms and conditions of sanction of credit limit where there was no condition to make deposits and the bank imposed the conditions as follows :
Terms and Conditions :
1. Sundry creditors for goods should be separately shown in the stock statement and excluded while arriving at drawing limit.
2. Quarterly interest debited to the account should be cleared immediately after the end of the calendar quarter. Necessary provision should be made in the current account at the end of the quarter to enable the branch to recover the interest debited before the commencement of next quarter.
3. All other terms and conditions marked with '-/' in the annexure should be scrupulously complied with.
4. All other terms and conditions as applicable to the above nature of advance(s) shall apply for compliance without fail as per HO circulars/guidelines issued from time-to-time.
Remarks :
1. The party should give 5 per cent cutback on export bills by way of term deposits. However, the same need not be taken as collateral security.
2. Branch should submit copies of latest WTAO/ITAO of the partners.
3. The TL liability of Rs. 0.63 lakh is to be continued as per original repayment schedule.
12. However, in the remark portion it was mentioned that "the party should give 5 per cent cutback on export bills by way of term deposits and the same need not be taken as collateral security." Because of this remark, now the assessee is claiming the interest on bank deposit as income from export earnings. On the other hand, we observed from the affidavit filed by the Department in support of miscellaneous petition against granting stay of outstanding demand of tax that the entire deposits were not made out of deduction of 5 per cent from the export earnings, but made out of surplus funds and substantial interest earned by the assessee from the bank deposits is voluntary in nature. The assessee has not produced any records to the contrary. Now, another question arises for our consideration is that whether the remark in the sanction letter to make deposit at 5 per cent of export earnings is the precondition for sanctioning of limit. In our opinion, that remarks cannot be construed as a condition to sanction the limit. It is only following the sanction and even if the assessee breaches this remark, it does not lead to withdrawal of the sanctioned limit. Deposit has no direct link to limit sanctioned by the bank. As a matter of fact, the remark was put in a routine manner to develop the banking business with an intention to mobilise deposit and this remark in the sanction letter cannot be termed as a condition to the contract of loan. Further, this remark in the sanction letter cannot be considered as compulsion or insistence by the bank to sanction the credit limit. Even if it is considered as precondition for sanctioning the credit limit, the interest earned on such deposits cannot be considered as income from export earnings as there is no direct nexus between export earnings and interest income. The interest is earned from the deposits and not from export business. We have also gone through the judgments relied on by the learned counsel of assessee. The contention of the assessee is that the case law relied on by the learned Departmental Representative are distinguishable as the assessee is 100 per cent EOU and the interest paid is more than the interest received. The entire income of the assessee has came from export business and even the interest earned on deposits shall be assessable under the head of income from business. This proposition is not correct as the income from different sources is assessable under the different heads of income. There are distinct heads of income for each source of income. If we accept the arguments of assessee that the interest income shall be assessable under the head of income from business, it leads to absurd situations. The facts in the case of K.S. Subbiah Pillai & Co. (India) (P) Ltd. v. CIT (supra) which was considered by the Hon'ble Madras High Court are similar to the present facts of the case. In that case, Hon'ble Madras High Court has held that interest paid and claimed as deduction in the computation of profits and gains for business cannot be set off against interest received and computed under income from 'other sources'. What has been said about interest is equally applicable to rent and commission included in the computation under the head "Profits and gains of business or profession". Further, the Hon'ble jurisdictional High Court in the case of CIT v. A.S. Nizar Ahmed & Co. (supra) has held that the interest paid by the assessee to the bank was, no doubt, an item of expenditure in the computation of its business income. That, however, would not justify taking the income that the assessee received by way of interest on the deposits that it had with the bank, as part of its business income when in reality, it was not. The deposit made with the bank was for the convenience and benefit of the assessee with a view to derive higher interest income. It was not a deposit made pursuant to any requirement imposed by the bank at the time of sanctioning of the facilities. The bank's decision to extend the facilities was linked more to the business prospects of the assessee and the confidence the bank had in the integrity and entrepreneur capacity of the partners of the firm who ran the business. Hence, the interest income had to be excluded for the purpose of calculating the special deduction under Section 80HHC of the IT Act. We have also gone through the judgment of Kerala High Court in the case of Ravindranathan Nair v. Dy. CIT (supra), wherein it was held that the interest from short-term deposits received by the appellant was not the direct result of any export of any goods or merchandise. The fixed deposit was made only for the purpose of opening letters of credit and for getting other benefits which were necessary requirements to enable the appellant to make the export. The interest income received on the short-term deposits, though it could be attributed to the export business, could not be treated as income which was derived from the export business. Even assuming that the bank had insisted for making short-term deposits for opening letters of credit and for other facilities, it could not be said that the income was derived from the export business. The assessee was not entitled to special deduction under Section 80HHC in respect of such interest.
13. In view of the above discussion and respectfully following the judgments cited supra, we hold that the assessee is not entitled for deduction under Section 80HHC on the interest income.
14. With regard to inclusion of estimated interest income for the asst. yr. 1997-98, since the assessee has neither received any interest nor the bank has credited any interest to the assessee's account, the AO is not justified in taxing the assessee on the estimated interest income. We direct the AO to consider only the interest which is actually credited or accrued interest to the account of assessee and delete the estimated additions towards interest income. For the asst. yr. 1998-99 also, the AO shall consider similarly and there cannot be double additions once in 1997-98 and another time in 1998-99. Regarding Revenue Secretary announcement that for the asst. yr. 2002-03, there was no scrutiny, we are of opinion that Revenue Secretary has no right to make such announcements and it has no binding effect. Accordingly, we reject the grounds taken by the assessee in the light of the above observations.
15. With reference to the miscellaneous petition filed by the Revenue against granting of stay, as we have dismissed the appeals of the assessee, thus miscellaneous petition has- become infructuous and accordingly, dismissed as infructuous.
16. In the result, the appeals filed by the assessee as well as the miscellaneous petition filed by the Revenue are dismissed.