Income Tax Appellate Tribunal - Chennai
Assistant Commissioner Of Income Tax vs P.S. Apparels on 25 November, 2005
Equivalent citations: (2006)101TTJ(CHENNAI)29
ORDER
K.D. Ranjan, A.M.
1. These cross-appeals are heard together and are being disposed of by a consolidated order for the sake of convenience.
2. In the Revenue's appeal for the asst. yr. 1991-92 in ITA No. 466/Mad/2002 the ground raised is to the effect that the CIT(A) erred in directing the AO to treat interest received as income from business and to allow deduction under Sections 80HHC and 80-I of the IT Act, 1961.
3. We have carefully considered the matter in the light of the material placed before us as well as arguments of the parties. The facts of the case as apparent from the record are the assessee has two units under which the business of export of ready made garments and moneylending are carried out. The assessee received interest of Rs. 22,21,683 from main unit and Rs. 10,05,006 from MEPZ, totalling to Rs. 32,26,069. This included the interest on refund of income-tax at Rs. 19,766. This amount also includes interest from bank to the extent of Rs. 17,48,477. The assessee treated the entire interest receipts as its income assessable under the head "Profits and gains from business" and thereby included the same in the local turnover for the purpose of deduction under Section 80HHC. The AO observed that there was no doubt in assessee's contention that the interest received from moneylending business was assessable under the head "profits and gains from business" and would form part of local turnover for the purpose of deduction under Section 80HHC. However, he held that interest received from banks on FDRs in main unit and MEPZ unit amounting to Rs. 11,11,809 and Rs. 6,36,669 respectively will be assessable under the head "other sources" as the same represent interest arising from fixed deposits with the bank made out of surplus funds. The AO has included the balance interest as part of total turnover for the purpose of deduction under Section 80HHC.
4. On appeal the learned CIT(A) held that there was definitely nexus between the monies invested in banks and interest received thereon. For arriving at this conclusion, he followed the findings contained in the appellate order passed by Dy. CIT(A) for asst. yr. 1990-91 wherein it was held that the money itself constituted stock-in-trade of the assessee's business. Therefore, the assessee was eligible for deduction under Section 80HHC and 80-I of the Act.
5. Before us learned Authorised Representative of the assessee submitted that the assessee is engaged in moneylending business. In asst. yr. 1990-91 the interest earned on moneylending business was treated as business income and no appeal against the said order was filed by the Department. The assessee was held eligible for deduction under Section 80HHC of the Act. In this regard reliance was placed on the decision of the Punjab & Haryana High Court in the case of CIT v. Vikas Chemi Gum India (2005) 196 CTR (P&H) 123 : (2005) 276 ITR 32 (P&H) for the proposition that when the Department has accepted the appellate order in one year it cannot challenge the same issue in a subsequent year. It was further submitted that moneylending business is done by the assessee as a part of business of the industrial unit. The money which is invested in the moneylending business constituted stock-in-trade of moneylending business. When there is no demand the same is invested in short-term fixed deptosits. Since, the money itself constituted the stock-in-trade, the income earned from the idle funds invested in short-term fixed deposits will be assessable under the head "Profits and gains of business or profession". The learned Authorised Representative further submitted that the assessee is having consolidated books of account and the financial debtors are clearly identified. The moneylending business of the assessee consists of lending funds to various individual parties. In addition, the assessee does bills discounting for certain financial houses and also invests in Certificate of Deposits of Banks. Both of these are wholly in the nature of business transactions. The income from bills discounting are in the nature of financial income. The Certificate of Deposits are given when Banks borrow from the public. The rates of interest are variable and akin to market rates and sometimes higher. These are pure transactions of borrowings that banks make with the approval of the RBI and the Certificates of Deposits are Negotiable Instruments which can be tradable in the open market just like any other security and are akin to promissory notes. Therefore, these are all pure financial transactions carried out by the assessee in its character of a financial dealer or moneylender. The assessee carries out this business in a systematic manner and all the ingredients of the business are found therein and which has been accepted in the orders itself. Therefore, it is submitted that the entire interest receipts of Rs. 4,89,92,839 and Rs. 5,67,82,293 for the asst. yrs. 1997-98 and 1998-99 respectively are only emanating from the moneylending and financial business of the assessee and are to be considered as business income for the purpose of Section 80HHC. The assessee is not claiming this income as export profits but only as profits and gains of business. In respect of this he relied on the decision of the Tribunal, Mumbai Bench, in the case of Jadishprasad M. Joshi v. Dy. CIT (2005) 97 TTJ (Mumbai) 924.
6. Learned Authorised Representative has drawn our attention to the decisions of the Hon'ble Supreme Court in the cases of CIT v. Cocanada Radhaswami Bank Ltd. , Brooke Bond & Co. Ltd. v. CIT and O.Rm.M.SP.SV. Firm v. CIT . In the case of O.Rm.M.SP.SV. Firm (supra) it was held that the interest earned by exploitation of a commercial asset should only be assessed under the head income from business. Mere circumstance that the assessee showed the dividend income under the head "Income from other sources" in its return cannot in law decide the nature of the dividend income. It must be determined from the evidence whether having regard to the true nature and character of the income, it could be described as income from business, even though it is liable to fall for computation under another head.
7. It was further argued that the AO himself has held that the interest receipts from financial debtors who constituted the moneylending business are assessed under the head "business income". Having held so, there is no justification for the AO for not treating the bank interest under the head "Business income", since the stock-in-trade (money) was kept as short-term deposit when the same was not used in business. By keeping the stock-in-trade in deposit, the character of the income would not change and it is only in course of carrying on moneylending business. :
8. The learned Departmental Representative on the other hand, submitted that interest income earned on fixed deposits was out of surplus funds and therefore the same should be assessable under the head "other sources". He further submitted that assessee's case is similar to that of a salaried person who invests his surplus income from salary; interest therefrom is assessable under the head "other sources". Therefore, the same is to be assessed under "other sources" and the assessee will not be entitled for deduction under Section 80HHC as well as 80-I of the Act.
9. Replying to the submissions made by the learned Departmental Representative, the learned Authorised Representative submitted that the comparison made with surplus income out of salary income is not correct on the ground that in case of assessee the funds utilised for moneylending business are not surplus funds. They are part of stock-in-trade and therefore, in order to earn income on idle money, assessee makes deposits for short-term period. He cited the case of banks where certain money is invested in securities, the income therefrom is treated as business income and not as income under the head "other sources".
10. We have carefully considered the submissions of both the parties. AO has treated moneylending business as income under the head "Profits and gains of business". However, idle money deposited in bank has been taken income from other sources. In asst. yr. 1990-91 the money invested in moneylending business was treated as stock-in-trade by the AAC and no second appeal was filed by the Department. It is admitted fact that no separate books of account are maintained in respect of export business and moneylending business. Therefore, the funds of moneylending business and export business are inter-twined. There is interlacing of funds. The Revenue has not been able to bifurcate that the funds invested in short-term fixed deposits were not out of moneylending activities of the assessee and they represented surplus funds of export business. Since the assessee is engaged in the moneylending business where idle funds are parked in short-term fixed deposits, the same will not lose the character of stock-in-trade of moneylending business. In our view the case is like insurance companies where the main activity is insurance business and income arising therefrom is invested in short-term deposits with the banks so as to earn maximum income. In assessee's case also whenever surplus funds were available with the assessee the same were parked in banks by way of short-term fixed deposits to earn higher rate of interest rather than keeping the money idle in the safe or in any other account without earning any interest or interest at lower rate. Hon'ble Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. (supra), held that for the purpose of computation of income the interest on securities separately classified, income by way of interest from such securities does not cease to be part of income from business income if the securities are part of trading assets. In the absence of separate books of account, it is impossible to identify whether funds of moneylending business are invested in export business or vice versa. Therefore, funds of both the businesses are inter-twined, intermingled and interlaced with each other. The AO has himself treated the interest received on fixed deposits as income from business. Therefore, the fixed deposits are to be treated as stock-in-trade and consequently the interest received from fixed deposits has to be treated as profits and gains of business or profession. As we have held that interest from fixed deposits is to be assessed under the head "Profits and gains of business or profession", therefore, provisions of Expln. (baa) in Section 80HHC would not be applicable.
11. Another issue for consideration is whether assessee will be entitled for deduction under Section 80-I of the Act for asst. yr. 1991-92 in respect of income received earned by the assessee. Under Section 80-I any profit and gains derived from an industrial undertaking shall be allowed deduction at specified rate in computing the assessee's total income. Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT held that the expression "derived from" is narrower than the expression "attributable to". The income eligible for deduction under Section 80-I must have direct nexus with the industrial activities of the assessee and hence interest income earned by assessee from moneylending business, though is in the nature of business income cannot be said to have direct nexus with the industrial activities of the assessee. Consequently, the assessee will not be entitled for deduction under Section 80-I of the Act on interest income earned by the assessee from moneylending business.
12. In the result, the Revenue's appeal for asst. yr. 1991-92 is partly allowed.
13. Now coming to Revenue's appeals for asst. yrs. 1997-98 and 1998-99, the point at issue is with regard to allowance of deduction under Section 80HHC and 80-IA of the Act. For asst. yr. 1991-92 in Revenue's appeal we have held that assessee will be eligible for deduction under Section 80HHC in respect of interest income from moneylending including interest on fixed deposits. We have also held that assessee will not be eligible for deduction under Section 80-IA in respect of moneylending income. Following our observations in the Revenue's appeals for asst. yr. 1991-92, it is held that assessee will be eligible for deduction under Section 80HHC in respect of interest income on fixed deposits. The assessee will not be eligible for deduction under Section 80-IA in respect of income from moneylending business.
In the result, the Revenue's appeals for both the years are partly allowed.
14. Now coming to assessee's appeal, the common issue for asst. yr. 1997-98 and 1998-99 is whether the assessee will be eligible for deduction under Section 80-IA in respect of duty drawback received by the assessee." The facts of the case are that the assessee received duty drawback and receipt by way of exchange rate difference and the same was treated as profits of business. The AO however, held that for the purpose of deduction under Section 80-IA the profit should be derived from an industrial undertaking and that there should be material to show that it has direct nexus to such industrial undertaking. Profit or loss can be said to have been derived from an activity carried on by an industrial undertaking only if the said activity is an immediate and effective source of said profit or gain. Mere commercial connection between the income and the industrial undertaking would not be sufficient. He, therefore, came to the conclusion that the duty drawback and exchange rate fluctuation receipt were not eligible for deduction under Section 80-IA of the Act. On appeal, the learned CIT(A) following the decision of Hon'ble Supreme Court in the case of CIT v. Sterling Foods held that duty drawback could not be said to be as profit derived from undertaking.
15. Before us, the learned Authorised Representative of the assessee submitted that the scheme of taxation in relation to custom and central excise duties has recognised the impact of multiple taxation on raw materials and on various inputs including packing materials, at the time of production of goods. The relief provisions in the case of exports were provided considering the internationally recognised practice in most of the countries to provide relief from input taxation to the exporters so as to make their product competitive in the international market. It was further submitted that duty drawback reduces the cost of raw material purchased by the manufacturer for exporting the goods manufactured. What duty is charged on the purchase of raw material is refunded to the manufacturer, if the manufacturer is exporting the finished goods. In the case of import against advance licences, if customs duty is not paid, duty drawback will not be given. The assessee has rightly adjusted drawback receipts in its trading account from the view of accountancy principles. To qualify for an exemption under Section 80-IA, income should be derived from an industrial undertaking. If an industrial undertaking purchases the raw material from outside and opts for not paying duty of customs, it will not be entitled for any duty drawback. Further, if the industrial undertaking is in MEPZ/SEZ, neither the custom/excise duty is payable by the manufacturer on purchase of its raw material even it is purchased locally and in-turn that undertaking is not getting any duty drawback also. This is because industrial undertaking has not paid any duty on its raw material purchases. Thus whatever profits derived by the industrial undertaking is profit of the business derived from industrial undertaking. Thus by no stretch of imagination, it can be said that an industrial undertaking, which carries on its activities identical to MEPZ, if it is outside the MEPZ will be deprived of deduction admissible under Section 80-IA simply because it first pays the duty and later gets reimbursed; not under any scheme but as per the statute provisions in Customs Act and Central Excise Act. He further submitted that import entitlement is an export incentive to help in promoting exports whereas duty drawback is the refund of duties of customs and excise paid by the industries on its raw materials. Drawback is derived from industrial undertaking and has got the direct and immediate nexus with the profits and gains of the industrial undertaking. The duty drawback is available only upon fulfilling the two conditions namely, (a) for purchase of raw material duty must have been charged; and (b) raw material purchased has been used for manufacturing and exporting of goods. This duty drawback is therefore, received from the actual conduct of business of industrial undertaking. It was further submitted that the decision of Hon'ble Supreme Court in the case of Sterling Foods (supra) is factually distinguishable as it deals with premium on import licence. He also relied on the following cases wherein it was held that duty drawback is eligible for exemption under Section 80-IA :
(i) Anil L. Shah v. CIT (2005) 95 TTJ (Mumbai) 216
(ii) Dy. CIT v. Metro Tyre Ltd. (2001) 79 ITD 557 (Del)
(iii) A.P. Industrial Components Ltd. v. Dy. CIT (2002) 74 TTJ (Hyd) 272
16. It was accordingly, submitted that duty drawback is not granted under scheme but under the statutory provisions of the respective Acts and is directly connected to business.
17. He placed reliance on the decision in the case of CIT v. India Gelatine & Chemicals Ltd. , wherein it was held that the duty drawback is intended to reduce the cost of production and being integral part of pricing of goods, is part of the cost of production of the industrial undertaking and hence 'derived from' industrial undertaking and eligible for deduction under Section 80J. He further submitted that the wordings of Section 80-IA are "any profits and gains derived from any business pf an industrial undertaking". The word used is "any business". In view of the above, it is submitted that the decisions of Madras High Court in the case of CIT v. Jameel Leathers had not taken cognizance of the facts as narrated above with regard to the duty drawback and deals with sections. 80J and 80H, wherein the wordings are different. Therefore, it is submitted by the learned Authorised Representative that the decisions of the Tribunal and the Gujarat High Court relied on the above may be followed and the claim of the assessee with regard to the deduction under Section 80-IA be allowed.
18. We have considered the submissions made by both the parties. According to assessee, there is difference in wordings of Section 80-IA. At the relevant time Section 80-IA(1) contained the expression "any profits and gains derived from any business of an industrial undertaking". The words "any business", appearing in the expression, according to the assessee would include the income from moneylending business also. Since the issue relating to deduction under Section 80-IA in respect of money tending business is not contained in the grounds of appeal and no additional ground has been raised, we reject the plea of the assessee. However, we are unable to agree with the assessee that deduction under Section 80-IA is available in respect of any business on the ground that Section 80-IA(1) is an enabling section whereas Sub-section (5) of Section 80-IA is machinery section which deals with the computation of deduction under this section. Sub-section (5)(i)(a) talks about the deduction at specified rate in respect of profits and gains "derived from" such industrial undertaking. In the machinery section the expression "any business" has not been used. Accordingly, the provisions of Sections 80-IA(1) and 80-IA(5) are to be interpreted harmoniously and would mean that assessee will be eligible for deduction in respect of such income which are derived from industrial undertaking.
19. Hon'ble jurisdictional High Court in the case of Jameel Leathers (supra) has held that cash assistance, duty drawback and import entitlement which were received as export benefits under the scheme were not eligible for deduction under Sections 80J and 80HH on the ground that such receipts were not having direct nexus with the assessee's industrial activity. Similar view has been expressed in the case of CIT v. Viswanathan & Co. (2003) 181 CTR (Mad) 335 : (2003) 261 ITR 737 (Mad).
20. However, the assessee's plea is that duty drawback has not been received by it as a part of the scheme. It has been explained that assessee has received duty drawback under Customs Act, 1962; and Central Excise Act. As per Section 75 of Customs Act, 1962 duty drawback means grant of refund of duty suffered on imported or local inputs used in the manufacture of a product on its export. The Drawback Rules, 1995 also define drawback in relation to any goods manufactured in India and exported and means the rebate of duty chargeable on any imported material or excisable material used in the manufacture of such goods. Therefore, it is clear that assessee may also receive duty drawback under Central Excise Act in respect of excise duty paid on inputs when the goods manufactured by an assessee are exported out of India. What the assessee may receive by way of duty drawback is excise duty already paid and therefore, refund of excise duty will have direct nexus with the industrial activity of the assessee. Under Section 28(iiic) of the IT Act, 1961 any duty of customs or excise repaid or repayable as duty drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971, shall be chargeable to income-tax under the head "Profits or gains of business or profession". The refund of excise duty paid as duty drawback has direct nexus with the industrial activity of the assessee.
21. In the case of Anil L. Shah v. Asstt. CIT (supra), Tribunal, Mumbai A Bench held that duty drawback, insurance, recovery of export freight, etc. have direct nexus with the industrial undertaking and therefore, eligible for deduction under Section 80-I. In that case it was held that the duty drawback is given by way of incentive to boost the export of the goods manufactured in India. If any imported goods on which customs duty is levied, has been used in the manufacture of any goods of any class or description and if such manufactured goods have been exported out of India, then customs duty paid on imported goods is given back to the manufacturer by way of rebate. This duty drawback is given only to the manufacturer making export as is apparent from Section 75 of Customs Act, 1962, In other words, it is nothing but reimbursement of duty already paid. Whenever such duty is paid, it is directly effected in profits of industrial undertaking inasmuch as it is debited to manufacturing and profit and loss account. Such payment of Customs duty increases the cost of manufacturing but when the same is received back as duty drawback, it nullifies the effect of aforesaid increase in the cost of manufacturing. Therefore, the duty drawback is inextricably linked with the production cost of the goods manufactured by the assessee. Accordingly, the drawback is a trading receipt of the industrial undertaking having direct nexus with the activities of such industrial undertaking and accordingly forms part of the income derived from such industrial undertaking. Similar view has been expressed by Hyderabad Tribunal in the case of A.P. Industrial Components v. Dy. CIT (supra).
22. The Hon'ble Madras High Court in the case of CIT v. Madras Motors/M.M. Forgings Ltd (head notes) held :
That the amount received by way of Modvat credits could not have been received by the assessee had the assessee not purchased the raw materials for running its industry of manufacturing the forgings. It was only on account of the purchase of the raw materials that it was required to pay the excise duty thereupon in respect of which the assessee had earned Modvat credits. Therefore, that credit would be directly relatable to the industrial undertaking. Therefore, the amounts received by the assessee under Modvat credits were eligible for deduction under Section 80HH. The same logic applies to the income earned by the assessee under the International Price Rationalisation' Scheme. The amount paid by the Government at the rate of Rs. 6 per kg. of raw materials purchased by the assessee had connection only with the industrial activity of the assessee If the assessee had riot purchased the raw materials for its industrial activity and had not exported the finished forgings, the assessee would not be entitled to the said amount of Rs. 6 per kg. Therefore, the amountearned by the assessee under the International Price Rationalisation Scheme was eligible for deduction under Section 80HH.
23. In the case of CIT v. U.P. State Industrial Development Corporation (1997) 139 CTR (SC) 267 : (1997) 225 ITR 703 (SC), wherein Hon'ble Supreme Court upheld the view taken by the Tribunal that the underwriting commission in respect of shares held by the assessee would reduce the cost of shares and would not be separately assessable as income of the assessee. Further the refund of excise duty/import duty by way of duty drawback received by assessee reduces the cost of goods manufactured thereby resulting in higher receipt of business profit. Consequently, the profits derived by industrial undertaking will be higher and the assessee will be eligible for deduction under Section 80-IA of the Act.
24. On a careful consideration of submissions made by the learned Authorised Representative of assessee and judicial pronouncements, it is clear that if duty drawback is received by way of export incentive, it cannot be said to have been derived from industrial activities of the assessee. However, when excise duty/import duty is refunded in the name of duty drawback under the Central Excise Act/Customs Act, the same is to be treated as directly or inextricably linked with the industrial activities of the assessee. Hon'ble Madras High Court in the case of CIT v. Madras Motors/M.M. Forgings Ltd. (supra) has held that the assessee will be eligible for deduction under Section 80HH of the Act in respect of Modvat credit which is similar to duty drawback. The assessee in this situation will be eligible for deduction under Section 80-IA of the Act. If duty drawback has been received as export incentives, the same will not be treated as derived from industrial activities and accordingly the assessee will not be eligible for deduction under Section 80-IA in view of decision of the jurisdictional High Court and of the Hon'ble Supreme Court referred to above. We accordingly direct the AO to verify the fact whether the assessee has received duty drawback under the Central Excise Act or as export incentive under the scheme announced by the Government.
25. The second issue for consideration for asst. yrs. 1997-98 and 1998-99 pertains to deduction under Section 80-IA in respect of exchange rate fluctuation. It is submitted that this is received in the course of realization of the sale proceeds and is part and parcel of the sale consideration. The case law relied on by the Department are not relevant to the issue at all. The order of the CIT(A) is upheld. We have heard both the parties. Exchange rate fluctuation is nothing but part of trading receipts. The assessee makes the sales in foreign currency. The realisation thereof on receipt of such sale proceeds may result in a gain attributable to exchange rate fluctuation. Therefore, the amount received on account of foreign exchange fluctuation will be in the nature of trading receipt and the assessee will be eligible for deduction under Section 80-IA in respect of foreign exchange rate fluctuation since it has direct nexus with the industrial activities of the assessee.
26. In assessee's appeal ground Nos. 6, 7 and 8 for asst. yrs. 1997-98 and 1998-99 are not pressed and accordingly stands dismissed.
27. In the result, the assessee's appeals for asst. yrs. 1997-98 and 1998-99 are partly allowed.