Income Tax Appellate Tribunal - Ahmedabad
Surya International, Ahmedabad vs Assessee on 18 January, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D"
[BEFORE SHRI MAH AVIR SINGH,JM AND SHRI A N P AHUJ A, AM]
ITA No.1533/Ahd/2007
(Assessment Year: 2003-04)
M/s Surya International, V/s Income-tax Officer, W ard-
A-401, Samudra Complex, 10(4),First Floor,Narayan
Navrangpura, Ahmedabad Chambers,Ashram Road,
[PAN:AAGFS5480A] Ahmedabad
(Appellant) (Respondent)
Assessee by :- Shri S N Divatia,AR
Revenue by:- Smt. Neeta Shah, DR
O R D E R
A N Pahuja: This appeal by the assessee against an order dated 18-01-2007 of the ld. CIT(Appeals)-XVI, Ahmedabad, raises the following grounds:
1. The order passed by the learned CIT(A) is bad in law and erroneous on facts. Your appellant submits that it be cancelled or suitably modified. It is submitted that it be so held now.
2. The learned CIT(A) has erred in confirming the disallowance of deduction U/s 80IA on DEPB receipts for Rs.16,64,745/- on the ground that DEPB receipts are not profits derived from Industrial undertaking. Your appellant submits that DEPB receipts and duty drawback are same in the nature in view of the fact that both the incentives reduces cost of production of the undertaking and thus directly related to industrial undertaking. The learned CIT (A) has erred in comparing the DEPB receipts with cash compensatory support. Your appellant submits that DEPB can be compared with Duty drawback and not with CCS as done by learned Commissioner. In view of the aforesaid facts and circumstances, your appellant submits that deduction U/s 80IA be allowed on DEPB as profits derived from Industrial undertaking. It is submitted that it be so allowed now.
3. The learned CIT(A) has erred in rejecting deduction U/s 80IA on interest income of Rs.3,01,290/- following decision of Special bench of jurisdictional ITAT in the case of Nirma Industries Ltd Vs. ACIT , 95 ITD 199 and in the case of Kripa Chemicals P Ltd VS. DCIT 88 ITD 200 (Pune). Your appellant submits that the above decisions are not applicable to the facts of your appellant's case. The above decisions were given while deciding deduction U/s 80I whereas in IT A No . 15 3 3/ A hd / 20 0 7 the case of your appellant, the question is determining amount of deduction U/s 80IA. It is submitted that the scope of deduction U/s 80IA is larger than scope of deduction U/s 801. Further in the aforesaid decisions, interest income was generated out of surplus business funds whereas in the case of your appellant the funds were kept with the bank out of business compulsion in order to avail overdraft and Cash credit facilities. In view of the aforesaid fact and circumstances, your appellant submits that the decisions cited by the learned Commissioner are not applicable and distinguishable to the facts of your appellant and therefore it is submitted that deduction U/s 80IA should be allowed on the interest income. It is submitted that it be so allowed now.
Without prejudice to the above, your appellant further submits that the learned CIT(A) ought to have considered and decided our alternative ground of setting of interest paid of Rs.17,52,102/- against interest income of Rs.3,01,290/- while computing deduction U/s 80IA of the Income Tax Act. Your appellant submits that even if it is held that interest is to be excluded while computing the profits derived from Industrial undertaking for the purpose of deduction U/s 80IA, it is "net" amount and not "gross" amount which can be excluded. During the assessment year, your appellant has paid interest of Rs.17,52,102/- which has direct nexus with the interest income. If net interest is taken out, it will be negative interest and therefore deduction U/s 80IA will get increase to that extent. Your appellant therefore submits that only "net" interest be directed to be excluded while computing deduction U/s 80IA of the Income Tax Act. It is submitted that it be so done now.
4. The learned CIT(A) has erred in holding that 90% of interest income of Rs.3,01,290/- be deducted from Profit for computing deduction U/s 80HHC. Your appellant submits that interest income is nothing but part of the profits of the business and therefore ought to have been considered for the purpose of computing deduction U/s 80HHC of the Income Tax Act. Your appellant submits that it has earned interest income out of deposits and margin money put with banks in order to avail overdraft and cash credit facilities and therefore it has direct nexus with the export business of the appellant. In view of the aforesaid facts and circumstances, your appellant submits that interest be considered as part of the profits of the export business and therefore should be included while computing profits of the business for the purpose of deduction u/s 80HHC of the Income Tax Act. It is submitted that it be so held now.
Your appellant prays for leave to add, alter, amend all or any other grounds before final hearing of appeal."
2 Ground no.1 being general in nature, does not require any separate adjudication and is, therefore, dismissed.
2IT A No . 15 3 3/ A hd / 20 0 7 3 Adverting now to ground no.2 relating to deduction u/s 80IA of the Act on DEPB receipts, facts, in brief, as per relevant orders are that return declaring income of Rs.4,02,310/- filed on 14.10.2003 by the assessee, after being processed u/s 143(1) of the Income-tax Act,1961[hereinafter referred to as the 'Act'] was taken up for scrutiny with the issue of notice u/s 143(2) of the Act on 12.7.2005. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that assessee claimed deduction of Rs. Rs.8,99,106/- u/s 80IA of the Act. To a query by the AO, the assessee explained that DEPB receipts of Rs. 16,64,745/- have direct nexus with the business of industrial undertaking and are therefore, eligible f or deduction u/s 80IA of the Act. However, the AO was of the opinion that for the purpose of deduction u/s 80IA of the Act the assessee has to establish that the profits and gains were derived from the business of industrial undertaking and a mere commercial connection was not sufficient to establish nexus between profits and the industrial undertaking. Accordingly, relying upon the decision of the Hon'ble Supreme Court in the case of CIT vs. Sterling Foods Pvt. Ltd., 237 ITR 579, the AO disallowed the claim.
4 On appeal, the assessee contended that the DEPB receipts amounting to Rs.16,64,745/-, are manufacturing profits, having direct nexus with the industrial undertaking and therefore, has to be considered as profit derived from industrial undertaking. It was pointed out that the duty draw back is in the form of reimbursement of excise duty which the assessee has paid on raw material and reimbursement of excise duty paid on the manufactured goods is, therefore, derived from industrial undertaking. W hile arguing that the decision in the case of Sterling Foods Pvt. Ltd.(supra) is not applicable, the assessee placed reliance on the decision of Hon'ble Gujarat High Court in the case of CIT vs. India Gelatine & Chemicals Ltd., 275 ITR 284. However, the ld. CIT(A) upheld the findings of the AO in the following terms:
"7 I have carefully considered the observations of the AO in the assessment order and arguments of the counsel for the appellant 3 IT A No . 15 3 3/ A hd / 20 0 7 and have also gone through the case-laws relied upon by the AO as well as by the appellant. As regards, the first part or not adding depreciation as per books of account amounting to Rs.2,39,479/- for computing the profit for the purpose of deduction u/s 80IA, the same is rejected since this part of the ground was not pressed by the counsel during the appellate proceedings. As regards the reduction of DEPB receipts amounting to Rs.16,64,745/- from the profit for computing deduction u/s 80IA, I do not find any force in the argument of the counsel for the appellant that the DEPB receipt forms part of the profit of industrial undertaking. The counsel for the appellant has wrongly placed reliance on the decision of Gujarat High Court in the case of CIT Vs. India Gelatine & Chemicals Ltd., 275 ITR 284. I have gone through the cited judgment. The Hon'ble Gujarat High has held that duty draw back has to be taken as part of the profit of industrial undertaking since the same reduces cost of input. However, the High Court has held that deduction u/s.80IB is not allowable on cash compensatory support since it does not have any direct link with the profit derived from the industrial ! ^undertaking. The DEPB Scheme is an Export Incentive Scheme provided in import and export policy. The objective of the Scheme is to neutralize the incident of basic custom duty on the import content of the export product. The exporter is eligible to claim credit as a specified percentage of value of exported product and is available at a rate of exported product as may be determined by DGFT. There is no bar for transferring of this credit to another person and from him to another person i.e. this credit amount is freely tradable. As compared to this, the duty draw back scheme is the refund of money to exporter and is not an instrument which can be transferred to anybody. The DEPB Scheme is, therefore, like cash compensatory support since it is freely tradable and is not directly related to the profits derived from the industrial undertaking. In view of these facts, the appellant is not entitled to deduction u/s.80IB since the DEPB Scheme does not inform part of the profit derived from industrial undertaking. The decision of the Hon'ble Gujarat High Court in the case of India Gelatine & Chemicals Limited is not applicable. The decision of the Hon'ble Supreme Court in the case of CIT Vs. Sterling Foods Ltd., 237 ITR 579 is applied. This part of the ground is, therefore, rejected. "
5. The assessee is now in appeal against the aforesaid findings of the ld. CIT(A). Before us, both the parties agreed that the issue is squarely covered by the decision dated 31.8.2009 of the Hon'ble Apex Court in the case of M/s Liberty India Vs. CIT in a civil appeal arising out of SLP no. 5827 of 2007 now reported in 317 ITR 218(SC).
6. We have heard both the parties and gone through the facts of the case. On a similar issue as to whether the profit from Duty Entitlement Passbook Scheme 4 IT A No . 15 3 3/ A hd / 20 0 7 (DEPB) and Duty Drawback Scheme are "derived from the business of the Industrial Undertaking" and consequently eligible for deduction u/s 80-IB of the Act, the Hon'ble Apex Court in the case of M/s Liberty India (supra) observed that the Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A essentially belongs to the category of "profit linked incentives" while ss. 80-IA/80-IB refer to profits derived from eligible business; it is not the ownership of that business which attracts the incentives but the generation of profits (operational profits) and each of the eligible business in sub-sections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. It was further held that ss. 80-IB/80-IA are a Code by themselves as they contain both substantive as well as procedural provisions. S. 80-IB allows deduction of profits and gains derived from the eligible business. The words "derived from" is narrower in connotation as compared to the words "attributable to". By using the expression "derived from", Parliament intended to cover sources not beyond the first degree. Though the object behind DEPB etc is to neutralize the incidence of customs duty payment on the import content of export product, DEPB credit/duty drawback receipt do not come within the first degree source as the said incentives flow from Incentive Schemes enacted by the Government or from s. 75 of the Customs Act. Such incentives profits are not profits derived from the eligible business u/s 80-IB. They are 'ancillary profits' of such undertakings and even as per AS-2 and the ICAI Guidance Note, duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods but have to be shown as an independent source of income beyond the first degree nexus between profits and the industrial undertaking. The Hon'ble Apex Court ,thus, concluded that "16. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc.. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from Section 75 of the Customs Act,1962, hence, incentives profits are not profits derived from the eligible 5 IT A No . 15 3 3/ A hd / 20 0 7 business under Section 80-IB. They belong to the category of ancillaryprofits of such Undertakings.
17. The next question is - what is duty drawback? Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944 empower Government of India to provide for repayment of customs and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum-manufacturer. Sub-section (2) of Section 75 of the Customs Act requires the amount of drawback to be determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported. Basically, the source of duty drawback receipt lies in Section 75 of the Customs Act and Section 37 of the Central Excise Act.
18. Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Scheme(s) framed by the Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression "profits derived from industrial undertaking" in Section 80- IB.
19. Since reliance was placed on behalf of the assessee(s) on AS-2 we need to analyse the said Standard.
20. AS-2 deals with Valuation of Inventories. Inventories are assets held for sale in the course of business; in the production for such sale or in form of materials or supplies to be consumed in the production.
21. "Inventory" should be valued at the lower of cost and net realizable value (NRV). The cost of "inventory" should comprise all costs of purchase, costs of conversion and other costs including costs incurred in bringing the "inventory" to their present location and condition.
22. The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Hence trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, duty drawback, rebate etc.should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly (see: page 44 of Indian Accounting Standards & GAAP by Dolphy D'souza). Therefore, for the purposes of AS-2, Cenvat credits should not be included in the cost of purchase of inventories. Even Institute of Chartered Accountants of India (ICAI) has issued Guidance Note on Accounting Treatment for Cenvat/Modvat under which the inputs consumed and the inventory of inputs should be valued on the basis of purchase cost net of specified duty on inputs (i.e. duty recoverable from the Department at later stage) arising on account of rebates, duty drawback, DEPB benefit etc. Profit generation could be on account 6 IT A No . 15 3 3/ A hd / 20 0 7 of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets etc. Therefore, we are of the view that duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking.
............................................................................................................
24. In the circumstances, we hold that Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I/80-IA/80-IB of the 1961 Act."
6.1. In the light of aforesaid decision of the Hon'ble Apex Court, we hold that DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of section 80-IA of the Act. Therefore, we have no option but to dismiss ground no.2 in the appeal.
7. Ground no. 3 relates to deduction u/s 80IA of the Act on the interest income of Rs. 3,01,290/- and the alternate claim of setting off of interest paid against the interest income. The AO disallowed the claim for deduction u/s 80IA of the Act on the aforesaid interest income on the ground that for the purpose of deduction u/s 80IA of the Act, the assessee is required to establish that the profits and gains were derived from the business of industrial undertaking and a mere commercial connection was not sufficient to establish nexus between profits and the industrial undertaking. Accordingly, relying upon the decision of the Hon'ble Supreme Court in the case of CIT vs. Sterling Foods Pvt. Ltd., 237 ITR 579, the AO disallowed the claim
8. On appeal, the assessee contended that interest has been received on deposit made with the Bank in order to get the cash credit facilities from the Banker for business purposes. The assessee had to place deposits with the bank out of business compulsion and not for earning any interest income. The interest on bank deposits is exclusive for export business and to import the raw-material and is, therefore, profit derived from the industrial undertaking. Inter alia, the assessee placed reliance on the decision of ITAT, Pune in the case of DCIT Vs. Jagdish Electronics, 66 ITD 7 IT A No . 15 3 3/ A hd / 20 0 7 542 and on the decision of Hon'ble Gujarat High Court in the case of CIT Vs. Gujarat Mineral Development Corporation, 132 ITR
377.However, the ld. CIT(A) upheld the findings of the AO, holding as under:
"8. The last of this ground is regarding the disallowance of deduction u/s 80IA on interest income of Rs.3,01,290/-. The appellant is not entitled to deduction u/s. 80IA on this income in view of the decision of Special Bench of jurisdictional ITAT in the case of Nirma Industries Ltd. vs. ACIT, 95 ITD, 109, in which it has been held that the interest on FDR does not qualify for deduction u/s 80IB. It has been held so in the case of Kripa Chemicals Pvt. Ltd. vs. DCIT, 88 ITD 200 (ITAT, Pune). The same view has been expressed by the ITAT, Ahmedabad in the case of DCIT vs. Meera Industries, 87 ITD 475. Thus, in view of the special bench's decision of ITAT, Ahmedabad in the case of Nirma Industries, it is held that the appellant is not entitled to deduction u/s.80IA on interest income. The disallowance made by the AO is upheld. This ground of appeal is, therefore, rejected.
9. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. AR on behalf of the assessee while reiterating their submissions before the ld. CIT(A) contended that the ld. CIT(A) has not adjudicated their alternate claim of setting off interest paid of Rs.17,52,102/- against the interest income. On the other hand, the ld. DR supported the findings of the ld. CIT(A).
10. We have heard both the parties and gone through the facts of the case. As regards exclusion of interest of Rs.3,01,290/- from the eligible profits for the purpose of deduction u/s 80IA of the Act, the leading decision is that of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 which holds that interest earned on deposits placed for the purposes of obtaining loans for business cannot be treated as business income but only as income from other sources. It was further held that the assessee cannot claim adjustment of expenditure against interest assessable under section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under section 56. It is not the case of the assessee that the interest payable by it on term loans is allowable as deduction under section 57 of the Act. The decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172, which was rendered in 8 IT A No . 15 3 3/ A hd / 20 0 7 the context of sections 56 and 57, has been followed in CIT v. Autokast Ltd. [2001] 248 ITR 110 (SC). Likewise, in CIT v. Dr. V. P. Gopinathan [2001] 248 ITR 449 (SC) interest on fixed deposits was held not to qualify for setting off against interest on loans borrowed. The other decisions on the same lines, in the context of section 80HHC are CIT v. Sterling Foods [1999] 237 ITR 579 (SC) and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC). In these decisions, the Hon'ble Supreme Court reiterated the nexus theory and declined to treat such interest earned as business income. The decision of the Madras High Court in South India Shipping Corporation Ltd. v. CIT [1999] 240 ITR 24 was also rendered in the context of treating certain receipts not as business income but income from other sources for the purposes of section 56 read with section 57(iii) of the Act. In cases where the assessee is required to mandatorily keep monies in fixed deposit in order to avail of credit facility, the argument on behalf of the assessee is that but for such a stipulation by the bank there was no need for the assessee to keep the money in fixed deposit and therefore, the income earned from such fixed deposits bears a direct nexus to the business activity itself. Given the repeated affirmation by the Hon'ble Supreme Court in the various cases, we are of the opinion that interest earned from the bank, does not have an immediate nexus with the business of the industrial undertaking and therefore, can not be said to be derived from the business of the industrial undertaking .
10.1 Before the AO , the assessee claimed that interest from bank was derived from the business of industrial undertaking . However, the AO and the ld. CIT(A) , relied upon certain decisions of Hon'ble Supreme Court and declined to allow deduction u/s 80IA of the Act . There is no material before us suggesting that interest received from the bank was derived from the business of industrial undertaking. In the case of CIT v. Sterling Foods [1999] 237 ITR 579 , the assessee engaged in processing prawns and other sea food, which was exported, earned some income from the import entitlements granted by the Central Government under the Export Promotion Scheme. The assessee was entitled to use the import entitlements itself or sell the same to others. The assessee claimed relief under section 80HH in respect of the sale proceeds of the import entitlements. The Tribunal held that the relief could not be granted. The Hon'ble Apex Court reversing the decision of the High Court while interpreting the words 'derived from' held that there must be, for the application 9 IT A No . 15 3 3/ A hd / 20 0 7 of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. As the nexus was only incidental and not direct, the receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Act. Similar views were expressed by the Hon'ble Apex court in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278. and recently in the case of M/s Liberty India Vs. CIT in a civil appeal arising out of SLP no. 5827 of 2007.
10.2 In this context in the case of Ahmedabad manufacturing and Calico Printing Co. Ltd. vs.CIT,137 ITR 616(Guj),Hon'ble jurisdictional High Court held "We are in full agreement with the view taken by the Bombay High Court and to some extent with the view taken by the Kerala High Court. Profits and gains can be said to have been " derived " from an activity carried on by a person only if the said activity is an immediate and effective source of the said profit or gain. There must be a direct nexus between the activity and the earning of the profits and gains. In other words, what we have to consider is the proximate source and not the source to which the profit or gain may in a remote indirect way be referable. The view to this effect of the Privy Council in CIT v. Kamakhya Narayan Singh [1948] 16 ITR 325 was approved by the Supreme Court in Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 and followed by the Kerala High Court in Cochin Company v. CIT [1978] 114 ITR 822 and by the Bombay High Court in Hindustan Lever Ltd. v. CIT [1980] 121 ITR 951. In our opinion, the word " derive " to be found in s. 2(5)(a)(i) of the relevant Finance Act will have to be given a meaning consistent with what was decided in the above decisions. The words "derived from exports" cannot be accepted as equivalent to " referable to exports " or even indirectly or remotely connected with the exports by a nebulous link.
10.3 Hon'ble Punjab and Haryana High Court in the case of Nahar Exports Vs. CIT,288 ITR 494 upheld disallowance of claim for deduction u/s 80IB of the Act on the interest income, in the light of aforesaid decisions of the Apex Court .
10.4 For the purpose of claiming deduction under s. 80-IA of the Act, the assessee is not only required to establish that it was business profit of the industrial undertaking, but also to establish that this was a profit 'derived from' the business activity of an industrial undertaking, which means a direct nexus between the profits and industrial undertaking. The mere fact that such income was a business income would not entitle the assessee for deduction under s. 80- IA of the Act. Though the assessee may necessarily have to make the deposit 10 IT A No . 15 3 3/ A hd / 20 0 7 with the bank for certain guarantees or warranties , the income on account of interest from such deposits with the bank cannot be said to have been derived from the business of the industrial undertaking. The immediate source of interest is the deposit itself, and the effective source of the genealogy of the source of the interest income is the deposit and not business, as the industrial undertaking is removed by one step from the source of income for the interest. In other words, the immediate and effective source of the interest is the deposit and not the business of the industrial undertaking. As held by the Hon'ble Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, the profits or gains eligible for deduction under section 80IA of the Act must be derived from the actual conduct of the business, and unless the profits or gains are derived from the actual conduct of the business, it cannot be stated that the interest is derived from the business of the industrial undertaking. In other words, the industrial undertaking must directly yield the profit, and it cannot be the means to yield the income. The deposit might be an incidental investment with the business of the industrial undertaking and that would not be sufficient to render the interest income as profits and gains derived from the industrial undertaking. The fact that the amount was assessed as business income itself would not be sufficient to hold that the interest income was derived from the actual conduct of the business of the industrial undertaking. In other words, it is not all business receipts that would qualify for the deduction and the Legislature has apparently not intended to give the benefit of deduction to all business income. If the intention of the Legislature was to grant relief to all business income, it could have used the expression, "profits and gains of industrial undertaking", The fact that the Legislature has used the expression "profits and gains derived from the business of industrial undertaking" has some significance and it connotes that the immediate and effective source of income eligible for grant of relief under section 80IA/IB of the Act must be the industrial undertaking itself and not any other source. The mandate of law is that unless the source of the profit is the undertaking, the assessee is not eligible to claim deduction under section 80IA/IB of the Act. Mere commercial connection between the income and the industrial undertaking would not be sufficient. The derivation of the income must be directly connected with the business in the sense that the income is generated by the business. It would not be sufficient if it is generated by the exploitation of a business asset.11
IT A No . 15 3 3/ A hd / 20 0 7 10.5 Hon'ble jurisdictional High Court in the case of CIT Vs.Gaskets and Radiators Distributors, 296 ITR 440(Guj) in the context of deduction u/s 80HHC of the Act in respect of income on account of interest on fixed deposits held "Identical question came to be considered by the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 and the question, which was posed for consideration before the apex court was whether the interest on deposits with the Tamil Nadu Electricity Board should be treated as income derived by the industrial undertaking for the purpose of section 80HH or not, and the Hon'ble Supreme Court has observed that section 80HH of the Income-tax Act grants deduction in respect of profits and gains "derived from" an industrial undertaking and 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. The Supreme Court held that interest derived by the industrial undertaking of the assessee on deposits made with the Tamil Nadu 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 said deduction under section 80HH. In G.T.N. Textiles Ltd. v. Dy. CIT [2005] 279 ITR 72, the Kerala High Court held that interest on bank deposits was not profit derived from export of goods. The Kerala High Court has further held that the interest earned by the assessee on fixed deposits, commission received on sale of machinery, etc., were not business income and consequently the assessee was not entitled to computation of eligible deduction under section 80HHC of the Act by including those receipts under business income. Therefore, considering the aforesaid two decisions, we must hold that the Tribunal as well as the Commissioner of Income-tax (Appeals), both committed an error in treating the interest on deposits as "business income" and granting the assessee the deduction under section 80HHC of the Act.."
11. In view of the foregoing, especially when there is nothing to establish the nexus of earning of interest income with the activities of the industrial undertaking and the export business of the assesse, in the light of the aforesaid judicial pronouncements, including the judgments in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC), CIT v. Cochin Refineries Ltd. [1982] 135 ITR 278 (Ker.) and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC) as also of jurisdictional High Court in the case of Gaskets and Radiators Distributors(supra), we have no alternative but to uphold the conclusion of the ld. CIT(A).
11.1 As regards alternate plea on behalf of the assessee for setting off interest expenditure against interest income and exclusion of net interest income while computing deduction u/s 80IA of the Act, there is no discussion on this aspect in 12 IT A No . 15 3 3/ A hd / 20 0 7 the assessment order nor the assessee raised any such ground or alternate plea before the ld. CIT(A). Consequently, there are no findings on this aspect in the impugned order. Though the ld. AR on behalf of the assessee pleaded that their claim for set off of the expenditure on account of interest against interest income has not been considered by the ld. CIT(A), not an iota of evidence seems to have been placed before the lower authorities and even before us that any such plea was raised before the ld. CIT(A) nor we find any such mention in the grounds of appeal. In the absence of any evidence establishing nexus of expenditure on account interest with the interest income, we are not inclined to accept even the alternate ground. Thus, ground no. 3 in the appeal is dismissed.
12. Next ground no.4 relates to exclusion of 90% of interest income from the profits of the business for the purpose of deduction u/s 80HHC of the Act. The AO excluded the gross interest income of Rs.3,01,790/- from the profits of the business while determining deduction u/s 80HHC of the Act on the ground that interest income was not derived from the export business relying, inter alia, on the decision of the Ho'ble Supreme Court in the case of CIT Vs. Sterling Foods,237 ITR 579(SC). On appeal, the ld. CIT(A) upheld the findings of the AO in the following terms:
"12 As regards the deduction of interest income from the profit for computing the deduction u/s 80HHC, I do not find any force in the arguments of the counsel for the appellant The Hon 'ble Madras High Court in the case of C1T Vs. China Pandi, 282 ITR 389 has clearly held that while computing the profit of business for the purpose of section u/s. 80HHC, 90% of the gross interest received by the assessee without deducting there from the interest paid by the assessee is to be reduced. The Hon'ble Madras High Court has followed the decision of the Hon'ble Punjab & Haryana High Court in the case of Rani Paliwal Vs. CIT, 268 ITR 220. Thus, in view of the direct judgments of the Hon'ble jMadras High Court & Punjab & Haryana High Court, it is held that 90% of the interest income should be reduced from the profit for computing deduction u/s.80HHC. The AO is directed to reduce 90% of the interest income from the profit for computing the deduction u/s. 80HHC. This ground of appeal is partly allowed. "
13. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee reiterated their submissions before the ld. CIT(A) while the ld. DR supported the findings of the ld. CIT(A).
13IT A No . 15 3 3/ A hd / 20 0 7
14. We have heard both the parties and gone through the facts of the case. We find that though the AO excluded entire interest income while determining profits of the business for the purpose of deduction u/s 80HHC of the Act on the ground that the said interest income was not derived from export business of the assessee , the ld. CIT(A) following the decisions of the Hon'ble Madras High Court in China Pandi(supra) and of the Hon'ble Punjab & Haryana High Court in Rani Paliwal(supa), directed the AO to excluded 90% of the interest income from the profits of the business. There is nothing to suggest as to whether or not the receipts on account interest on deposits and margin money kept with bank in order to avail overdraft and cash credit facilities, had any relation with exports made by the assessee during the year under consideration.
14.1 A bare perusal of provisions of sec. 80HHC of the Act reveals that the income which is understood to be computed under this provision must have been derived by the assessee from the export of such goods or merchandise. Admittedly the interest income was not derived by export of goods or merchandise. A Division Bench of the Hon'ble Kerala High Court in Nanji Topanbhai and Co. v. Asst. CIT [2000] 243 ITR 192 was considering the question as to whether the interest earned on fixed deposit was income arising out of export or income from other sources. The Hon'ble High Court held (headnote):
"Under section 80HHC of the Income-tax Act, 1961, the assessee who is engaged in export business is allowed, in computing the total income, a deduction out of the income derived from the export of such goods. Unless the assessee is able to show that the income received by way of interest from the fixed deposit is derived from the export business, it will not be entitled to claim deduction under section 80HHC in respect of it".
14.2 In another judgment reported in CIT v. Cochin Refineries Ltd. [1985] 154 ITR 345, Hon'ble Kerala High Court held:
"Profits and gains are well understood to mean only the business income, and not any other income. So long as the company has no business of lending money, and so long as the admitted case of the company is that the income derived is only on account of the peculiar situation arising from the time schedule for repayment of the loans, it cannot be stated that the income yielded by the deposits or investments was received in the course of the company's business so as to be treated as a business profit"14
IT A No . 15 3 3/ A hd / 20 0 7 14.3 We find that in Urban Stanislaus Co. [2003] 263 ITR 10 (Ker) where the assessee had contended that as a condition for obtaining a loan from the bank, 29 per cent. of the sale receipts had to be deposited by way of security and it was claimed that the interest earned on such deposit was business income for the purpose of section 80HHC, the Hon'ble Kerala High Court negatived the claim by observing that:
"the assessee can claim deduction in respect of the profits derived from the export of goods only when it is established that the income is solely related to the export. The obvious intention behind the provision in section 80HHC is to promote exports. However, the income earned by way of interest from fixed deposit is not an income from exports. Thus, it was rightly taken into account as income from other sources".
14.4 This decision has been affirmed by the Hon'ble Supreme Court by the dismissal of the special leave petition. In K. Ravindranathan Nair [2003] 262 ITR 669 (Ker), in dealing with a similar issue, the Hon'ble Kerala High Court held:
"The interest from short-term deposits received by the appellant is 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 are necessary requirements to enable the appellant to make the export. From the above it is clear that the interest income received on the short-term deposits though it can be attributed to the export business cannot be treated as income which is derived from the export business. In the above circumstances, even assuming that the bank has insisted for making shortterm deposits for opening letters of credit and for other facilities, it cannot be said that the income is derived from the export business."
14.5 The above decision in K. Ravindranathan Nair [2003] 262 ITR 669 (Ker) has been affirmed by the Hon'ble Supreme Court by the dismissal of the special leave petition. To the same effect is the judgment of the same High Court in Southern Cashew Exporters v. Deputy CIT [2003] 130 Taxman 203 (Ker) which has been affirmed by the Hon'ble Supreme Court on account of the dismissal of the special leave petition. The resultant position is that on three occasions, the Hon'ble Supreme Court has affirmed the judgments of the Kerala High Court that has consistently held that interest earned on fixed deposits for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and, therefore has to necessarily be treated as income from other sources and not as business income. In CIT v. Sterling Foods [1999] 237 ITR 579 (SC) and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC), the 15 IT A No . 15 3 3/ A hd / 20 0 7 Hon'ble Supreme Court reiterated the nexus theory and declined to treat such interest earned as business income. An assessee who is engaged in the business of exports and invests the surplus funds in fixed deposits will not be able to treat the interest earned thereon as business income since it does not bear any direct nexus with the export business of the assessee. Hon'ble jurisdictional High Court in the case of CIT Vs. Gaskets & Radiators Distributors,296 ITR 440(Guj) relying ,inter alia, on the decision of the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 held that receipts on account of interest on deposits are not required to be considered for deduction u/s 80HHC of the Act.
14.6 In CIT Vs. Rakesh Rakheja ,166 Taxman 50(Delhi), Hon'ble High Court held that the income earned by the assessee from FDRs is required to be assessed as income from other sources. The said income is therefore outside the purview of section 80HHC of the Act and 100 per cent of the interest is required to be excluded from the profits of the business in terms of Explanation (baa) to section 80HHC of the Act.
14.7 In CIT Vs. Kraft Land India, 162 Taxman 123 (Del),Hon'ble Delhi High Court held that interest received on FDRs pledged for shipping loan/depository loan, was not business income and therefore, interest paid by the assessee could not be reduced from the interest received while calculating deduction u/s 80HHC read with explanation (baa) thereto.
14.8 In CIT Vs. Malwa Cotton Spinning Mills Ltd.,166 Taxman 457(Pb. & Haryana) ,Hon'ble High Court held that
6. Clause (baa), as referred to above, talks of procedures, as to how profits of business are to be computed. It provides that in case, incomes of the kind including interest are included in the profits of business, 90 per cent thereof shall be reduced therefrom. It does not make any distinction between the interest earned from source 'A' or source 'B'. Interest from wherever it is earned retains the character of interest. Be it an interest from the customer on delayed payment of dues.
15. During the course of hearing of the appeal, the ld. AR was pointed out a recent decision dated 18/19/3/2010 of the Hon'ble Bombay High Court in the 16 IT A No . 15 3 3/ A hd / 20 0 7 case of CIT Vs. Asian Star Co. Ltd. in ITA no. 200 of 2009 ,wherein it was held that explanation (baa) to s. 80HHC requires that ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature have to be reduced from the profits. The reason why items like brokerage etc have to be excluded is because they do not possess any nexus with export turnover and their inclusion in profits would result in a distortion of the figure of export profits. However, as some expenditure might have been incurred in earning these incomes, an adhoc deduction of ten per cent from such income is allowed. It was further observed by the Hon'ble High Court that once Parliament has legislated both in regard to the nature of the exclusion and the extent of the exclusion, it would not be open to the Court to order otherwise by rewriting the legislative provision. The task of interpretation is to find out the true intent of a legislative provision and it is clearly not open to the Court to legislate by substituting a formula or provision other than what has been legislated by Parliament. It is not open to say that something more than the 10% statutorily provided should also be allowed. Hon'ble High Court further held that in Shri Ram Honda Power Equip, 289 ITR 475 the Delhi High Court has not adequately emphasized the entire rationale for confining the deduction only to the extent of ninety per cent of the excludible receipts and it cannot be followed; As regards the judgement of the Special Bench in Lalsons Enterprises, Hon'ble High Court held that "We are affirmatively of the view that ... the Tribunal ... has transgressed the limitations on the exercise of judicial power and .... has in effect legislated by providing a deduction on the ground of expenses other than in the terms which have been allowed by Parliament. That is impermissible".
16. In view of the foregoing, especially when the aforesaid receipts on account of bank interest are independent incomes , we are not inclined to interfere with the findings of the ld. CIT(A). These receipts have no relation with exports made by the assessee during the year under consideration. There is no material before us that any expenditure has been incurred for earning the aforesaid receipts nor such an issue seems to have been raised before the ld. CIT(A).Therefore, ground no. 4 is dismissed.
.
17. No additional ground having been raised in terms of the residuary ground, accordingly, this ground is dismissed..
17IT A No . 15 3 3/ A hd / 20 0 7 18 In the result, appeal is dismissed.
Order pronounced in the open court on 9-04-2010
Sd/- Sd/-
(MAH AVIR SINGH) (A N P AHUJ A)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Date : 9 -04-2010
Copy of the order forwarded to :
1. M/s Surya International, A-401, Samudra Complex,
Navrangpura, Ahmedabad
2. The ITO, W ard-10(4), Ahmedabad
3. The CIT concerned
4. The CIT(A)-XVI, Ahmedabad
5. The DR, ITAT, 'D' Bench,Ahmedabad
6. Guard File
BY ORDER
DY.R/AR, ITAT, AHMEDABAD
18